-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N3RL/+nJSqMIZk8V9nYX8IBahPobUw44KwogmjWoGtpOTCGxiMF0q3qHT6fZbBsK PWNGCx7j11Rwiijc1gpkaw== 0000898531-00-000132.txt : 20040421 0000898531-00-000132.hdr.sgml : 20040421 20000501165300 ACCESSION NUMBER: 0000898531-00-000132 CONFORMED SUBMISSION TYPE: N-1A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 20000501 DATE AS OF CHANGE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINETICS PORTFOLIOS TRUST CENTRAL INDEX KEY: 0001113229 IRS NUMBER: 223723753 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: N-1A SEC ACT: 1933 Act SEC FILE NUMBER: 811-09923 FILM NUMBER: 00615771 BUSINESS ADDRESS: STREET 1: 1311 MAMARONECK AVE. CITY: WHITE PLAINS STATE: NY ZIP: 10605 N-1A 1 Filed with the Securities and Exchange Commission on April 28, 2000 1933 Act Registration File No. 333-78275 1940 Act File No. 811-09303 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |_| Pre-Effective Amendment No. |_| Post-Effective Amendment No. |_| and REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X| Amendment No. |_| (Check appropriate box or boxes.) KINETICS MUTUAL FUNDS, INC. --------------------------- (Exact Name of Registrant as Specified in Charter) 1311 Mamaroneck Ave White Plains, New York 10605 (Address and Zip Code of Principal Executive Offices) (800) 930-3828 Registrant's Telephone Number, including Area Code Lee Schultheis 1311 Mamaroneck Ave White Plains, New York 10605 (Name and Address of Agent for Service) WITH A COPY TO: --------------- Thomas R. Westle, Esq. Spitzer & Feldman P.C. 405 Park Avenue New York, New York 10022 INTERESTS OFFERED PURSUANT TO THIS REGISTRATION STATEMENT ARE ISSUED SOLELY TO ELIGIBLE INVESTORS IN PRIVATE PLACEMENT TRANSACTIONS AND DO NOT INVOLVE ANY "PUBLIC OFFERING" WITHIN THE MEANING OF SECTION 4(2) OF THE 1933 ACT. Approximate Date of Proposed Public Offering INTERESTS --------- (Title of Securities Being Registered) It is proposed that this filing will become effective immediately upon filing pursuant to paragraph (b) - - ------ on pursuant to paragraph (b) - - ------- ---------------------- 60 days after filing pursuant to paragraph (a)(1) - - ------ on ___________ pursuant to paragraph (a)(1) - - ------- 75 days after filing pursuant to paragraph (a)(2) - - ------- on pursuant to paragraph (a)(2) of Rule 485. - - ------- ----------------------- THE INTERNET PORTFOLIO THE INTERNET INFRASTRUCTURE PORTFOLIO THE INTERNET EMERGING GROWTH PORTFOLIO THE INTERNET GLOBAL GROWTH PORTFOLIO THE INTERNET NEW PARADIGM PORTFOLIO EACH A SERIES OF KINETICS PORTFOLIOS TRUST A DELAWARE BUSINESS TRUST [LOGO] PROSPECTUS April 28, 2000 EXPLANATORY NOTE This Prospectus is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended (the "1933 Act"), because such interests are issued solely to eligible investors in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in any of the portfolio series of the Trust described hereunder may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts, and certain qualified pension and retirement plans. No part of this Prospectus or of the Trust's Registration Statement constitutes an offer to sell, or the solicitation of an offer to buy any beneficial interests of any of the portfolio series described hereunder or any other portfolio series of the Trust. Responses to Items 1, 2, 3, 5 and 9 of Part A and Items 23(e) and (i)-(k) of Part C have been omitted pursuant to paragraph B.2.(b) of the General Instructions to Form N-1A. Investment Adviser KINETICS ASSET MANAGEMENT, INC. Minimum Initial Investment -- $1,000 THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE INTERNET PORTFOLIO THE INTERNET INFRASTRUCTURE PORTFOLIO THE INTERNET EMERGING GROWTH PORTFOLIO THE INTERNET GLOBAL GROWTH PORTFOLIO THE INTERNET NEW PARADIGM PORTFOLIO EACH A SERIES OF KINETICS PORTFOLIOS TRUST PROSPECTUS April 28, 2000 THE INTERNET PORTFOLIO (the "Internet Portfolio") is a no-load, non-diversified investment company which seeks to provide investors with long-term capital growth by investing primarily in the equity securities of domestic and foreign companies engaged in the Internet and Internet-related activities. THE INTERNET INFRASTRUCTURE PORTFOLIO (the "Infrastructure Portfolio") is a no-load, non-diversified investment company which seeks to provide investors with long-term capital growth by investing primarily in the equity securities of domestic and foreign companies engaged in the development and implementation of hardware, software and communications technologies that support the growing infrastructure and activities of the Internet. THE INTERNET EMERGING GROWTH PORTFOLIO (the "Emerging Portfolio") is a no-load, non-diversified investment company which seeks to provide investors with long-term capital growth by investing primarily in the equity securities of small and medium capitalization domestic and foreign emerging companies engaged in the Internet and Internet-related activities. THE INTERNET GLOBAL GROWTH PORTFOLIO (the "Global Portfolio") is a no-load, non-diversified investment company which seeks to provide investors with long-term capital growth by investing primarily in the equity securities of domestic and foreign companies engaged in the Internet and Internet-related activities. THE INTERNET NEW PARADIGM FUND (the "New Paradigm Portfolio") is a no-load, non-diversified investment company which seeks to provide investors with long-term capital growth by investing primarily in the equity securities of domestic and foreign companies that the investment adviser believes will reduce their costs, extend the reach of their distribution channels and experience significant growth in their assets or revenues as a result of increased involvement in or growth of the Internet. This Prospectus gives vital information about each Portfolio. For your own benefit and protection, please read it before you invest, and keep it on hand for future reference. PART A: INFORMATION REQUIRED IN A PROSPECTUS I. REQUIRED DISCLOSURE ITEMS ITEM 4.: INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND RELATED RISKS INVESTMENT OBJECTIVE AND STRATEGIES OF - - -------------------------------------------------------------------------------- THE INTERNET PORTFOLIO (A) INVESTMENT OBJECTIVE The investment objective of the Internet Portfolio is long-term growth of capital. (B) IMPLEMENTATION OF INVESTMENT OBJECTIVE To achieve the Internet Portfolio's investment objective, under normal circumstances, at least 65% of the Internet Portfolio's total assets will be invested in common stocks, convertible securities, warrants and other equity securities having the characteristics of common stocks, such as American Depositary Receipts ("ADRs") and International Depositary Receipts ("IDRs"), of domestic and foreign companies that are engaged in the Internet and Internet-related activities. The Internet Portfolio may also write and sell options on securities in which it invests for hedging purposes and/or direct investment. Portfolio securities will be selected by the investment adviser from companies that are engaged in the development of hardware, software and telecommunications solutions that enable the transaction of business on the Internet by individuals and companies engaged in private and commercial use of the Internet as well as companies that offer products and services primarily via the Internet. Accordingly, the Internet Portfolio seeks to invest in the equity securities of companies whose research and development efforts may result in higher stock values. These companies may be large, medium or small in size if, in the investment adviser's opinion, they meet the Internet Portfolio's investment criteria. Such companies include, but are not limited to, the following: o INTERNET SERVICE PROVIDERS: Companies that provide users with access to the Internet. o COMPUTER SOFTWARE COMPANIES: Companies that produce, manufacture and develop tools to access the Internet, enable Internet users to enhance the speed, integrity and storage of data on the Internet, facilitate information distribution and gathering on the Internet, and secure Internet-based transactions. o COMPUTER HARDWARE COMPANIES: Companies that develop and produce computer and network hardware such as modems, switchers and routers, and those that develop and manufacture workstations and personal communications systems used to access the Internet and provide Internet services. o E-COMMERCE: Companies that derive a substantial portion of their revenue from sales of products and services conducted via the Internet. o CONTENT DEVELOPERS: Companies that supply proprietary information and entertainment content, such as games, music, video, graphics, news, etc. on the Internet. The investment adviser selects portfolio securities by evaluating a company's positioning and business model as well as its ability to grow and expand its activities via the Internet or achieve a competitive advantage in cost/profitability and brand image leveraging via use of the Internet. The investment adviser also considers a company's fundamentals by reviewing its balance sheets, corporate revenues, earnings and dividends. Furthermore, the investment adviser looks at the amount of capital a company currently spends on research and development. The investment adviser believes that dollars invested in research and development today frequently have significant bearing on future growth. TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other conditions, the Internet Portfolio may invest up to 100% of its assets in high quality U.S. short-term debt securities and money market instruments. The Internet Portfolio may invest up to 35% of its assets in these securities to maintain liquidity. Some of these short-term instruments include: o commercial paper o certificates of deposit, demand and time deposits and banker's acceptance o U.S. Government securities (i.e., U.S. Treasury obligations) o repurchase agreements To the extent that the Internet Portfolio engages in a temporary, defensive strategy, the Internet Portfolio may not achieve its investment objective. INVESTMENT OBJECTIVE AND STRATEGIES OF THE INFRASTRUCTURE PORTFOLIO - - -------------------------------------------------------------------------------- (A) INVESTMENT OBJECTIVE The investment objective of the Infrastructure Portfolio is long-term growth of capital. (B) IMPLEMENTATION OF INVESTMENT OBJECTIVE To achieve the Infrastructure Portfolio's investment objective, under normal circumstances, at least 65% of the Infrastructure Portfolio's total assets will be invested in common stocks, convertible securities, warrants and other equity securities having the characteristics of common stocks, such as ADRs and IDRs, of domestic and foreign companies that are engaged in the development and implementation of hardware, software and communications technologies that support the growing infrastructure and activities of the Internet. The Infrastructure Portfolio may also write and sell options on securities in which it invests for hedging purposes and/or direct investment. Portfolio securities will be selected by the investment adviser from companies that provide hardware, software and telecommunications solutions that enable the transaction of business on the Internet by individuals and companies engaged in private and commercial use of the Internet. These companies may be large, medium or small in size if, in the investment adviser's opinion, the companies meet the Infrastructure Portfolio's investment criteria. Such companies include, but are not limited to the following: o COMPUTER SOFTWARE COMPANIES: Companies that produce, manufacture and develop tools to access the Internet, enable Internet users to enhance the speed, integrity and storage of data on the Internet, facilitate information distribution and gathering on the Internet, and secure Internet-based transactions. o COMPUTER HARDWARE COMPANIES: Companies that develop and produce computer and network hardware such as modems, switchers and routers, and those that develop and manufacture workstations and personal communications systems used to access the Internet services. o TELECOMMUNICATIONS COMPANIES: Companies that are primarily engaged in the development of the telecommunications transmission lines and software technologies that enhance the reach and band-width technologies of Internet users. The investment adviser selects portfolio securities by evaluating a company's positioning and both the current percentage and growth in percentage of resources that it spends in the Internet infrastructure marketplace. The investment adviser also considers a company's fundamentals by reviewing its balance sheets, corporate revenues, earnings and dividends. TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other conditions, the Infrastructure Portfolio may invest up to 100% of its assets in high quality U.S. short-term debt securities and money market instruments. The Infrastructure Portfolio may invest up to 35% of its assets in these securities to maintain liquidity. Some of these short-term instruments include: o commercial paper o certificates of deposit, demand and time deposits and banker's acceptance o U.S. Government securities (i.e., U.S. Treasury obligations) o repurchase agreements To the extent that the Infrastructure Portfolio engages in a temporary, defensive strategy, the Infrastructure Portfolio may not achieve its investment objective. INVESTMENT OBJECTIVE AND STRATEGIES OF THE EMERGING PORTFOLIO - - -------------------------------------------------------------------------------- (A) INVESTMENT OBJECTIVE The investment objective of the Emerging Portfolio is long-term growth of capital. (B) IMPLEMENTATION OF INVESTMENT OBJECTIVE To achieve the Emerging Portfolio's investment objective, under normal circumstances, at least 65% of the Emerging Portfolio's total assets will be invested in common stocks, convertible securities, warrants and other equity securities having the characteristics of common stocks, such as ADRs and IDRs of small and medium capitalization emerging companies that are engaged in the Internet and Internet-related activities. The Emerging Portfolio may also write and sell options on securities in which it invests for hedging purposes and/or direct investment. Portfolio securities will be selected by the investment adviser from emerging, small and medium-sized companies that are engaged in the development of hardware, software and telecommunications solutions that enable the transaction of business on the Internet by individuals and companies engaged in private and commercial use of the Internet as well as companies that offer products and services primarily via the Internet. Accordingly, the Emerging Portfolio seeks to invest in the equity securities of companies whose research and development efforts may result in higher stock values. Such companies include, but are not limited to the following: o INTERNET SERVICE PROVIDERS: Companies that provide users with access to the Internet. o COMPUTER SOFTWARE COMPANIES: Companies that produce, manufacture and develop tools to access the Internet, enable Internet users to enhance the speed, integrity and storage of data on the Internet, facilitate information distribution and gathering on the Internet, and secure Internet-based transactions. o COMPUTER HARDWARE COMPANIES: Companies that develop and produce computer and network hardware such as modems, switchers and routers, and those that develop and manufacture workstations and personal communications systems used to access the Internet and provide Internet services. o E-COMMERCE: Companies that derive a substantial portion of their revenue from sales of products and services conducted via the Internet. o CONTENT DEVELOPERS: Companies that supply proprietary information and entertainment content, such as games, music, video, graphics, news, etc. on the Internet. The investment adviser selects portfolio securities by evaluating a company's positioning and business model as well as its ability to grow and expand its activities via the Internet or achieve a greater competitive advantage in cost/profitability and brand image leveraging via use of the Internet. The investment adviser also considers a company's fundamentals by reviewing its balance sheets, corporate revenues, earnings and dividends. Furthermore, the investment adviser looks at the amount of capital a company currently spends on research and development. The investment adviser believes that dollars invested in research and development today frequently have significant bearing on future growth. TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other conditions, the Emerging Portfolio may invest up to 100% of its assets in high quality domestic short-term debt securities and money market instruments. The Emerging Portfolio may invest up to 35% of its assets in these securities to maintain liquidity. Some of these short-term instruments include: o commercial paper o certificates of deposit, demand and time deposits and banker's acceptance o U.S. Government securities (i.e., U.S. Treasury obligations) o repurchase agreements To the extent that the Emerging Portfolio engages in a temporary, defensive strategy, the Emerging Portfolio may not achieve its investment objective. INVESTMENT OBJECTIVE AND STRATEGIES OF THE GLOBAL PORTFOLIO - - -------------------------------------------------------------------------------- (A) INVESTMENT OBJECTIVE The investment objective of the Global Portfolio is long-term growth of capital. (B) IMPLEMENTATION OF INVESTMENT OBJECTIVE To achieve the Global Portfolio's investment objective, under normal circumstances, at least 65% of the Global Portfolio's total assets will be invested in common stocks, convertible securities, warrants and other equity securities having the characteristics of common stocks, such as ADRs and IDRs, of companies in at least three different countries that are engaged in the Internet and Internet-related activities. The Global Portfolio may also write and sell options on securities in which it invests for hedging purposes and/or direct investment. Portfolio securities will be selected by the investment adviser from domestic and international companies that are engaged in the development of hardware, software and telecommunications solutions that enable the transaction of business on the Internet by individuals and companies engaged in private and commercial use of the Internet as well as companies that offer products and services primarily via the Internet. These companies may be large, medium or small in size if, in the investment adviser's opinion, the companies meet the Global Portfolio's investment criteria. Accordingly, the Global Portfolio seeks to invest in the equity securities of companies whose research and development efforts may result in higher stock values. Such companies include, but are not limited to, the following: o INTERNET SERVICE PROVIDERS: Companies that provide users with access to the Internet. o COMPUTER SOFTWARE COMPANIES: Companies that produce, manufacture and develop tools to access the Internet, enable Internet users to enhance the speed, integrity and storage of data on the Internet, facilitate information distribution and gathering on the Internet, and to secure Internet-based transactions. o COMPUTER HARDWARE COMPANIES: Companies that develop and produce computer and network hardware such as modems, switchers and routers, and those that develop and manufacture workstations and personal communications systems used to access the Internet and provide Internet services. o E-COMMERCE: Companies that derive a substantial portion of their revenue from sales of products and services conducted via the Internet. o CONTENT DEVELOPERS: Companies that supply proprietary information and entertainment content, such as games, music, video, graphics, news, etc. on the Internet. The investment adviser selects portfolio securities by evaluating a company's positioning and business model as well as its ability to grow and expand its activities via the Internet or achieve a competitive advantage in cost/profitability and brand image leveraging via use of the Internet. The investment adviser also considers a company's fundamentals by reviewing its balance sheets, corporate revenues, earnings and dividends. Furthermore, the investment adviser looks at the amount of capital a company currently spends on research and development. The investment adviser believes that dollars invested in research and development today frequently have significant bearing on future growth. TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other conditions, the Global Portfolio may invest up to 100% of its assets in high quality U.S. short-term debt securities and money market instruments. The Global Portfolio may invest up to 35% of its assets in these securities to maintain liquidity. Some of these short-term instruments include: o commercial paper o certificates of deposit, demand and time deposits and banker's acceptance o U.S. Government securities (i.e., U.S. Treasury obligations) o repurchase agreements To the extent that the Global Portfolio engages in a temporary, defensive strategy, the Global Portfolio may not achieve its investment objective. INVESTMENT OBJECTIVE AND STRATEGIES OF THE NEW PARADIGM PORTFOLIO - - -------------------------------------------------------------------------------- (A) INVESTMENT OBJECTIVE The investment objective of the New Paradigm Portfolio is long-term growth of capital. (B) IMPLEMENTATION OF INVESTMENT OBJECTIVE To achieve the New Paradigm Portfolio's investment objective, under normal circumstances, at least 65% of the New Paradigm Portfolio's total assets will be invested in common stocks, convertible securities, warrants and other equity securities having the characteristics of common stocks, such as ADRs and IDRs, of domestic and foreign companies with business models that stand to benefit from the utilization and growth of the Internet. The New Paradigm Portfolio may also write and sell options on securities in which it invests for hedging purposes and/or direct investment. Portfolio securities will be selected by the investment adviser from companies that are engaged in various industries where the growth of the Internet will facilitate an increase in the growth of traditional business lines, entry into new distribution channels, an ability to leverage brand identity, and an improvement in the underlying cost/profitability dynamics of the business. These companies may be large, medium or small in size if, in the investment adviser's opinion, these companies meet the New Paradigm Portfolio's investment criteria. Accordingly, the New Paradigm Portfolio seeks to invest in the equity securities of companies whose research and development efforts may result in higher stock values. Such companies include, but are not limited to, the following: o RETAILERS: Companies that sell retail products and services via traditional stores, catalogues, telemarketing, and web-site means. o MEDIA COMPANIES: Companies that provide print, broadcast, cable, satellite and web-based information and entertainment content. o FINANCIAL SERVICE COMPANIES: Companies that engage in financial service transactions such as banking, credit cards, investment services, etc. The investment adviser selects portfolio securities by evaluating a company's positioning and traditional business lines as well as its ability to expand its activities via the Internet or achieve a competitive advantage in cost/profitability and brand image leveraging via use of the Internet. The investment adviser also considers a company's fundamentals by reviewing its balance sheets, corporate revenues, earnings and dividends. TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other conditions, the New Paradigm Portfolio may invest up to 100% of its assets in high quality U.S. short-term debt securities and money market instruments. The New Paradigm Portfolio may invest up to 35% of its assets in these securities to maintain liquidity. Some of these short-term instruments include: o commercial paper o certificates of deposit, demand and time deposits and banker's acceptance o U.S. Government securities (i.e., U.S. Treasury obligations) o repurchase agreements To the extent that the New Paradigm Portfolio engages in a temporary, defensive strategy, the New Paradigm Portfolio may not achieve its investment objective. MAIN RISKS OF THE PORTFOLIOS - - -------------------------------------------------------------------------------- INVESTING IN MUTUAL PORTFOLIOS All mutual funds carry risk which may cause you to lose money on your investment in one or more of the Portfolios. The following describes the primary risks of investing in each Portfolio due to each Portfolio's specific investment objective and strategies. As all investment securities are subject to inherent market risks and fluctuations in value due to earnings, economic and political conditions and other factors, no Portfolio can give any assurance that its investment objective will be achieved. In addition, you should be aware that, with the exception of the Internet Portfolio, none of the Portfolios have any operating history. MARKET RISK The net asset value of each Portfolio will fluctuate based on changes in the value of its underlying portfolio. The stock market is generally susceptible to volatile fluctuations in market price. Market prices of securities in which the Portfolios invest may be adversely affected by an issuer's having experienced losses or by the lack of earnings or by the issuer's failure to meet the market's expectations with respect to new products or services, or even by factors wholly unrelated to the value or condition of the issuer. The value of the securities held by each Portfolio is also subject to the risk that a specific segment of the stock market does not perform as well as the overall market. Under any of these circumstances, the value of each Portfolio's shares and total return will fluctuate, and your investment may be worth more or less than your original cost when you redeem your shares. INTERNET INDUSTRY SPECIFIC RISKS The value of each Portfolio's shares will be susceptible to factors affecting the Internet, such as heightened regulatory scrutiny and impending changes in government policies which may have a material effect on the products and services of this industry. Furthermore, securities of companies in this industry tend to be more volatile than securities of companies in other industries. Competitive pressures and changing demand may have a significant effect on the financial condition of Internet companies. These companies spend heavily on research and development and are especially sensitive to the risk of product obsolescence. The occurrence of any of these factors, individually or collectively, may adversely affect the value of a Portfolio's shares and your investment. OTHER SECURITIES A PORTFOLIO MIGHT PURCHASE Under normal market conditions, each Portfolio will invest at least 65% of its total assets in equity securities, consisting of common stocks, convertible securities, warrants and securities having the characteristics of common stocks. If the investment adviser believes that market conditions warrant a temporary defensive posture, a Portfolio may invest without limitation in high quality, short-term debt securities and money market instruments. These short-term debt securities and money market instruments include commercial paper, certificates of deposit, bankers' acceptances, and U.S. Government securities and repurchase agreements. More information about these investments is disclosed in the Statement of Additional Information ("SAI"). SECURITIES LENDING Each Portfolio may lend its portfolio securities to broker-dealers by entering directly into lending arrangements with such broker-dealers or indirectly through repurchase agreements, amounting to no more than 25% of its assets. Repurchase transactions will be fully collateralized at all times with cash and/or short-term debt obligations. These transactions involve some risk to a Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral. In the event that the original seller defaults on its obligation to repurchase, a Portfolio will seek to sell the collateral, which could involve costs or delays. To the extent proceeds from the sale of collateral are less than the repurchase price, each Portfolio forced to sell such collateral in this manner would suffer a loss. NON-DIVERSIFICATION Each Portfolio is classified as "non-diversified" under federal securities laws which means that one-half of each Portfolio's assets may be invested in two or more stocks while the other half is spread out among various investments not exceeding 5% of a Portfolio's total assets. As a result of their non-diversified status, a Portfolio's shares may be more susceptible to adverse changes in the value of the securities of a particular company than would be the shares of a diversified investment company. INVESTMENT IN SMALL AND MEDIUM-SIZE COMPANIES Each Portfolio may invest in small or medium-size companies. Accordingly, a Portfolio may be subject to the additional risks associated with investment in companies with small or medium-size capital structures (generally a market capitalization of $5 billion or less). The market prices of the securities of such companies tend to be more volatile than those of larger companies. Further, these securities tend to trade at a lower volume than those of larger, more established companies. If a Portfolio is heavily invested in these securities and the value of these securities suddenly decline, the net asset value of that Portfolio and your investment will be more susceptible to significant losses. FOREIGN SECURITIES Investing in foreign securities can carry higher returns than those generally associated with domestic investments. However, foreign securities may be substantially riskier than domestic investments. The economies of foreign countries may differ from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency, and balance of payments position. Furthermore, the economies of developing countries generally are heavily dependent on international trade and, accordingly, have been, and may continue to be, adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protective measures imposed or negotiated by the countries with which they trade. These economies also have been, and may continue to be, adversely affected by economic conditions in the countries with which they trade. A Portfolio may be required to obtain prior governmental approval for foreign investments in some countries under certain circumstances. Governments may require approval to invest in certain issuers or industries deemed sensitive to national interests, and the extent of foreign investment in certain debt securities and domestic companies may be subject to limitation. Individual companies may also limit foreign ownership to prevent, among other things, violation of foreign investment limitations. Some foreign investments may risk being subject to repatriation controls that could render such securities illiquid. Other countries might undergo nationalization, expropriation, political changes, governmental regulation, social instability or diplomatic developments (including war) that could adversely affect the economies of such countries or the value of the investments in those countries. For this reason, funds that invest primarily in the securities of a single country will be greatly impacted by any political, economic or regulatory developments affecting the value of the securities. Additional risks include currency fluctuations, political and economic instability, differences in financial reporting standards and less stringent regulation of securities markets. OPTIONS TRANSACTIONS Each Portfolio may write and sell options on securities in which such Portfolio invests for hedging purposes and/or direct investment. The successful use of options by a Portfolio is largely dependent on the ability of the Adviser to correctly forecast interest rate and market movements. For example, if a Portfolio were to write a call option based on the investment adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if a Portfolio were to write a put option based on the investment adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When a Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, a Portfolio will lose part or all of its investment in the option. This contrasts with an investment by a Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on each Portfolio's ability to terminate option positions at times when the investment adviser deems it desirable to do so. There is no assurance that a Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. PORTFOLIO BORROWING Each Portfolio may leverage up to 5% of its assets to fund investment activities or to achieve higher returns. Each Portfolio may borrow money from banks for temporary or emergency purposes in order to meet redemption requests. To reduce its indebtedness, a Portfolio may have to sell a portion of its investments at a time when it may be disadvantageous to do so. In addition, interest paid by a Portfolio on borrowed funds would decrease the net earnings of both that Portfolio and your investment. MANAGEMENT OF THE PORTFOLIOS - - -------------------------------------------------------------------------------- Each Portfolio's investment adviser is Kinetics Asset Management, Inc. ("Kinetics" or the "investment adviser"), 1311 Mamaroneck Avenue, Suite 130, White Plains, New York, 10605. The management and affairs of each Portfolio is supervised by the Board of Trustees whose names and general background information appear in the SAI. The investment adviser conducts investment research and supervision for each Portfolio and is responsible for the purchase and sale of securities in the investment portfolio of each Portfolio. The investment adviser receives an annual fee from each Portfolio for its services of 1.25% of each Portfolio's average daily net assets. The investment adviser has entered into a Research Agreement with Horizon Asset Management, Inc. ("Horizon Asset Management"), a New York based investment management and research firm, for which it is responsible for the payment of all fees owing to Horizon Asset Management. Peter B. Doyle is the Chairman of the Board of Trustees of Kinetics. He is also the Chief Investment Strategist. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has more than 24 years experience in the mutual fund and financial services industries. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics. Mr. Schultheis is has more than 20 years of experience in the mutual fund and financial services industries. PORTFOLIO MANAGERS PETER B. DOYLE is the Chief Investment Strategist for all of the Portfolios. Mr. Doyle also serves as the Portfolio Manager for the New Paradigm Portfolio and is a Co-Portfolio Manager of the Internet Portfolio. He is primarily responsible for the day-to-day management of each of these Portfolios' assets and securities. In early 1996, Mr. Doyle co-founded Kinetics, the investment adviser to the Portfolios. Mr. Doyle also co-founded and has been a Managing Director of Horizon Asset Management since 1994. From 1988 through late 1994, Mr. Doyle was an Investment Officer in Bankers Trust Company's Investment Services Group, where he was responsible for managing approximately $250 million in assets. During his tenure at Bankers Trust Company, Mr. Doyle served on the Finance and Utility research sub-groups. Mr. Doyle holds a Bachelor of Science in Economics from St. John's University and a Masters of Business Administration from Fordham University. FRED A. FROEWISS is the Portfolio Manager of the Infrastructure Portfolio. Mr. Froewiss also serves as a Co-Portfolio Manager of the New Paradigm Portfolio. Prior to joining Kinetics in 1999, Mr. Froewiss was the Vice President of Investments at Janney Montgomery Scott, LLC from 1992 to 1999. Earlier, Mr. Froewiss spent 10 years as a Portfolio Manager in the Private Banking Division of Citibank. He started his career at IBM Corp. in the controller's office. Mr. Froewiss holds a Bachelor of Science in Accounting and a Masters of Business Administration from Pace University. TINA LARSSON is the Portfolio Manager for the Global Portfolio. Ms. Larsson also serves as a Co-Portfolio Manager of the Internet Portfolio and the Emerging Portfolio. From 1996 to 1999, Ms. Larsson was an Analyst at Horizon Asset Management for the Spin-Off Report, a research service that focuses on spin-offs, developing institutional market research. Ms. Larsson joined the Adviser in 1999 as an Analyst for the Internet Fund and became Portfolio Manager of the Global Portfolio when the Global Portfolio commenced investment operations in December of 1999. Ms. Larsson holds a Bachelors of Science in Finance and a Masters of Business Administration from Pace University. STEVEN TUEN, CFA, is Co-Portfolio Manager of and Executive Adviser to the Internet Portfolio. Mr. Tuen also serves as Portfolio Manager of the Emerging Portfolio and Co-Portfolio Mangager of the Infrastructure Portfolio. Mr. Tuen's primary duties include research and analysis of equity securities for investment by each of these Portfolios. From 1996 to 1999, Mr. Tuen was an Analyst and the Director of Research of IPO Value Monitor, a research service that focuses on initial public offerings. From 1989 to 1996, Mr. Tuen was an Analyst at Bankers Trust Company where he became Portfolio Manager of the Private Banking Group. Mr. Tuen holds a Bachelor of Science in Business Administration from the City University of New York and is a Chartered Financial Analyst. MURRAY STAHL is the Co-Portfolio Mangager of the New Paradigm Portfolio. Mr. Stahl is Chairman and a co-founder of Horizon Asset Management. Previously, he was with Bankers Trust Company for 16 years as a portfolio manager and research analyst, and managed approximately $600 million of individual, trust and institutional client assets. As the senior fund manager, he directed the investments of three of the banks Common Trust Funds, the Special Opportunity, Utility, and Tangible Assets Funds. Mr. Stahl also served as a member of the Equity Strategy Group as well as the Investment Strategy Group, which established asset allocation guidelines for the Private Bank, and was deeply involved in new product development. Mr. Shahl holds a Bachelors of Arts in Economics and a Masters of Business Administration from Pace University. STEVEN M. BREGMAN, CFA is Co-Portfolio Manager of the Gobal Portfolio. Mr. Bregman, 41, also co-founded and is a President of Horizon Asset Management. From 1987 through late 1994, Mr. Bregman was an Investment Officer in Bankers Trust Company's Private Clients Group, where he managed in excess of $600 million of equity and fixed-income assets. Mr. Bregman was one of a five- mangager group responsible for managing the bank's largest individual relationships and for setting equity investment guidelines for the Private Bank. Mr. Bregman served as a member of the Special Situations Equity Strategy Group and served in a variety of new product development projects. Mr. Bregman received a Bachelor of Arts in Economics from City University of New York. VALUATION OF PORTFOLIO SHARES - - -------------------------------------------------------------------------------- Shares of each Portfolio are sold at its net asset value per share ("NAV"), which is determined by each Portfolio as of the close of regular trading (generally 4:00 p.m. eastern time) on each day that the New York Stock Exchange (the "Exchange") is open for unrestricted business. Purchase and redemption requests are priced at the next NAV calculated after receipt and acceptance of a completed purchase or redemption request. The NAV is determined by dividing the value of a Portfolio's securities, cash and other assets, minus all expenses and liabilities, by the number of shares outstanding (assets-liabilities/ # of shares = NAV). The NAV takes into account the expenses and fees of each Portfolio, including management, administration and shareholder servicing fees, which are accrued daily. The portfolio securities of each Portfolio are valued each day at the last quoted sales price on the securities principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees. Each Portfolio may use independent pricing services to assist in calculating the NAV of such Portfolio's shares. TRADING IN FOREIGN SECURITIES Trading in foreign securities may be completed at times when the Exchange is closed. In computing the NAV of each Portfolio, the investment adviser values foreign securities at the latest closing price on the exchange on which they are traded immediately prior to the closing of the Exchange. Certain foreign currency exchange rates may also be determined at the latest rate prior to the closing of the Exchange. Prices of foreign securities quoted in foreign currencies are translated into U.S. dollars at current rates. Occasionally, events that affect these values and exchange rates may occur between the times at which they are determined and the closing of the Exchange. If such events materially affect the value of portfolio securities, these securities may be valued at their fair value as determined in good faith by the Board of Trustees. PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in each Portfolio are sold without a sales load, at the NAV next determined after an order is received by a Portfolio. Shares in a Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in a Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by such Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. Each Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in a Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. DISTRIBUTION AND TAXES - - -------------------------------------------------------------------------------- DISTRIBUTIONS Distributions (whether treated for tax purposes as ordinary income or long-term capital gains) to shareholders of each Portfolio are generally paid in additional shares of the Portfolio in which shareholders are already invested, with no sales charge, based on the Portfolio's NAV as of the close of business on the record date for such distributions. However, you may elect on the application form to receive distributions as follows: OPTION 1: To receive income dividends and capital gain distributions in additional Portfolio shares, or OPTION 2: To receive all income dividends and capital gain distributions in cash. Each Portfolio intends to pay any dividends from investment company taxable income and distributions representing capital gain at least annually, usually in December. Each Portfolio will advise each shareholder annually of the amounts of dividends from investment company taxable income and of net capital gain distributions reinvested or paid in cash to the shareholder during the calendar year. If you select Option 1 or Option 2 and the U.S. Postal Service cannot deliver your distribution checks, or if your distribution checks remain uncashed for six months, your distribution checks will be reinvested in your account at the then current NAV of the appropriate Portfolio and your election will be converted to the purchase of additional shares. TAXES None of the Portfolios is required to pay federal income taxes on its ordinary income and capital gain because each Portfolio is treated as a partnership for federal income tax purposes. All interest, dividends and gains and losses of a Portfolio are deemed to "pass through" to its shareholders, regardless of whether such interest, dividends or gains are distributed by the Portfolio or the Portfolio realizes losses. Under each Portfolio's operational method, it is not subject to any federal income tax. However, each shareholder in a Portfolio will be taxed on its proportionate share (as determined in accordance with the Trust's Declaration of Trust and the Internal Revenue Code, as amended) of the Portfolio's ordinary income and capital gain, to the extent that the shareholder is subject to tax on its income. The Trust will inform shareholders of each Portfolio of the amount and nature of such income or gain. The foregoing discussion relates only to federal income tax law. Income from a Portfolio also may be subject to foreign, state and local taxes, and the treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Shareholders should consult their tax advisors with respect to particular questions of federal, foreign, state and local taxation. EXCHANGE PRIVILEGE - - -------------------------------------------------------------------------------- You can exchange your shares in a Portfolio for shares of any other Portfolio offered by Kinetics Portfolios Trust at no charge. You should carefully read the prospectus of a portfolio before exchanging shares into that portfolio. Be advised that exercising the exchange privilege consists of two transactions: a sale of shares in one portfolio and the purchase of shares in another. Further, exchanges may have certain tax consequences and you could realize short- or long-term capital gains or losses. Exchanges are generally made only between identically registered accounts unless you send written instructions with a signature guarantee requesting otherwise. You should request your exchange prior to market close to obtain that day's closing NAV. Exchange requests received after the close of the Exchange will be treated as though received on the next business day. Call (800) 930-3828 to learn more about the other Kinetics Portfolios and about exercising your exchange privilege. DISTRIBUTION OF SHARES - - -------------------------------------------------------------------------------- PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. PORTFOLIO ADMINISTRATOR Kinetics also serves as Administrator to the Portfolios. Kinetics will be entitled to receive an annual administration fee equal to 0.10% of each Portfolio's average daily net assets, out of which it will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTANT Firstar Bank, N.A. serves as Custodian for each Portfolio's cash and securities. The Custodian does not assist in, and is not responsible for, investment decisions involving assets of the Portfolios. Firstar, the Portfolios' Sub-Administrator, also acts as each Portfolio's Transfer Agent, Dividend Disbursing Agent and Portfolio Accountant. COUNSEL AND INDEPENDENT AUDITORS - - -------------------------------------------------------------------------------- Legal matters in connection with the issuance of shares of beneficial interests of the Trust are passed upon by Spitzer & Feldman P.C., 405 Park Avenue, New York, New York. PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. THE MEDICAL PORTFOLIO THE SMALL CAP OPPORTUNITIES PORTFOLIO THE MIDDLE EAST GROWTH PORTFOLIO EACH A SERIES OF KINETICS PORTFOLIOS TRUST A DELAWARE BUSINESS TRUST [LOGO] PROSPECTUS April 28, 2000 EXPLANATORY NOTE This Prospectus is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended (the "1933 Act"), because such interests are issued solely to eligible investors in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in any of the portfolio series of the Trust described hereunder may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts, and certain qualified pension and retirement plans. No part of this Prospectus or of the Trust's Registration Statement constitutes an offer to sell, or the solicitation of an offer to buy any beneficial interests of any of the portfolio series described hereunder or any other portfolio series of the Trust. Responses to Items 1, 2, 3, 5 and 9 of Part A and Items 23(e) and (i)-(k) of Part C have been omitted pursuant to paragraph B.2.(b) of the General Instructions to Form N-1A. THE MEDICAL PORTFOLIO THE SMALL CAP OPPORTUNITIES PORTFOLIO THE MIDDLE EAST GROWTH PORTFOLIO EACH A SERIES OF KINETICS PORTFOLIOS TRUST PROSPECTUS April 28, 2000 THE MEDICAL PORTFOLIO (the "Medical Portfolio") is a no-load, non-diversified investment company which seeks to provide investors with long-term capital growth by investing primarily in the equity securities of domestic and foreign companies engaged in medical research, pharmaceutical treatments and related medical technology with an emphasis towards companies engaged in cancer research and drug development. THE SMALL CAP OPPORTUNITIES PORTFOLIO (the "Small Cap Portfolio") is a no-load, non-diversified investment company which seeks to provide investors with long-term capital growth by investing primarily in the equity securities of domestic and foreign small capitalization companies that provide attractive valuation opportunities due to lack of institutional ownership, lack of significant analyst coverage, or short-term earnings disappointments. THE MIDDLE EAST GROWTH PORTFOLIO (the "Middle East Portfolio) is a no-load, non-diversified investment company which seeks to provide investors with long-term capital growth by investing primarily in the equity securities of foreign companies domiciled in the Middle East region of the globe and U.S. companies engaged in significant business activities in the Middle East. This Prospectus gives vital information about each Portfolio. For your own benefit and protection, please read it before you invest, and keep it on hand for future reference. Investment Adviser KINETICS ASSET MANAGEMENT, INC. Minimum Initial Investment -- $1,000 THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. INVESTMENT OBJECTIVE AND STRATEGIES OF - - -------------------------------------------------------------------------------- THE MEDICAL PORTFOLIO INVESTMENT OBJECTIVE The investment objective of the Medical Portfolio is long-term growth of capital. INVESTMENT STRATEGIES To achieve the Medical Portfolio's investment objective, at least 65% of the Portfolio's total assets will be invested in common stocks, convertible securities, warrants and other equity securities having the characteristics of common stocks, such as American Depositary Receipts ("ADRs") and International Depositary Receipts ("IDRs"), of domestic and foreign companies engaged in the medical research, pharmaceutical and technology industries and related medical technology industries, generally, with an emphasis toward companies engaged in cancer research and drug development. The Medical Portfolio may also write and sell options on securities in which it invests for hedging purposes and/or direct investment. The Medical Portfolio's investment adviser believes that favorable investment opportunities are available through companies that are developing technology, products, and/or services for cancer research and treatment and related medical activities. Accordingly, the Medical Portfolio seeks to invest in the equity securities of companies whose research and development efforts may result in higher stock values. The Medical Portfolio securities will be selected from companies that are engaged in the medical industry generally, including companies engaged in cancer research and treatment, biopharmaceutical research and the development of medical instruments for therapeutic purposes. These companies may be large, medium or small in size if in the investment adviser's opinion, the companies meet the Medical Portfolio's investment criteria. Such companies include, but are not limited to the following: o PHARMACEUTICAL DEVELOPMENT COMPANIES: Companies that develop drugs and medications for the treatment and prevention of cancer and other disease. o SURGICAL AND MEDICAL INSTRUMENT MANUFACTURERS AND DEVELOPERS: Companies that produce, manufacture and develop the tools used by health care providers in the delivery of medical care and procedures for the treatment of cancer and other diseases. o PHARMACEUTICAL MANUFACTURERS: Companies that primarily engage in the mass production of existing drugs and medicines including drugs and medicines for the treatment of cancer and other diseases. o MEDICAL RESEARCH COMPANIES: Companies that primarily research and develop new methods and procedures in the provision of health care related services for the treatment of cancer and other diseases. The investment adviser selects portfolio securities by evaluating a company's positioning and resources that it currently expends on research and development looking for a significant percentage, or large amount, of capital invested into research and treatment of cancer and other diseases. The investment adviser also considers a company's fundamentals by reviewing its balance sheets, corporate revenues, earnings and dividends. The investment adviser believes that dollars invested in research and development today frequently have significant bearing on future growth. TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other conditions, the Medical Portfolio may invest up to 100% of its assets in high quality U.S. short-term debt securities and money market instruments. The Medical Portfolio may invest up to 35% of its assets in these securities to maintain liquidity. Some of these short-term instruments include: o commercial paper o certificates of deposit, demand and time deposits and banker's acceptances o U.S. Government securities (i.e., U.S. Treasury obligations) o repurchase agreements To the extent that the Medical Portfolio engages in a temporary, defensive strategy, the Medical Portfolio may not achieve its investment objective. INVESTMENT OBJECTIVE AND STRATEGIES OF - - -------------------------------------------------------------------------------- THE SMALL CAP PORTFOLIO INVESTMENT OBJECTIVE The investment objective of the Small Cap Portfolio is long-term growth of capital. INVESTMENT STRATEGIES To achieve the Small Cap Portfolio's investment objective, under normal circumstances, at least 65% of the Small Cap Portfolio's total assets will be invested in common stocks, convertible securities, warrants and other equity securities having the characteristics of common stocks, such as American Depositary Receipts ("ADRs") and International Depositary Receipts ("IDRs"), of domestic and foreign small capitalization companies. The Small Cap Portfolio may also write and sell options on securities in which it invests for hedging purposes and/or direct investment. The Small Cap Portfolio's investment adviser believes that favorable investment opportunities are available through companies that exhibit a number of the following characteristics: have a market capitalization under $1 billion, have little or no institutional ownership, have had short-term earnings disappointments, have had a recent IPO but has not attracted significant analyst coverage, are selling at or below book or replacement value, and have price to earnings ratios that are less than one half of their projected growth rate. Portfolio securities will be selected from companies that are engaged in a number of industries. These companies may be large, medium or small in size if in the investment adviser's opinion, the companies meet the Small Cap Portfolio's investment criteria. Such companies include, but are not limited to the following: o RETAILERS: Companies that sell retail products and services via traditional stores, catalogues, telemarketing, and web-site means. o MEDIA COMPANIES: Companies that provide print, broadcast, cable, satellite and web-based information and entertainment content. o FINANCIAL SERVICE COMPANIES: Companies that engage in financial service transactions such as banking, credit cards, investment services, etc. The investment adviser considers a company's fundamentals by reviewing its balance sheets, corporate revenues, earnings and dividends. The investment adviser believes that dollars invested in research and development today frequently have significant bearing on future growth. TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other conditions, the Small Cap Portfolio may invest up to 100% of its assets in high quality domestic short-term debt securities and money market instruments. The Small Cap Portfolio may invest up to 35% of its assets in these securities to maintain liquidity. Some of these short-term money market instruments include: o commercial paper o certificates of deposit, demand and time deposits and banker's acceptance o U.S. Government securities (i.e., U.S. Treasury obligations) o repurchase agreements To the extent that the Small Cap Portfolio engages in this temporary, defensive strategy, the Small Cap Portfolio may not achieve its investment objective. INVESTMENT OBJECTIVE AND STRATEGIES OF - - -------------------------------------------------------------------------------- THE MIDDLE EAST PORTFOLIO INVESTMENT OBJECTIVE The investment objective of the Middle East Portfolio is long-term growth of capital. INVESTMENT STRATEGIES To achieve the Middle East Portfolio's objective, under normal circumstances, at least 65% of the Middle East Portfolio's total assets will be invested in common stocks, convertible securities, warrants and other equity securities having the characteristics of common stocks, such as American Depositary Receipts ("ADRs") and International Depositary Receipts ("IDRs"), of foreign and U.S. companies that are engaged in business activities in the "Middle East". The Middle East Portfolio may also write and sell options on securities in which it invests for hedging purposes and/or direct investment. The Middle East Portfolio defines the "Middle East" to be that region ranging from Morocco on the North African coast, including Algeria, Tunisia, Libya, Egypt, Sudan and Chad, to the Persian Gulf region, including Israel , Lebanon, Jordan, Syria, Iraq, Iran, Saudi Arabia, Yemen, People's Republic of Yemen, Oman, United Arab Emirates, Qatar and Kuwait). Based on their gross domestic products and stock market capitalizations, it is expected that Israel and Egypt will represent the largest country investments in the Middle East Portfolio. The Middle East Portfolio's investment adviser believes that the Middle East offers significant investment opportunities. The Middle East region is characterized by wide variations in wealth, physical resources, economic development and demographics, among other fundamental measures. Some of these nations, notably Israel, have attained world-class status in areas such as technological innovation. This great divergence is encompassed in a relatively small region and is coupled with varying degrees of progress in economic development, privatization, and financial market deregulation. The Middle East's positioning in the technology and bio-technology sectors and the historical constraints on valuation due to geo-political turmoil, have created many attractive investment valuations. Historically, political risk has been manifested in local financial markets in the form of significant valuation discounts, particularly on an episodic short-term basis. Improved prospects for political stability in the region and the anticipation of progress in peace negotiations has historically resulted in significant appreciation in many of these markets. The recent advent of the Internet has provided many technology and bio-technology companies, with a strong track record for innovation, the ability to communicate electronically, access and share information and conduct business around the world. Middle East Portfolio securities will be selected from foreign or U.S. companies that are organized under the laws of Middle East nations or which, at the time of investment are determined to hold a significant portion of their assets in or derive a significant proportion of their gross revenues from Middle East nations. These companies may be large, medium or small in size if, in the investment adviser's opinion, the companies meet the Middle East Portfolio's investment criteria. Accordingly, the Middle East Portfolio seeks to invest in securities of companies whose research and development efforts may result in higher stock values. Such companies include, but are not limited to the following: o SOFTWARE COMPANIES: Companies that produce, manufacture and develop tools to enhance the speed, integrity and storage of data, facilitate information distribution and gathering, provide secure electronic transactions, and operate other computer and telecommunications-based applications, for domestic and export markets. o COMPUTER HARDWARE COMPANIES: Companies that develop and produce computer and network hardware such as modems, switchers and routers, and those that develop and manufacture workstations and personal communications systems, for domestic and export markets. o INTERNET COMPANIES: Companies that develop, produce and sell products and services via and in support of the Internet, especially in local markets. o PHARMACEUTICAL AND BIO-TECHNOLOGY COMPANIES: Companies that develop and market drug and medical treatment products and technologies, especially for the export marketplace. o LOCAL RETAIL FRANCHISE COMPANIES: Companies that benefit from regulatory, cultural or physical characteristics specific to the region, such as non-alcoholic brewers, air conditioning distributors and financial institutions. o GROWTH IN POPULATION/WEALTH COMPANIES: Companies that benefit from local demographic trends in fields such as real estate, mortgage banking, telecommunications and food manufacturers/distributors. The investment adviser selects portfolio securities by evaluating a company's positioning and the business model as well as its ability to grow and expand its.business The investment adviser also considers a company's fundamentals by reviewing its balance sheets, corporate revenues, earnings and dividends. The investment adviser also looks at the amount of capital a company spends on research and development. The investment adviser believes that dollars invested in research and development today frequently have significant bearing on future growth. TEMPORARY INVESTMENTS To respond to adverse market, economic, political or other conditions, the Middle East Portfolio may invest up to 100% of its assets in high quality domestic short-term debt securities and money market instruments. The Middle East Portfolio may invest up to 35% of its assets in these securities to maintain liquidity. Some of these short-term money market instruments include: o commercial paper o certificates of deposit, demand and time deposits and banker's acceptance o U.S. government securities (i.e., U.S. Treasury obligations) o repurchase agreements To the extent that the Middle East Portfolio engages in this temporary, defensive strategy, the Middle East Portfolio may not achieve its investment objective. MAIN RISKS OF THE PORTFOLIOS - - -------------------------------------------------------------------------------- INVESTING IN MUTUAL FUNDS All mutual funds carry risk, which may cause you to lose money on your investment. The following describes the primary risks of investing in each Portfolio based on each Portfolio's specific investment objective and strategies. As all investment securities are subject to inherent market risks and fluctuations in value due to earnings, economic and political conditions and other factors, the Portfolios can give no assurance that their investment objectives will be achieved. In addition, you should be aware that no Portfolio has any operating history. MEDICAL RESEARCH INDUSTRY SPECIFIC RISKS Medical and pharmaceutical-related companies in which the Medical Portfolio invests are generally subject to the rate of change in technology, which is generally higher than that of other industries. Similarly, cancer research-related industries use many products and services of companies engaged in medical and pharmaceutical-related activities and are also subject to relatively high risks of rapid obsolescence caused by progressive scientific and technological advances. Medical research and development is also subject to strict regulatory scrutiny and ongoing legislative action. INVESTMENT IN SMALL-AND MEDIUM-SIZED CAPITALIZATION COMPANIES Each Portfolio will invest in companies with small and medium-sized market capitalizations. Accordingly, the Small Cap Portfolio may be subject to the additional risks associated with investment in companies with small capital structures (generally a market cap of $1 billion or less). Similarly, the Medical and Middle East Portfolios may be subject to the additional risks associated with investment in companies with small or medium-sized capital structures (generally a market capitalization of $5 billion or less). The market prices of the securities of companies with small or medium-sized capital structures tend to be more volatile than those of larger companies. Further, these securities tend to trade at a lower volume than do those of larger, more established companies. If a Portfolio is heavily invested in these securities, the net asset value of that Portfolio will be more susceptible to sudden and significant losses if the value of these securities decline. TECHNOLOGY & BIO-TECHNOLOGY INDUSTRY SPECIFIC RISKS The Middle East Portfolio invests in companies that derive a significant portion of their revenues from technology and bio-technology-related activities that, in general, are subject to the rate of change in technology and competition, which is generally higher than that of other industries. MARKET RISK The net asset value of each Portfolio will fluctuate based on changes in the value of its underlying portfolio. The stock market is generally susceptible to volatile fluctuations in market price. Market prices of securities in which each Portfolio invests may be adversely affected by an issuer's having experienced losses or by the lack of earnings or by the issuer's failure to meet the market's expectations with respect to new products or services, or even by factors wholly unrelated to the value or condition of the issuer. The value of the securities held by the Portfolios is also subject to the risk that a specific segment of the stock market does not perform as well as the overall market. Under any of these circumstances, the value of each Portfolio's shares and total return will fluctuate, and your investment may be worth more or less than your original cost when you redeem your shares. OTHER SECURITIES THE PORTFOLIOS MIGHT PURCHASE Under normal market conditions, each Portfolio will invest at least 65% of its total assets in equity securities, consisting of common stocks, convertible securities, warrants and securities having the characteristics of common stocks. With respect o the Middle East Portfolio, these may include securities that are traded on recognized Middle East stock exchanges, such as the Tel Aviv Stock Exchange or the Amman Financial Market, as well as securities that are traded outside of the Middle East, including those that trade in the U.S. or other international stock exchanges and in the U.S. over-the-counter market. If the investment adviser believes that market conditions warrant a temporary defensive posture, each Portfolio may invest without limitation in high quality, short-term debt securities and money market instruments. These short-term debt securities and money market instruments include commercial paper, certificates of deposit, bankers' acceptances, and U.S. Government securities and repurchase agreements. More information about these investments is disclosed in the Statement of Additional Information ("SAI"). OPTIONS TRANSACTIONS Each Portfolio may write and sell options on securities in which such Portfolio invests for hedging purposes and/or direct investment. The successful use of options by a Portfolio is largely dependent on the ability of the Adviser to correctly forecast interest rate and market movements. For example, if a Portfolio were to write a call option based on the investment adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if a Portfolio were to write a put option based on the investment adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When a Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, a Portfolio will lose part or all of its investment in the option. This contrasts with an investment by a Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on each Portfolio's ability to terminate option positions at times when the investment adviser deems it desirable to do so. There is no assurance that a Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. SECURITIES LENDING Each Portfolio may lend its portfolio securities to broker-dealers by entering directly into lending arrangements with such broker-dealers or indirectly through repurchase agreements, amounting to no more than 25% of its assets. Repurchase transactions will be fully collateralized at all times with cash and/or short-term debt obligations. These transactions involve some risk to a Portfolio if the other party should default on its obligation and the Portfolio is delayed or prevented from recovering the collateral. In the event that the original seller defaults on its obligation to repurchase, a Portfolio will seek to sell the collateral, which could involve costs or delays. To the extent proceeds from the sale of collateral are less than the repurchase price, a Portfolio would suffer a loss. NON-DIVERSIFICATION Each Portfolio is classified as "non-diversified" under federal securities laws which means that one-half of each Portfolio's assets may be invested in two or more stocks while the other half is spread out among various investments not exceeding 5% of each Portfolio's total assets. As a result of each Portfolio's non-diversified status, each Portfolio's shares may be more susceptible to adverse changes in the value of the securities of a particular company than would be the shares of a diversified investment company. FOREIGN SECURITIES Investing in foreign securities can carry higher returns than those generally associated with domestic investments. However, foreign securities may be substantially riskier than domestic investments. The economies of foreign countries may differ from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency, and balance of payments position. Furthermore, the economies of developing countries generally are heavily dependent on international trade and, accordingly, have been, and may continue to be, adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protective measures imposed or negotiated by the countries with which they trade. These economies also have been, and may continue to be, adversely affected by economic conditions in the countries with which they trade. A Portfolio may be required to obtain prior governmental approval for foreign investments in some countries under certain circumstances. Governments may require approval to invest in certain issuers or industries deemed sensitive to national interests, and the extent of foreign investment in certain debt securities and domestic companies may be subject to limitation. Individual companies may also limit foreign ownership to prevent, among other things, violation of foreign investment limitations. Some foreign investments may risk being subject to repatriation controls that could render such securities illiquid. Other countries might undergo nationalization, expropriation, political changes, governmental regulation, social instability or diplomatic developments (including war) that could adversely affect the economies of such countries or the value of the investments in those countries. For this reason, funds that invest primarily in the securities of a single country will be greatly impacted by any political, economic or regulatory developments affecting the value of the securities. Additional risks include currency fluctuations, political and economic instability, differences in financial reporting standards and less stringent regulation of securities markets. PORTFOLIO BORROWING Each Portfolio may leverage up to 5% of its assets to fund investment activities or to achieve higher returns. Each Portfolio may borrow money from banks for temporary or emergency purposes in order to meet redemption requests. To reduce indebtedness, a Portfolio may have to sell a portion of its investments at a time when it may be disadvantageous to do so. In addition, interest paid by a Portfolio on borrowed funds would decrease the net earnings of both the Portfolio and your investment. MANAGEMENT OF THE PORTFOLIOS - - -------------------------------------------------------------------------------- INVESTMENT ADVISER Each Portfolio's investment adviser is Kinetics Asset Management, Inc. ("Kinetics" or the "investment adviser"), 1311 Mamaroneck Avenue, Suite 130, White Plains, New York, 10605. The management and affairs of each Portfolio is supervised by the Board of Trustees whose names and general background information appear in the SAI. The investment adviser conducts investment research and supervision for each Portfolio and is responsible for the purchase and sale of securities in the investment portfolio of each Portfolio. The investment adviser receives an annual fee from each Portfolio for its services of 1.25% of each Portfolio's average daily net assets. The investment adviser has entered into a Research Agreement with Horizon Asset Management, Inc. ("Horizon Asset Management"), a New York based investment management and research firm, for which it is responsible for the payment of all fees owing to Horizon Asset Management. Peter B. Doyle is the Chairman of the Board of Portfolios of Kinetics. He is also the Chief Investment Strategist. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has more than 24 years experience in the mutual fund and financial services industries. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics. Mr. Schultheis has more than 20 years of experience in the mutual fund and financial services industries. PORTFOLIO MANAGERS PETER B. DOYLE is the Co-Portfolio Manager of the Medical and Middle East Portfolios and is primarily responsible for the day-to-day management of each of these Portfolios' assets and securities. In early 1996, Mr. Doyle co-founded Kinetics, the investment adviser to the Portfolios. Mr. Doyle also co-founded and has been a Managing Director of Horizon Asset Management since 1994. From 1988 through late 1994, Mr. Doyle was an Investment Officer in Bankers Trust Company's Investment Services Group, where he was responsible for managing approximately $250 million in assets. During his tenure at Bankers Trust Company, Mr. Doyle served on the Finance and Utility research sub-groups. Mr. Doyle holds a Bachelor of Science in Economics from St. John's University and a Masters of Business Administration from Fordham University. BRUCE P. ABEL is Co-Portfolio Manager of the Medical Portfolio. Mr. Abel's primary duties include research and analysis of developing scientific technologies and innovations in the medical, bio-technical and pharmaceutical industries specific to cancer research and treatment. Prior to joining Kinetics in 1999, Mr. Abel was employed with Brookhaven National Laboratory since 1989 where he worked researching, developing and implementing technical and scientific programs and systems in the areas of nuclear physics, computer programming, and industrial design. During that time, Mr. Abel was also a freelance writer for Academic Science News and Review, researching, reporting, and providing scholarly analysis and insight on a myriad of issues and developments in the fields of science and technology. Mr. Abel has over ten years experience in the fields of science, chemistry, physics, and engineering. Mr. Abel holds a Masters Degree in Mechanical Engineering with an emphasis on Nuclear Engineering, and has also studied extensively in the areas of Applied Mathematics, Hydrodynamics, Aerodynamics, and Physics. FRED A. FROEWISS is the Co-Portfolio Manager of the Small Cap Portfolio. Prior to joining Kinetics in 1999, Mr. Froewiss was the Vice President of Investments at Janney Montgomery Scott, LLC from 1992 to 1999. Earlier, Mr. Froewiss spent 10 years as a Portfolio Manager in the Private Banking Division of Citibank. He started his career at IBM Corp. in the controller's office. Mr. Froewiss holds a Bachelor of Science in Accounting and a Masters of Business Administration from Pace University. MURRAY STAHL is Co-Portfolio Manager of the Small Cap Portfolio. Mr. Stahl is Chairman and a co-founder of Horizon. Previously, he was with Bankers Trust Company for 16 years as a portfolio manager and research analyst, and managed approximately $600 million of individual, trust and institutional client assets. As the senior fund manager, he directed the investments of three of the banks Common Trust Funds, the Special Opportunity, Utility, and Tangible Assets Funds. Mr. Stahl also served as a member of the Equity Strategy Group as well as the Investment Strategy Group, which established asset allocation guidelines for the Private Bank, and was deeply involved in new product development. Mr. Stahl holds a Bachelors of Arts in Economics and a Masters of Arts in History from the City University of New York and a Masters of Business Administration from Pace University. STEVEN M. BREGMAN, CFA is Co-Portfolio Manager of the Middle East Portfolio. Mr. Bregman's primary duties include research and analysis of equity securities for investment in the Portfolio. Mr. Bregman, 41, also co-founded and is a President of Horizon Asset Management, Inc., a New York based investment management and research firm, which was established in 1994. From 1987 through late 1994, Mr. Bregman was an Investment Officer in Bankers Trust Company's Private Clients Group, where he managed in excess of $600 million of equity and fixed-income assets. Mr. Bregman was one of a five manager group responsible for managing the bank's largest individual relationships and for setting equity investment guidelines for the Private Bank. Mr. Bregman served as a member of the Special Situations Equity Strategy Group and served in a variety of new product development projects. Mr. Bregman received a Bachelor of Arts in Economics from City University of New York. VALUATION OF PORTFOLIO SHARES - - -------------------------------------------------------------------------------- Shares of each Portfolio are sold at net asset value per share ("NAV"), which is determined by each Portfolio as of the close of regular trading (generally 4:00 p.m. eastern time) on each day that the New York Stock Exchange (the "Exchange") is open for unrestricted business. Purchase and redemption requests are priced at the next NAV calculated after receipt and acceptance of a completed purchase or redemption request. The NAV is determined by dividing the value of a Portfolio's securities, cash and other assets, minus all expenses and liabilities, by the number of shares outstanding (assets-liabilities / # of shares outstanding = NAV). The NAV takes into account the expenses and fees of the Portfolio, including management, administration and shareholder servicing fees, which are accrued daily. Each Portfolio's securities are valued each day at the last quoted sales price on the securities' principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees of the Portfolios. Each Portfolio may use independent pricing services to assist in calculating its NAV. TRADING IN FOREIGN SECURITIES Trading in foreign securities may be completed at times when the Exchange is closed. In computing the NAV of a Portfolio, the investment adviser values foreign securities held by the Portfolio at the latest closing price on the exchange on which they are traded immediately prior to the closing of the Exchange. Certain foreign currency exchange rates may also be determined at the latest rate prior to the closing of the Exchange. Prices of foreign securities quoted in foreign currencies are translated into U.S. dollars at current rates. Occasionally, events that affect these values and exchange rates may occur between the times at which they are determined and the closing of the Exchange. If such events materially affect the value of a Portfolio's securities, these securities may be valued at their fair value as determined in good faith by the Portfolios' Board of Trustees. PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest of each Portfolio are sold without a sales load, at the NAV next determined after an order is received by a Portfolio. Shares of each Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in a Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Prospectus does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in a Portfolio. Each Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in a Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. Each Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in a Portfolio as a group, a Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. DISTRIBUTION AND TAXES - - -------------------------------------------------------------------------------- DISTRIBUTIONS Distributions (whether treated for tax purposes as ordinary income or long-term capital gains) to shareholders of each Portfolio are paid in additional shares of the Portfolio in which the investaor is invested, with no sales charge, based on each Portfolio's NAV as of the close of business on the record date for such distributions. However, you may elect on the application form to receive distributions as follows: OPTION 1: To receive income dividends in cash and capital gain distributions in additional Portfolio shares, or OPTION 2: To receive all income dividends and capital gain distributions in cash. Each Portfolio intends to pay any dividends from investment company taxable income and distributions representing capital gain at least annually, usually in November. Each Portfolio will advise each investor annually of the amounts of dividends from investment company taxable income and of net capital gain distributions reinvested or paid in cash to the shareholder during the calendar year. If you select Option 1 or Option 2 and the U.S. Postal Service cannot deliver your distribution checks, or if your distribution checks remain uncashed for six months, your distribution checks be will reinvested in your account at the then current NAV and your election will be converted to the purchase of additional shares. Taxes None of the Portfolios is required to pay federal income taxes on its ordinary income and capital gain because each Portfolio is treated as a partnership for federal income tax purposes. All interest, dividends and gains and losses of a Portfolio are deemed to "pass through" to its shareholders, regardless of whether such interest, dividends or gains are distributed by the Portfolio or the Portfolio realizes losses. Under each Portfolio's operational method, it is not subject to any federal income tax. However, each shareholder in a Portfolio will be taxed on its proportionate share (as determined in accordance with the Trust's Declaration of Trust and the Internal Revenue Code, as amended) of the Portfolio's ordinary income and capital gain, to the extent that the shareholder is subject to tax on its income. The Trust will inform shareholders of each Portfolio of the amount and nature of such income or gain. The foregoing discussion relates only to federal income tax law. Income from a Portfolio also may be subject to foreign, state and local taxes, and the treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Shareholders should consult their tax advisors with respect to particular questions of federal, foreign, state and local taxation. EXCHANGE PRIVILEGE - - -------------------------------------------------------------------------------- You can exchange your shares in a Portfolio for shares of any other portfolio offered by Kinetics Portfolios Trust at no charge. You should carefully read the prospectus of a portfolio before exchanging shares into that portfolio. Be advised that exercising the exchange privilege consists of two transactions: a sale of shares in one portfolio and the purchase of shares in another. Further, exchanges may have certain tax consequences and you could realize short- or long-term capital gains or losses. Exchanges are generally made only between identically registered accounts unless you send written instructions with a signature guarantee requesting otherwise. You should request your exchange prior to market close to obtain that day's closing NAV. Exchange requests received after the close of the Exchange will be treated as though received on the next business day. Call (800) 930-3828 to learn more about the other Kinetics Portfolios and about exercising your exchange privilege. DISTRIBUTION OF SHARES - - -------------------------------------------------------------------------------- PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. PORTFOLIO ADMINISTRATOR Kinetics also serves as Administrator to the Portfolios. Kinetics will be entitled to receive an annual administration fee equal to 0.10% of each Portfolio's average daily net assets, out of which it will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to each Portfolio by Firstar. CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTANT Firstar Bank, N.A. serves as Custodian for each Portfolio's cash and securities. The Custodian does not assist in, and is not responsible for, investment decisions involving assets of the Portfolios. Firstar, each Portfolio's Sub-Administrator, also acts as each Portfolio's Transfer Agent, Dividend Disbursing Agent and Portfolio Accountant. COUNSEL AND INDEPENDENT AUDITOR - - -------------------------------------------------------------------------------- Legal matters in connection with the issuance of shares of beneficial interests of each Portfolio are passed upon by Spitzer & Feldman P.C., 405 Park Avenue, New York, New York. PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Portfolios for the year ending December 31, 2000. THE KINETICS GOVERNMENT MONEY MARKET PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST A DELAWARE BUSINESS TRUST [LOGO] PROSPECTUS April 28, 2000 EXPLANATORY NOTE This Prospectus is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended (the "1933 Act"), because such interests are issued solely to eligible investors in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Kinetics Government Money Market Portfolio (the "Portfolio") may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts, and certain qualified pension and retirement plans. No part of this Prospectus or of the Trust's Registration Statement constitutes an offer to sell, or the solicitation of an offer to buy any beneficial interests in the Portfolio or any other portfolio series of the Trust. Responses to Items 1, 2, 3, 5 and 9 of Part A and Items 23(e) and (i)-(k) of Part C have been omitted pursuant to paragraph B.2.(b) of the General Instructions to Form N-1A. INVESTMENT OBJECTIVE AND STRATEGIES - - -------------------------------------------------------------------------------- (A) INVESTMENT OBJECTIVE INVESTMENT OBJECTIVE The investment objective of the Portfolio is to provide current income consistent with the preservation of capital and maintenance of liquidity. (B) IMPLEMENTATION OF INVESTMENT OBJECTIVE INVESTMENT STRATEGIES The Portfolio seeks to achieve its investment objective by investing all of its investable assets in high quality, U.S. dollar-denominated short-term obligations that have been determined by the investment adviser, subject to the approval of the Portfolio's Board of Trustees, to present minimal credit risk. The Portfolio invests exclusively in obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities and repurchase agreements that are fully collateralized by such obligations ("U.S. Government Securities"). U.S. Government Securities include direct obligations of the U.S. Treasury, such as Treasury Bills, Treasury Notes and Treasury Bonds. U.S. Government Securities are high quality instruments guaranteed as to principal and interest and issued by the U.S. Treasury or by an agency or instrumentality of the U.S. Government. Not all U.S. Government Securities are backed by the full faith and credit of the United States however. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by the discretionary authority of the U.S. Government to purchase the agencies' obligations; while others are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the Portfolio must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment. Yields on short-, intermediate- and long-term U.S. Government Securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering and the maturity of the obligation. Debt securities with longer maturities tend to produce higher capital appreciation and depreciation than do obligations with shorter maturities and lower yields. The market value of U.S. Government Securities generally varies inversely with changes in interest rates. An increase in interest rates, therefore, generally would reduce the market value of the Portfolio's investments in U.S. Government Securities, while a decline in interest rates generally would increase the market value of the Portfolio's investments in these securities. Under a repurchase agreement, the Portfolio purchases a U.S. Government Security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate premium during the Portfolio's holding period. While the maturities of the underlying securities in repurchase agreement transactions may be more than one year, the term of each repurchase agreement will always be less than one year. The Portfolio may enter into repurchase agreements with banks that are members of Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. Government Securities. The investment adviser monitors the creditworthiness of each firm that is a party to a repurchase agreement with the Portfolio. MAIN RISKS OF THE PORTFOLIO - - -------------------------------------------------------------------------------- GENERAL The following describes the primary risks of the Portfolio based on the specific investment objective and strategies of the Portfolio. REPURCHASE AGREEMENT RISKS One of the risks of investing in repurchase agreements is that the seller may not repurchase the securities from the Portfolio, which may result in the Portfolio selling the security for less than the price agreed upon with the seller. Another risk of repurchase agreements is that the seller may default or file for bankruptcy under which circumstances the Portfolio might have to wait through lengthy court actions before selling the securities. In the event of a default or bankruptcy by the seller, the Portfolio will liquidate those securities held under the repurchase agreement, which securities constitute collateral for the seller's obligation to repurchase the securities. INTEREST RATE RISKS The Portfolio's securities may be affected by general changes in interest rates resulting in increases or decreases in the values of the obligations held by the Portfolio. The values of the obligations held by the Portfolio can be expected to vary inversely with changes in prevailing interest rates. Although the investment policies of the Portfolio are designed to minimize these changes and to maintain a net asset value of $1.00 per share, there is no assurance that these policies will be successful. MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- (A) MANAGEMENT (1) INVESTMENT ADVISER INVESTMENT ADVISER The Portfolio's investment adviser is Kinetics Asset Management, Inc. ("Kinetics" or the "investment adviser"), 1311 Mamaroneck Avenue, Suite 130, White Plains, New York, 10605. The investment adviser conducts investment research and supervision for the Portfolio and is responsible for the purchase and sale of securities for the Portfolio's assets. The investment adviser receives an annual fee from the Portfolio for its services of 0.50% of the Portfolio's average daily net assets. The investment adviser has entered into a Research Agreement with Horizon Asset Management, Inc. ("Horizon Asset Management"), a New York based investment management and research firm, for which it is responsible for the payment of all fees owing to Horizon Asset Management. Peter B. Doyle is the Chairman of the Board of Directors of Kinetics. He is also the Chief Investment Strategist. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has more than 24 years experience in the mutual fund and financial services industries. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics. Mr. Schultheis has more than 20 years of experience in the mutual fund and financial services industries. (2) PORTFOLIO MANAGER PETER B. DOYLE is Co-Portfolio Manager of the Portfolio and is primarily responsible for the day-to-day management of the Portfolio's assets and securities. Mr. Doyle is the Chief Investment Strategist and Chairman of the Board of Directors of Kinetics. In early 1996, Mr. Doyle co-founded Kinetics, the investment adviser to the Portfolios. Mr. Doyle also co-founded and has been a Managing Director of Horizon Asset Management since 1994. From 1988 through late 1994, Mr. Doyle was an Investment Officer in Bankers Trust Company's Investment Services Group, where he was responsible for managing approximately $250 million in assets. During his tenure at Bankers Trust Company, Mr. Doyle served on the Finance and Utility research sub-groups. Mr. Doyle holds a Bachelor of Science in Economics from St. John's University and a Masters of Business Administration from Fordham University. VALUATION OF PORTFOLIO SHARES - - -------------------------------------------------------------------------------- Shares of the Portfolio are sold at net asset value per share ("NAV"), which is determined by the Portfolio as of the close of regular trading (generally 4:00 p.m. eastern time) on each day that the New York Stock Exchange (the "Exchange") is open for unrestricted business. Purchase and redemption requests are priced at the next NAV calculated after receipt and acceptance of a completed purchase or redemption request. The NAV is determined by dividing the value of the Portfolio's securities, cash and other assets, minus all expenses and liabilities, by the number of shares outstanding (assets-liabilities / # of shares outstanding = NAV). The NAV takes into account the expenses and fees of the Portfolio, including management, administration and shareholder servicing fees, which are accrued daily. The Portfolio will utilize the amortized cost method in valuing its portfolio securities. This method involves valuing a security at its cost adjusted by a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. The purpose of this method of calculation is to facilitate the maintenance of a consistent net asset value per share for the Portfolio of $1.00. However, there is no assurance that the $1.00 net asset value per share will be maintained. PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. DISTRIBUTION AND TAXES - - -------------------------------------------------------------------------------- DISTRIBUTIONS Distributions (whether treated for tax purposes as ordinary income or long-term capital gains) to shareholders of the Portfolio are paid in additional shares of the Portfolio, with no sales charge, based on the Portfolio's NAV as of the close of business on the record date for such distributions. However, you may elect on the application form to receive distributions as follows: OPTION 1: To receive income dividends in cash and capital gain distributions in additional Portfolio shares, or OPTION 2: To receive all income dividends and capital gain distributions in cash. The Portfolio intends to pay any dividends from investment company taxable income and distributions representing capital gain at least annually, usually in November. The Portfolio will advise each shareholder annually of the amounts of dividends from investment company taxable income and of net capital gain distributions reinvested or paid in cash to the shareholder during the calendar year. If you select Option 1 or Option 2 and the U.S. Postal Service cannot deliver your distribution checks, or if your distribution checks remain uncashed for six months, your distribution checks be will reinvested in your account at the then current NAV and your election will be converted to the purchase of additional shares. TAXES The Portfolio is not required to pay federal income taxes on its ordinary income and capital gain because the Portfolio is treated as a partnership for federal income tax purposes. All interest, dividends and gains and losses of the Portfolio are deemed to "pass through" to its shareholders, regardless of whether such interest, dividends or gains are distributed by the Portfolio or the Portfolio realizes losses. Under the Portfolio's operational method, it is not subject to any federal income tax. However, each shareholder in the Portfolio will be taxed on its proportionate share (as determined in accordance with the Trust's Declaration of Trust and the Internal Revenue Code, as amended) of the Portfolio's ordinary income and capital gain, to the extent that the shareholder is subject to tax on its income. The Trust will inform shareholders of the Portfolio of the amount and nature of such income or gain. The foregoing discussion relates only to federal income tax law. Income from the Portfolio also may be subject to foreign, state and local taxes, and the treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Shareholders should consult their tax advisors with respect to particular questions of federal, foreign, state and local taxation. EXCHANGE PRIVILEGE - - -------------------------------------------------------------------------------- You can exchange your shares in the Portfolio for shares of any other Portfolio offered by Kinetics Portfolios Trust at no charge. You should carefully read the prospectus of a portfolio before exchanging shares into that portfolio. Be advised that exercising the exchange privilege consists of two transactions: a sale of shares in one portfolio and the purchase of shares in another. Further, exchanges may have certain tax consequences and you could realize short- or long-term capital gains or losses. Exchanges are generally made only between identically registered accounts unless you send written instructions with a signature guarantee requesting otherwise. You should request your exchange prior to market close to obtain that day's closing NAV. Exchange requests received after the close of the Exchange will be treated as though received on the next business day. Call (800) 930-3828 to learn more about the other Kinetics Portfolios and about exercising your exchange privilege. DISTRIBUTION OF SHARES - - -------------------------------------------------------------------------------- PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. PORTFOLIO ADMINISTRATOR Kinetics also serves as Administrator to the Portfolio. Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets, out of which it will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. CUSTODIAN, TRANSFER AGENT, DIVIDEND DISBURSING AGENT AND PORTFOLIO ACCOUNTANT Firstar Bank, N.A. serves as Custodian for the Portfolio's cash and securities. The Custodian does not assist in, and is not responsible for, investment decisions involving assets of the Portfolio. Firstar, the Portfolio's Sub-Administrator, also acts as the Portfolio's Transfer Agent, Dividend Disbursing Agent and Portfolio Accountant. COUNSEL AND INDEPENDENT AUDITORS - - -------------------------------------------------------------------------------- Legal matters in connection with the issuance of shares of beneficial interests of the Portfolio are passed upon by Spitzer & Feldman P.C., 405 Park Avenue, New York, New York. PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Portfolio for the year ending December 31, 2000. THE INTERNET PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST 1311 Mamaroneck Avenue White Plains, New York 10605 (800) 930-3828 April 28, 2000 STATEMENT OF ADDITIONAL INFORMATION This SAI provides general information about the Portfolio. The Portfolio is a series of Kinetics Portfolios Trust (the "Trust"), a Delaware business trust. This SAI is not a prospectus and should be read in conjunction with the Portfolio's current Prospectus dated April 28, 2000, as supplemented and amended from time to time, which is incorporated hereto by reference. To obtain a copy of the Prospectus, please write the Portfolio at the address set forth above or call the telephone number shown above. This SAI is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended ("1933 Act"), because such interests are issued solely to in private placement transactions to eligible investors that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Portfolio may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts and certain qualified pension and retirement plans. Neither this SAI nor the Registration Statement as a whole constitutes an offer to sell or the solicitation of an offer to buy any beneficial interests in this Portfolio or any other portfolio series of the Trust. THE INTERNET PORTFOLIO The Portfolio..................................................................2 Investment Objective, Strategies, and Risks....................................2 Investment Policies and Associated Risks.......................................3 Investment Restrictions........................................................7 Temporary Investments..........................................................8 Portfolio Turnover.............................................................9 Management of the Portfolio....................................................9 Control Persons and Principal Holders of Securities...........................12 Investment Adviser............................................................13 Administrative Services.......................................................14 Custodian.....................................................................15 Independent Public Accountants................................................15 Brokerage.....................................................................15 Capitalization................................................................16 Purchase of Shares............................................................17 Redemption of Shares..........................................................18 Valuation of Shares...........................................................18 Taxes.........................................................................19 Performance Information.......................................................20 Financial Statements..........................................................22 THE PORTFOLIO - - -------------------------------------------------------------------------------- The Portfolio is a series of Kinetics Portfolios Trust, a business trust organized pursuant to a Declaration of Trust under the laws of the State of Delaware on March 14, 2000. The Portfolio's principal office is located at 1311 Mamaroneck Avenue, White Plains, New York 10605. The Portfolio is a non-diversified, open-end management investment company. INVESTMENT OBJECTIVE, STRATEGIES, AND RISKS - - -------------------------------------------------------------------------------- The Portfolio's primary investment objective is long-term growth of capital. The Portfolio is designed for long-term investors who understand and are willing to accept the risk of loss involved in investing in a mutual fund seeking long-term capital growth. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in securities of companies that provide products or services designed for the Internet. This Portfolio should not be used as a trading vehicle. INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The following paragraphs provide a more detailed description of the Portfolio's investment policies and risks identified in the Prospectus. Unless otherwise noted, the policies described in this SAI are not fundamental and may be changed by the Board of Trustees of the Trust. COMMON AND PREFERRED STOCK Common stocks are units of ownership of a corporation. Preferred stocks are stocks that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. Some preference stocks may be convertible into common stock. Convertible securities are securities that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. CONVERTIBLE DEBT SECURITIES The Portfolio may invest in debt securities convertible into common stocks. Debt purchased by the Portfolio will consist of obligations of medium-grade or higher, having at least adequate capacity to pay interest and repay principal. Non-convertible debt obligations will be rated BBB or higher by S&P, or Baa or higher by Moody's. Convertible debt obligations will be rated B or higher by S&P or B or higher by Moody's. Securities rated Baa by Moody's are considered by Moody's to be medium-grade securities and have adequate capacity to pay principal and interest. Bonds in the lowest investment grade category (BBB) have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Securities rated B are referred to as "high-risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. See "Appendix" to this Statement of Additional Information for a description of debt security ratings. FIXED-INCOME SECURITIES The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. CREDIT RISK relates to the ability of the issuer to meet interest and principal payments, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, will also increase the credit risk to which those assets are subject. MARKET RISK relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium- and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wilder fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of debt securities whose ratings are downgraded below these ratings subsequent to the Portfolio's purchase of the securities. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which the Portfolio invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events. At no time will the Portfolio have more than 5% of its total assets invested in any fixed-income securities that are unrated or rated below investment grade either at the time of purchase or as a result of a reduction in rating after purchase. DEPOSITARY RECEIPTS. The Portfolio may invest in American Depositary Receipts ("ADRs") or other forms of depositary receipts, such as International Depositary Receipts ("IDRs"). Depositary receipts are typically issued in connection with a U.S. or foreign bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. Investments in these types of securities involve certain inherent risks generally associated with investments in foreign securities, including the following: POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain countries may 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, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. CURRENCY FLUCTUATIONS. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of an ADR's underlying portfolio securities denominated in that currency. Such changes will affect the Portfolio to the extent that the Portfolio is invested in ADR's comprised of foreign securities. TAXES. The interest and dividends payable on certain foreign securities comprising an ADR may be subject to foreign withholding taxes, thus reducing the net amount of income to be paid to the Portfolio and that may, ultimately, be available for distribution to the Portfolio's investors. OPTIONS Most mutual funds that use option strategies to hedge portfolio positions do not depend solely on the option profit or loss to justify the use of options, because such funds also take into account the profit or loss of the underlying securities. A more detailed discussion of writing covered and uncovered options on securities generally and the investment risks associated with such investments is set forth below. PURCHASING PUT AND CALL OPTIONS. The Portfolio may purchase put and call options on securities eligible for purchase by the Portfolio and on securities indices. Put and call options are derivative securities traded on U.S. exchanges. If the Portfolio purchases a put option, it acquires the right to sell the underlying security or index value at a specified price at any time during the term of the option. If the Portfolio purchases a call option, it acquires the right to purchase the underlying security or index value at a specified price at any time during the term of the option. Prior to exercise or expiration, the Portfolio may sell an option when through a "closing sale transaction," which is accomplished by selling an option of the same series as the option previously purchased. The Portfolio generally will purchase only those options for which the investment adviser believes there is an active secondary market to facilitate closing transactions. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. The Portfolio will purchase put options to hedge against a decrease in the price of securities it holds. Such hedge protection is provided during the life of the put option since the Portfolio, as the holder of the put option, is able to sell the underlying security at the exercise price regardless of any decrease in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decrease sufficiently below the exercise price to cover the premium and transaction costs. WRITING CALL OPTIONS. The Portfolio may write covered call options on securities eligible for purchase by the Portfolio. A call option is "covered" if the Portfolio owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, it may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option. Effecting a closing transaction in the case of a written call option will permit the Portfolio to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction allows the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of the Portfolio. If the Portfolio desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. The Portfolio realizes a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. The Portfolio realizes a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, appreciation of the underlying security owned by the Portfolio generally offsets, in whole or in part, any loss to the Portfolio resulting from the repurchase of a call option. RISK FACTORS IN OPTIONS TRANSACTIONS. The successful use of options by the Portfolio depends on the ability of the Adviser to forecast correctly interest rate and market movements. For example, if the Portfolio were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Portfolio were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When the Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Portfolio will lose part or all of its investment in the option. This contrasts with an investment by the Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Adviser deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. If a secondary market in options were to become unavailable, the Portfolio could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events --such as volume in excess of trading or clearing capability-- were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or an options clearing corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unit asset valuable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, an options clearing corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If an options clearing corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. DEALER OPTIONS. The Portfolio may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While the Portfolio might look to an exchange's clearing corporation to exercise exchange-traded options, if the Portfolio purchases a dealer option it must rely on the selling dealer to perform if the Portfolio exercises the option. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, the Portfolio can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when the Portfolio writes a dealer option, the Portfolio can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and can enter into closing transactions with the Portfolio, no assurance exists that the Portfolio will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Portfolio, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Portfolio may be unable to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because the Portfolio must maintain a secured position with respect to any call option on a security it writes, the Portfolio may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Portfolio's ability to sell portfolio securities at a time when such sale might be advantageous. The staff of the SEC takes the position that purchased dealer options are illiquid securities. The Portfolio may treat the cover used for written dealer options as liquid if the dealer agrees that the Portfolio may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. With that exception, however, the Portfolios will treat dealer options as subject to the Portfolios' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Portfolios will change their treatment of such instruments accordingly. INVESTMENT RESTRICTIONS - - -------------------------------------------------------------------------------- The investment restrictions of the Portfolio may be changed only with the approval of the holders of a majority of the Portfolio's outstanding voting securities. 1. The Portfolio will not act as underwriter for securities of other issuers. 2. The Portfolio will not make loans. 3. With respect to 50% of its total assets, the Portfolio will not invest in the securities of any issuer if as a result the Portfolio holds more than 10% of the outstanding securities or more than 10% of the outstanding voting securities of such issuer. 4. The Portfolio will not borrow money or pledge, mortgage, or hypothecate its assets except to facilitate redemption requests that might otherwise require the untimely disposition of portfolio securities and then only from banks and in amounts not exceeding the lesser of 10% of its total assets valued at cost or 5% of its total assets valued at market at the time of such borrowing, pledge, mortgage, or hypothecation and except that the Portfolio may enter into futures contracts and related options. 5. The Portfolio will not invest more than 10% of the value of its net assets in illiquid securities, restricted securities, and other securities for which market quotations are not readily available. 6. The Portfolio will not invest in the securities of any one industry except the Internet and Internet-related industries, with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and instrumentality's, if as a result, more than 20% of the Portfolio's total assets would be invested in the securities of such industries. Except during temporary defensive periods, at least 65% of the Portfolio's total assets will be invested in the securities of domestic and foreign companies that are engaged in the Internet and Internet-related activities. 7. The Portfolio will not purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs or real estate except that the Portfolio may purchase and sell securities of companies that deal in oil, gas, or mineral exploration or development programs or interests therein. 8. The Portfolio will not issue senior securities. If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in value in the portfolio securities held by the Portfolio will not constitute a violation of such limitation. TEMPORARY INVESTMENTS - - -------------------------------------------------------------------------------- Due to the changing nature of the Internet and related companies, the national economy and market conditions, the Portfolio may, as a temporary defensive measure, invest without limitation, in short-term debt securities and money market securities with a rating of A2-P2 or higher. In order to have funds available for redemption and investment opportunities, the Portfolio may also hold a portion of its assets in cash or U.S. short-term money market instruments. Certificates of deposit purchased by the Portfolio will be those of U.S. banks having total assets at the time of purchase in excess of $1 billion, and bankers' acceptances purchased by the Portfolio will be guaranteed by U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion. The Portfolio anticipates that not more than 10% of its total assets will be so invested or held in cash at any given time, except when the Portfolio is in a temporary defensive posture. PORTFOLIO TURNOVER - - -------------------------------------------------------------------------------- In order to qualify for the beneficial tax treatment afforded regulated investment companies, and to be relieved of Federal tax liabilities, the Portfolio must distribute substantially all of its net income to investors generally on an annual basis. Thus, the Portfolio may have to dispose of portfolio securities under disadvantageous circumstances to generate cash or borrow cash in order to satisfy the distribution requirement. The Portfolio does not trade in securities for short-term profits but, when circumstances warrant, securities may be sold without regard to the length of time they have been held. MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- BOARD OF TRUSTEES The management and affairs of the Portfolio are supervised by the Board of Trustees of the Trust. The Board consists of eight individuals, five of whom are not "interested" persons of the Portfolio as that term is defined in the 1940 Act. The Trustees are fiduciaries for the Portfolio's investors and are governed by the laws of the State of Delaware in this regard They establish policies for the operation of the Portfolio and appoint the officers who conduct the daily business of the Portfolio. Officers and Trustees of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. "Interested" Trustees are designated by an asterisk that appears beside their names.
- - ----------------------------------- --------- ------------------------ ------------------------------------------- NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Steven R. Samson 45 President & Chairman President and CEO, Kinetics Asset 342 Madison Avenue of the Board Management, Inc. (1999 to Present); New York, NY 10173 President, The Internet Fund, Inc. (1999 to Present); Managing Director, Chase Manhattan Bank (1993 to 1999); President and Chairman of the Board of Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Kathleen Campbell 34 Trustee Attorney, Campbell and Campbell, 2 Madison Avenue Counselors-at-Law (1995 to Present); Valhalla, NY 10595 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Murray Stahl 46 Trustee President, Horizon Asset Management, an 342 Madison Avenue investment adviser (1994 to Present); New York, NY 10173 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Steven T. Russell 36 Trustee Attorney and Counselor at Law, 146 Fairview Avenue Steven Russell Law Firm (1994 to Bayport, NY 117045 Present); Professor of Business Law, Suffolk County Community College (1997 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Douglas Cohen, C.P.A. 36 Trustee Wagner, Awerma & Strinberg, LLP Certified 6 Saywood Lane Public Accountant (1997 to present); Stonybrook, NY 11790 Director, Kinetics Mutual Funds, Inc. (1999 to Present); Leon D. Alpern & Co. (1985 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- William J. Graham 37 Trustee Attorney, Bracken & Margolin, LLP (1997 20 Franklin Boulevard to Present); Director, Kinetics Mutual Long Beach, NY 11561 Funds, Inc. (1999 to Present); Gabor & Gabor (1995 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Joseph E. Breslin 45 Trustee Senior Vice President, Marketing & Sales, One State Street IBJ Whitehall Financial Group, a New York, NY 10004 financial services company (1999 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present); formerly President, J.E. Breslin & Co., an investment management consulting firm (1994 to 1999. - - ----------------------------------- --------- ------------------------ ------------------------------------------- John J. Sullivan 68 Trustee Director, Kinetics Mutual Funds, Inc. 31 Hemlock Drive (1999 to Present); Retired; Senior Sleepy Hollow, NY 10591 Advisor, Long Term Credit Bank of Japan, Ltd.; Executive Vice President, LTCB Trust Company; - - ----------------------------------- --------- ------------------------ ------------------------------------------- Lee W. Schultheis 43 Vice President & Managing Director & COO of Kinetics Asset 342 Madison Avenue Treasurer of the Trust Management (1999 to Present); Vice New York, NY 10173 President and Treasurer Kinetics Mutual Funds, Inc. (1999 to Present); President & Director of Business. Development, Vista Fund Distributors, Inc. (1995 to 1999); Managing Director, Forum Financial Group, a mutual fund services company. - - ----------------------------------- --------- ------------------------ -------------------------------------------
COMPENSATION Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust , Kinetics Mutual Funds, Inc. or Kinetics Asset Management, Inc. receive an aggregate annual fee of $15,000 per year for their services as Trustees or directors of all open-end investment companies distributed by Kinetics Funds Distributors, Inc. and $1,000 per meeting attended, as well as reimbursement for expenses incurred in connection with attendance at such meetings. In addition, each committee chairman of the Company and the Trust (such as the Audit committee or Pricing committee) receives an additional fee of $5,000 per year for his service as chairman.. Payment of the annual fees is allocated among such investment companies based on their relative net assets. Payment of meeting fees are allocated only among those investment companies to which such meetings relate. The "interested" Trustees of the Portfolio receive no compensation for their service as Trustees. None of the executive officers receive compensation from the Portfolio. The following tables provide compensation information for the Trustees for the year-ended December 31, 1999.
KINETICS PORTFOLIOS TRUST COMPENSATION TABLE - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND FROM FUND PART OF FUND EXPENSES RETIREMENT COMPLEX PAID TO DIRECTORS** - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ Steven R. Samson* None None None None Chairman and Director Kathleen Campbell* None None None None Director Murray Stahl*** None None None $3,844 Director Steven T. Russell None None None $5,500 Independent Director Douglas Cohen, CPA None None None $6,094 Independent Director William J. Graham None None None $5,500 Independent Director Joseph E. Breslin None None None $4,500 Independent Director John J. Sullivan None None None $5,500 Independent Director - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
* "Interested person" as defined under the 1940 Act. ** Includes compensation paid by Kinetics Mutual Funds, Inc. *** Murray Stahl became an "interested person" of the Fund (as defined under the 1940 Act) as of December 15, 1999. Previous to becoming an interested person, Mr. Stahl received $3844 as total compensation from the Fund and Fund complex for being an independent director. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - - -------------------------------------------------------------------------------- A control person is one who owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. As of the commencement of investment operations of the Portfolio, the Portfolio could be deemed to be under the control of The Internet Fund, a series of Kinetics Mutual Funds, Inc. and the sole investor in the Portfolio as of the date of this SAI. Similarly, as of such time, Kinetics Mutual Funds, Inc. through its series, The Internet Fund, The Internet Emerging Growth Fund, The Internet Global Growth Fund, The Internet Infrastructure Fund, The Internet New Paradigm Fund, The Small Cap Opportunities Fund, The Middle East Growth Fund, The Medical Fund, and The Kinetics Government Money Market Fund (each a "Fund" and collectively the "Funds"), was the owner of 100% of the value of the outstanding interests in the Trust. Any investor owning more than 50% of the value of the outstanding interests in the Portfolio may take actions without the approval of any other investor who invests in the Portfolio. Kinetics Mutual Funds, Inc. has informed the Trust that whenever The Internet Fund is requested to vote on a matter pertaining to the Portfolio, The Internet Fund will hold a meeting of its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by The Internet Fund's shareholders. It is anticipated that other registered investment companies investing in the Portfolio, if any, will follow the same or a similar practice, although, as of May 1, 2000, there were no other investors in the Portfolio. MANAGEMENT OWNERSHIP The percentage of the Portfolio's interests owned or controlled by the executive officers and Trustees of the Portfolio and the Trust is less than 1% of the interests of the Portfolio. INVESTMENT ADVISER - - -------------------------------------------------------------------------------- Kinetics Asset Management, Inc. ("Kinetics" or the "Adviser") is a New York corporation that serves as the investment adviser to the Portfolio. Peter B. Doyle is the Chairman of the Board of Directors and Chief Investment Strategist of Kinetics. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has over 24 years experience in the mutual funds and financial services industries. Mr. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics and has more than 20 years experience in the mutual funds and financial services industries. On April 25, 2000 the Board of the Trustees of the Trust, on behalf of the Portfolio, approved a management and advisory contract (the "Agreement") with Kinetics. This Agreement will remain in effect for a term of two years and will continue on a year-to-year basis thereafter provided that specific approval is voted at least annually by the Board of Trustees of the Trust or by the vote of the holders of a majority of the outstanding voting securities of the Portfolio. In either event, it must also be approved by a majority of the Trustees of the Trust who are neither parties to the Agreement nor "interested" persons as defined in the 1940 Act at a meeting called for the purpose of voting on such approval. The Adviser's investment decisions are made subject to the direction and supervision of the Board of Trustees. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Ultimate decisions as to the investment policy and as to individual purchases and sales of securities are made by the Portfolio's officers and the Trustees. PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. Under the Agreement, Kinetics furnishes investment advice to the Portfolio by continuously reviewing the portfolio and recommending to the Portfolio to what extent, securities should be purchased or disposed. Pursuant to the Agreement, the Adviser: (1) renders research, statistical and advisory services to the Portfolio; (2) makes specific recommendations based on the Portfolio's investment requirements; (3) pays the salaries of those of the Portfolio's employees who may be officers or directors or employees of the investment adviser. For these services, the Portfolio has agreed to pay to Kinetics an annual fee of 1.25% of the Portfolio's average daily net assets. All fees are computed on the average daily closing net asset value ("NAV") of the Portfolio and are payable monthly. The fee is higher than the fee paid by most other funds. Kinetics has also entered into a Research Agreement with Horizon Assets Management, Inc. ("Horizon") for which it is solely responsible for the payment of all fees owing to Horizon. Fees of the custodian, administrator, transfer agent and Portfolio accountant are paid by the Portfolio. ADMINISTRATIVE SERVICES - - -------------------------------------------------------------------------------- Kinetics also serves as Administrator of the Portfolio. Under an Administrative Services Agreement with the Portfolio, Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets of which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. Firstar, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, also serves as the Portfolio's accountant and transfer agent. As such, Firstar provides certain investor services and record management services as well as acts as the Portfolio's dividend disbursement agent. Administrative services include, but are not limited to, providing office space, equipment, telephone facilities, various personnel, including clerical and supervisory, and computers, as is necessary or beneficial to: |X| establish and maintain investors' accounts and records, |X| process purchase and redemption transactions, |X| process automatic investments of client account cash balances, |X| answer routine client inquiries regarding the Portfolio, |X| assist clients in changing dividend options, |X| account designations, and addresses, and |X| providing such other services as the Portfolio may reasonably request. CUSTODIAN - - -------------------------------------------------------------------------------- Firstar Bank, N.A. ("Firstar Bank") is custodian for the securities and cash of the Portfolio. Under a Custody Agreement, Firstar Bank holds the Portfolio's assets in safekeeping and keeps all necessary records and documents relating to its duties. Firstar Bank receives an annual fee equal to 0.010% of the Portfolio's average daily net assets with a minimum annual fee of $3,000. Independent Public Accountants - - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. Their services include examination of the Trust's financial statements and the performance of other related audit and tax services. BROKERAGE - - -------------------------------------------------------------------------------- The Portfolio's assets are invested by the Adviser in a manner consistent with its investment objective, strategies, policies and restrictions and with any instructions the Board of Trustees may issue from time to time. Within this framework, the Adviser is responsible for making all determinations as to the purchase and sale of portfolio securities and for taking all steps necessary to implement securities transactions on behalf of the Portfolio. Transactions on U.S. stock exchanges, commodities markets and futures markets and other agency transactions may involve the payment by the Adviser on behalf of the Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Adviser usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Adviser on behalf of the Portfolio includes a disclosed, fixed commission or discount retained by the underwriter or dealer. U.S. Government securities generally are traded in the over-the-counter market through broker-dealers. A broker-dealer is a securities firm or bank that makes a market for securities by offering to buy at one price and sell at a slightly higher price. The difference between the prices is known as a spread. In placing orders for the purchase and sale of portfolio securities for the Portfolio, the Adviser seeks to obtain the best price and execution, taking into account such factors as price, size of order, difficulty and risk of execution and operational facilities of the firm involved. For securities traded in the over-the-counter markets, the Adviser deals directly with the dealers who make markets in these securities unless better prices and execution are available elsewhere. The Adviser negotiates commission rates with brokers based on the quality and quantity of services provided in light of generally prevailing rates, and while the Adviser generally seeks reasonably competitive commission rates, the Portfolio does not necessarily pay the lowest commissions available. The Board of Trustees periodically reviews the commission rates and allocation of orders. When consistent with the objectives of best price and execution, business may be placed with broker-dealers who furnish investment research or services to the Adviser. Such research or services include advice, both orally and in writing, as to the value of securities; the advisability of investing in, purchasing or selling securities; and the availability of securities, or purchasers or sellers of securities; as well as analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser, the Adviser receives a benefit, not capable of evaluation in dollar amounts, without providing any direct monetary benefit to the Portfolio from these transactions. The Adviser believes that most research services obtained by it generally benefit several or all of the investment companies and private accounts which it manages, as opposed to solely benefiting one specific managed fund or account. The same security may be suitable for the Portfolio, another portfolio series of the Trust or other private accounts managed by the Adviser. If and when the Portfolio and two or more accounts simultaneously purchase or sell the same security, the transactions will be allocated as to price and amount in accordance with arrangements equitable to the Portfolio and the accounts. The simultaneous purchase or sale of the same securities by the Portfolio and other accounts may have a detrimental effect on the Portfolio, as this may affect the price paid or received by the Portfolio or the size of the position obtainable or able to be sold by the Portfolio. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc. and subject to seeking the most favorable price and execution available and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Portfolio as a factor in the selection of broker-dealers to execute portfolio transactions for the Portfolio. CAPITALIZATION - - -------------------------------------------------------------------------------- The authorized capitalization of Kinetics Portfolio Trust consists of 1 billion shares of beneficial interest of $0.001 par value per share. Each share has equal dividend, distribution and liquidation rights. There are no conversion or preemptive rights applicable to any shares of the Portfolio. All shares issued are fully paid and non-assessable. Each holder of beneficial interest has one vote for each share held. Each investor in a Portfolio is entitled to participate equally in the Portfolio's earnings and assets and to vote in proportion to the amount of its investment in the Portfolio. Voting rights are non-cumulative. Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment therein. Investors in the Portfolio will all vote together in certain circumstances (e.g., election of the Trustees and ratification of auditors, as required by the 1940 Act and the rules thereunder). One or more Portfolios could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust or in a Portfolio, as the case may be, may control the outcome of votes. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when (1) a majority of the Trustees determines to do so or (2) investors holding at least 10% of the interests in a Portfolio (if the meeting relates solely to that Portfolio), or investors holding at least 10% of the aggregate interests in the Trust (if the meeting relates to the Trust and not specifically to a Portfolio) requests in writing a meeting of investors. Changes in fundamental policies or limitations will be submitted to investors for approval. The Trust is organized as a business trust under the laws of the State of Delaware. Investors in a Portfolio will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest in the Portfolio. The Declaration of Trust also provides that, subject to the provisions of the 1940 Act, the Trust may maintain insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Portfolio, investors, Trustees, officers, employees, and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of such liability would be limited to circumstances in which the Portfolio had inadequate insurance and was unable to meet its obligations out of its assets. PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. VALUATION OF SHARES - - -------------------------------------------------------------------------------- Shares of the Portfolio are sold at the NAV per share next computed following acceptance of an order by the Portfolio. The Portfolio's NAV per share for the purpose of pricing purchase and redemption orders is determined at the close of normal trading (currently 4:00 p.m. EST) on each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Portfolio's investment securities are valued each day at the last quoted sales price on the securities principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees. The Portfolio may use independent pricing services to assist in calculating the NAV of the Portfolio's shares. The Portfolio's investment securities that are listed on a U.S. securities exchange or NASDAQ for which market quotations are readily available are valued at the last quoted sale price on the day the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded. Options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the mean of the most recent quoted bid and asked price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed-income securities purchased with remaining maturities of 60 days or less are valued at amortized cost if it reflects fair value. In the event that amortized cost does not reflect market, market prices as determined above will be used. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Portfolio. TAXES - - -------------------------------------------------------------------------------- The Portfolio will be classified for federal income tax purposes as a partnership that is not a "publicly traded partnership." As a result, the Portfolio is not subject to federal income tax; instead, each Interestholder in the Portfolio is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, and credits, without regard to whether it has received any cash distributions from the Portfolio. The Portfolio also is not subject to Delaware income or franchise tax. A holder of beneficial interest in the Portfolio (an "Interestholder") is deemed to own a proportionate share of the Portfolio's assets and to earn a proportionate share of the Portfolio's income, for, among other things, purposes of determining whether the Interestholder satisfies the requirements to qualify as a regulated investment company ("RIC"). Accordingly, the Portfolio intends to conduct its operations so that its Interestholders that invest substantially all of their assets in the Portfolio and intend to qualify as RICs should be able to satisfy all those requirements. Distributions to an Interestholder from the Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Interestholder's recognition of any gain or loss for federal income tax purposes, except that: (1) gain will be recognized to the extent any cash that is distributed exceeds the Interestholder's basis for its interest in the Portfolio before the distribution; (2) income or gain will be recognized if the distribution is in liquidation of the Interestholder's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio; (3) loss will be recognized to the extent that a liquidation distribution consisting solely of cash and/or unrealized receivables is less than the Interestholder's basis for its interest in the Portfolio prior to the distribution; and (4) gain or loss may be recognized on a distribution to an Interestholder that contributed property to the Portfolio. An Interestholder's basis for its interest in the Portfolio generally will equal the amount of cash and the basis of any property it invests in the Portfolio, increased by the Interestholder's share of the Portfolio's net income and gains and decreased by (a) the amount of cash and the basis of any property the Portfolio distributes to the Interestholder and (b) the Interestholder's share of the Portfolio's losses. The income tax and estate tax consequences to a non-U.S. Interestholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. Interestholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Non-U.S. Interestholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Portfolio. The foregoing discussion relates only to federal income tax law. Income from the Portfolio also may be subject to foreign, state and local taxes, and their treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Interestholders should consult their tax advisors with respect to particular questions of federal, state and local taxation. PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. PERFORMANCE INFORMATION - - -------------------------------------------------------------------------------- TOTAL RETURN Average annual total return quotations used in the Portfolio's advertising and promotional materials are calculated according to the following formula: P(1+T)n = ERV where P equals a hypothetical initial payment of $1,000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. CUMULATIVE TOTAL RETURN Cumulative total return represents the simple change in value of an investment over a stated period and may be quoted as a percentage or as a dollar amount. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship between these factors and their contributions to total return. YIELD Annualized yield quotations used in the Portfolio's advertising and promotional materials are calculated by dividing the Portfolio's interest income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the NAV per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2[(A-B + 1)6 - 1] --- c-d where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and "d" equals the maximum offering price per share on the last day of the period. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. OTHER INFORMATION The Portfolio's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in the Portfolio will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. If permitted by applicable law, the Portfolio may advertise the performance of registered investment companies or private accounts that have investment objectives, policies and strategies substantially similar to those of the Portfolio. COMPARISON OF PORTFOLIO PERFORMANCE The performance of the Portfolio may be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue Organization, Inc. or other independent services which monitor the performance of investment companies, and may be quoted in advertising in terms of its ranking in each applicable universe. In addition, the Portfolio may use performance data reported in financial and industry publications, including Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal and USA Today. The Portfolio may from time to time use the following unmanaged indices for performance comparison purposes: o S&P 500 - The S&P 500 is an unmanaged mutual fund index of 500 stocks designed to mimic the overall equity market's industry weightings. Most, but not all, large capitalization stocks are in the index. There are also some small capitalization names in the index. The list is maintained by Standard & Poor's Corporation. It is market capitalization weighted. There are always 500 issuers in the S&P 500. Changes are made by Standard & Poor's as needed. o Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000, a market value weighted index of the 3,000 largest U.S. publicly-traded companies. FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS ASSETS Cash $ 100,000 NET ASSETS $ 100,000 Kinetics Portfolios Trust FINANCIAL STATEMENT APRIL 27, 2000 Report of Independent Accountants To the Shareholder and Board of Trustees of Kinetics Portfolios Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Kinetics Portfolios Trust (hereafter referred to as the "Trust") at April 27, 2000, in conformity with accounting principles generally accepted in the United States. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin April 27, 2000 KINETICS PORTFOLIOS TRUST STATEMENT OF ASSETS AND LIABILITIES - - -------------------------------------------------------------------------------- AS OF APRIL 27, 2000 The accompanying notes are an integral part of this financial statement. [OBJECT OMITTED] KINETICS PORTFOLIOS TRUST NOTES TO FINANCIAL STATEMENT AS OF APRIL 27, 2000 - - -------------------------------------------------------------------------------- 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Business Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Internet Global Growth Portfolio, The Internet New Paradigm Portfolio, The Internet Infrastructure Portfolio, The Medical Portfolio, The Kinetics Government Money Market Portfolio, The Small Cap Opportunities Portfolio and The Middle East Growth Portfolio (the "Portfolios"). Pursuant to the 1940 Act, the Portfolios are "non-diversified" series of the Trust. The Trust has had no operations other than the contribution by Kinetics Asset Management, Inc., the Portfolios' Adviser ("Adviser"), of $100,000, representing a beneficial interest in the Trust. The Portfolios have had no operations through April 27, 2000. On April 28, 2000, the Trust intends to distribute the Adviser's $100,000 contribution to the Portfolios, at which time the Adviser will become a partner in each of the Portfolios. In addition, on April 28, 2000 various feeder funds ("Funds") sponsored by the Adviser will invest their investable assets in the corresponding Portfolios under a master-feeder capital structure. 2. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION COSTS Expenses in connection with the organization of the Trust have been absorbed by the Funds prior to their conversion to the master-feeder capital structure. Accordingly, no statement of operations of the Trust has been provided. FEDERAL INCOME TAXES Each Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Portfolios will be taxed on its allocable share of the Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Actual results could differ from those estimates. 1. 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Portfolios. Under the terms of the Agreement, the Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of the Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Portfolio's average daily net assets. The Adviser also serves as administrator to the Portfolios. Under an Administrative Services Agreement with the Trust on behalf of the Portfolios, the Adviser receives an annual administration fee equal to 0.10% of the Portfolio's average daily net assets from which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolios by Firstar. APPENDIX - - -------------------------------------------------------------------------------- STANDARD & POOR'S ("S&P") CORPORATE BOND RATING DEFINITIONS AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree. A-Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions. CI-The rating "CI" is reversed for income bonds on which no interest is being paid. D-Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA-Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated "A" possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the near future. BAA-Bonds which are rated "Baa" are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BA-Bonds which are "Ba" are judged to have speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA-Bonds which are "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS AAA-Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA-Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A-Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB-Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB-Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B-Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC-Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC-Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C-Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D-Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. THE INTERNET INFRASTRUCTURE PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST 1311 Mamaroneck Avenue White Plains, New York 10605 (800) 930-3828 April 28, 2000 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") provides general information about The Internet Infrastructure Portfolio (the "Portfolio"). The Portfolio is a series of Kinetics Portfolios Trust (the "Trust"), a Delaware business trust. This SAI is not a prospectus and should be read in conjunction with the Portfolio's current Prospectus dated April 28, 2000, as supplemented and amended from time to time, which is incorporated hereto by reference. To obtain a copy of the Prospectus, please write the Portfolio at the address set forth above or call the telephone number shown above. This SAI is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended ("1933 Act"), because such interests are issued solely to in private placement transactions to eligible investors that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Portfolio may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts and certain qualified pension and retirement plans. Neither this SAI nor the Registration Statement as a whole constitutes an offer to sell or the solicitation of an offer to buy any beneficial interests in this Portfolio or any other portfolio series of the Trust. THE INTERNET INFRASTRUCTURE PORTFOLIO The Portfolio..................................................................2 Investment Objective, Strategies, and Risks....................................2 Investment Policies and Associated Risks.......................................3 Investment Restrictions........................................................8 Temporary Investments..........................................................9 Portfolio Turnover.............................................................9 Management of the Portfolio....................................................9 Control Persons and Principal Holders of Securities...........................12 Investment Adviser............................................................13 Administrative Services.......................................................14 Custodian.....................................................................15 Independent Public Accountants................................................15 Brokerage.....................................................................15 Capitalization................................................................17 Purchase of Shares............................................................17 Redemption of Shares..........................................................18 Valuation of Shares...........................................................18 Taxes.........................................................................19 Performance Information.......................................................20 Financial Statements..........................................................22 Appendix......................................................................23 THE PORTFOLIO - - -------------------------------------------------------------------------------- The Portfolio is a series of Kinetics Portfolios Trust, a business trust organized pursuant to a Declaration of Trust under the laws of the State of Delaware on March 14, 2000. The Portfolio's principal office is located at 1311 Mamaroneck Avenue, White Plains, New York 10605 The Portfolio is a non-diversified, open-end management investment company. INVESTMENT OBJECTIVE, STRATEGIES, AND RISKS - - -------------------------------------------------------------------------------- The Portfolio's primary investment objective is long-term growth of capital. The Portfolio is designed for long-term investors who understand and are willing to accept the risk of loss involved in investing in a mutual fund seeking long-term capital growth. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in securities of companies that provide products or services designed for the Internet. This Portfolio should not be used as a trading vehicle. INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The following paragraphs provide a more detailed description of the Portfolio's investment policies and risks identified in the Prospectus. Unless otherwise noted, the policies described in this SAI are not fundamental and may be changed by the Board of Trustees of the Trust. COMMON AND PREFERRED STOCK Common stocks are units of ownership of a corporation. Preferred stocks are stocks that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. Some preference stocks may be convertible into common stock. Convertible securities are securities that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. CONVERTIBLE DEBT SECURITIES The Portfolio may invest in debt securities convertible into common stocks. Debt purchased by the Portfolio will consist of obligations of medium-grade or higher, having at least adequate capacity to pay interest and repay principal. Non-convertible debt obligations will be rated BBB or higher by S&P, or Baa or higher by Moody's. Convertible debt obligations will be rated B or higher by S&P or B or higher by Moody's. Securities rated Baa by Moody's are considered by Moody's to be medium-grade securities and have adequate capacity to pay principal and interest. Bonds in the lowest investment grade category (BBB) have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Securities rated B are referred to as "high-risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. See "Appendix" to this Statement of Additional Information for a description of debt security ratings. FIXED-INCOME SECURITIES The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. CREDIT RISK relates to the ability of the issuer to meet interest and principal payments, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, will also increase the credit risk to which those assets are subject. MARKET RISK relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium- and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wilder fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of debt securities whose ratings are downgraded below these ratings subsequent to the Portfolio's purchase of the securities. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which the Portfolio invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events. At no time will the Portfolio have more than 5% of its total assets invested in any fixed-income securities that are unrated or rated below investment grade either at the time of purchase or as a result of a reduction in rating after purchase. DEPOSITARY RECEIPTS. The Portfolio may invest in American Depositary Receipts ("ADRs") or other forms of depositary receipts, such as International Depositary Receipts ("IDRs"). Depositary receipts are typically issued in connection with a U.S. or foreign bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. Investments in these types of securities involve certain inherent risks generally associated with investments in foreign securities, including the following: POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain countries may 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, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. CURRENCY FLUCTUATIONS. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of an ADR's underlying portfolio securities denominated in that currency. Such changes will affect the Portfolio to the extent that the Portfolio is invested in ADR's comprised of foreign securities. TAXES. The interest and dividends payable on certain foreign securities comprising an ADR may be subject to foreign withholding taxes, thus reducing the net amount of income to be paid to the Portfolio and that may, ultimately, be available for distribution to the Portfolio's investors. OPTIONS Most mutual funds that use option strategies to hedge portfolio positions do not depend solely on the option profit or loss to justify the use of options, because such funds also take into account the profit or loss of the underlying securities. A more detailed discussion of writing covered and uncovered options on securities generally and the investment risks associated with such investments is set forth below. PURCHASING PUT AND CALL OPTIONS. The Portfolio may purchase put and call options on securities eligible for purchase by the Portfolio and on securities indices. Put and call options are derivative securities traded on U.S. exchanges. If the Portfolio purchases a put option, it acquires the right to sell the underlying security or index value at a specified price at any time during the term of the option. If the Portfolio purchases a call option, it acquires the right to purchase the underlying security or index value at a specified price at any time during the term of the option. Prior to exercise or expiration, the Portfolio may sell an option when through a "closing sale transaction," which is accomplished by selling an option of the same series as the option previously purchased. The Portfolio generally will purchase only those options for which the investment adviser believes there is an active secondary market to facilitate closing transactions. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. The Portfolio will purchase put options to hedge against a decrease in the price of securities it holds. Such hedge protection is provided during the life of the put option since the Portfolio, as the holder of the put option, is able to sell the underlying security at the exercise price regardless of any decrease in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decrease sufficiently below the exercise price to cover the premium and transaction costs. WRITING CALL OPTIONS. The Portfolio may write covered call options on securities eligible for purchase by the Portfolio. A call option is "covered" if the Portfolio owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, it may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option. Effecting a closing transaction in the case of a written call option will permit the Portfolio to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction allows the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of the Portfolio. If the Portfolio desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. The Portfolio realizes a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. The Portfolio realizes a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, appreciation of the underlying security owned by the Portfolio generally offsets, in whole or in part, any loss to the Portfolio resulting from the repurchase of a call option. RISK FACTORS IN OPTIONS TRANSACTIONS. The successful use of options by the Portfolio depends on the ability of the Adviser to forecast correctly interest rate and market movements. For example, if the Portfolio were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Portfolio were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When the Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Portfolio will lose part or all of its investment in the option. This contrasts with an investment by the Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Adviser deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. If a secondary market in options were to become unavailable, the Portfolio could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events -- such as volume in excess of trading or clearing capability -- were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or an options clearing corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unit asset valuable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, an options clearing corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If an options clearing corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. DEALER OPTIONS. The Portfolio may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While the Portfolio might look to an exchange's clearing corporation to exercise exchange-traded options, if the Portfolio purchases a dealer option it must rely on the selling dealer to perform if the Portfolio exercises the option. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, the Portfolio can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when the Portfolio writes a dealer option, the Portfolio can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and can enter into closing transactions with the Portfolio, no assurance exists that the Portfolio will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Portfolio, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Portfolio may be unable to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because the Portfolio must maintain a secured position with respect to any call option on a security it writes, the Portfolio may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Portfolio's ability to sell portfolio securities at a time when such sale might be advantageous. The staff of the SEC takes the position that purchased dealer options are illiquid securities. The Portfolio may treat the cover used for written dealer options as liquid if the dealer agrees that the Portfolio may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. With that exception, however, the Portfolios will treat dealer options as subject to the Portfolios' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Portfolios will change their treatment of such instruments accordingly. INVESTMENT RESTRICTIONS - - -------------------------------------------------------------------------------- The investment restrictions of the Portfolio may be changed only with the approval of the holders of a majority of the Portfolio's outstanding voting securities. 1. The Portfolio will not act as underwriter for securities of other issuers. 2. The Portfolio will not make loans. 3. With respect to 50% of its total assets, the Portfolio will not invest in the securities of any issuer if as a result the Portfolio holds more than 10% of the outstanding securities or more than 10% of the outstanding voting securities of such issuer. 4. The Portfolio will not borrow money or pledge, mortgage, or hypothecate its assets except to facilitate redemption requests that might otherwise require the untimely disposition of portfolio securities and then only from banks and in amounts not exceeding the lesser of 10% of its total assets valued at cost or 5% of its total assets valued at market at the time of such borrowing, pledge, mortgage, or hypothecation and except that the Portfolio may enter into futures contracts and related options. 5. The Portfolio will not invest more than 10% of the value of its net assets in illiquid securities, restricted securities, and other securities for which market quotations are not readily available. 6. The Portfolio will not invest in the securities of any one industry except the Internet and Internet-related industries, with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and instrumentality's, if as a result, more than 20% of the Portfolio's total assets would be invested in the securities of such industries. Except during temporary defensive periods, at least 65% of the Portfolio's total assets will be invested in the securities of domestic and foreign companies that are engaged in the Internet and Internet-related activities. 7. The Portfolio will not purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs or real estate except that the Portfolio may purchase and sell securities of companies that deal in oil, gas, or mineral exploration or development programs or interests therein. 8. The Portfolio will not issue senior securities. If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in value in the portfolio securities held by the Portfolio will not constitute a violation of such limitation. TEMPORARY INVESTMENTS - - -------------------------------------------------------------------------------- Due to the changing nature of the Internet and related companies, the national economy and market conditions, the Portfolio may, as a temporary defensive measure, invest without limitation, in short-term debt securities and money market securities with a rating of A2-P2 or higher. In order to have funds available for redemption and investment opportunities, the Portfolio may also hold a portion of its assets in cash or U.S. short-term money market instruments. Certificates of deposit purchased by the Portfolio will be those of U.S. banks having total assets at the time of purchase in excess of $1 billion, and bankers' acceptances purchased by the Portfolio will be guaranteed by U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion. The Portfolio anticipates that not more than 10% of its total assets will be so invested or held in cash at any given time, except when the Portfolio is in a temporary defensive posture. PORTFOLIO TURNOVER - - -------------------------------------------------------------------------------- In order to qualify for the beneficial tax treatment afforded regulated investment companies, and to be relieved of Federal tax liabilities, the Portfolio must distribute substantially all of its net income to investors generally on an annual basis. Thus, the Portfolio may have to dispose of portfolio securities under disadvantageous circumstances to generate cash or borrow cash in order to satisfy the distribution requirement. The Portfolio does not trade in securities for short-term profits but, when circumstances warrant, securities may be sold without regard to the length of time they have been held. MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- BOARD OF TRUSTEES The management and affairs of the Portfolio are supervised by the Board of Trustees of the Trust. The Board consists of eight individuals, five of whom are not "interested" persons of the Portfolio as that term is defined in the 1940 Act. The Trustees are fiduciaries for the Portfolio's investors and are governed by the laws of the State of Delaware in this regard They establish policies for the operation of the Portfolio and appoint the officers who conduct the daily business of the Portfolio. Officers and Trustees of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. "Interested" Trustees are designated by an asterisk that appears beside their names.
- - ----------------------------------- --------- ------------------------ ------------------------------------------- NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Steven R. Samson 45 President & Chairman President and CEO, Kinetics Asset 342 Madison Avenue of the Board Management, Inc. (1999 to Present); New York, NY 10173 President, The Internet Fund, Inc. (1999 to Present); Managing Director, Chase Manhattan Bank (1993 to 1999); President and Chairman of the Board of Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Kathleen Campbell 34 Trustee Attorney, Campbell and Campbell, 2 Madison Avenue Counselors-at-Law (1995 to Present); Valhalla, NY 10595 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Murray Stahl 46 Trustee President, Horizon Asset Management, an 342 Madison Avenue investment adviser (1994 to Present); New York, NY 10173 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Steven T. Russell 36 Trustee Attorney and Counselor at Law, 146 Fairview Avenue Steven Russell Law Firm (1994 to Bayport, NY 117045 Present); Professor of Business Law, Suffolk County Community College (1997 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Douglas Cohen, C.P.A. 36 Trustee Wagner, Awerma & Strinberg, LLP Certified 6 Saywood Lane Public Accountant (1997 to present); Stonybrook, NY 11790 Director, Kinetics Mutual Funds, Inc. (1999 to Present); Leon D. Alpern & Co. (1985 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- William J. Graham 37 Trustee Attorney, Bracken & Margolin, LLP (1997 20 Franklin Boulevard to Present); Director, Kinetics Mutual Long Beach, NY 11561 Funds, Inc. (1999 to Present); Gabor & Gabor (1995 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Joseph E. Breslin 45 Trustee Senior Vice President, Marketing & Sales, One State Street IBJ Whitehall Financial Group, a New York, NY 10004 financial services company (1999 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present); formerly President, J.E. Breslin & Co., an investment management consulting firm (1994 to 1999. - - ----------------------------------- --------- ------------------------ ------------------------------------------- John J. Sullivan 68 Trustee Director, Kinetics Mutual Funds, Inc. 31 Hemlock Drive (1999 to Present); Retired; Senior Sleepy Hollow, NY 10591 Advisor, Long Term Credit Bank of Japan, Ltd.; Executive Vice President, LTCB Trust Company; - - ----------------------------------- --------- ------------------------ ------------------------------------------- Lee W. Schultheis 43 Vice President & Managing Director & COO of Kinetics Asset 342 Madison Avenue Treasurer of the Trust Management (1999 to Present); Vice New York, NY 10173 President and Treasurer Kinetics Mutual Funds, Inc. (1999 to Present); President & Director of Business. Development, Vista Fund Distributors, Inc. (1995 to 1999); Managing Director, Forum Financial Group, a mutual fund services company. - - ----------------------------------- --------- ------------------------ -------------------------------------------
COMPENSATION Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust , Kinetics Mutual Funds, Inc. or Kinetics Asset Management, Inc. receive an aggregate annual fee of $15,000 per year for their services as Trustees or directors of all open-end investment companies distributed by Kinetics Funds Distributors, Inc. and $1,000 per meeting attended, as well as reimbursement for expenses incurred in connection with attendance at such meetings. In addition, each committee chairman of the Company and the Trust (such as the Audit committee or Pricing committee) receives an additional fee of $5,000 per year for his service as chairman.. Payment of the annual fees is allocated among such investment companies based on their relative net assets. Payment of meeting fees are allocated only among those investment companies to which such meetings relate. The "interested" Trustees of the Portfolio receive no compensation for their service as Trustees. None of the executive officers receive compensation from the Portfolio. The following tables provide compensation information for the Trustees for the year-ended December 31, 1999.
KINETICS PORTFOLIOS TRUST COMPENSATION TABLE - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND FROM FUND PART OF FUND EXPENSES RETIREMENT COMPLEX PAID TO DIRECTORS** - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ Steven R. Samson* None None None None Chairman and Director Kathleen Campbell* None None None None Director Murray Stahl*** None None None $3,844 Director Steven T. Russell None None None $5,500 Independent Director Douglas Cohen None None None $6,094 Independent Director William J. Graham None None None $5,500 Independent Director Joseph E. Breslin None None None $4,500 Independent Director John J. Sullivan None None None $5,500 Independent Director - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
* "Interested person" as defined under the 1940 Act. ** Includes compensation paid by Kinetics Mutual Funds, Inc. *** Murray Stahl became an "interested person" of the Fund (as defined under the 1940 Act) as of December 15, 1999. Previous to becoming an interested person, Mr. Stahl received $3844 as total compensation from the Fund and Fund complex for being an independent director. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - - -------------------------------------------------------------------------------- A control person is one who owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. As of the commencement of investment operations, the Portfolio could be deemed to be under the control of The Internet Infrastructure Fund, a series of Kinetics Mutual Funds, Inc. and the sole investor in the Portfolio as of the date of this SAI. Similarly, as of such time, Kinetics Mutual Funds, Inc. through its series, The Internet Fund, The Internet Emerging Growth Fund, The Internet Global Growth Fund, The Internet Infrastructure Fund, The Internet New Paradigm Fund, The Small Cap Opportunities Fund, The Middle East Growth Fund, The Medical Fund, and The Kinetics Government Money Market Fund (each a "Fund" and collectively the "Funds"), was the owner of 100% of the value of the outstanding interests in the Trust. Any investor owning more than 50% of the value of the outstanding interests in the Portfolio may take actions without the approval of any other investor who invests in the Portfolio. Kinetics Mutual Funds, Inc. has informed the Trust that whenever The Internet Infrastructure Fund is requested to vote on a matter pertaining to the Portfolio, The Internet Infrastructure Fund will hold a meeting of its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by The Internet Infrastructure Fund's shareholders. It is anticipated that other registered investment companies investing in the Portfolio, if any, will follow the same or a similar practice, although, as of May 1, 2000, there were no other investors in the Portfolio. MANAGEMENT OWNERSHIP The percentage of the Portfolio's interests owned or controlled by the executive officers and Trustees of the Portfolio and the Trust is less than 1% of the interests of the Portfolio. INVESTMENT ADVISER - - -------------------------------------------------------------------------------- Kinetics Asset Management, Inc. ("Kinetics" or the "Adviser") is a New York corporation that serves as the investment adviser to the Portfolio. Peter B. Doyle is the Chairman of the Board of Directors and Chief Investment Strategist of Kinetics. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has over 24 years experience in the mutual funds and financial services industries. Mr. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics and has more than 20 years experience in the mutual funds and financial services industries. On April 25, 2000 the Board of the Trustees of the Trust, on behalf of the Portfolio, approved a management and advisory contract (the "Agreement") with Kinetics. This Agreement will remain in effect for a term of two years and will continue on a year-to-year basis thereafter provided that specific approval is voted at least annually by the Board of Trustees of the Trust or by the vote of the holders of a majority of the outstanding voting securities of the Portfolio. In either event, it must also be approved by a majority of the Trustees of the Trust who are neither parties to the Agreement nor "interested" persons as defined in the 1940 Act at a meeting called for the purpose of voting on such approval. The Adviser's investment decisions are made subject to the direction and supervision of the Board of Trustees. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Ultimate decisions as to the investment policy and as to individual purchases and sales of securities are made by the Portfolio's officers and the Trustees. PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. Under the Agreement, Kinetics furnishes investment advice to the Portfolio by continuously reviewing the portfolio and recommending to the Portfolio to what extent, securities should be purchased or disposed. Pursuant to the Agreement, the Adviser: (1) renders research, statistical and advisory services to the Portfolio; (2) makes specific recommendations based on the Portfolio's investment requirements; (3) pays the salaries of those of the Portfolio's employees who may be officers or directors or employees of the investment adviser. For these services, the Portfolio has agreed to pay to Kinetics an annual fee of 1.25% of the Portfolio's average daily net assets. All fees are computed on the average daily closing net asset value ("NAV") of the Portfolio and are payable monthly. The fee is higher than the fee paid by most other funds. Kinetics has also entered into a Research Agreement with Horizon Assets Management, Inc. ("Horizon") for which it is solely responsible for the payment of all fees owing to Horizon. Fees of the custodian, administrator, transfer agent and Portfolio accountant are paid by the Portfolio. ADMINISTRATIVE SERVICES - - -------------------------------------------------------------------------------- Kinetics also serves as Administrator of the Portfolio. Under an Administrative Services Agreement with the Portfolio, Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets of which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. Firstar, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, also serves as the Portfolio's accountant and transfer agent. As such, Firstar provides certain investor services and record management services as well as acts as the Portfolio's dividend disbursement agent. Administrative services include, but are not limited to, providing office space, equipment, telephone facilities, various personnel, including clerical and supervisory, and computers, as is necessary or beneficial to: |X| establish and maintain investors' accounts and records, |X| process purchase and redemption transactions, |X| process automatic investments of client account cash balances, |X| answer routine client inquiries regarding the Portfolio, |X| assist clients in changing dividend options, |X| account designations, and addresses, and |X| providing such other services as the Portfolio may reasonably request. CUSTODIAN - - -------------------------------------------------------------------------------- Firstar Bank, N.A. ("Firstar Bank") is custodian for the securities and cash of the Portfolio. Under a Custody Agreement, Firstar Bank holds the Portfolio's assets in safekeeping and keeps all necessary records and documents relating to its duties. Firstar Bank receives an annual fee equal to 0.010% of the Portfolio's average daily net assets with a minimum annual fee of $3,000. Independent Public Accountants - - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. Their services include examination of the Trust's financial statements and the performance of other related audit and tax services. BROKERAGE - - -------------------------------------------------------------------------------- The Portfolio's assets are invested by the Adviser in a manner consistent with its investment objective, strategies, policies and restrictions and with any instructions the Board of Trustees may issue from time to time. Within this framework, the Adviser is responsible for making all determinations as to the purchase and sale of portfolio securities and for taking all steps necessary to implement securities transactions on behalf of the Portfolio. Transactions on U.S. stock exchanges, commodities markets and futures markets and other agency transactions may involve the payment by the Adviser on behalf of the Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Adviser usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Adviser on behalf of the Portfolio includes a disclosed, fixed commission or discount retained by the underwriter or dealer. U.S. Government securities generally are traded in the over-the-counter market through broker-dealers. A broker-dealer is a securities firm or bank that makes a market for securities by offering to buy at one price and sell at a slightly higher price. The difference between the prices is known as a spread. In placing orders for the purchase and sale of portfolio securities for the Portfolio, the Adviser seeks to obtain the best price and execution, taking into account such factors as price, size of order, difficulty and risk of execution and operational facilities of the firm involved. For securities traded in the over-the-counter markets, the Adviser deals directly with the dealers who make markets in these securities unless better prices and execution are available elsewhere. The Adviser negotiates commission rates with brokers based on the quality and quantity of services provided in light of generally prevailing rates, and while the Adviser generally seeks reasonably competitive commission rates, the Portfolio does not necessarily pay the lowest commissions available. The Board of Trustees periodically reviews the commission rates and allocation of orders. When consistent with the objectives of best price and execution, business may be placed with broker-dealers who furnish investment research or services to the Adviser. Such research or services include advice, both orally and in writing, as to the value of securities; the advisability of investing in, purchasing or selling securities; and the availability of securities, or purchasers or sellers of securities; as well as analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser, the Adviser receives a benefit, not capable of evaluation in dollar amounts, without providing any direct monetary benefit to the Portfolio from these transactions. The Adviser believes that most research services obtained by it generally benefit several or all of the investment companies and private accounts which it manages, as opposed to solely benefiting one specific managed fund or account. The same security may be suitable for the Portfolio, another portfolio series of the Trust or other private accounts managed by the Adviser. If and when the Portfolio and two or more accounts simultaneously purchase or sell the same security, the transactions will be allocated as to price and amount in accordance with arrangements equitable to the Portfolio and the accounts. The simultaneous purchase or sale of the same securities by the Portfolio and other accounts may have a detrimental effect on the Portfolio, as this may affect the price paid or received by the Portfolio or the size of the position obtainable or able to be sold by the Portfolio. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc. and subject to seeking the most favorable price and execution available and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Portfolio as a factor in the selection of broker-dealers to execute portfolio transactions for the Portfolio. CAPITALIZATION - - -------------------------------------------------------------------------------- The authorized capitalization of Kinetics Portfolio Trust consists of 1 billion shares of beneficial interest of $0.001 par value per share. Each share has equal dividend, distribution and liquidation rights. There are no conversion or preemptive rights applicable to any shares of the Portfolio. All shares issued are fully paid and non-assessable. Each holder of beneficial interest has one vote for each share held. Each investor in a Portfolio is entitled to participate equally in the Portfolio's earnings and assets and to vote in proportion to the amount of its investment in the Portfolio. Voting rights are non-cumulative. Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment therein. Investors in the Portfolio will all vote together in certain circumstances (e.g., election of the Trustees and ratification of auditors, as required by the 1940 Act and the rules thereunder). One or more Portfolios could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust or in a Portfolio, as the case may be, may control the outcome of votes. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when (1) a majority of the Trustees determines to do so or (2) investors holding at least 10% of the interests in a Portfolio (if the meeting relates solely to that Portfolio), or investors holding at least 10% of the aggregate interests in the Trust (if the meeting relates to the Trust and not specifically to a Portfolio) requests in writing a meeting of investors. Changes in fundamental policies or limitations will be submitted to investors for approval. The Trust is organized as a business trust under the laws of the State of Delaware. Investors in a Portfolio will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest in the Portfolio. The Declaration of Trust also provides that, subject to the provisions of the 1940 Act, the Trust may maintain insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Portfolio, investors, Trustees, officers, employees, and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of such liability would be limited to circumstances in which the Portfolio had inadequate insurance and was unable to meet its obligations out of its assets. PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. VALUATION OF SHARES - - -------------------------------------------------------------------------------- Shares of the Portfolio are sold at the NAV per share next computed following acceptance of an order by the Portfolio. The Portfolio's NAV per share for the purpose of pricing purchase and redemption orders is determined at the close of normal trading (currently 4:00 p.m. EST) on each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Portfolio's investment securities are valued each day at the last quoted sales price on the securities principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees. The Portfolio may use independent pricing services to assist in calculating the NAV of the Portfolio's shares. The Portfolio's investment securities that are listed on a U.S. securities exchange or NASDAQ for which market quotations are readily available are valued at the last quoted sale price on the day the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded. Options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the mean of the most recent quoted bid and asked price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed-income securities purchased with remaining maturities of 60 days or less are valued at amortized cost if it reflects fair value. In the event that amortized cost does not reflect market, market prices as determined above will be used. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Portfolio. TAXES - - -------------------------------------------------------------------------------- The Portfolio will be classified for federal income tax purposes as a partnership that is not a "publicly traded partnership." As a result, the Portfolio is not subject to federal income tax; instead, each Interestholder in the Portfolio is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, and credits, without regard to whether it has received any cash distributions from the Portfolio. The Portfolio also is not subject to Delaware income or franchise tax. A holder of beneficial interest in the Portfolio (an "Interestholder") is deemed to own a proportionate share of the Portfolio's assets and to earn a proportionate share of the Portfolio's income, for, among other things, purposes of determining whether the Interestholder satisfies the requirements to qualify as a regulated investment company ("RIC"). Accordingly, the Portfolio intends to conduct its operations so that its Interestholders that invest substantially all of their assets in the Portfolio and intend to qualify as RICs should be able to satisfy all those requirements. Distributions to an Interestholder from the Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Interestholder's recognition of any gain or loss for federal income tax purposes, except that: (1) gain will be recognized to the extent any cash that is distributed exceeds the Interestholder's basis for its interest in the Portfolio before the distribution; (2) income or gain will be recognized if the distribution is in liquidation of the Interestholder's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio; (3) loss will be recognized to the extent that a liquidation distribution consisting solely of cash and/or unrealized receivables is less than the Interestholder's basis for its interest in the Portfolio prior to the distribution; and (4) gain or loss may be recognized on a distribution to an Interestholder that contributed property to the Portfolio. An Interestholder's basis for its interest in the Portfolio generally will equal the amount of cash and the basis of any property it invests in the Portfolio, increased by the Interestholder's share of the Portfolio's net income and gains and decreased by (a) the amount of cash and the basis of any property the Portfolio distributes to the Interestholder and (b) the Interestholder's share of the Portfolio's losses. The income tax and estate tax consequences to a non-U.S. Interestholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. Interestholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Non-U.S. Interestholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Portfolio. The foregoing discussion relates only to federal income tax law. Income from the Portfolio also may be subject to foreign, state and local taxes, and their treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Interestholders should consult their tax advisors with respect to particular questions of federal, state and local taxation. PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. PERFORMANCE INFORMATION - - -------------------------------------------------------------------------------- (1) AVERAGE ANNUAL TOTAL RETURN QUOTATION TOTAL RETURN Average annual total return quotations used in the Portfolio's advertising and promotional materials are calculated according to the following formula: P(1+T)n = ERV where P equals a hypothetical initial payment of $1,000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. CUMULATIVE TOTAL RETURN Cumulative total return represents the simple change in value of an investment over a stated period and may be quoted as a percentage or as a dollar amount. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship between these factors and their contributions to total return. YIELD Annualized yield quotations used in the Portfolio's advertising and promotional materials are calculated by dividing the Portfolio's interest income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the NAV per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2[(A-B + 1)6 - 1] --- c-d where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and "d" equals the maximum offering price per share on the last day of the period. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. OTHER INFORMATION The Portfolio's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in the Portfolio will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. If permitted by applicable law, the Portfolio may advertise the performance of registered investment companies or private accounts that have investment objectives, policies and strategies substantially similar to those of the Portfolio. COMPARISON OF PORTFOLIO PERFORMANCE The performance of the Portfolio may be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue Organization, Inc. or other independent services which monitor the performance of investment companies, and may be quoted in advertising in terms of its ranking in each applicable universe. In addition, the Portfolio may use performance data reported in financial and industry publications, including Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal and USA Today. The Portfolio may from time to time use the following unmanaged indices for performance comparison purposes: o S&P 500 - The S&P 500 is an unmanaged mutual fund index of 500 stocks designed to mimic the overall equity market's industry weightings. Most, but not all, large capitalization stocks are in the index. There are also some small capitalization names in the index. The list is maintained by Standard & Poor's Corporation. It is market capitalization weighted. There are always 500 issuers in the S&P 500. Changes are made by Standard & Poor's as needed. o Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000, a market value weighted index of the 3,000 largest U.S. publicly-traded companies. FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS ASSETS Cash $ 100,000 NET ASSETS $ 100,000 Kinetics Portfolios Trust FINANCIAL STATEMENT APRIL 27, 2000 Report of Independent Accountants To the Shareholder and Board of Trustees of Kinetics Portfolios Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Kinetics Portfolios Trust (hereafter referred to as the "Trust") at April 27, 2000, in conformity with accounting principles generally accepted in the United States. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin April 27, 2000 KINETICS PORTFOLIOS TRUST STATEMENT OF ASSETS AND LIABILITIES - - -------------------------------------------------------------------------------- AS OF APRIL 27, 2000 The accompanying notes are an integral part of this financial statement. [OBJECT OMITTED] KINETICS PORTFOLIOS TRUST NOTES TO FINANCIAL STATEMENT AS OF APRIL 27, 2000 - - -------------------------------------------------------------------------------- 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Business Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Internet Global Growth Portfolio, The Internet New Paradigm Portfolio, The Internet Infrastructure Portfolio, The Medical Portfolio, The Kinetics Government Money Market Portfolio, The Small Cap Opportunities Portfolio and The Middle East Growth Portfolio (the "Portfolios"). Pursuant to the 1940 Act, the Portfolios are "non-diversified" series of the Trust. The Trust has had no operations other than the contribution by Kinetics Asset Management, Inc., the Portfolios' Adviser ("Adviser"), of $100,000, representing a beneficial interest in the Trust. The Portfolios have had no operations through April 27, 2000. On April 28, 2000, the Trust intends to distribute the Adviser's $100,000 contribution to the Portfolios, at which time the Adviser will become a partner in each of the Portfolios. In addition, on April 28, 2000 various feeder funds ("Funds") sponsored by the Adviser will invest their investable assets in the corresponding Portfolios under a master-feeder capital structure. 2. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION COSTS Expenses in connection with the organization of the Trust have been absorbed by the Funds prior to their conversion to the master-feeder capital structure. Accordingly, no statement of operations of the Trust has been provided. FEDERAL INCOME TAXES Each Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Portfolios will be taxed on its allocable share of the Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Actual results could differ from those estimates. 1. 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Portfolios. Under the terms of the Agreement, the Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of the Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Portfolio's average daily net assets. The Adviser also serves as administrator to the Portfolios. Under an Administrative Services Agreement with the Trust on behalf of the Portfolios, the Adviser receives an annual administration fee equal to 0.10% of the Portfolio's average daily net assets from which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolios by Firstar. APPENDIX - - -------------------------------------------------------------------------------- STANDARD & POOR'S ("S&P") CORPORATE BOND RATING DEFINITIONS AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree. A-Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions. CI-The rating "CI" is reversed for income bonds on which no interest is being paid. D-Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA-Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated "A" possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the near future. BAA-Bonds which are rated "Baa" are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BA-Bonds which are "Ba" are judged to have speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA-Bonds which are "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS AAA-Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA-Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A-Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB-Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB-Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B-Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC-Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC-Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C-Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D-Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. THE INTERNET EMERGING GROWTH PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST 1311 Mamaroneck Avenue White Plains, New York 10605 (800) 930-3828 April 28, 2000 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") provides general information about The Internet Emerging Growth Portfolio (the "Portfolio"). The Portfolio is a series of Kinetics Portfolios Trust (the "Trust"), a Delaware business trust. This SAI is not a prospectus and should be read in conjunction with the Portfolio's current Prospectus dated April 28, 2000, as supplemented and amended from time to time, which is incorporated hereto by reference. To obtain a copy of the Prospectus, please write the Portfolio at the address set forth above or call the telephone number shown above. This SAI is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended ("1933 Act"), because such interests are issued solely to in private placement transactions to eligible investors that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Portfolio may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts and certain qualified pension and retirement plans. Neither this SAI nor the Registration Statement as a whole constitutes an offer to sell or the solicitation of an offer to buy any beneficial interests in this Portfolio or any other portfolio series of the Trust. THE INTERNET EMERGING GROWTH PORTFOLIO The Portfolio..................................................................3 Investment Objective, Strategies, and Risks....................................3 Investment Policies and Associated Risks.......................................3 Investment Restrictions........................................................8 Temporary Investments..........................................................9 Portfolio Turnover.............................................................9 Management of the Portfolio...................................................10 Control Persons and Principal Holders of Securities............................8 Investment Adviser............................................................13 Administrative Services.......................................................14 Custodian.....................................................................15 Capitalization................................................................16 Valuation of Shares...........................................................18 Purchasing Shares.............................................................13 Redemption of Shares..........................................................13 Brokerage.....................................................................15 Taxes.........................................................................19 Performance Information.......................................................20 Independent Auditors..........................................................15 Financial Statements..........................................................22 Appendix......................................................................23 THE PORTFOLIO - - -------------------------------------------------------------------------------- The Portfolio is a series of Kinetics Portfolios Trust, a business trust organized pursuant to a Declaration of Trust under the laws of the State of Delaware on March 14, 2000. The Portfolio's principal office is located at 1311 Mamaroneck Avenue, White Plains, New York 10605 The Portfolio is a non-diversified, open-end management investment company. INVESTMENT OBJECTIVE, STRATEGIES, AND RISKS - - -------------------------------------------------------------------------------- The Portfolio's primary investment objective is long-term growth of capital. The Portfolio is designed for long-term investors who understand and are willing to accept the risk of loss involved in investing in a mutual fund seeking long-term capital growth. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in securities of companies that provide products or services designed for the Internet. This Portfolio should not be used as a trading vehicle. INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The following paragraphs provide a more detailed description of the Portfolio's investment policies and risks identified in the Prospectus. Unless otherwise noted, the policies described in this SAI are not fundamental and may be changed by the Board of Trustees of the Trust. COMMON AND PREFERRED STOCK Common stocks are units of ownership of a corporation. Preferred stocks are stocks that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. Some preference stocks may be convertible into common stock. Convertible securities are securities that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. CONVERTIBLE DEBT SECURITIES The Portfolio may invest in debt securities convertible into common stocks. Debt purchased by the Portfolio will consist of obligations of medium-grade or higher, having at least adequate capacity to pay interest and repay principal. Non-convertible debt obligations will be rated BBB or higher by S&P, or Baa or higher by Moody's. Convertible debt obligations will be rated B or higher by S&P or B or higher by Moody's. Securities rated Baa by Moody's are considered by Moody's to be medium-grade securities and have adequate capacity to pay principal and interest. Bonds in the lowest investment grade category (BBB) have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Securities rated B are referred to as "high-risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. See "Appendix" to this Statement of Additional Information for a description of debt security ratings. FIXED-INCOME SECURITIES The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. CREDIT RISK relates to the ability of the issuer to meet interest and principal payments, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, will also increase the credit risk to which those assets are subject. MARKET RISK relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium- and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wilder fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of debt securities whose ratings are downgraded below these ratings subsequent to the Portfolio's purchase of the securities. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which the Portfolio invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events. At no time will the Portfolio have more than 5% of its total assets invested in any fixed-income securities that are unrated or rated below investment grade either at the time of purchase or as a result of a reduction in rating after purchase. DEPOSITARY RECEIPTS. The Portfolio may invest in American Depositary Receipts ("ADRs") or other forms of depositary receipts, such as International Depositary Receipts ("IDRs"). Depositary receipts are typically issued in connection with a U.S. or foreign bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. Investments in these types of securities involve certain inherent risks generally associated with investments in foreign securities, including the following: POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain countries may 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, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. CURRENCY FLUCTUATIONS. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of an ADR's underlying portfolio securities denominated in that currency. Such changes will affect the Portfolio to the extent that the Portfolio is invested in ADR's comprised of foreign securities. TAXES. The interest and dividends payable on certain foreign securities comprising an ADR may be subject to foreign withholding taxes, thus reducing the net amount of income to be paid to the Portfolio and that may, ultimately, be available for distribution to the Portfolio's investors. OPTIONS Most mutual funds that use option strategies to hedge portfolio positions do not depend solely on the option profit or loss to justify the use of options, because such funds also take into account the profit or loss of the underlying securities. A more detailed discussion of writing covered and uncovered options on securities generally and the investment risks associated with such investments is set forth below. PURCHASING PUT AND CALL OPTIONS. The Portfolio may purchase put and call options on securities eligible for purchase by the Portfolio and on securities indices. Put and call options are derivative securities traded on U.S. exchanges. If the Portfolio purchases a put option, it acquires the right to sell the underlying security or index value at a specified price at any time during the term of the option. If the Portfolio purchases a call option, it acquires the right to purchase the underlying security or index value at a specified price at any time during the term of the option. Prior to exercise or expiration, the Portfolio may sell an option when through a "closing sale transaction," which is accomplished by selling an option of the same series as the option previously purchased. The Portfolio generally will purchase only those options for which the investment adviser believes there is an active secondary market to facilitate closing transactions. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. The Portfolio will purchase put options to hedge against a decrease in the price of securities it holds. Such hedge protection is provided during the life of the put option since the Portfolio, as the holder of the put option, is able to sell the underlying security at the exercise price regardless of any decrease in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decrease sufficiently below the exercise price to cover the premium and transaction costs. WRITING CALL OPTIONS. The Portfolio may write covered call options on securities eligible for purchase by the Portfolio. A call option is "covered" if the Portfolio owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, it may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option. Effecting a closing transaction in the case of a written call option will permit the Portfolio to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction allows the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of the Portfolio. If the Portfolio desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. The Portfolio realizes a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. The Portfolio realizes a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, appreciation of the underlying security owned by the Portfolio generally offsets, in whole or in part, any loss to the Portfolio resulting from the repurchase of a call option. RISK FACTORS IN OPTIONS TRANSACTIONS. The successful use of options by the Portfolio depends on the ability of the Adviser to forecast correctly interest rate and market movements. For example, if the Portfolio were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Portfolio were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When the Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Portfolio will lose part or all of its investment in the option. This contrasts with an investment by the Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Adviser deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. If a secondary market in options were to become unavailable, the Portfolio could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events -- such as volume in excess of trading or clearing capability -- were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or an options clearing corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unit asset valuable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, an options clearing corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If an options clearing corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. DEALER OPTIONS. The Portfolio may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While the Portfolio might look to an exchange's clearing corporation to exercise exchange-traded options, if the Portfolio purchases a dealer option it must rely on the selling dealer to perform if the Portfolio exercises the option. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, the Portfolio can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when the Portfolio writes a dealer option, the Portfolio can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and can enter into closing transactions with the Portfolio, no assurance exists that the Portfolio will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Portfolio, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Portfolio may be unable to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because the Portfolio must maintain a secured position with respect to any call option on a security it writes, the Portfolio may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Portfolio's ability to sell portfolio securities at a time when such sale might be advantageous. The staff of the SEC takes the position that purchased dealer options are illiquid securities. The Portfolio may treat the cover used for written dealer options as liquid if the dealer agrees that the Portfolio may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. With that exception, however, the Portfolios will treat dealer options as subject to the Portfolios' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Portfolios will change their treatment of such instruments accordingly. INVESTMENT RESTRICTIONS - - -------------------------------------------------------------------------------- The investment restrictions of the Portfolio may be changed only with the approval of the holders of a majority of the Portfolio's outstanding voting securities. 1. The Portfolio will not act as underwriter for securities of other issuers. 2. The Portfolio will not make loans. 3. With respect to 50% of its total assets, the Portfolio will not invest in the securities of any issuer if as a result the Portfolio holds more than 10% of the outstanding securities or more than 10% of the outstanding voting securities of such issuer. 4. The Portfolio will not borrow money or pledge, mortgage, or hypothecate its assets except to facilitate redemption requests that might otherwise require the untimely disposition of portfolio securities and then only from banks and in amounts not exceeding the lesser of 10% of its total assets valued at cost or 5% of its total assets valued at market at the time of such borrowing, pledge, mortgage, or hypothecation and except that the Portfolio may enter into futures contracts and related options. 5. The Portfolio will not invest more than 10% of the value of its net assets in illiquid securities, restricted securities, and other securities for which market quotations are not readily available. 6. The Portfolio will not invest in the securities of any one industry except the Internet and Internet-related industries, with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and instrumentality's, if as a result, more than 20% of the Portfolio's total assets would be invested in the securities of such industries. Except during temporary defensive periods, at least 65% of the Portfolio's total assets will be invested in the securities of domestic and foreign companies that are engaged in the Internet and Internet-related activities. 7. The Portfolio will not purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs or real estate except that the Portfolio may purchase and sell securities of companies that deal in oil, gas, or mineral exploration or development programs or interests therein. 8. The Portfolio will not issue senior securities. If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in value in the portfolio securities held by the Portfolio will not constitute a violation of such limitation. TEMPORARY INVESTMENTS - - -------------------------------------------------------------------------------- Due to the changing nature of the Internet and related companies, the national economy and market conditions, the Portfolio may, as a temporary defensive measure, invest without limitation, in short-term debt securities and money market securities with a rating of A2-P2 or higher. In order to have funds available for redemption and investment opportunities, the Portfolio may also hold a portion of its assets in cash or U.S. short-term money market instruments. Certificates of deposit purchased by the Portfolio will be those of U.S. banks having total assets at the time of purchase in excess of $1 billion, and bankers' acceptances purchased by the Portfolio will be guaranteed by U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion. The Portfolio anticipates that not more than 10% of its total assets will be so invested or held in cash at any given time, except when the Portfolio is in a temporary defensive posture. PORTFOLIO TURNOVER - - -------------------------------------------------------------------------------- In order to qualify for the beneficial tax treatment afforded regulated investment companies, and to be relieved of Federal tax liabilities, the Portfolio must distribute substantially all of its net income to investors generally on an annual basis. Thus, the Portfolio may have to dispose of portfolio securities under disadvantageous circumstances to generate cash or borrow cash in order to satisfy the distribution requirement. The Portfolio does not trade in securities for short-term profits but, when circumstances warrant, securities may be sold without regard to the length of time they have been held. MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- BOARD OF TRUSTEES The management and affairs of the Portfolio are supervised by the Board of Trustees of the Trust. The Board consists of eight individuals, five of whom are not "interested" persons of the Portfolio as that term is defined in the 1940 Act. The Trustees are fiduciaries for the Portfolio's investors and are governed by the laws of the State of Delaware in this regard They establish policies for the operation of the Portfolio and appoint the officers who conduct the daily business of the Portfolio. Officers and Trustees of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. "Interested" Trustees are designated by an asterisk that appears beside their names.
- - ----------------------------------- --------- ------------------------ ------------------------------------------- NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Steven R. Samson 45 President & Chairman President and CEO, Kinetics Asset 342 Madison Avenue of the Board Management, Inc. (1999 to Present); New York, NY 10173 President, The Internet Fund, Inc. (1999 to Present); Managing Director, Chase Manhattan Bank (1993 to 1999); President and Chairman of the Board of Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Kathleen Campbell 34 Trustee Attorney, Campbell and Campbell, 2 Madison Avenue Counselors-at-Law (1995 to Present); Valhalla, NY 10595 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Murray Stahl 46 Trustee President, Horizon Asset Management, an 342 Madison Avenue investment adviser (1994 to Present); New York, NY 10173 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Steven T. Russell 36 Trustee Attorney and Counselor at Law, 146 Fairview Avenue Steven Russell Law Firm (1994 to Bayport, NY 117045 Present); Professor of Business Law, Suffolk County Community College (1997 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Douglas Cohen, C.P.A. 36 Trustee Wagner, Awerma & Strinberg, LLP Certified 6 Saywood Lane Public Accountant (1997 to present); Stonybrook, NY 11790 Director, Kinetics Mutual Funds, Inc. (1999 to Present); Leon D. Alpern & Co. (1985 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- William J. Graham 37 Trustee Attorney, Bracken & Margolin, LLP (1997 20 Franklin Boulevard to Present); Director, Kinetics Mutual Long Beach, NY 11561 Funds, Inc. (1999 to Present); Gabor & Gabor (1995 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Joseph E. Breslin 45 Trustee Senior Vice President, Marketing & Sales, One State Street IBJ Whitehall Financial Group, a New York, NY 10004 financial services company (1999 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present); formerly President, J.E. Breslin & Co., an investment management consulting firm (1994 to 1999. - - ----------------------------------- --------- ------------------------ ------------------------------------------- John J. Sullivan 68 Trustee Director, Kinetics Mutual Funds, Inc. 31 Hemlock Drive (1999 to Present); Retired; Senior Sleepy Hollow, NY 10591 Advisor, Long Term Credit Bank of Japan, Ltd.; Executive Vice President, LTCB Trust Company; - - ----------------------------------- --------- ------------------------ ------------------------------------------- Lee W. Schultheis 43 Vice President & Managing Director & COO of Kinetics Asset 342 Madison Avenue Treasurer of the Trust Management (1999 to Present); Vice New York, NY 10173 President and Treasurer Kinetics Mutual Funds, Inc. (1999 to Present); President & Director of Business. Development, Vista Fund Distributors, Inc. (1995 to 1999); Managing Director, Forum Financial Group, a mutual fund services company. - - ----------------------------------- --------- ------------------------ -------------------------------------------
COMPENSATION Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust , Kinetics Mutual Funds, Inc. or Kinetics Asset Management, Inc. receive an aggregate annual fee of $15,000 per year for their services as Trustees or directors of all open-end investment companies distributed by Kinetics Funds Distributors, Inc. and $1,000 per meeting attended, as well as reimbursement for expenses incurred in connection with attendance at such meetings. In addition, each committee chairman of the Company and the Trust (such as the Audit committee or Pricing committee) receives an additional fee of $5,000 per year for his service as chairman.. Payment of the annual fees is allocated among such investment companies based on their relative net assets. Payment of meeting fees are allocated only among those investment companies to which such meetings relate. The "interested" Trustees of the Portfolio receive no compensation for their service as Trustees. None of the executive officers receive compensation from the Portfolio. The following tables provide compensation information for the Trustees for the year-ended December 31, 1999.
KINETICS PORTFOLIOS TRUST COMPENSATION TABLE - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND FROM FUND PART OF FUND EXPENSES RETIREMENT COMPLEX PAID TO DIRECTORS** - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ Steven R. Samson* None None None None Chairman and Director Kathleen Campbell* None None None None Director Murray Stahl*** None None None $3,844 Director Steven T. Russell None None None $5,500 Independent Director Douglas Cohen None None None $6,094 Independent Director William J. Graham None None None $5,500 Independent Director Joseph E. Breslin None None None $4,500 Independent Director John J. Sullivan None None None $5,500 Independent Director - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
* "Interested person" as defined under the 1940 Act. ** Includes compensation paid by Kinetics Mutual Funds, Inc. *** Murray Stahl became an "interested person" of the Fund (as defined under the 1940 Act) as of December 15, 1999. Previous to becoming an interested person, Mr. Stahl received $3844 as total compensation from the Fund and Fund complex for being an independent director. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - - -------------------------------------------------------------------------------- A control person is one who owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. As of the commencement of investment operations, the Portfolio could be deemed to be under the control of The Internet Emerging Growth Fund, a series of Kinetics Mutual Funds, Inc. and the sole investor in the Portfolio as of the date of this SAI. Similarly, as of such time, Kinetics Mutual Funds, Inc. through its series, The Internet Fund, The Internet Emerging Growth Fund, The Internet Global Growth Fund, The Internet Infrastructure Fund, The Internet New Paradigm Fund, The Small Cap Opportunities Fund, The Middle East Growth Fund, The Medical Fund, and The Kinetics Government Money Market Fund (each a "Fund" and collectively the "Funds"), was the owner of 100% of the value of the outstanding interests in the Trust. Any investor owning more than 50% of the value of the outstanding interests in the Portfolio may take actions without the approval of any other investor who invests in the Portfolio. Kinetics Mutual Funds, Inc. has informed the Trust that whenever The Internet Emerging Growth Fund is requested to vote on a matter pertaining to the Portfolio, The Internet Emerging Growth Fund will hold a meeting of its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by The Internet Emerging Growth Fund's shareholders. It is anticipated that other registered investment companies investing in the Portfolio, if any, will follow the same or a similar practice, although, as of May 1, 2000, there were no other investors in the Portfolio. MANAGEMENT OWNERSHIP The percentage of the Portfolio's interests owned or controlled by the executive officers and Trustees of the Portfolio and the Trust is less than 1% of the interests of the Portfolio. INVESTMENT ADVISER - - -------------------------------------------------------------------------------- Kinetics Asset Management, Inc. ("Kinetics" or the "Adviser") is a New York corporation that serves as the investment adviser to the Portfolio. Peter B. Doyle is the Chairman of the Board of Directors and Chief Investment Strategist of Kinetics. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has over 24 years experience in the mutual funds and financial services industries. Mr. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics and has more than 20 years experience in the mutual funds and financial services industries. On April 25, 2000 the Board of the Trustees of the Trust, on behalf of the Portfolio, approved a management and advisory contract (the "Agreement") with Kinetics. This Agreement will remain in effect for a term of two years and will continue on a year-to-year basis thereafter provided that specific approval is voted at least annually by the Board of Trustees of the Trust or by the vote of the holders of a majority of the outstanding voting securities of the Portfolio. In either event, it must also be approved by a majority of the Trustees of the Trust who are neither parties to the Agreement nor "interested" persons as defined in the 1940 Act at a meeting called for the purpose of voting on such approval. The Adviser's investment decisions are made subject to the direction and supervision of the Board of Trustees. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Ultimate decisions as to the investment policy and as to individual purchases and sales of securities are made by the Portfolio's officers and the Trustees. PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. Under the Agreement, Kinetics furnishes investment advice to the Portfolio by continuously reviewing the portfolio and recommending to the Portfolio to what extent, securities should be purchased or disposed. Pursuant to the Agreement, the Adviser: (1) renders research, statistical and advisory services to the Portfolio; (2) makes specific recommendations based on the Portfolio's investment requirements; (3) pays the salaries of those of the Portfolio's employees who may be officers or directors or employees of the investment adviser. For these services, the Portfolio has agreed to pay to Kinetics an annual fee of 1.25% of the Portfolio's average daily net assets. All fees are computed on the average daily closing net asset value ("NAV") of the Portfolio and are payable monthly. The fee is higher than the fee paid by most other funds. Kinetics has also entered into a Research Agreement with Horizon Assets Management, Inc. ("Horizon") for which it is solely responsible for the payment of all fees owing to Horizon. Fees of the custodian, administrator, transfer agent and Portfolio accountant are paid by the Portfolio. (D) SERVICE AGREEMENTS ADMINISTRATIVE SERVICES - - -------------------------------------------------------------------------------- Kinetics also serves as Administrator of the Portfolio. Under an Administrative Services Agreement with the Portfolio, Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets of which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. Firstar, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, also serves as the Portfolio's accountant and transfer agent. As such, Firstar provides certain investor services and record management services as well as acts as the Portfolio's dividend disbursement agent. Administrative services include, but are not limited to, providing office space, equipment, telephone facilities, various personnel, including clerical and supervisory, and computers, as is necessary or beneficial to: |X| establish and maintain investors' accounts and records, |X| process purchase and redemption transactions, |X| process automatic investments of client account cash balances, |X| answer routine client inquiries regarding the Portfolio, |X| assist clients in changing dividend options, |X| account designations, and addresses, and |X| providing such other services as the Portfolio may reasonably request. CUSTODIAN - - -------------------------------------------------------------------------------- Firstar Bank, N.A. ("Firstar Bank") is custodian for the securities and cash of the Portfolio. Under a Custody Agreement, Firstar Bank holds the Portfolio's assets in safekeeping and keeps all necessary records and documents relating to its duties. Firstar Bank receives an annual fee equal to 0.010% of the Portfolio's average daily net assets with a minimum annual fee of $3,000. Independent Public Accountants - - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. Their services include examination of the Trust's financial statements and the performance of other related audit and tax services. BROKERAGE - - -------------------------------------------------------------------------------- The Portfolio's assets are invested by the Adviser in a manner consistent with its investment objective, strategies, policies and restrictions and with any instructions the Board of Trustees may issue from time to time. Within this framework, the Adviser is responsible for making all determinations as to the purchase and sale of portfolio securities and for taking all steps necessary to implement securities transactions on behalf of the Portfolio. Transactions on U.S. stock exchanges, commodities markets and futures markets and other agency transactions may involve the payment by the Adviser on behalf of the Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Adviser usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Adviser on behalf of the Portfolio includes a disclosed, fixed commission or discount retained by the underwriter or dealer. U.S. Government securities generally are traded in the over-the-counter market through broker-dealers. A broker-dealer is a securities firm or bank that makes a market for securities by offering to buy at one price and sell at a slightly higher price. The difference between the prices is known as a spread. In placing orders for the purchase and sale of portfolio securities for the Portfolio, the Adviser seeks to obtain the best price and execution, taking into account such factors as price, size of order, difficulty and risk of execution and operational facilities of the firm involved. For securities traded in the over-the-counter markets, the Adviser deals directly with the dealers who make markets in these securities unless better prices and execution are available elsewhere. The Adviser negotiates commission rates with brokers based on the quality and quantity of services provided in light of generally prevailing rates, and while the Adviser generally seeks reasonably competitive commission rates, the Portfolio does not necessarily pay the lowest commissions available. The Board of Trustees periodically reviews the commission rates and allocation of orders. When consistent with the objectives of best price and execution, business may be placed with broker-dealers who furnish investment research or services to the Adviser. Such research or services include advice, both orally and in writing, as to the value of securities; the advisability of investing in, purchasing or selling securities; and the availability of securities, or purchasers or sellers of securities; as well as analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser, the Adviser receives a benefit, not capable of evaluation in dollar amounts, without providing any direct monetary benefit to the Portfolio from these transactions. The Adviser believes that most research services obtained by it generally benefit several or all of the investment companies and private accounts which it manages, as opposed to solely benefiting one specific managed fund or account. The same security may be suitable for the Portfolio, another portfolio series of the Trust or other private accounts managed by the Adviser. If and when the Portfolio and two or more accounts simultaneously purchase or sell the same security, the transactions will be allocated as to price and amount in accordance with arrangements equitable to the Portfolio and the accounts. The simultaneous purchase or sale of the same securities by the Portfolio and other accounts may have a detrimental effect on the Portfolio, as this may affect the price paid or received by the Portfolio or the size of the position obtainable or able to be sold by the Portfolio. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc. and subject to seeking the most favorable price and execution available and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Portfolio as a factor in the selection of broker-dealers to execute portfolio transactions for the Portfolio. CAPITALIZATION - - -------------------------------------------------------------------------------- The authorized capitalization of Kinetics Portfolio Trust consists of 1 billion shares of beneficial interest of $0.001 par value per share. Each share has equal dividend, distribution and liquidation rights. There are no conversion or preemptive rights applicable to any shares of the Portfolio. All shares issued are fully paid and non-assessable. Each holder of beneficial interest has one vote for each share held. Each investor in a Portfolio is entitled to participate equally in the Portfolio's earnings and assets and to vote in proportion to the amount of its investment in the Portfolio. Voting rights are non-cumulative. Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment therein. Investors in the Portfolio will all vote together in certain circumstances (e.g., election of the Trustees and ratification of auditors, as required by the 1940 Act and the rules thereunder). One or more Portfolios could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust or in a Portfolio, as the case may be, may control the outcome of votes. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when (1) a majority of the Trustees determines to do so or (2) investors holding at least 10% of the interests in a Portfolio (if the meeting relates solely to that Portfolio), or investors holding at least 10% of the aggregate interests in the Trust (if the meeting relates to the Trust and not specifically to a Portfolio) requests in writing a meeting of investors. Changes in fundamental policies or limitations will be submitted to investors for approval. The Trust is organized as a business trust under the laws of the State of Delaware. Investors in a Portfolio will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest in the Portfolio. The Declaration of Trust also provides that, subject to the provisions of the 1940 Act, the Trust may maintain insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Portfolio, investors, Trustees, officers, employees, and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of such liability would be limited to circumstances in which the Portfolio had inadequate insurance and was unable to meet its obligations out of its assets. PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. VALUATION OF SHARES - - -------------------------------------------------------------------------------- Shares of the Portfolio are sold at the NAV per share next computed following acceptance of an order by the Portfolio. The Portfolio's NAV per share for the purpose of pricing purchase and redemption orders is determined at the close of normal trading (currently 4:00 p.m. EST) on each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Portfolio's investment securities are valued each day at the last quoted sales price on the securities principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees. The Portfolio may use independent pricing services to assist in calculating the NAV of the Portfolio's shares. The Portfolio's investment securities that are listed on a U.S. securities exchange or NASDAQ for which market quotations are readily available are valued at the last quoted sale price on the day the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded. Options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the mean of the most recent quoted bid and asked price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed-income securities purchased with remaining maturities of 60 days or less are valued at amortized cost if it reflects fair value. In the event that amortized cost does not reflect market, market prices as determined above will be used. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Portfolio. TAXES - - -------------------------------------------------------------------------------- The Portfolio will be classified for federal income tax purposes as a partnership that is not a "publicly traded partnership." As a result, the Portfolio is not subject to federal income tax; instead, each Interestholder in the Portfolio is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, and credits, without regard to whether it has received any cash distributions from the Portfolio. The Portfolio also is not subject to Delaware income or franchise tax. A holder of beneficial interest in the Portfolio (an "Interestholder") is deemed to own a proportionate share of the Portfolio's assets and to earn a proportionate share of the Portfolio's income, for, among other things, purposes of determining whether the Interestholder satisfies the requirements to qualify as a regulated investment company ("RIC"). Accordingly, the Portfolio intends to conduct its operations so that its Interestholders that invest substantially all of their assets in the Portfolio and intend to qualify as RICs should be able to satisfy all those requirements. Distributions to an Interestholder from the Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Interestholder's recognition of any gain or loss for federal income tax purposes, except that: (1) gain will be recognized to the extent any cash that is distributed exceeds the Interestholder's basis for its interest in the Portfolio before the distribution; (2) income or gain will be recognized if the distribution is in liquidation of the Interestholder's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio; (3) loss will be recognized to the extent that a liquidation distribution consisting solely of cash and/or unrealized receivables is less than the Interestholder's basis for its interest in the Portfolio prior to the distribution; and (4) gain or loss may be recognized on a distribution to an Interestholder that contributed property to the Portfolio. An Interestholder's basis for its interest in the Portfolio generally will equal the amount of cash and the basis of any property it invests in the Portfolio, increased by the Interestholder's share of the Portfolio's net income and gains and decreased by (a) the amount of cash and the basis of any property the Portfolio distributes to the Interestholder and (b) the Interestholder's share of the Portfolio's losses. The income tax and estate tax consequences to a non-U.S. Interestholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. Interestholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Non-U.S. Interestholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Portfolio. The foregoing discussion relates only to federal income tax law. Income from the Portfolio also may be subject to foreign, state and local taxes, and their treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Interestholders should consult their tax advisors with respect to particular questions of federal, state and local taxation. ITEM 20. UNDERWRITERS PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. ITEM 21. CALCULATION OF PERFORMANCE DATA PERFORMANCE INFORMATION - - -------------------------------------------------------------------------------- (1) AVERAGE ANNUAL TOTAL RETURN QUOTATION TOTAL RETURN Average annual total return quotations used in the Portfolio's advertising and promotional materials are calculated according to the following formula: P(1+T)n = ERV where P equals a hypothetical initial payment of $1,000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. CUMULATIVE TOTAL RETURN Cumulative total return represents the simple change in value of an investment over a stated period and may be quoted as a percentage or as a dollar amount. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship between these factors and their contributions to total return. (2) Yield Quotation YIELD Annualized yield quotations used in the Portfolio's advertising and promotional materials are calculated by dividing the Portfolio's interest income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the NAV per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2[(A-B + 1)6 - 1] --- c-d where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and "d" equals the maximum offering price per share on the last day of the period. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. OTHER INFORMATION The Portfolio's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in the Portfolio will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. If permitted by applicable law, the Portfolio may advertise the performance of registered investment companies or private accounts that have investment objectives, policies and strategies substantially similar to those of the Portfolio. COMPARISON OF PORTFOLIO PERFORMANCE The performance of the Portfolio may be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue Organization, Inc. or other independent services which monitor the performance of investment companies, and may be quoted in advertising in terms of its ranking in each applicable universe. In addition, the Portfolio may use performance data reported in financial and industry publications, including Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal and USA Today. The Portfolio may from time to time use the following unmanaged indices for performance comparison purposes: o S&P 500 - The S&P 500 is an unmanaged mutual fund index of 500 stocks designed to mimic the overall equity market's industry weightings. Most, but not all, large capitalization stocks are in the index. There are also some small capitalization names in the index. The list is maintained by Standard & Poor's Corporation. It is market capitalization weighted. There are always 500 issuers in the S&P 500. Changes are made by Standard & Poor's as needed. o Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000, a market value weighted index of the 3,000 largest U.S. publicly-traded companies. ITEM 22. FINANCIAL STATEMENTS FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS ASSETS Cash $ 100,000 NET ASSETS $ 100,000 Kinetics Portfolios Trust FINANCIAL STATEMENT APRIL 27, 2000 Report of Independent Accountants To the Shareholder and Board of Trustees of Kinetics Portfolios Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Kinetics Portfolios Trust (hereafter referred to as the "Trust") at April 27, 2000, in conformity with accounting principles generally accepted in the United States. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin April 27, 2000 KINETICS PORTFOLIOS TRUST STATEMENT OF ASSETS AND LIABILITIES - - -------------------------------------------------------------------------------- AS OF APRIL 27, 2000 The accompanying notes are an integral part of this financial statement. [OBJECT OMITTED] KINETICS PORTFOLIOS TRUST NOTES TO FINANCIAL STATEMENT AS OF APRIL 27, 2000 - - -------------------------------------------------------------------------------- 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Business Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Internet Global Growth Portfolio, The Internet New Paradigm Portfolio, The Internet Infrastructure Portfolio, The Medical Portfolio, The Kinetics Government Money Market Portfolio, The Small Cap Opportunities Portfolio and The Middle East Growth Portfolio (the "Portfolios"). Pursuant to the 1940 Act, the Portfolios are "non-diversified" series of the Trust. The Trust has had no operations other than the contribution by Kinetics Asset Management, Inc., the Portfolios' Adviser ("Adviser"), of $100,000, representing a beneficial interest in the Trust. The Portfolios have had no operations through April 27, 2000. On April 28, 2000, the Trust intends to distribute the Adviser's $100,000 contribution to the Portfolios, at which time the Adviser will become a partner in each of the Portfolios. In addition, on April 28, 2000 various feeder funds ("Funds") sponsored by the Adviser will invest their investable assets in the corresponding Portfolios under a master-feeder capital structure. 2. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION COSTS Expenses in connection with the organization of the Trust have been absorbed by the Funds prior to their conversion to the master-feeder capital structure. Accordingly, no statement of operations of the Trust has been provided. FEDERAL INCOME TAXES Each Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Portfolios will be taxed on its allocable share of the Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Actual results could differ from those estimates. 1. 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Portfolios. Under the terms of the Agreement, the Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of the Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Portfolio's average daily net assets. The Adviser also serves as administrator to the Portfolios. Under an Administrative Services Agreement with the Trust on behalf of the Portfolios, the Adviser receives an annual administration fee equal to 0.10% of the Portfolio's average daily net assets from which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolios by Firstar. APPENDIX - - -------------------------------------------------------------------------------- STANDARD & POOR'S ("S&P") CORPORATE BOND RATING DEFINITIONS AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree. A-Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions. CI-The rating "CI" is reversed for income bonds on which no interest is being paid. D-Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA-Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated "A" possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the near future. BAA-Bonds which are rated "Baa" are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BA-Bonds which are "Ba" are judged to have speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA-Bonds which are "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS AAA-Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA-Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A-Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB-Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB-Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B-Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC-Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC-Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C-Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D-Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. PART B.: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION ITEM 10.: COVER PAGE AND TABLE OF CONTENTS THE INTERNET GLOBAL GROWTH PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST 1311 Mamaroneck Avenue White Plains, New York 10605 (800) 930-3828 April 28, 2000 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") provides general information about The Internet Global Growth Portfolio (the "Portfolio"). The Portfolio is a series of Kinetics Portfolios Trust (the "Trust"), a Delaware business trust. This SAI is not a prospectus and should be read in conjunction with the Portfolio's current Prospectus dated April 28, 2000, as supplemented and amended from time to time, which is incorporated hereto by reference. To obtain a copy of the Prospectus, please write the Portfolio at the address set forth above or call the telephone number shown above. This SAI is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended ("1933 Act"), because such interests are issued solely to in private placement transactions to eligible investors that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Portfolio may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts and certain qualified pension and retirement plans. Neither this SAI nor the Registration Statement as a whole constitutes an offer to sell or the solicitation of an offer to buy any beneficial interests in this Portfolio or any other portfolio series of the Trust. THE INTERNET GLOBAL GROWTH PORTFOLIO The Portfolio..................................................................3 Investment Objective, Strategies, and Risks....................................3 Investment Policies and Associated Risks.......................................3 Investment Restrictions........................................................8 Temporary Investments..........................................................9 Portfolio Turnover.............................................................9 Management of the Portfolio...................................................10 Control Persons and Principal Holders of Securities............................8 Investment Adviser............................................................13 Administrative Services.......................................................14 Custodian.....................................................................15 Capitalization................................................................16 Valuation of Shares...........................................................18 Purchasing Shares.............................................................13 Redemption of Shares..........................................................13 Brokerage.....................................................................15 Taxes.........................................................................18 Performance Information.......................................................20 Independent Auditors..........................................................15 Financial Statements..........................................................21 Appendix......................................................................22 ITEM 11. PORTFOLIO HISTORY THE PORTFOLIO - - -------------------------------------------------------------------------------- The Portfolio is a series of Kinetics Portfolios Trust, a business trust organized pursuant to a Declaration of Trust under the laws of the State of Delaware on March 14, 2000. The Portfolio's principal office is located at 1311 Mamaroneck Avenue, White Plains, New York 10605 ITEM 12. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS (A) CLASSIFICATION The Portfolio is a non-diversified, open-end management investment company. (B) INVESTMENT STRATEGIES AND RISKS INVESTMENT OBJECTIVE, STRATEGIES, AND RISKS - - -------------------------------------------------------------------------------- The Portfolio's primary investment objective is long-term growth of capital. The Portfolio is designed for long-term investors who understand and are willing to accept the risk of loss involved in investing in a mutual fund seeking long-term capital growth. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in securities of companies that provide products or services designed for the Internet. This Portfolio should not be used as a trading vehicle. (C) PORTFOLIO POLICIES INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The following paragraphs provide a more detailed description of the Portfolio's investment policies and risks identified in the Prospectus. Unless otherwise noted, the policies described in this SAI are not fundamental and may be changed by the Board of Trustees of the Trust. COMMON AND PREFERRED STOCK Common stocks are units of ownership of a corporation. Preferred stocks are stocks that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. Some preference stocks may be convertible into common stock. Convertible securities are securities that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. CONVERTIBLE DEBT SECURITIES The Portfolio may invest in debt securities convertible into common stocks. Debt purchased by the Portfolio will consist of obligations of medium-grade or higher, having at least adequate capacity to pay interest and repay principal. Non-convertible debt obligations will be rated BBB or higher by S&P, or Baa or higher by Moody's. Convertible debt obligations will be rated B or higher by S&P or B or higher by Moody's. Securities rated Baa by Moody's are considered by Moody's to be medium-grade securities and have adequate capacity to pay principal and interest. Bonds in the lowest investment grade category (BBB) have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Securities rated B are referred to as "high-risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. See "Appendix" to this Statement of Additional Information for a description of debt security ratings. FIXED-INCOME SECURITIES The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. CREDIT RISK relates to the ability of the issuer to meet interest and principal payments, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, will also increase the credit risk to which those assets are subject. MARKET RISK relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium- and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wilder fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of debt securities whose ratings are downgraded below these ratings subsequent to the Portfolio's purchase of the securities. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which the Portfolio invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events. At no time will the Portfolio have more than 5% of its total assets invested in any fixed-income securities that are unrated or rated below investment grade either at the time of purchase or as a result of a reduction in rating after purchase. DEPOSITARY RECEIPTS. The Portfolio may invest in American Depositary Receipts ("ADRs") or other forms of depositary receipts, such as International Depositary Receipts ("IDRs"). Depositary receipts are typically issued in connection with a U.S. or foreign bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. Investments in these types of securities involve certain inherent risks generally associated with investments in foreign securities, including the following: POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain countries may 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, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. CURRENCY FLUCTUATIONS. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of an ADR's underlying portfolio securities denominated in that currency. Such changes will affect the Portfolio to the extent that the Portfolio is invested in ADR's comprised of foreign securities. TAXES. The interest and dividends payable on certain foreign securities comprising an ADR may be subject to foreign withholding taxes, thus reducing the net amount of income to be paid to the Portfolio and that may, ultimately, be available for distribution to the Portfolio's investors. OPTIONS Most mutual funds that use option strategies to hedge portfolio positions do not depend solely on the option profit or loss to justify the use of options, because such funds also take into account the profit or loss of the underlying securities. A more detailed discussion of writing covered and uncovered options on securities generally and the investment risks associated with such investments is set forth below. PURCHASING PUT AND CALL OPTIONS. The Portfolio may purchase put and call options on securities eligible for purchase by the Portfolio and on securities indices. Put and call options are derivative securities traded on U.S. exchanges. If the Portfolio purchases a put option, it acquires the right to sell the underlying security or index value at a specified price at any time during the term of the option. If the Portfolio purchases a call option, it acquires the right to purchase the underlying security or index value at a specified price at any time during the term of the option. Prior to exercise or expiration, the Portfolio may sell an option when through a "closing sale transaction," which is accomplished by selling an option of the same series as the option previously purchased. The Portfolio generally will purchase only those options for which the investment adviser believes there is an active secondary market to facilitate closing transactions. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. The Portfolio will purchase put options to hedge against a decrease in the price of securities it holds. Such hedge protection is provided during the life of the put option since the Portfolio, as the holder of the put option, is able to sell the underlying security at the exercise price regardless of any decrease in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decrease sufficiently below the exercise price to cover the premium and transaction costs. WRITING CALL OPTIONS. The Portfolio may write covered call options on securities eligible for purchase by the Portfolio. A call option is "covered" if the Portfolio owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, it may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option. Effecting a closing transaction in the case of a written call option will permit the Portfolio to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction allows the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of the Portfolio. If the Portfolio desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. The Portfolio realizes a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. The Portfolio realizes a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, appreciation of the underlying security owned by the Portfolio generally offsets, in whole or in part, any loss to the Portfolio resulting from the repurchase of a call option. RISK FACTORS IN OPTIONS TRANSACTIONS. The successful use of options by the Portfolio depends on the ability of the Adviser to forecast correctly interest rate and market movements. For example, if the Portfolio were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Portfolio were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When the Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Portfolio will lose part or all of its investment in the option. This contrasts with an investment by the Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Adviser deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. If a secondary market in options were to become unavailable, the Portfolio could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events -- such as volume in excess of trading or clearing capability -- were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or an options clearing corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unit asset valuable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, an options clearing corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If an options clearing corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. DEALER OPTIONS. The Portfolio may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While the Portfolio might look to an exchange's clearing corporation to exercise exchange-traded options, if the Portfolio purchases a dealer option it must rely on the selling dealer to perform if the Portfolio exercises the option. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, the Portfolio can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when the Portfolio writes a dealer option, the Portfolio can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and can enter into closing transactions with the Portfolio, no assurance exists that the Portfolio will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Portfolio, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Portfolio may be unable to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because the Portfolio must maintain a secured position with respect to any call option on a security it writes, the Portfolio may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Portfolio's ability to sell portfolio securities at a time when such sale might be advantageous. The staff of the SEC takes the position that purchased dealer options are illiquid securities. The Portfolio may treat the cover used for written dealer options as liquid if the dealer agrees that the Portfolio may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. With that exception, however, the Portfolios will treat dealer options as subject to the Portfolios' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Portfolios will change their treatment of such instruments accordingly. INVESTMENT RESTRICTIONS - - -------------------------------------------------------------------------------- The investment restrictions of the Portfolio may be changed only with the approval of the holders of a majority of the Portfolio's outstanding voting securities. 1. The Portfolio will not act as underwriter for securities of other issuers. 2. The Portfolio will not make loans. 3. With respect to 50% of its total assets, the Portfolio will not invest in the securities of any issuer if as a result the Portfolio holds more than 10% of the outstanding securities or more than 10% of the outstanding voting securities of such issuer. 4. The Portfolio will not borrow money or pledge, mortgage, or hypothecate its assets except to facilitate redemption requests that might otherwise require the untimely disposition of portfolio securities and then only from banks and in amounts not exceeding the lesser of 10% of its total assets valued at cost or 5% of its total assets valued at market at the time of such borrowing, pledge, mortgage, or hypothecation and except that the Portfolio may enter into futures contracts and related options. 5. The Portfolio will not invest more than 10% of the value of its net assets in illiquid securities, restricted securities, and other securities for which market quotations are not readily available. 6. The Portfolio will not invest in the securities of any one industry except the Internet and Internet-related industries, with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and instrumentality's, if as a result, more than 20% of the Portfolio's total assets would be invested in the securities of such industries. Except during temporary defensive periods, at least 65% of the Portfolio's total assets will be invested in the securities of domestic and foreign companies that are engaged in the Internet and Internet-related activities. 7. The Portfolio will not purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs or real estate except that the Portfolio may purchase and sell securities of companies that deal in oil, gas, or mineral exploration or development programs or interests therein. 8. The Portfolio will not issue senior securities. If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in value in the portfolio securities held by the Portfolio will not constitute a violation of such limitation. (D) TEMPORARY DEFENSIVE POSITION TEMPORARY INVESTMENTS - - -------------------------------------------------------------------------------- Due to the changing nature of the Internet and related companies, the national economy and market conditions, the Portfolio may, as a temporary defensive measure, invest without limitation, in short-term debt securities and money market securities with a rating of A2-P2 or higher. In order to have funds available for redemption and investment opportunities, the Portfolio may also hold a portion of its assets in cash or U.S. short-term money market instruments. Certificates of deposit purchased by the Portfolio will be those of U.S. banks having total assets at the time of purchase in excess of $1 billion, and bankers' acceptances purchased by the Portfolio will be guaranteed by U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion. The Portfolio anticipates that not more than 10% of its total assets will be so invested or held in cash at any given time, except when the Portfolio is in a temporary defensive posture. (E) PORTFOLIO TURNOVER PORTFOLIO TURNOVER - - -------------------------------------------------------------------------------- In order to qualify for the beneficial tax treatment afforded regulated investment companies, and to be relieved of Federal tax liabilities, the Portfolio must distribute substantially all of its net income to investors generally on an annual basis. Thus, the Portfolio may have to dispose of portfolio securities under disadvantageous circumstances to generate cash or borrow cash in order to satisfy the distribution requirement. The Portfolio does not trade in securities for short-term profits but, when circumstances warrant, securities may be sold without regard to the length of time they have been held. ITEM 13. MANAGEMENT OF THE PORTFOLIO MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- BOARD OF TRUSTEES The management and affairs of the Portfolio are supervised by the Board of Trustees of the Trust. The Board consists of eight individuals, five of whom are not "interested" persons of the Portfolio as that term is defined in the 1940 Act. The Trustees are fiduciaries for the Portfolio's investors and are governed by the laws of the State of Delaware in this regard They establish policies for the operation of the Portfolio and appoint the officers who conduct the daily business of the Portfolio. Officers and Trustees of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. "Interested" Trustees are designated by an asterisk that appears beside their names.
- - ----------------------------------- --------- ------------------------ ------------------------------------------- NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Steven R. Samson 45 President & Chairman President and CEO, Kinetics Asset 342 Madison Avenue of the Board Management, Inc. (1999 to Present); New York, NY 10173 President, The Internet Fund, Inc. (1999 to Present); Managing Director, Chase Manhattan Bank (1993 to 1999); President and Chairman of the Board of Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Kathleen Campbell 34 Trustee Attorney, Campbell and Campbell, 2 Madison Avenue Counselors-at-Law (1995 to Present); Valhalla, NY 10595 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Murray Stahl 46 Trustee President, Horizon Asset Management, an 342 Madison Avenue investment adviser (1994 to Present); New York, NY 10173 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Steven T. Russell 36 Trustee Attorney and Counselor at Law, 146 Fairview Avenue Steven Russell Law Firm (1994 to Bayport, NY 117045 Present); Professor of Business Law, Suffolk County Community College (1997 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Douglas Cohen, C.P.A. 36 Trustee Wagner, Awerma & Strinberg, LLP Certified 6 Saywood Lane Public Accountant (1997 to present); Stonybrook, NY 11790 Director, Kinetics Mutual Funds, Inc. (1999 to Present); Leon D. Alpern & Co. (1985 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- William J. Graham 37 Trustee Attorney, Bracken & Margolin, LLP (1997 20 Franklin Boulevard to Present); Director, Kinetics Mutual Long Beach, NY 11561 Funds, Inc. (1999 to Present); Gabor & Gabor (1995 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Joseph E. Breslin 45 Trustee Senior Vice President, Marketing & Sales, One State Street IBJ Whitehall Financial Group, a New York, NY 10004 financial services company (1999 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present); formerly President, J.E. Breslin & Co., an investment management consulting firm (1994 to 1999. - - ----------------------------------- --------- ------------------------ ------------------------------------------- John J. Sullivan 68 Trustee Director, Kinetics Mutual Funds, Inc. 31 Hemlock Drive (1999 to Present); Retired; Senior Sleepy Hollow, NY 10591 Advisor, Long Term Credit Bank of Japan, Ltd.; Executive Vice President, LTCB Trust Company; - - ----------------------------------- --------- ------------------------ ------------------------------------------- Lee W. Schultheis 43 Vice President & Managing Director & COO of Kinetics Asset 342 Madison Avenue Treasurer of the Trust Management (1999 to Present); Vice New York, NY 10173 President and Treasurer Kinetics Mutual Funds, Inc. (1999 to Present); President & Director of Business. Development, Vista Fund Distributors, Inc. (1995 to 1999); Managing Director, Forum Financial Group, a mutual fund services company. - - ----------------------------------- --------- ------------------------ -------------------------------------------
COMPENSATION Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust , Kinetics Mutual Funds, Inc. or Kinetics Asset Management, Inc. receive an aggregate annual fee of $15,000 per year for their services as Trustees or directors of all open-end investment companies distributed by Kinetics Funds Distributors, Inc. and $1,000 per meeting attended, as well as reimbursement for expenses incurred in connection with attendance at such meetings. In addition, each committee chairman of the Company and the Trust (such as the Audit committee or Pricing committee) receives an additional fee of $5,000 per year for his service as chairman.. Payment of the annual fees is allocated among such investment companies based on their relative net assets. Payment of meeting fees are allocated only among those investment companies to which such meetings relate. The "interested" Trustees of the Portfolio receive no compensation for their service as Trustees. None of the executive officers receive compensation from the Portfolio. The following tables provide compensation information for the Trustees for the year-ended December 31, 1999.
KINETICS PORTFOLIOS TRUST COMPENSATION TABLE - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND FROM FUND PART OF FUND EXPENSES RETIREMENT COMPLEX PAID TO DIRECTORS** - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ Steven R. Samson* None None None None Chairman and Director Kathleen Campbell* None None None None Director Murray Stahl*** None None None $3,844 Director Steven T. Russell None None None $5,500 Independent Director Douglas Cohen None None None $6,094 Independent Director William J. Graham None None None $5,500 Independent Director Joseph E. Breslin None None None $4,500 Independent Director John J. Sullivan None None None $5,500 Independent Director - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
* "Interested person" as defined under the 1940 Act. ** Includes compensation paid by Kinetics Mutual Funds, Inc. *** Murray Stahl became an "interested person" of the Fund (as defined under the 1940 Act) as of December 15, 1999. Previous to becoming an interested person, Mr. Stahl received $3844 as total compensation from the Fund and Fund complex for being an independent director. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES (A) CONTROL PERSONS & (B) PRINCIPAL HOLDERS CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - - -------------------------------------------------------------------------------- A control person is one who owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. As of the commencement of investment operations, the Portfolio could be deemed to be under the control of The Internet Global Growth Fund, a series of Kinetics Mutual Funds, Inc. and the sole investor in the Portfolio as of the date of this SAI. Similarly, as of such time, Kinetics Mutual Funds, Inc. through its series, The Internet Fund, The Internet Emerging Growth Fund, The Internet Global Growth Fund, The Internet Infrastructure Fund, The Internet New Paradigm Fund, The Small Cap Opportunities Fund, The Middle East Growth Fund, The Medical Fund, and The Kinetics Government Money Market Fund (each a "Fund" and collectively the "Funds"), was the owner of 100% of the value of the outstanding interests in the Trust. Any investor owning more than 50% of the value of the outstanding interests in the Portfolio may take actions without the approval of any other investor who invests in the Portfolio. Kinetics Mutual Funds, Inc. has informed the Trust that whenever The Internet Global Growth Fund is requested to vote on a matter pertaining to the Portfolio, The Internet Global Growth Fund will hold a meeting of its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by The Internet Global Growth Fund's shareholders. It is anticipated that other registered investment companies investing in the Portfolio, if any, will follow the same or a similar practice, although, as of May 1, 2000, there were no other investors in the Portfolio. (b) Management Ownership MANAGEMENT OWNERSHIP The percentage of the Portfolio's interests owned or controlled by the executive officers and Trustees of the Portfolio and the Trust is less than 1% of the interests of the Portfolio. ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES (A) INVESTMENT ADVISER INVESTMENT ADVISER - - -------------------------------------------------------------------------------- Kinetics Asset Management, Inc. ("Kinetics" or the "Adviser") is a New York corporation that serves as the investment adviser to the Portfolio. Peter B. Doyle is the Chairman of the Board of Directors and Chief Investment Strategist of Kinetics. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has over 24 years experience in the mutual funds and financial services industries. Mr. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics and has more than 20 years experience in the mutual funds and financial services industries. On April 25, 2000 the Board of the Trustees of the Trust, on behalf of the Portfolio, approved a management and advisory contract (the "Agreement") with Kinetics. This Agreement will remain in effect for a term of two years and will continue on a year-to-year basis thereafter provided that specific approval is voted at least annually by the Board of Trustees of the Trust or by the vote of the holders of a majority of the outstanding voting securities of the Portfolio. In either event, it must also be approved by a majority of the Trustees of the Trust who are neither parties to the Agreement nor "interested" persons as defined in the 1940 Act at a meeting called for the purpose of voting on such approval. The Adviser's investment decisions are made subject to the direction and supervision of the Board of Trustees. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Ultimate decisions as to the investment policy and as to individual purchases and sales of securities are made by the Portfolio's officers and the Trustees. (B) PRINCIPAL UNDERWRITER PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. (C) SERVICES PROVIDED BY THE INVESTMENT ADVISER AND PORTFOLIO EXPENSES PAID BY THIRD PARTIES Under the Agreement, Kinetics furnishes investment advice to the Portfolio by continuously reviewing the portfolio and recommending to the Portfolio to what extent, securities should be purchased or disposed. Pursuant to the Agreement, the Adviser: (1) renders research, statistical and advisory services to the Portfolio; (2) makes specific recommendations based on the Portfolio's investment requirements; (3) pays the salaries of those of the Portfolio's employees who may be officers or directors or employees of the investment adviser. For these services, the Portfolio has agreed to pay to Kinetics an annual fee of 1.25% of the Portfolio's average daily net assets. All fees are computed on the average daily closing net asset value ("NAV") of the Portfolio and are payable monthly. The fee is higher than the fee paid by most other funds. Kinetics has also entered into a Research Agreement with Horizon Assets Management, Inc. ("Horizon") for which it is solely responsible for the payment of all fees owing to Horizon. Fees of the custodian, administrator, transfer agent and Portfolio accountant are paid by the Portfolio. (D) SERVICE AGREEMENTS ADMINISTRATIVE SERVICES - - -------------------------------------------------------------------------------- Kinetics also serves as Administrator of the Portfolio. Under an Administrative Services Agreement with the Portfolio, Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets of which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. Firstar, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, also serves as the Portfolio's accountant and transfer agent. As such, Firstar provides certain investor services and record management services as well as acts as the Portfolio's dividend disbursement agent. Administrative services include, but are not limited to, providing office space, equipment, telephone facilities, various personnel, including clerical and supervisory, and computers, as is necessary or beneficial to: |X| establish and maintain investors' accounts and records, |X| process purchase and redemption transactions, |X| process automatic investments of client account cash balances, |X| answer routine client inquiries regarding the Portfolio, |X| assist clients in changing dividend options, |X| account designations, and addresses, and |X| providing such other services as the Portfolio may reasonably request. CUSTODIAN - - -------------------------------------------------------------------------------- Firstar Bank, N.A. ("Firstar Bank") is custodian for the securities and cash of the Portfolio. Under a Custody Agreement, Firstar Bank holds the Portfolio's assets in safekeeping and keeps all necessary records and documents relating to its duties. Firstar Bank receives an annual fee equal to 0.010% of the Portfolio's average daily net assets with a minimum annual fee of $3,000. Independent Public Accountants - - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. Their services include examination of the Trust's financial statements and the performance of other related audit and tax services. ITEM 16. BROKERAGE ALLOCATION AND OTHER PRACTICES BROKERAGE - - -------------------------------------------------------------------------------- The Portfolio's assets are invested by the Adviser in a manner consistent with its investment objective, strategies, policies and restrictions and with any instructions the Board of Trustees may issue from time to time. Within this framework, the Adviser is responsible for making all determinations as to the purchase and sale of portfolio securities and for taking all steps necessary to implement securities transactions on behalf of the Portfolio. Transactions on U.S. stock exchanges, commodities markets and futures markets and other agency transactions may involve the payment by the Adviser on behalf of the Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Adviser usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Adviser on behalf of the Portfolio includes a disclosed, fixed commission or discount retained by the underwriter or dealer. U.S. Government securities generally are traded in the over-the-counter market through broker-dealers. A broker-dealer is a securities firm or bank that makes a market for securities by offering to buy at one price and sell at a slightly higher price. The difference between the prices is known as a spread. In placing orders for the purchase and sale of portfolio securities for the Portfolio, the Adviser seeks to obtain the best price and execution, taking into account such factors as price, size of order, difficulty and risk of execution and operational facilities of the firm involved. For securities traded in the over-the-counter markets, the Adviser deals directly with the dealers who make markets in these securities unless better prices and execution are available elsewhere. The Adviser negotiates commission rates with brokers based on the quality and quantity of services provided in light of generally prevailing rates, and while the Adviser generally seeks reasonably competitive commission rates, the Portfolio does not necessarily pay the lowest commissions available. The Board of Trustees periodically reviews the commission rates and allocation of orders. When consistent with the objectives of best price and execution, business may be placed with broker-dealers who furnish investment research or services to the Adviser. Such research or services include advice, both orally and in writing, as to the value of securities; the advisability of investing in, purchasing or selling securities; and the availability of securities, or purchasers or sellers of securities; as well as analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser, the Adviser receives a benefit, not capable of evaluation in dollar amounts, without providing any direct monetary benefit to the Portfolio from these transactions. The Adviser believes that most research services obtained by it generally benefit several or all of the investment companies and private accounts which it manages, as opposed to solely benefiting one specific managed fund or account. The same security may be suitable for the Portfolio, another portfolio series of the Trust or other private accounts managed by the Adviser. If and when the Portfolio and two or more accounts simultaneously purchase or sell the same security, the transactions will be allocated as to price and amount in accordance with arrangements equitable to the Portfolio and the accounts. The simultaneous purchase or sale of the same securities by the Portfolio and other accounts may have a detrimental effect on the Portfolio, as this may affect the price paid or received by the Portfolio or the size of the position obtainable or able to be sold by the Portfolio. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc. and subject to seeking the most favorable price and execution available and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Portfolio as a factor in the selection of broker-dealers to execute portfolio transactions for the Portfolio. ITEM 17. CAPITAL STOCK AND OTHER SECURITIES (a) Capital Stock CAPITALIZATION - - -------------------------------------------------------------------------------- The authorized capitalization of Kinetics Portfolio Trust consists of 1 billion shares of beneficial interest of $0.001 par value per share. Each share has equal dividend, distribution and liquidation rights. There are no conversion or preemptive rights applicable to any shares of the Portfolio. All shares issued are fully paid and non-assessable. Each holder of beneficial interest has one vote for each share held. Each investor in a Portfolio is entitled to participate equally in the Portfolio's earnings and assets and to vote in proportion to the amount of its investment in the Portfolio. Voting rights are non-cumulative. Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment therein. Investors in the Portfolio will all vote together in certain circumstances (e.g., election of the Trustees and ratification of auditors, as required by the 1940 Act and the rules thereunder). One or more Portfolios could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust or in a Portfolio, as the case may be, may control the outcome of votes. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when (1) a majority of the Trustees determines to do so or (2) investors holding at least 10% of the interests in a Portfolio (if the meeting relates solely to that Portfolio), or investors holding at least 10% of the aggregate interests in the Trust (if the meeting relates to the Trust and not specifically to a Portfolio) requests in writing a meeting of investors. Changes in fundamental policies or limitations will be submitted to investors for approval. The Trust is organized as a business trust under the laws of the State of Delaware. Investors in a Portfolio will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest in the Portfolio. The Declaration of Trust also provides that, subject to the provisions of the 1940 Act, the Trust may maintain insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Portfolio, investors, Trustees, officers, employees, and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of such liability would be limited to circumstances in which the Portfolio had inadequate insurance and was unable to meet its obligations out of its assets. ITEM 18. PURCHASE, REDEMPTION AND PRICING OF SHARES (A) PURCHASE OF SHARES PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. (C) REDEMPTION OF SHARES REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. (B) OFFERING PRICE VALUATION OF SHARES - - -------------------------------------------------------------------------------- Shares of the Portfolio are sold at the NAV per share next computed following acceptance of an order by the Portfolio. The Portfolio's NAV per share for the purpose of pricing purchase and redemption orders is determined at the close of normal trading (currently 4:00 p.m. EST) on each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Portfolio's investment securities are valued each day at the last quoted sales price on the securities principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees. The Portfolio may use independent pricing services to assist in calculating the NAV of the Portfolio's shares. The Portfolio's investment securities that are listed on a U.S. securities exchange or NASDAQ for which market quotations are readily available are valued at the last quoted sale price on the day the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded. Options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the mean of the most recent quoted bid and asked price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed-income securities purchased with remaining maturities of 60 days or less are valued at amortized cost if it reflects fair value. In the event that amortized cost does not reflect market, market prices as determined above will be used. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Portfolio. ITEM 19. TAXATION OF THE PORTFOLIO TAXES - - -------------------------------------------------------------------------------- The Portfolio will be classified for federal income tax purposes as a partnership that is not a "publicly traded partnership." As a result, the Portfolio is not subject to federal income tax; instead, each Interestholder in the Portfolio is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, and credits, without regard to whether it has received any cash distributions from the Portfolio. The Portfolio also is not subject to Delaware income or franchise tax. A holder of beneficial interest in the Portfolio (an "Interestholder") is deemed to own a proportionate share of the Portfolio's assets and to earn a proportionate share of the Portfolio's income, for, among other things, purposes of determining whether the Interestholder satisfies the requirements to qualify as a regulated investment company ("RIC"). Accordingly, the Portfolio intends to conduct its operations so that its Interestholders that invest substantially all of their assets in the Portfolio and intend to qualify as RICs should be able to satisfy all those requirements. Distributions to an Interestholder from the Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Interestholder's recognition of any gain or loss for federal income tax purposes, except that: (1) gain will be recognized to the extent any cash that is distributed exceeds the Interestholder's basis for its interest in the Portfolio before the distribution; (2) income or gain will be recognized if the distribution is in liquidation of the Interestholder's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio; (3) loss will be recognized to the extent that a liquidation distribution consisting solely of cash and/or unrealized receivables is less than the Interestholder's basis for its interest in the Portfolio prior to the distribution; and (4) gain or loss may be recognized on a distribution to an Interestholder that contributed property to the Portfolio. An Interestholder's basis for its interest in the Portfolio generally will equal the amount of cash and the basis of any property it invests in the Portfolio, increased by the Interestholder's share of the Portfolio's net income and gains and decreased by (a) the amount of cash and the basis of any property the Portfolio distributes to the Interestholder and (b) the Interestholder's share of the Portfolio's losses. The income tax and estate tax consequences to a non-U.S. Interestholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. Interestholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Non-U.S. Interestholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Portfolio. The foregoing discussion relates only to federal income tax law. Income from the Portfolio also may be subject to foreign, state and local taxes, and their treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Interestholders should consult their tax advisors with respect to particular questions of federal, state and local taxation. ITEM 20. UNDERWRITERS PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. ITEM 21. CALCULATION OF PERFORMANCE DATA PERFORMANCE INFORMATION - - -------------------------------------------------------------------------------- (1) AVERAGE ANNUAL TOTAL RETURN QUOTATION TOTAL RETURN Average annual total return quotations used in the Portfolio's advertising and promotional materials are calculated according to the following formula: P(1+T)n = ERV where P equals a hypothetical initial payment of $1,000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. CUMULATIVE TOTAL RETURN Cumulative total return represents the simple change in value of an investment over a stated period and may be quoted as a percentage or as a dollar amount. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship between these factors and their contributions to total return. (2) Yield Quotation YIELD Annualized yield quotations used in the Portfolio's advertising and promotional materials are calculated by dividing the Portfolio's interest income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the NAV per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2[(A-B + 1)6 - 1] --- c-d where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and "d" equals the maximum offering price per share on the last day of the period. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. OTHER INFORMATION The Portfolio's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in the Portfolio will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. If permitted by applicable law, the Portfolio may advertise the performance of registered investment companies or private accounts that have investment objectives, policies and strategies substantially similar to those of the Portfolio. COMPARISON OF PORTFOLIO PERFORMANCE The performance of the Portfolio may be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue Organization, Inc. or other independent services which monitor the performance of investment companies, and may be quoted in advertising in terms of its ranking in each applicable universe. In addition, the Portfolio may use performance data reported in financial and industry publications, including Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal and USA Today. The Portfolio may from time to time use the following unmanaged indices for performance comparison purposes: o S&P 500 - The S&P 500 is an unmanaged mutual fund index of 500 stocks designed to mimic the overall equity market's industry weightings. Most, but not all, large capitalization stocks are in the index. There are also some small capitalization names in the index. The list is maintained by Standard & Poor's Corporation. It is market capitalization weighted. There are always 500 issuers in the S&P 500. Changes are made by Standard & Poor's as needed. o Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000, a market value weighted index of the 3,000 largest U.S. publicly-traded companies. ITEM 22. FINANCIAL STATEMENTS FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS ASSETS Cash $ 100,000 NET ASSETS $ 100,000 Kinetics Portfolios Trust FINANCIAL STATEMENT APRIL 27, 2000 Report of Independent Accountants To the Shareholder and Board of Trustees of Kinetics Portfolios Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Kinetics Portfolios Trust (hereafter referred to as the "Trust") at April 27, 2000, in conformity with accounting principles generally accepted in the United States. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin April 27, 2000 KINETICS PORTFOLIOS TRUST STATEMENT OF ASSETS AND LIABILITIES - - -------------------------------------------------------------------------------- AS OF APRIL 27, 2000 The accompanying notes are an integral part of this financial statement. [OBJECT OMITTED] KINETICS PORTFOLIOS TRUST NOTES TO FINANCIAL STATEMENT AS OF APRIL 27, 2000 - - -------------------------------------------------------------------------------- 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Business Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Internet Global Growth Portfolio, The Internet New Paradigm Portfolio, The Internet Infrastructure Portfolio, The Medical Portfolio, The Kinetics Government Money Market Portfolio, The Small Cap Opportunities Portfolio and The Middle East Growth Portfolio (the "Portfolios"). Pursuant to the 1940 Act, the Portfolios are "non-diversified" series of the Trust. The Trust has had no operations other than the contribution by Kinetics Asset Management, Inc., the Portfolios' Adviser ("Adviser"), of $100,000, representing a beneficial interest in the Trust. The Portfolios have had no operations through April 27, 2000. On April 28, 2000, the Trust intends to distribute the Adviser's $100,000 contribution to the Portfolios, at which time the Adviser will become a partner in each of the Portfolios. In addition, on April 28, 2000 various feeder funds ("Funds") sponsored by the Adviser will invest their investable assets in the corresponding Portfolios under a master-feeder capital structure. 2. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION COSTS Expenses in connection with the organization of the Trust have been absorbed by the Funds prior to their conversion to the master-feeder capital structure. Accordingly, no statement of operations of the Trust has been provided. FEDERAL INCOME TAXES Each Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Portfolios will be taxed on its allocable share of the Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Actual results could differ from those estimates. 1. 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Portfolios. Under the terms of the Agreement, the Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of the Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Portfolio's average daily net assets. The Adviser also serves as administrator to the Portfolios. Under an Administrative Services Agreement with the Trust on behalf of the Portfolios, the Adviser receives an annual administration fee equal to 0.10% of the Portfolio's average daily net assets from which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolios by Firstar. APPENDIX - - -------------------------------------------------------------------------------- STANDARD & POOR'S ("S&P") CORPORATE BOND RATING DEFINITIONS AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree. A-Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions. CI-The rating "CI" is reversed for income bonds on which no interest is being paid. D-Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA-Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated "A" possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the near future. BAA-Bonds which are rated "Baa" are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BA-Bonds which are "Ba" are judged to have speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA-Bonds which are "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS AAA-Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA-Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A-Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB-Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB-Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B-Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC-Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC-Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C-Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D-Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. PART B.: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION ITEM 10.: COVER PAGE AND TABLE OF CONTENTS THE INTERNET NEW PARADIGM PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST 1311 Mamaroneck Avenue White Plains, New York 10605 (800) 930-3828 April 28, 2000 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") provides general information about The Internet New Paradigm Portfolio (the "Portfolio"). The Portfolio is a series of Kinetics Portfolios Trust (the "Trust"), a Delaware business trust. This SAI is not a prospectus and should be read in conjunction with the Portfolio's current Prospectus dated April 28, 2000, as supplemented and amended from time to time, which is incorporated hereto by reference. To obtain a copy of the Prospectus, please write the Portfolio at the address set forth above or call the telephone number shown above. This SAI is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended ("1933 Act"), because such interests are issued solely to in private placement transactions to eligible investors that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Portfolio may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts and certain qualified pension and retirement plans. Neither this SAI nor the Registration Statement as a whole constitutes an offer to sell or the solicitation of an offer to buy any beneficial interests in this Portfolio or any other portfolio series of the Trust. THE INTERNET NEW PARADIGM PORTFOLIO The Portfolio..................................................................2 Investment Objective, Strategies, and Risks....................................2 Investment Policies and Associated Risks.......................................3 Investment Restrictions........................................................7 Temporary Investments..........................................................8 Portfolio Turnover.............................................................9 Management of the Portfolio....................................................9 Control Persons and Principal Holders of Securities...........................12 Investment Adviser............................................................12 Administrative Services.......................................................14 Custodian.....................................................................14 Brokerage.....................................................................14 Capitalization................................................................16 Purchase of Shares............................................................16 Redemption of Shares..........................................................17 Valuation of Shares...........................................................17 Taxes.........................................................................19 Performance Information.......................................................19 Financial Statements..........................................................21 Appendix......................................................................22 ITEM 11. PORTFOLIO HISTORY THE PORTFOLIO - - -------------------------------------------------------------------------------- The Portfolio is a series of Kinetics Portfolios Trust, a business trust organized pursuant to a Declaration of Trust under the laws of the State of Delaware on March 14, 2000. The Portfolio's principal office is located at 1311 Mamaroneck Avenue, White Plains, New York 10605 ITEM 12. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS (A) CLASSIFICATION The Portfolio is a non-diversified, open-end management investment company. (B) INVESTMENT STRATEGIES AND RISKS INVESTMENT OBJECTIVE, STRATEGIES, AND RISKS - - -------------------------------------------------------------------------------- The Portfolio's primary investment objective is long-term growth of capital. The Portfolio is designed for long-term investors who understand and are willing to accept the risk of loss involved in investing in a mutual fund seeking long-term capital growth. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in securities of companies that provide products or services designed for the Internet. This Portfolio should not be used as a trading vehicle. (C) PORTFOLIO POLICIES INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The following paragraphs provide a more detailed description of the Portfolio's investment policies and risks identified in the Prospectus. Unless otherwise noted, the policies described in this SAI are not fundamental and may be changed by the Board of Trustees of the Trust. COMMON AND PREFERRED STOCK Common stocks are units of ownership of a corporation. Preferred stocks are stocks that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. Some preference stocks may be convertible into common stock. Convertible securities are securities that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. CONVERTIBLE DEBT SECURITIES The Portfolio may invest in debt securities convertible into common stocks. Debt purchased by the Portfolio will consist of obligations of medium-grade or higher, having at least adequate capacity to pay interest and repay principal. Non-convertible debt obligations will be rated BBB or higher by S&P, or Baa or higher by Moody's. Convertible debt obligations will be rated B or higher by S&P or B or higher by Moody's. Securities rated Baa by Moody's are considered by Moody's to be medium-grade securities and have adequate capacity to pay principal and interest. Bonds in the lowest investment grade category (BBB) have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Securities rated B are referred to as "high-risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. See "Appendix" to this Statement of Additional Information for a description of debt security ratings. FIXED-INCOME SECURITIES The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. CREDIT RISK relates to the ability of the issuer to meet interest and principal payments, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, will also increase the credit risk to which those assets are subject. MARKET RISK relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium- and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wilder fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of debt securities whose ratings are downgraded below these ratings subsequent to the Portfolio's purchase of the securities. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which the Portfolio invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events. At no time will the Portfolio have more than 5% of its total assets invested in any fixed-income securities that are unrated or rated below investment grade either at the time of purchase or as a result of a reduction in rating after purchase. DEPOSITARY RECEIPTS. The Portfolio may invest in American Depositary Receipts ("ADRs") or other forms of depositary receipts, such as International Depositary Receipts ("IDRs"). Depositary receipts are typically issued in connection with a U.S. or foreign bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. Investments in these types of securities involve certain inherent risks generally associated with investments in foreign securities, including the following: POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain countries may 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, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. CURRENCY FLUCTUATIONS. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of an ADR's underlying portfolio securities denominated in that currency. Such changes will affect the Portfolio to the extent that the Portfolio is invested in ADR's comprised of foreign securities. TAXES. The interest and dividends payable on certain foreign securities comprising an ADR may be subject to foreign withholding taxes, thus reducing the net amount of income to be paid to the Portfolio and that may, ultimately, be available for distribution to the Portfolio's investors. OPTIONS Most mutual funds that use option strategies to hedge portfolio positions do not depend solely on the option profit or loss to justify the use of options, because such funds also take into account the profit or loss of the underlying securities. A more detailed discussion of writing covered and uncovered options on securities generally and the investment risks associated with such investments is set forth below. PURCHASING PUT AND CALL OPTIONS. The Portfolio may purchase put and call options on securities eligible for purchase by the Portfolio and on securities indices. Put and call options are derivative securities traded on U.S. exchanges. If the Portfolio purchases a put option, it acquires the right to sell the underlying security or index value at a specified price at any time during the term of the option. If the Portfolio purchases a call option, it acquires the right to purchase the underlying security or index value at a specified price at any time during the term of the option. Prior to exercise or expiration, the Portfolio may sell an option when through a "closing sale transaction," which is accomplished by selling an option of the same series as the option previously purchased. The Portfolio generally will purchase only those options for which the investment adviser believes there is an active secondary market to facilitate closing transactions. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. The Portfolio will purchase put options to hedge against a decrease in the price of securities it holds. Such hedge protection is provided during the life of the put option since the Portfolio, as the holder of the put option, is able to sell the underlying security at the exercise price regardless of any decrease in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decrease sufficiently below the exercise price to cover the premium and transaction costs. WRITING CALL OPTIONS. The Portfolio may write covered call options on securities eligible for purchase by the Portfolio. A call option is "covered" if the Portfolio owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, it may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option. Effecting a closing transaction in the case of a written call option will permit the Portfolio to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction allows the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of the Portfolio. If the Portfolio desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. The Portfolio realizes a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. The Portfolio realizes a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, appreciation of the underlying security owned by the Portfolio generally offsets, in whole or in part, any loss to the Portfolio resulting from the repurchase of a call option. RISK FACTORS IN OPTIONS TRANSACTIONS. The successful use of options by the Portfolio depends on the ability of the Adviser to forecast correctly interest rate and market movements. For example, if the Portfolio were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Portfolio were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When the Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Portfolio will lose part or all of its investment in the option. This contrasts with an investment by the Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Adviser deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. If a secondary market in options were to become unavailable, the Portfolio could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events --such as volume in excess of trading or clearing capability-- were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or an options clearing corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unit asset valuable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, an options clearing corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If an options clearing corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. DEALER OPTIONS. The Portfolio may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While the Portfolio might look to an exchange's clearing corporation to exercise exchange-traded options, if the Portfolio purchases a dealer option it must rely on the selling dealer to perform if the Portfolio exercises the option. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, the Portfolio can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when the Portfolio writes a dealer option, the Portfolio can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and can enter into closing transactions with the Portfolio, no assurance exists that the Portfolio will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Portfolio, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Portfolio may be unable to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because the Portfolio must maintain a secured position with respect to any call option on a security it writes, the Portfolio may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Portfolio's ability to sell portfolio securities at a time when such sale might be advantageous. The staff of the SEC takes the position that purchased dealer options are illiquid securities. The Portfolio may treat the cover used for written dealer options as liquid if the dealer agrees that the Portfolio may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. With that exception, however, the Portfolios will treat dealer options as subject to the Portfolios' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Portfolios will change their treatment of such instruments accordingly. INVESTMENT RESTRICTIONS - - -------------------------------------------------------------------------------- The investment restrictions of the Portfolio may be changed only with the approval of the holders of a majority of the Portfolio's outstanding voting securities. 1. The Portfolio will not act as underwriter for securities of other issuers. 2. The Portfolio will not make loans. 3. With respect to 50% of its total assets, the Portfolio will not invest in the securities of any issuer if as a result the Portfolio holds more than 10% of the outstanding securities or more than 10% of the outstanding voting securities of such issuer. 4. The Portfolio will not borrow money or pledge, mortgage, or hypothecate its assets except to facilitate redemption requests that might otherwise require the untimely disposition of portfolio securities and then only from banks and in amounts not exceeding the lesser of 10% of its total assets valued at cost or 5% of its total assets valued at market at the time of such borrowing, pledge, mortgage, or hypothecation and except that the Portfolio may enter into futures contracts and related options. 5. The Portfolio will not invest more than 10% of the value of its net assets in illiquid securities, restricted securities, and other securities for which market quotations are not readily available. 6. The Portfolio will not invest in the securities of any one industry except the Internet and Internet-related industries, with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and instrumentality's, if as a result, more than 20% of the Portfolio's total assets would be invested in the securities of such industries. Except during temporary defensive periods, at least 65% of the Portfolio's total assets will be invested in the securities of domestic and foreign companies that are engaged in the Internet and Internet-related activities. 7. The Portfolio will not purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs or real estate except that the Portfolio may purchase and sell securities of companies that deal in oil, gas, or mineral exploration or development programs or interests therein. 8. The Portfolio will not issue senior securities. If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in value in the portfolio securities held by the Portfolio will not constitute a violation of such limitation. (D) TEMPORARY DEFENSIVE POSITION TEMPORARY INVESTMENTS - - -------------------------------------------------------------------------------- Due to the changing nature of the Internet and related companies, the national economy and market conditions, the Portfolio may, as a temporary defensive measure, invest without limitation, in short-term debt securities and money market securities with a rating of A2-P2 or higher. In order to have funds available for redemption and investment opportunities, the Portfolio may also hold a portion of its assets in cash or U.S. short-term money market instruments. Certificates of deposit purchased by the Portfolio will be those of U.S. banks having total assets at the time of purchase in excess of $1 billion, and bankers' acceptances purchased by the Portfolio will be guaranteed by U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion. The Portfolio anticipates that not more than 10% of its total assets will be so invested or held in cash at any given time, except when the Portfolio is in a temporary defensive posture. (E) PORTFOLIO TURNOVER PORTFOLIO TURNOVER - - -------------------------------------------------------------------------------- In order to qualify for the beneficial tax treatment afforded regulated investment companies, and to be relieved of Federal tax liabilities, the Portfolio must distribute substantially all of its net income to investors generally on an annual basis. Thus, the Portfolio may have to dispose of portfolio securities under disadvantageous circumstances to generate cash or borrow cash in order to satisfy the distribution requirement. The Portfolio does not trade in securities for short-term profits but, when circumstances warrant, securities may be sold without regard to the length of time they have been held. ITEM 13. MANAGEMENT OF THE PORTFOLIO MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- BOARD OF TRUSTEES The management and affairs of the Portfolio are supervised by the Board of Trustees of the Trust. The Board consists of eight individuals, five of whom are not "interested" persons of the Portfolio as that term is defined in the 1940 Act. The Trustees are fiduciaries for the Portfolio's investors and are governed by the laws of the State of Delaware in this regard They establish policies for the operation of the Portfolio and appoint the officers who conduct the daily business of the Portfolio. Officers and Trustees of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. "Interested" Trustees are designated by an asterisk that appears beside their names.
- - ----------------------------------- --------- ------------------------ ------------------------------------------- NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Steven R. Samson 45 President & Chairman President and CEO, Kinetics Asset 342 Madison Avenue of the Board Management, Inc. (1999 to Present); New York, NY 10173 President, The Internet Fund, Inc. (1999 to Present); Managing Director, Chase Manhattan Bank (1993 to 1999); President and Chairman of the Board of Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Kathleen Campbell 34 Trustee Attorney, Campbell and Campbell, 2 Madison Avenue Counselors-at-Law (1995 to Present); Valhalla, NY 10595 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Murray Stahl 46 Trustee President, Horizon Asset Management, an 342 Madison Avenue investment adviser (1994 to Present); New York, NY 10173 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Steven T. Russell 36 Trustee Attorney and Counselor at Law, 146 Fairview Avenue Steven Russell Law Firm (1994 to Bayport, NY 117045 Present); Professor of Business Law, Suffolk County Community College (1997 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Douglas Cohen, C.P.A. 36 Trustee Wagner, Awerma & Strinberg, LLP Certified 6 Saywood Lane Public Accountant (1997 to present); Stonybrook, NY 11790 Director, Kinetics Mutual Funds, Inc. (1999 to Present); Leon D. Alpern & Co. (1985 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- William J. Graham 37 Trustee Attorney, Bracken & Margolin, LLP (1997 20 Franklin Boulevard to Present); Director, Kinetics Mutual Long Beach, NY 11561 Funds, Inc. (1999 to Present); Gabor & Gabor (1995 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Joseph E. Breslin 45 Trustee Senior Vice President, Marketing & Sales, One State Street IBJ Whitehall Financial Group, a New York, NY 10004 financial services company (1999 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present); formerly President, J.E. Breslin & Co., an investment management consulting firm (1994 to 1999. - - ----------------------------------- --------- ------------------------ ------------------------------------------- John J. Sullivan 68 Trustee Director, Kinetics Mutual Funds, Inc. 31 Hemlock Drive (1999 to Present); Retired; Senior Sleepy Hollow, NY 10591 Advisor, Long Term Credit Bank of Japan, Ltd.; Executive Vice President, LTCB Trust Company; - - ----------------------------------- --------- ------------------------ ------------------------------------------- Lee W. Schultheis 43 Vice President & Managing Director & COO of Kinetics Asset 342 Madison Avenue Treasurer of the Trust Management (1999 to Present); Vice New York, NY 10173 President and Treasurer Kinetics Mutual Funds, Inc. (1999 to Present); President & Director of Business. Development, Vista Fund Distributors, Inc. (1995 to 1999); Managing Director, Forum Financial Group, a mutual fund services company. - - ----------------------------------- --------- ------------------------ -------------------------------------------
COMPENSATION Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust , Kinetics Mutual Funds, Inc. or Kinetics Asset Management, Inc. receive an aggregate annual fee of $15,000 per year for their services as Trustees or directors of all open-end investment companies distributed by Kinetics Funds Distributors, Inc. and $1,000 per meeting attended, as well as reimbursement for expenses incurred in connection with attendance at such meetings. In addition, each committee chairman of the Company and the Trust (such as the Audit committee or Pricing committee) receives an additional fee of $5,000 per year for his service as chairman.. Payment of the annual fees is allocated among such investment companies based on their relative net assets. Payment of meeting fees are allocated only among those investment companies to which such meetings relate. The "interested" Trustees of the Portfolio receive no compensation for their service as Trustees. None of the executive officers receive compensation from the Portfolio. The following tables provide compensation information for the Trustees for the year-ended December 31, 1999.
KINETICS PORTFOLIOS TRUST COMPENSATION TABLE - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND FROM FUND PART OF FUND EXPENSES RETIREMENT COMPLEX PAID TO DIRECTORS** - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ Steven R. Samson* None None None None Chairman and Director Kathleen Campbell* None None None None Director Murray Stahl*** None None None $3,844 Director Steven T. Russell None None None $5,500 Independent Director Douglas Cohen None None None $6,094 Independent Director William J. Graham None None None $5,500 Independent Director Joseph E. Breslin None None None $4,500 Independent Director John J. Sullivan None None None $5,500 Independent Director - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
* "Interested person" as defined under the 1940 Act. ** Includes compensation paid by Kinetics Mutual Funds, Inc. *** Murray Stahl became an "interested person" of the Fund (as defined under the 1940 Act) as of December 15, 1999. Previous to becoming an interested person, Mr. Stahl received $3844 as total compensation from the Fund and Fund complex for being an independent director. ITEM 14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES (A) CONTROL PERSONS & (B) PRINCIPAL HOLDERS CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - - -------------------------------------------------------------------------------- A control person is one who owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. As of the commencement of investment operations, the Portfolio could be deemed to be under the control of The Internet New Paradigm Fund, a series of Kinetics Mutual Funds, Inc. and the sole investor in the Portfolio as of the date of this SAI. Similarly, as of such time, Kinetics Mutual Funds, Inc. through its series, The Internet Fund, The Internet Emerging Growth Fund, The Internet Global Growth Fund, The Internet Infrastructure Fund, The Internet New Paradigm Fund, The Small Cap Opportunities Fund, The Middle East Growth Fund, The Medical Fund, and The Kinetics Government Money Market Fund (each a "Fund" and collectively the "Funds"), was the owner of 100% of the value of the outstanding interests in the Trust. Any investor owning more than 50% of the value of the outstanding interests in the Portfolio may take actions without the approval of any other investor who invests in the Portfolio. Kinetics Mutual Funds, Inc. has informed the Trust that whenever The Internet New Paradigm Fund is requested to vote on a matter pertaining to the Portfolio, The Internet New Paradigm Fund will hold a meeting of its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by The Internet New Paradigm Fund 's shareholders. It is anticipated that other registered investment companies investing in the Portfolio, if any, will follow the same or a similar practice, although, as of May 1, 2000, there were no other investors in the Portfolio. (b) Management Ownership MANAGEMENT OWNERSHIP The percentage of the Portfolio's interests owned or controlled by the executive officers and Trustees of the Portfolio and the Trust is less than 1% of the interests of the Portfolio. ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES (A) INVESTMENT ADVISER INVESTMENT ADVISER - - -------------------------------------------------------------------------------- Kinetics Asset Management, Inc. ("Kinetics" or the "Adviser") is a New York corporation that serves as the investment adviser to the Portfolio. Peter B. Doyle is the Chairman of the Board of Directors and Chief Investment Strategist of Kinetics. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has over 24 years experience in the mutual funds and financial services industries. Mr. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics and has more than 20 years experience in the mutual funds and financial services industries. On April 25, 2000, the Board of the Trustees of the Trust, on behalf of the Portfolio, approved a management and advisory contract (the "Agreement") with Kinetics. This Agreement will remain in effect for a term of two years and will continue on a year-to-year basis thereafter provided that specific approval is voted at least annually by the Board of Trustees of the Trust or by the vote of the holders of a majority of the outstanding voting securities of the Portfolio. In either event, it must also be approved by a majority of the Trustees of the Trust who are neither parties to the Agreement nor "interested" persons as defined in the 1940 Act at a meeting called for the purpose of voting on such approval. The Adviser's investment decisions are made subject to the direction and supervision of the Board of Trustees. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Ultimate decisions as to the investment policy and as to individual purchases and sales of securities are made by the Portfolio's officers and the Trustees. (B) PRINCIPAL UNDERWRITER PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. (C) SERVICES PROVIDED BY THE INVESTMENT ADVISER AND PORTFOLIO EXPENSES PAID BY THIRD PARTIES Under the Agreement, Kinetics furnishes investment advice to the Portfolio by continuously reviewing the portfolio and recommending to the Portfolio to what extent, securities should be purchased or disposed. Pursuant to the Agreement, the Adviser: (1) renders research, statistical and advisory services to the Portfolio; (2) makes specific recommendations based on the Portfolio's investment requirements; (3) pays the salaries of those of the Portfolio's employees who may be officers or directors or employees of the investment adviser. For these services, the Portfolio has agreed to pay to Kinetics an annual fee of 1.25% of the Portfolio's average daily net assets. All fees are computed on the average daily closing net asset value ("NAV") of the Portfolio and are payable monthly. The fee is higher than the fee paid by most other funds. Kinetics has also entered into a Research Agreement with Horizon Assets Management, Inc. ("Horizon") for which it is solely responsible for the payment of all fees owing to Horizon. Fees of the custodian, administrator, transfer agent and Portfolio accountant are paid by the Portfolio. (D) SERVICE AGREEMENTS ADMINISTRATIVE SERVICES - - -------------------------------------------------------------------------------- Kinetics also serves as Administrator of the Portfolio. Under an Administrative Services Agreement with the Portfolio, Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets of which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. Firstar, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, also serves as the Portfolio's accountant and transfer agent. As such, Firstar provides certain investor services and record management services as well as acts as the Portfolio's dividend disbursement agent. Administrative services include, but are not limited to, providing office space, equipment, telephone facilities, various personnel, including clerical and supervisory, and computers, as is necessary or beneficial to: |X| establish and maintain investors' accounts and records, |X| process purchase and redemption transactions, |X| process automatic investments of client account cash balances, |X| answer routine client inquiries regarding the Portfolio, |X| assist clients in changing dividend options, |X| account designations, and addresses, and |X| providing such other services as the Portfolio may reasonably request. CUSTODIAN - - -------------------------------------------------------------------------------- Firstar Bank, N.A. ("Firstar Bank") is custodian for the securities and cash of the Portfolio. Under a Custody Agreement, Firstar Bank holds the Portfolio's assets in safekeeping and keeps all necessary records and documents relating to its duties. Firstar Bank receives an annual fee equal to 0.010% of the Portfolio's average daily net assets with a minimum annual fee of $3,000. Independent Public Accountants - - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. Their services include examination of the Trust's financial statements and the performance of other related audit and tax services. ITEM 16. BROKERAGE ALLOCATION AND OTHER PRACTICES BROKERAGE - - -------------------------------------------------------------------------------- The Portfolio's assets are invested by the Adviser in a manner consistent with its investment objective, strategies, policies and restrictions and with any instructions the Board of Trustees may issue from time to time. Within this framework, the Adviser is responsible for making all determinations as to the purchase and sale of portfolio securities and for taking all steps necessary to implement securities transactions on behalf of the Portfolio. Transactions on U.S. stock exchanges, commodities markets and futures markets and other agency transactions may involve the payment by the Adviser on behalf of the Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Adviser usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Adviser on behalf of the Portfolio includes a disclosed, fixed commission or discount retained by the underwriter or dealer. U.S. Government securities generally are traded in the over-the-counter market through broker-dealers. A broker-dealer is a securities firm or bank that makes a market for securities by offering to buy at one price and sell at a slightly higher price. The difference between the prices is known as a spread. In placing orders for the purchase and sale of portfolio securities for the Portfolio, the Adviser seeks to obtain the best price and execution, taking into account such factors as price, size of order, difficulty and risk of execution and operational facilities of the firm involved. For securities traded in the over-the-counter markets, the Adviser deals directly with the dealers who make markets in these securities unless better prices and execution are available elsewhere. The Adviser negotiates commission rates with brokers based on the quality and quantity of services provided in light of generally prevailing rates, and while the Adviser generally seeks reasonably competitive commission rates, the Portfolio does not necessarily pay the lowest commissions available. The Board of Trustees periodically reviews the commission rates and allocation of orders. When consistent with the objectives of best price and execution, business may be placed with broker-dealers who furnish investment research or services to the Adviser. Such research or services include advice, both orally and in writing, as to the value of securities; the advisability of investing in, purchasing or selling securities; and the availability of securities, or purchasers or sellers of securities; as well as analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser, the Adviser receives a benefit, not capable of evaluation in dollar amounts, without providing any direct monetary benefit to the Portfolio from these transactions. The Adviser believes that most research services obtained by it generally benefit several or all of the investment companies and private accounts which it manages, as opposed to solely benefiting one specific managed fund or account. The same security may be suitable for the Portfolio, another portfolio series of the Trust or other private accounts managed by the Adviser. If and when the Portfolio and two or more accounts simultaneously purchase or sell the same security, the transactions will be allocated as to price and amount in accordance with arrangements equitable to the Portfolio and the accounts. The simultaneous purchase or sale of the same securities by the Portfolio and other accounts may have a detrimental effect on the Portfolio, as this may affect the price paid or received by the Portfolio or the size of the position obtainable or able to be sold by the Portfolio. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc. and subject to seeking the most favorable price and execution available and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Portfolio as a factor in the selection of broker-dealers to execute portfolio transactions for the Portfolio. ITEM 17. CAPITAL STOCK AND OTHER SECURITIES (a) Capital Stock CAPITALIZATION - - -------------------------------------------------------------------------------- The authorized capitalization of Kinetics Portfolio Trust consists of 1 billion shares of beneficial interest of $0.001 par value per share. Each share has equal dividend, distribution and liquidation rights. There are no conversion or preemptive rights applicable to any shares of the Portfolio. All shares issued are fully paid and non-assessable. Each holder of beneficial interest has one vote for each share held. Each investor in a Portfolio is entitled to participate equally in the Portfolio's earnings and assets and to vote in proportion to the amount of its investment in the Portfolio. Voting rights are non-cumulative. Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment therein. Investors in the Portfolio will all vote together in certain circumstances (e.g., election of the Trustees and ratification of auditors, as required by the 1940 Act and the rules thereunder). One or more Portfolios could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust or in a Portfolio, as the case may be, may control the outcome of votes. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when (1) a majority of the Trustees determines to do so or (2) investors holding at least 10% of the interests in a Portfolio (if the meeting relates solely to that Portfolio), or investors holding at least 10% of the aggregate interests in the Trust (if the meeting relates to the Trust and not specifically to a Portfolio) requests in writing a meeting of investors. Changes in fundamental policies or limitations will be submitted to investors for approval. The Trust is organized as a business trust under the laws of the State of Delaware. Investors in a Portfolio will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest in the Portfolio. The Declaration of Trust also provides that, subject to the provisions of the 1940 Act, the Trust may maintain insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Portfolio, investors, Trustees, officers, employees, and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of such liability would be limited to circumstances in which the Portfolio had inadequate insurance and was unable to meet its obligations out of its assets. ITEM 18. PURCHASE, REDEMPTION AND PRICING OF SHARES (A) PURCHASE OF SHARES PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. (C) REDEMPTION OF SHARES REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. (B) OFFERING PRICE VALUATION OF SHARES - - -------------------------------------------------------------------------------- Shares of the Portfolio are sold at the NAV per share next computed following acceptance of an order by the Portfolio. The Portfolio's NAV per share for the purpose of pricing purchase and redemption orders is determined at the close of normal trading (currently 4:00 p.m. EST) on each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Portfolio's investment securities are valued each day at the last quoted sales price on the securities principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees. The Portfolio may use independent pricing services to assist in calculating the NAV of the Portfolio's shares. The Portfolio's investment securities that are listed on a U.S. securities exchange or NASDAQ for which market quotations are readily available are valued at the last quoted sale price on the day the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded. Options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the mean of the most recent quoted bid and asked price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed-income securities purchased with remaining maturities of 60 days or less are valued at amortized cost if it reflects fair value. In the event that amortized cost does not reflect market, market prices as determined above will be used. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Portfolio. ITEM 19. TAXATION OF THE PORTFOLIO TAXES - - -------------------------------------------------------------------------------- ITEM 20. UNDERWRITERS PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. ITEM 21. CALCULATION OF PERFORMANCE DATA PERFORMANCE INFORMATION - - -------------------------------------------------------------------------------- (1) AVERAGE ANNUAL TOTAL RETURN QUOTATION TOTAL RETURN Average annual total return quotations used in the Portfolio's advertising and promotional materials are calculated according to the following formula: P(1+T)n = ERV where P equals a hypothetical initial payment of $1,000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. CUMULATIVE TOTAL RETURN Cumulative total return represents the simple change in value of an investment over a stated period and may be quoted as a percentage or as a dollar amount. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship between these factors and their contributions to total return. (2) Yield Quotation YIELD Annualized yield quotations used in the Portfolio's advertising and promotional materials are calculated by dividing the Portfolio's interest income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the NAV per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2[(A-B + 1)6 - 1] --- c-d where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and "d" equals the maximum offering price per share on the last day of the period. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. OTHER INFORMATION The Portfolio's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in the Portfolio will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. If permitted by applicable law, the Portfolio may advertise the performance of registered investment companies or private accounts that have investment objectives, policies and strategies substantially similar to those of the Portfolio. COMPARISON OF PORTFOLIO PERFORMANCE The performance of the Portfolio may be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue Organization, Inc. or other independent services which monitor the performance of investment companies, and may be quoted in advertising in terms of its ranking in each applicable universe. In addition, the Portfolio may use performance data reported in financial and industry publications, including Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal and USA Today. The Portfolio may from time to time use the following unmanaged indices for performance comparison purposes: o S&P 500 - The S&P 500 is an unmanaged mutual fund index of 500 stocks designed to mimic the overall equity market's industry weightings. Most, but not all, large capitalization stocks are in the index. There are also some small capitalization names in the index. The list is maintained by Standard & Poor's Corporation. It is market capitalization weighted. There are always 500 issuers in the S&P 500. Changes are made by Standard & Poor's as needed. o Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000, a market value weighted index of the 3,000 largest U.S. publicly-traded companies. ITEM 22. FINANCIAL STATEMENTS FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS ASSETS Cash $ 100,000 NET ASSETS $ 100,000 Kinetics Portfolios Trust FINANCIAL STATEMENT APRIL 27, 2000 Report of Independent Accountants To the Shareholder and Board of Trustees of Kinetics Portfolios Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Kinetics Portfolios Trust (hereafter referred to as the "Trust") at April 27, 2000, in conformity with accounting principles generally accepted in the United States. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin April 27, 2000 KINETICS PORTFOLIOS TRUST STATEMENT OF ASSETS AND LIABILITIES - - -------------------------------------------------------------------------------- AS OF APRIL 27, 2000 The accompanying notes are an integral part of this financial statement. [OBJECT OMITTED] KINETICS PORTFOLIOS TRUST NOTES TO FINANCIAL STATEMENT AS OF APRIL 27, 2000 - - -------------------------------------------------------------------------------- 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Business Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Internet Global Growth Portfolio, The Internet New Paradigm Portfolio, The Internet Infrastructure Portfolio, The Medical Portfolio, The Kinetics Government Money Market Portfolio, The Small Cap Opportunities Portfolio and The Middle East Growth Portfolio (the "Portfolios"). Pursuant to the 1940 Act, the Portfolios are "non-diversified" series of the Trust. The Trust has had no operations other than the contribution by Kinetics Asset Management, Inc., the Portfolios' Adviser ("Adviser"), of $100,000, representing a beneficial interest in the Trust. The Portfolios have had no operations through April 27, 2000. On April 28, 2000, the Trust intends to distribute the Adviser's $100,000 contribution to the Portfolios, at which time the Adviser will become a partner in each of the Portfolios. In addition, on April 28, 2000 various feeder funds ("Funds") sponsored by the Adviser will invest their investable assets in the corresponding Portfolios under a master-feeder capital structure. 2. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION COSTS Expenses in connection with the organization of the Trust have been absorbed by the Funds prior to their conversion to the master-feeder capital structure. Accordingly, no statement of operations of the Trust has been provided. FEDERAL INCOME TAXES Each Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Portfolios will be taxed on its allocable share of the Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Actual results could differ from those estimates. 1. 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Portfolios. Under the terms of the Agreement, the Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of the Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Portfolio's average daily net assets. The Adviser also serves as administrator to the Portfolios. Under an Administrative Services Agreement with the Trust on behalf of the Portfolios, the Adviser receives an annual administration fee equal to 0.10% of the Portfolio's average daily net assets from which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolios by Firstar. APPENDIX - - -------------------------------------------------------------------------------- STANDARD & POOR'S ("S&P") CORPORATE BOND RATING DEFINITIONS AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree. A-Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions. CI-The rating "CI" is reversed for income bonds on which no interest is being paid. D-Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA-Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated "A" possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the near future. BAA-Bonds which are rated "Baa" are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BA-Bonds which are "Ba" are judged to have speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA-Bonds which are "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS AAA-Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA-Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A-Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB-Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB-Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B-Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC-Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC-Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C-Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D-Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. PART B.: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION ITEM 10.: COVER PAGE AND TABLE OF CONTENTS THE MEDICAL PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST 1311 Mamaroneck Avenue White Plains, New York 10605 (800) 930-3828 April 28, 2000 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") provides general information about The Medical Portfolio (the "Portfolio"). The Portfolio is a series of Kinetics Portfolios Trust (the "Trust"), a Delaware business trust. This SAI is not a prospectus and should be read in conjunction with the Portfolio's current Prospectus dated April 28, 2000, as supplemented and amended from time to time, which is incorporated hereto by reference. To obtain a copy of the Prospectus, please write the Portfolio at the address set forth above or call the telephone number shown above. This SAI is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended ("1933 Act"), because such interests are issued solely to in private placement transactions to eligible investors that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Portfolio may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, segregated asset accounts and certain qualified pension and retirement plans. Neither this SAI nor the Registration Statement as a whole constitutes an offer to sell or the solicitation of an offer to buy any beneficial interests in this Portfolio or any other portfolio series of the Trust. THE MEDICAL PORTFOLIO The Portfolio..................................................................3 Investment Objective, Strategies, and Risks....................................3 Investment Policies and Associated Risks.......................................3 Investment Restrictions........................................................8 Temporary Investments..........................................................9 Portfolio Turnover.............................................................9 Management of the Portfolio...................................................10 Control Persons and Principal Holders of Securities...........................12 Investment Adviser............................................................13 Administrative Services.......................................................14 Custodian.....................................................................14 Brokerage.....................................................................15 Capitalization................................................................16 Purchase of Shares............................................................17 Redemption of Shares..........................................................17 Valuation of Shares...........................................................17 Taxes.........................................................................18 Performance Information.......................................................20 Financial Statements..........................................................22 Appendix......................................................................23 ITEM 11. PORTFOLIO HISTORY THE PORTFOLIO - - -------------------------------------------------------------------------------- The Portfolio is a series of Kinetics Portfolios Trust, a business trust organized pursuant to a Declaration of Trust under the laws of the State of Delaware on March 14, 2000. The Portfolio's principal office is located at 1311 Mamaroneck Avenue, White Plains, New York 10605 ITEM 12. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS (A) CLASSIFICATION The Portfolio is a non-diversified, open-end management investment company. (B) INVESTMENT STRATEGIES AND RISKS INVESTMENT OBJECTIVE, STRATEGIES, AND RISKS - - -------------------------------------------------------------------------------- The Portfolio's primary investment objective is long-term growth of capital. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in securities of domestic and foreign companies engaged in the medical research, pharmaceutical and technology industries and related medical technology industries, generally, with an emphasis toward companies engaged in cancer research and drug development. . The Portfolio is designed for long-term investors who understand and are willing to accept the risk of loss involved in investing in a mutual fund seeking long-term capital growth. This Portfolio should not be used as a trading vehicle. (C) PORTFOLIO POLICIES INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The following paragraphs provide a more detailed description of the Portfolio's investment policies and risks identified in the Prospectus. Unless otherwise noted, the policies described in this SAI are not fundamental and may be changed by the Board of Trustees of the Trust. COMMON AND PREFERRED STOCK Common stocks are units of ownership of a corporation. Preferred stocks are stocks that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. Some preference stocks may be convertible into common stock. Convertible securities are securities that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. CONVERTIBLE DEBT SECURITIES The Portfolio may invest in debt securities convertible into common stocks. Debt purchased by the Portfolio will consist of obligations of medium-grade or higher, having at least adequate capacity to pay interest and repay principal. Non-convertible debt obligations will be rated BBB or higher by S&P, or Baa or higher by Moody's. Convertible debt obligations will be rated B or higher by S&P or B or higher by Moody's. Securities rated Baa by Moody's are considered by Moody's to be medium-grade securities and have adequate capacity to pay principal and interest. Bonds in the lowest investment grade category (BBB) have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Securities rated B are referred to as "high-risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. See "Appendix" to this Statement of Additional Information for a description of debt security ratings. FIXED-INCOME SECURITIES The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. CREDIT RISK relates to the ability of the issuer to meet interest and principal payments, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, will also increase the credit risk to which those assets are subject. MARKET RISK relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium- and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wilder fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of debt securities whose ratings are downgraded below these ratings subsequent to the Portfolio's purchase of the securities. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which the Portfolio invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events. At no time will the Portfolio have more than 5% of its total assets invested in any fixed-income securities that are unrated or rated below investment grade either at the time of purchase or as a result of a reduction in rating after purchase. DEPOSITARY RECEIPTS. The Portfolio may invest in American Depositary Receipts ("ADRs") or other forms of depositary receipts, such as International Depositary Receipts ("IDRs"). Depositary receipts are typically issued in connection with a U.S. or foreign bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. Investments in these types of securities involve certain inherent risks generally associated with investments in foreign securities, including the following: POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain countries may 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, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. CURRENCY FLUCTUATIONS. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of an ADR's underlying portfolio securities denominated in that currency. Such changes will affect the Portfolio to the extent that the Portfolio is invested in ADR's comprised of foreign securities. TAXES. The interest and dividends payable on certain foreign securities comprising an ADR may be subject to foreign withholding taxes, thus reducing the net amount of income to be paid to the Portfolio and that may, ultimately, be available for distribution to the Portfolio's investors. OPTIONS Most mutual funds that use option strategies to hedge portfolio positions do not depend solely on the option profit or loss to justify the use of options, because such funds also take into account the profit or loss of the underlying securities. A more detailed discussion of writing covered and uncovered options on securities generally and the investment risks associated with such investments is set forth below. PURCHASING PUT AND CALL OPTIONS. The Portfolio may purchase put and call options on securities eligible for purchase by the Portfolio and on securities indices. Put and call options are derivative securities traded on U.S. exchanges. If the Portfolio purchases a put option, it acquires the right to sell the underlying security or index value at a specified price at any time during the term of the option. If the Portfolio purchases a call option, it acquires the right to purchase the underlying security or index value at a specified price at any time during the term of the option. Prior to exercise or expiration, the Portfolio may sell an option when through a "closing sale transaction," which is accomplished by selling an option of the same series as the option previously purchased. The Portfolio generally will purchase only those options for which the investment adviser believes there is an active secondary market to facilitate closing transactions. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. The Portfolio will purchase put options to hedge against a decrease in the price of securities it holds. Such hedge protection is provided during the life of the put option since the Portfolio, as the holder of the put option, is able to sell the underlying security at the exercise price regardless of any decrease in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decrease sufficiently below the exercise price to cover the premium and transaction costs. WRITING CALL OPTIONS. The Portfolio may write covered call options on securities eligible for purchase by the Portfolio. A call option is "covered" if the Portfolio owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, it may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option. Effecting a closing transaction in the case of a written call option will permit the Portfolio to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction allows the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of the Portfolio. If the Portfolio desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. The Portfolio realizes a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. The Portfolio realizes a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, appreciation of the underlying security owned by the Portfolio generally offsets, in whole or in part, any loss to the Portfolio resulting from the repurchase of a call option. RISK FACTORS IN OPTIONS TRANSACTIONS. The successful use of options by the Portfolio depends on the ability of the Adviser to forecast correctly interest rate and market movements. For example, if the Portfolio were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Portfolio were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When the Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Portfolio will lose part or all of its investment in the option. This contrasts with an investment by the Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Adviser deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. If a secondary market in options were to become unavailable, the Portfolio could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events -- such as volume in excess of trading or clearing capability -- were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or an options clearing corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unit asset valuable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, an options clearing corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If an options clearing corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. DEALER OPTIONS. The Portfolio may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While the Portfolio might look to an exchange's clearing corporation to exercise exchange-traded options, if the Portfolio purchases a dealer option it must rely on the selling dealer to perform if the Portfolio exercises the option. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, the Portfolio can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when the Portfolio writes a dealer option, the Portfolio can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and can enter into closing transactions with the Portfolio, no assurance exists that the Portfolio will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Portfolio, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Portfolio may be unable to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because the Portfolio must maintain a secured position with respect to any call option on a security it writes, the Portfolio may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Portfolio's ability to sell portfolio securities at a time when such sale might be advantageous. The staff of the SEC takes the position that purchased dealer options are illiquid securities. The Portfolio may treat the cover used for written dealer options as liquid if the dealer agrees that the Portfolio may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. With that exception, however, the Portfolios will treat dealer options as subject to the Portfolios' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Portfolios will change their treatment of such instruments accordingly. INVESTMENT RESTRICTIONS - - -------------------------------------------------------------------------------- The investment restrictions of the Portfolio may be changed only with the approval of the holders of a majority of the Portfolio's outstanding voting securities. 1. The Portfolio will not act as underwriter for securities of other issuers. 2. The Portfolio will not make loans. 3. With respect to 50% of its total assets, the Portfolio will not invest in the securities of any issuer if as a result the Portfolio holds more than 10% of the outstanding securities or more than 10% of the outstanding voting securities of such issuer. 4. The Portfolio will not borrow money or pledge, mortgage, or hypothecate its assets except to facilitate redemption requests that might otherwise require the untimely disposition of portfolio securities and then only from banks and in amounts not exceeding the lesser of 10% of its total assets valued at cost or 5% of its total assets valued at market at the time of such borrowing, pledge, mortgage, or hypothecation and except that the Portfolio may enter into futures contracts and related options. 5. The Portfolio will not invest more than 10% of the value of its net assets in illiquid securities, restricted securities, and other securities for which market quotations are not readily available. 6. The Portfolio will not invest in the securities of any one industry except in domestic and foreign companies engaged in the medical research, pharmaceutical and technology industries and related medical technology industries, generally, with an emphasis toward companies engaged in cancer research and drug development, with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and instrumentality's, if as a result, more than 20% of the Portfolio's total assets would be invested in the securities of such industry. Except during temporary defensive periods, not less than 65% of the Portfolio's total assets will be invested in the securities of companies engaged in the medical research, pharmaceutical and technology industries and related technology industries, generally, with an emphasis toward publicly traded entities engaged in cancer research and drug development. 7. The Portfolio will not purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs or real estate except that the Portfolio may purchase and sell securities of companies that deal in oil, gas, or mineral exploration or development programs or interests therein. 8. The Portfolio will not issue senior securities. If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in value in the portfolio securities held by the Portfolio will not constitute a violation of such limitation. However, in the event that the Portfolio's holdings in illiquid securities reach 15% of the value of its net assets, the Adviser is authorized by the Board of Trustees to make such adjustments as necessary to reduce the holdings of illiquid securities to comply with the guidelines of paragraph number 5 above. (D) TEMPORARY DEFENSIVE POSITION TEMPORARY INVESTMENTS - - -------------------------------------------------------------------------------- Due to the changing nature of the medical research, biopharmaceutical and treatment industry, the national economy and market conditions, the Portfolio may, as a temporary defensive measure, invest without limitation, in short-term money market securities with a rating of A2-P2 or higher. In order to have funds available for redemption and investment opportunities, the Portfolio may also hold a portion of its assets in cash or U.S. short-term money market instruments. Certificates of deposit purchased by the Portfolio will be those of U.S. banks having total assets at the time of purchase in excess of $1 billion, and bankers' acceptances purchased by the Portfolio will be guaranteed by U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion. The Portfolio anticipates that not more than 10% of its total assets will be so invested or held in cash at any given time, except when the Portfolio is in a temporary defensive posture. (E) PORTFOLIO TURNOVER PORTFOLIO TURNOVER - - -------------------------------------------------------------------------------- In order to qualify for the beneficial tax treatment afforded regulated investment companies, and to be relieved of Federal tax liabilities, the Portfolio must distribute substantially all of their net income to shareholders generally on an annual basis. Thus, the Portfolio may have to dispose of portfolio securities under disadvantageous circumstances to generate cash or borrow cash in order to satisfy the distribution requirement. The Portfolio does not trade in securities for short-term profits but, when circumstances warrant, securities may be sold without regard to the length of time they have been held. ITEM 13. MANAGEMENT OF THE PORTFOLIO MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- BOARD OF TRUSTEES The management and affairs of the Portfolio are supervised by the Board of Trustees of the Trust. The Board consists of eight individuals, five of whom are not "interested" persons of the Portfolio as that term is defined in the 1940 Act. The Trustees are fiduciaries for the Portfolio's investors and are governed by the laws of the State of Delaware in this regard They establish policies for the operation of the Portfolio and appoint the officers who conduct the daily business of the Portfolio. Officers and Trustees of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. "Interested" Trustees are designated by an asterisk that appears beside their names.
- - ----------------------------------- --------- ------------------------ ------------------------------------------- NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Steven R. Samson 45 President & Chairman President and CEO, Kinetics Asset 342 Madison Avenue of the Board Management, Inc. (1999 to Present); New York, NY 10173 President, The Internet Fund, Inc. (1999 to Present); Managing Director, Chase Manhattan Bank (1993 to 1999); President and Chairman of the Board of Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Kathleen Campbell 34 Trustee Attorney, Campbell and Campbell, 2 Madison Avenue Counselors-at-Law (1995 to Present); Valhalla, NY 10595 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Murray Stahl 46 Trustee President, Horizon Asset Management, an 342 Madison Avenue investment adviser (1994 to Present); New York, NY 10173 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Steven T. Russell 36 Trustee Attorney and Counselor at Law, 146 Fairview Avenue Steven Russell Law Firm (1994 to Bayport, NY 117045 Present); Professor of Business Law, Suffolk County Community College (1997 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Douglas Cohen, C.P.A. 36 Trustee Wagner, Awerma & Strinberg, LLP Certified 6 Saywood Lane Public Accountant (1997 to present); Stonybrook, NY 11790 Director, Kinetics Mutual Funds, Inc. (1999 to Present); Leon D. Alpern & Co. (1985 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- William J. Graham 37 Trustee Attorney, Bracken & Margolin, LLP (1997 20 Franklin Boulevard to Present); Director, Kinetics Mutual Long Beach, NY 11561 Funds, Inc. (1999 to Present); Gabor & Gabor (1995 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Joseph E. Breslin 45 Trustee Senior Vice President, Marketing & Sales, One State Street IBJ Whitehall Financial Group, a New York, NY 10004 financial services company (1999 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present); formerly President, J.E. Breslin & Co., an investment management consulting firm (1994 to 1999. - - ----------------------------------- --------- ------------------------ ------------------------------------------- John J. Sullivan 68 Trustee Director, Kinetics Mutual Funds, Inc. 31 Hemlock Drive (1999 to Present); Retired; Senior Sleepy Hollow, NY 10591 Advisor, Long Term Credit Bank of Japan, Ltd.; Executive Vice President, LTCB Trust Company; - - ----------------------------------- --------- ------------------------ ------------------------------------------- Lee W. Schultheis 43 Vice President & Managing Director & COO of Kinetics Asset 342 Madison Avenue Treasurer of the Trust Management (1999 to Present); Vice New York, NY 10173 President and Treasurer Kinetics Mutual Funds, Inc. (1999 to Present); President & Director of Business. Development, Vista Fund Distributors, Inc. (1995 to 1999); Managing Director, Forum Financial Group, a mutual fund services company. - - ----------------------------------- --------- ------------------------ -------------------------------------------
COMPENSATION Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust , Kinetics Mutual Funds, Inc. or Kinetics Asset Management, Inc. receive an aggregate annual fee of $15,000 per year for their services as Trustees or directors of all open-end investment companies distributed by Kinetics Funds Distributors, Inc. and $1,000 per meeting attended, as well as reimbursement for expenses incurred in connection with attendance at such meetings. In addition, each committee chairman of the Company and the Trust (such as the Audit committee or Pricing committee) receives an additional fee of $5,000 per year for his service as chairman.. Payment of the annual fees is allocated among such investment companies based on their relative net assets. Payment of meeting fees are allocated only among those investment companies to which such meetings relate. The "interested" Trustees of the Portfolio receive no compensation for their service as Trustees. None of the executive officers receive compensation from the Portfolio. The following tables provide compensation information for the Trustees for the year-ended December 31, 1999.
KINETICS PORTFOLIOS TRUST COMPENSATION TABLE - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM PORTFOLIO AND FROM PORTFOLIO PART OF PORTFOLIO RETIREMENT PORTFOLIO COMPLEX PAID EXPENSES TO TRUSTEES - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ Steven R. Samson None None None None Chairman and Trustee Kathleen Campbell None None None None Trustee Murray Stahl None None None None Trustee Steven T. Russell None None None None Trustee Douglas Cohen, CPA None None None None Trustee William J. Graham None None None None Trustee Joseph E. Breslin None None None None Trustee John J. Sullivan None None None None Trustee - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
ITEM 14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES (A) CONTROL PERSONS & (B) PRINCIPAL HOLDERS CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - - -------------------------------------------------------------------------------- A control person is one who owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. As of the commencement of investment operations, the Portfolio could be deemed to be under the control of The Internet New Paradigm Fund, a series of Kinetics Mutual Funds, Inc. and the sole investor in the Portfolio as of the date of this SAI. Similarly, as of such time, Kinetics Mutual Funds, Inc. through its series, The Internet Fund, The Internet Emerging Growth Fund, The Internet Global Growth Fund, The Internet Infrastructure Fund, The Internet New Paradigm Fund, The Small Cap Opportunities Fund, The Middle East Growth Fund, The Medical Fund, and The Kinetics Government Money Market Fund (each a "Fund" and collectively the "Funds"), was the owner of 100% of the value of the outstanding interests in the Trust. Any investor owning more than 50% of the value of the outstanding interests in the Portfolio may take actions without the approval of any other investor who invests in the Portfolio. Kinetics Mutual Funds, Inc. has informed the Trust that whenever The Internet New Paradigm Fund is requested to vote on a matter pertaining to the Portfolio, The Internet New Paradigm Fund will hold a meeting of its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by The Internet New Paradigm Fund 's shareholders. It is anticipated that other registered investment companies investing in the Portfolio, if any, will follow the same or a similar practice, although, as of May 1, 2000, there were no other investors in the Portfolio. (b) Management Ownership MANAGEMENT OWNERSHIP The percentage of the Portfolio's interests owned or controlled by the executive officers and Trustees of the Portfolio and the Trust is less than 1% of the interests of the Portfolio. ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES (A) INVESTMENT ADVISER INVESTMENT ADVISER - - -------------------------------------------------------------------------------- Kinetics Asset Management, Inc. ("Kinetics" or the "Adviser") is a New York corporation that serves as the investment adviser to the Portfolio. Peter B. Doyle is the Chairman of the Board of Directors and Chief Investment Strategist of Kinetics. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has over 24 years experience in the mutual funds and financial services industries. Mr. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics and has more than 20 years experience in the mutual funds and financial services industries. On April 25, 2000 the Board of the Trustees of the Trust, on behalf of the Portfolio, approved a management and advisory contract (the "Agreement") with Kinetics. This Agreement will remain in effect for a term of two years and will continue on a year-to-year basis thereafter provided that specific approval is voted at least annually by the Board of Trustees of the Trust or by the vote of the holders of a majority of the outstanding voting securities of the Portfolio. In either event, it must also be approved by a majority of the Trustees of the Trust who are neither parties to the Agreement nor "interested" persons as defined in the 1940 Act at a meeting called for the purpose of voting on such approval. The Adviser's investment decisions are made subject to the direction and supervision of the Board of Trustees. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Ultimate decisions as to the investment policy and as to individual purchases and sales of securities are made by the Portfolio's officers and the Trustees. (B) PRINCIPAL UNDERWRITER PRIVATE PLACEMENT AGENT T.O. Richardson Securities, Inc., 2 Bridgewater Road, Farmington, Connecticut, 06032 serves as the private placement agent for the shares of the Portfolio on a best efforts basis. T.O. Richardson Securities, Inc., is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. and serves as the distributor for numerous registered investment companies across the United States. Beneficial interests in the Portfolio are issued continuously. (C) SERVICES PROVIDED BY THE INVESTMENT ADVISER AND PORTFOLIO EXPENSES PAID BY THIRD PARTIES Under the Agreement, Kinetics furnishes investment advice to the Portfolio by continuously reviewing the portfolio and recommending to the Portfolio to what extent, securities should be purchased or disposed. Pursuant to the Agreement, the Adviser: (1) renders research, statistical and advisory services to the Portfolio; (2) makes specific recommendations based on the Portfolio's investment requirements; (3) pays the salaries of those of the Portfolio's employees who may be officers or directors or employees of the investment adviser. For these services, the Portfolio has agreed to pay to Kinetics an annual fee of 1.25% of the Portfolio's average daily net assets. All fees are computed on the average daily closing net asset value ("NAV") of the Portfolio and are payable monthly. The fee is higher than the fee paid by most other funds. Kinetics has also entered into a Research Agreement with Horizon Assets Management, Inc. ("Horizon") for which it is solely responsible for the payment of all fees owing to Horizon. Fees of the custodian, administrator, transfer agent and Portfolio accountant are paid by the Portfolio. (D) SERVICE AGREEMENTS ADMINISTRATIVE SERVICES - - -------------------------------------------------------------------------------- Kinetics also serves as Administrator of the Portfolio. Under an Administrative Services Agreement with the Portfolio, Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets of which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. Firstar, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, also serves as the Portfolio's accountant and transfer agent. As such, Firstar provides certain investor services and record management services as well as acts as the Portfolio's dividend disbursement agent. Administrative services include, but are not limited to, providing office space, equipment, telephone facilities, various personnel, including clerical and supervisory, and computers, as is necessary or beneficial to: |X| establish and maintain investors' accounts and records, |X| process purchase and redemption transactions, |X| process automatic investments of client account cash balances, |X| answer routine client inquiries regarding the Portfolio, |X| assist clients in changing dividend options, |X| account designations, and addresses, and |X| providing such other services as the Portfolio may reasonably request. CUSTODIAN - - -------------------------------------------------------------------------------- Firstar Bank, N.A. ("Firstar Bank") is custodian for the securities and cash of the Portfolio. Under a Custody Agreement, Firstar Bank holds the Portfolio's assets in safekeeping and keeps all necessary records and documents relating to its duties. Firstar Bank receives an annual fee equal to 0.010% of the Portfolio's average daily net assets with a minimum annual fee of $3,000. Independent Public Accountants - - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. Their services include examination of the Trust's financial statements and the performance of other related audit and tax services. ITEM 16. BROKERAGE ALLOCATION AND OTHER PRACTICES BROKERAGE - - -------------------------------------------------------------------------------- The Portfolio's assets are invested by the Adviser in a manner consistent with its investment objective, strategies, policies and restrictions and with any instructions the Board of Trustees may issue from time to time. Within this framework, the Adviser is responsible for making all determinations as to the purchase and sale of portfolio securities and for taking all steps necessary to implement securities transactions on behalf of the Portfolio. Transactions on U.S. stock exchanges, commodities markets and futures markets and other agency transactions may involve the payment by the Adviser on behalf of the Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Adviser usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Adviser on behalf of the Portfolio includes a disclosed, fixed commission or discount retained by the underwriter or dealer. U.S. Government securities generally are traded in the over-the-counter market through broker-dealers. A broker-dealer is a securities firm or bank that makes a market for securities by offering to buy at one price and sell at a slightly higher price. The difference between the prices is known as a spread. In placing orders for the purchase and sale of portfolio securities for the Portfolio, the Adviser seeks to obtain the best price and execution, taking into account such factors as price, size of order, difficulty and risk of execution and operational facilities of the firm involved. For securities traded in the over-the-counter markets, the Adviser deals directly with the dealers who make markets in these securities unless better prices and execution are available elsewhere. The Adviser negotiates commission rates with brokers based on the quality and quantity of services provided in light of generally prevailing rates, and while the Adviser generally seeks reasonably competitive commission rates, the Portfolio does not necessarily pay the lowest commissions available. The Board of Trustees periodically reviews the commission rates and allocation of orders. When consistent with the objectives of best price and execution, business may be placed with broker-dealers who furnish investment research or services to the Adviser. Such research or services include advice, both orally and in writing, as to the value of securities; the advisability of investing in, purchasing or selling securities; and the availability of securities, or purchasers or sellers of securities; as well as analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser, the Adviser receives a benefit, not capable of evaluation in dollar amounts, without providing any direct monetary benefit to the Portfolio from these transactions. The Adviser believes that most research services obtained by it generally benefit several or all of the investment companies and private accounts which it manages, as opposed to solely benefiting one specific managed fund or account. The same security may be suitable for the Portfolio, another portfolio series of the Trust or other private accounts managed by the Adviser. If and when the Portfolio and two or more accounts simultaneously purchase or sell the same security, the transactions will be allocated as to price and amount in accordance with arrangements equitable to the Portfolio and the accounts. The simultaneous purchase or sale of the same securities by the Portfolio and other accounts may have a detrimental effect on the Portfolio, as this may affect the price paid or received by the Portfolio or the size of the position obtainable or able to be sold by the Portfolio. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc. and subject to seeking the most favorable price and execution available and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Portfolio as a factor in the selection of broker-dealers to execute portfolio transactions for the Portfolio. ITEM 17. CAPITAL STOCK AND OTHER SECURITIES (a) Capital Stock CAPITALIZATION - - -------------------------------------------------------------------------------- The authorized capitalization of Kinetics Portfolio Trust consists of 1 billion shares of beneficial interest of $0.001 par value per share. Each share has equal dividend, distribution and liquidation rights. There are no conversion or preemptive rights applicable to any shares of the Portfolio. All shares issued are fully paid and non-assessable. Each holder of beneficial interest has one vote for each share held. Each investor in a Portfolio is entitled to participate equally in the Portfolio's earnings and assets and to vote in proportion to the amount of its investment in the Portfolio. Voting rights are non-cumulative. Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment therein. Investors in the Portfolio will all vote together in certain circumstances (e.g., election of the Trustees and ratification of auditors, as required by the 1940 Act and the rules thereunder). One or more Portfolios could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust or in a Portfolio, as the case may be, may control the outcome of votes. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when (1) a majority of the Trustees determines to do so or (2) investors holding at least 10% of the interests in a Portfolio (if the meeting relates solely to that Portfolio), or investors holding at least 10% of the aggregate interests in the Trust (if the meeting relates to the Trust and not specifically to a Portfolio) requests in writing a meeting of investors. Changes in fundamental policies or limitations will be submitted to investors for approval. The Trust is organized as a business trust under the laws of the State of Delaware. Investors in a Portfolio will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest in the Portfolio. The Declaration of Trust also provides that, subject to the provisions of the 1940 Act, the Trust may maintain insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Portfolio, investors, Trustees, officers, employees, and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of such liability would be limited to circumstances in which the Portfolio had inadequate insurance and was unable to meet its obligations out of its assets. ITEM 18. PURCHASE, REDEMPTION AND PRICING OF SHARES (A) PURCHASE OF SHARES PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. (C) REDEMPTION OF SHARES REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. (B) OFFERING PRICE VALUATION OF SHARES - - -------------------------------------------------------------------------------- Shares of the Portfolio are sold at the NAV per share next computed following acceptance of an order by the Portfolio. The Portfolio's NAV per share for the purpose of pricing purchase and redemption orders is determined at the close of normal trading (currently 4:00 p.m. EST) on each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Portfolio's investment securities are valued each day at the last quoted sales price on the securities principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees. The Portfolio may use independent pricing services to assist in calculating the NAV of the Portfolio's shares. The Portfolio's investment securities that are listed on a U.S. securities exchange or NASDAQ for which market quotations are readily available are valued at the last quoted sale price on the day the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded. Options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the mean of the most recent quoted bid and asked price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed-income securities purchased with remaining maturities of 60 days or less are valued at amortized cost if it reflects fair value. In the event that amortized cost does not reflect market, market prices as determined above will be used. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Portfolio. ITEM 19. TAXATION OF THE PORTFOLIO TAXES - - -------------------------------------------------------------------------------- The Portfolio will be treated as a partnership for federal income tax purposes and will not be a "publicly traded partnership." As a result, the Portfolio is not subject to federal income tax; instead, each investor in the Portfolio, such as the Fund, is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, and credits, without regard to whether it has received any cash distributions from the Portfolio. The Portfolio also is not subject to Delaware or New York income or franchise tax. Because the Fund is deemed to own a proportionate share of the Portfolio's assets and income for purposes of determining whether the Fund satisfies the requirements to qualify as a RIC, the Portfolio intends to continue to conduct its operations so that the Fund will be able to continue to satisfy all those requirements. Distributions to the Fund from the Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Fund's recognition of any gain or loss for federal income tax purposes, except that (1) gain will be recognized to the extent any cash that is distributed exceeds the Fund's basis for its interest in the Portfolio before the distribution, (2) income or gain will be recognized if the distribution is in liquidation of the Fund's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio, and (3) loss will be recognized if a liquidation distribution consists solely of cash and/or unrealized receivables. The Fund's basis for its interest in the Portfolio generally equals the amount of cash the Fund invests in the Portfolio, increased by the Fund's share of the Portfolio's net income and capital gains and decreased by (1) the amount of cash and the basis of any property the Portfolio distributes to the Fund, and (2) the Fund's share of the Portfolio's losses. Dividends and interest received by the Portfolio, and gains realized by the Portfolio, may be subject to income, withholding, or other taxes imposed by foreign countries and U.S. possessions ("foreign taxes") that would reduce the yield and/or total return on its securities. Tax treaties between certain countries and the United States may reduce or eliminate these foreign taxes, however, and many foreign countries do not impose taxes on capital gains in respect of investments by foreign investors. The Portfolio's use of hedging strategies, such as writing (selling) and purchasing options and entering into forward contracts, involves complex rules that will determine for income tax purposes the amount, character and timing of recognition of the gains and losses the Portfolio realizes in connection therewith. Gains from the disposition of foreign currencies (except certain gains that may be excluded by future regulations), and gains from hedging instruments derived by the Portfolio with respect to its business of investing in securities, will qualify as permissible income for the Fund under the Income Requirement. Exchange-traded futures contracts, certain forward contracts and listed options thereon subject to Section 1256 of the code ("Section 1256 Contracts") are required to be marked to market (that is, treated as having been sold at market value) for federal income tax purposes at the end of the Portfolio's taxable year. Sixty percent of any net gain or loss recognized as a result of these "deemed sales," and 60% of any net realized gain or loss from any actual sales, of Section 1256 Contracts are treated as long-term capital gain or loss; the remainder is treated as short-term capital gain or loss. Section 1256 Contracts also may be marked-to-market for purposes of the Excise Tax. These rules may operate to increase the amount that a Fund must distribute to satisfy the Distribution Requirement, which will be taxable to the shareholders as ordinary income, and to increase the net capital gain recognized by the Fund, without in either case increasing the cash available to the Fund. A Fund may elect to exclude certain transactions from the operation of Section 1256, although doing so may have the effect of increasing the relative proportion of net short-term capital gain (taxable as ordinary income) and/or increasing the amount of dividends that must be distributed to meet the Distribution Requirement and avoid imposition of the Excise Tax. If the Fund has an "appreciated financial position" - generally, an interest (including an interest through an option, futures or forward contract, or short sale) with respect to any stock, debt instrument (other than "straight debt"), or partnership interest the fair market value of which exceeds its adjusted basis - and enters into a "constructive sale" of the same or substantially similar property, the Fund will be treated as having made an actual sale thereof, with the result that gain will be recognized at that time. A constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract entered into by the Fund or a related person with respect to the same or substantially similar property. In addition, if the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially similar property will be deemed a constructive sale. The foregoing will not apply, however, to any transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that closing (i.e., at no time during that 60-day period is the Fund's risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially similar or related property such as having an option to sell, being contractually obligated to sell, making a short sale, or granting an option to buy substantially identical stock or securities). The Portfolio may acquire securities issued with original issue discount ("OID"). As a holder of those securities, the Portfolio (and, through it, the Fund) must take into income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on them during the year. Because the Fund annually must distribute substantially all of its investment company taxable income (including its share of the Portfolio's accrued OID) to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, the Fund may be required in a particular year to distribute as a dividend an amount that is greater than its share of the total amount of cash the Portfolio actually receives. Those distributions will be made from the Fund's (or its share of the Portfolio's) cash assets or, if necessary, from the proceeds of sales of the Portfolio's securities. The Portfolio may realize capital gains or losses from those sales, which would increase or decrease the Fund's investment company taxable income and/or net capital gain. ITEM 20. UNDERWRITERS PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. ITEM 21. CALCULATION OF PERFORMANCE DATA PERFORMANCE INFORMATION - - -------------------------------------------------------------------------------- (1) AVERAGE ANNUAL TOTAL RETURN QUOTATION TOTAL RETURN Average annual total return quotations used in the Portfolio's advertising and promotional materials are calculated according to the following formula: P(1+T)n = ERV where P equals a hypothetical initial payment of $1,000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. CUMULATIVE TOTAL RETURN Cumulative total return represents the simple change in value of an investment over a stated period and may be quoted as a percentage or as a dollar amount. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship between these factors and their contributions to total return. (2) Yield Quotation YIELD Annualized yield quotations used in the Portfolio's advertising and promotional materials are calculated by dividing the Portfolio's interest income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the NAV per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2[(A-B + 1)6 - 1] --- c-d where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and "d" equals the maximum offering price per share on the last day of the period. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. OTHER INFORMATION The Portfolio's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in the Portfolio will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. If permitted by applicable law, the Portfolio may advertise the performance of registered investment companies or private accounts that have investment objectives, policies and strategies substantially similar to those of the Portfolio. COMPARISON OF PORTFOLIO PERFORMANCE The performance of the Portfolio may be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue Organization, Inc. or other independent services which monitor the performance of investment companies, and may be quoted in advertising in terms of its ranking in each applicable universe. In addition, the Portfolio may use performance data reported in financial and industry publications, including Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal and USA Today. The Portfolio may from time to time use the following unmanaged indices for performance comparison purposes: o S&P 500 - The S&P 500 is an unmanaged mutual fund index of 500 stocks designed to mimic the overall equity market's industry weightings. Most, but not all, large capitalization stocks are in the index. There are also some small capitalization names in the index. The list is maintained by Standard & Poor's Corporation. It is market capitalization weighted. There are always 500 issuers in the S&P 500. Changes are made by Standard & Poor's as needed. o Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000, a market value weighted index of the 3,000 largest U.S. publicly-traded companies. ITEM 22. FINANCIAL STATEMENTS FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS ASSETS Cash $ 100,000 NET ASSETS $ 100,000 Kinetics Portfolios Trust FINANCIAL STATEMENT APRIL 27, 2000 Report of Independent Accountants To the Shareholder and Board of Trustees of Kinetics Portfolios Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Kinetics Portfolios Trust (hereafter referred to as the "Trust") at April 27, 2000, in conformity with accounting principles generally accepted in the United States. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin April 27, 2000 KINETICS PORTFOLIOS TRUST STATEMENT OF ASSETS AND LIABILITIES - - -------------------------------------------------------------------------------- AS OF APRIL 27, 2000 The accompanying notes are an integral part of this financial statement. [OBJECT OMITTED] KINETICS PORTFOLIOS TRUST NOTES TO FINANCIAL STATEMENT AS OF APRIL 27, 2000 - - -------------------------------------------------------------------------------- 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Business Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Internet Global Growth Portfolio, The Internet New Paradigm Portfolio, The Internet Infrastructure Portfolio, The Medical Portfolio, The Kinetics Government Money Market Portfolio, The Small Cap Opportunities Portfolio and The Middle East Growth Portfolio (the "Portfolios"). Pursuant to the 1940 Act, the Portfolios are "non-diversified" series of the Trust. The Trust has had no operations other than the contribution by Kinetics Asset Management, Inc., the Portfolios' Adviser ("Adviser"), of $100,000, representing a beneficial interest in the Trust. The Portfolios have had no operations through April 27, 2000. On April 28, 2000, the Trust intends to distribute the Adviser's $100,000 contribution to the Portfolios, at which time the Adviser will become a partner in each of the Portfolios. In addition, on April 28, 2000 various feeder funds ("Funds") sponsored by the Adviser will invest their investable assets in the corresponding Portfolios under a master-feeder capital structure. 2. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION COSTS Expenses in connection with the organization of the Trust have been absorbed by the Funds prior to their conversion to the master-feeder capital structure. Accordingly, no statement of operations of the Trust has been provided. FEDERAL INCOME TAXES Each Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Portfolios will be taxed on its allocable share of the Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Actual results could differ from those estimates. 1. 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Portfolios. Under the terms of the Agreement, the Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of the Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Portfolio's average daily net assets. The Adviser also serves as administrator to the Portfolios. Under an Administrative Services Agreement with the Trust on behalf of the Portfolios, the Adviser receives an annual administration fee equal to 0.10% of the Portfolio's average daily net assets from which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolios by Firstar. APPENDIX - - -------------------------------------------------------------------------------- STANDARD & POOR'S ("S&P") CORPORATE BOND RATING DEFINITIONS AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree. A-Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions. CI-The rating "CI" is reversed for income bonds on which no interest is being paid. D-Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA-Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated "A" possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the near future. BAA-Bonds which are rated "Baa" are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BA-Bonds which are "Ba" are judged to have speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA-Bonds which are "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS AAA-Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA-Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A-Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB-Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB-Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B-Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC-Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC-Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C-Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D-Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. PART B.: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION ITEM 10.: COVER PAGE AND TABLE OF CONTENTS THE SMALL CAP OPPORTUNITIES PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST 1311 Mamaroneck Avenue White Plains, New York 10605 (800) 930-3828 April 28, 2000 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") provides general information about The Small Cap Opportunities Portfolio (the "Portfolio"). The Portfolio is a series of Kinetics Portfolios Trust (the "Trust"), a Delaware business trust. This SAI is not a prospectus and should be read in conjunction with the Portfolio's current Prospectus dated April 28, 2000, as supplemented and amended from time to time, which is incorporated hereto by reference. To obtain a copy of the Prospectus, please write the Portfolio at the address set forth above or call the telephone number shown above. This SAI is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended ("1933 Act"), because such interests are issued solely to in private placement transactions to eligible investors that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Portfolio may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts and certain qualified pension and retirement plans. Neither this SAI nor the Registration Statement as a whole constitutes an offer to sell or the solicitation of an offer to buy any beneficial interests in this Portfolio or any other portfolio series of the Trust. THE SMALL CAP OPPORTUNITIES PORTFOLIO The Portfolio..................................................................3 Investment Objective, Strategies, and Risks....................................3 Investment Policies and Associated Risks.......................................4 Investment Restrictions........................................................8 Temporary Investments..........................................................6 Portfolio Turnover.............................................................6 Management of the Portfolio....................................................7 Control Persons and Principal Holders of Securities............................8 Investment Adviser.............................................................8 Administrative Services........................................................9 Custodian......................................................................9 Capitalization.................................................................9 Valuation of Shares...........................................................10 Purchasing Shares.............................................................10 Redemption of Shares..........................................................11 Brokerage.....................................................................12 Taxes.........................................................................13 Performance Information.......................................................14 Independent Auditors..........................................................15 Financial Statements..........................................................15 Appendix......................................................................16 ITEM 11. PORTFOLIO HISTORY THE PORTFOLIO - - -------------------------------------------------------------------------------- The Portfolio is a series of Kinetics Portfolios Trust, a business trust organized pursuant to a Declaration of Trust under the laws of the State of Delaware on March 14, 2000. The Portfolio's principal office is located at 1311 Mamaroneck Avenue, White Plains, New York 10605 ITEM 12. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS (A) CLASSIFICATION The Portfolio is a non-diversified, open-end management investment company. (B) INVESTMENT STRATEGIES AND RISKS INVESTMENT OBJECTIVE, STRATEGIES, AND RISKS - - -------------------------------------------------------------------------------- The Portfolio's primary investment objective is long-term growth of capital. Except during temporary, defensive periods, at least 65% of the Portfolio's total assets will be invested in securities of domestic and foreign small capitalization companies that provide attractive valuation opportunities due to lack of institutional ownership, lack of significant analyst coverage, or a short-term earnings disappointments. The Portfolio is designed for long-term investors who understand and are willing to accept the risk of loss involved in investing in a mutual fund seeking long-term capital growth. (C) PORTFOLIO POLICIES INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The following paragraphs provide a more detailed description of the Portfolio's investment policies and risks identified in the Prospectus. Unless otherwise noted, the policies described in this SAI are not fundamental and may be changed by the Board of Trustees of the Trust. COMMON AND PREFERRED STOCK Common stocks are units of ownership of a corporation. Preferred stocks are stocks that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. Some preference stocks may be convertible into common stock. Convertible securities are securities that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. CONVERTIBLE DEBT SECURITIES The Portfolio may invest in debt securities convertible into common stocks. Debt purchased by the Portfolio will consist of obligations of medium-grade or higher, having at least adequate capacity to pay interest and repay principal. Non-convertible debt obligations will be rated BBB or higher by S&P, or Baa or higher by Moody's. Convertible debt obligations will be rated B or higher by S&P or B or higher by Moody's. Securities rated Baa by Moody's are considered by Moody's to be medium-grade securities and have adequate capacity to pay principal and interest. Bonds in the lowest investment grade category (BBB) have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Securities rated B are referred to as "high-risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. See "Appendix" to this SAI for a description of debt security ratings. FIXED-INCOME SECURITIES The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. CREDIT RISK relates to the ability of the issuer to meet interest and principal payments, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, will also increase the credit risk to which those assets are subject. MARKET RISK relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium- and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wilder fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of debt securities whose ratings are downgraded below these ratings subsequent to the Portfolio's purchase of the securities. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which the Portfolio invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events. At no time will the Portfolio have more than 5% of its total assets invested in any fixed-income securities that are unrated or rated below investment grade either at the time of purchase or as a result of a reduction in rating after purchase. DEPOSITARY RECEIPTS. The Portfolio may invest in American Depositary Receipts ("ADRs") or other forms of depositary receipts, such as International Depositary Receipts ("IDRs"). Depositary receipts are typically issued in connection with a U.S. or foreign bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. Investments in these types of securities involve certain inherent risks generally associated with investments in foreign securities, including the following: POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain countries may 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, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. CURRENCY FLUCTUATIONS. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of an ADR's underlying portfolio securities denominated in that currency. Such changes will affect the Portfolio to the extent that the Portfolio is invested in ADR's comprised of foreign securities. TAXES. The interest and dividends payable on certain foreign securities comprising an ADR may be subject to foreign withholding taxes, thus reducing the net amount of income to be paid to the Portfolio and that may, ultimately, be available for distribution to the Portfolio's investors. OPTIONS Most mutual funds that use option strategies to hedge portfolio positions do not depend solely on the option profit or loss to justify the use of options, because such funds also take into account the profit or loss of the underlying securities. A more detailed discussion of writing covered and uncovered options on securities generally and the investment risks associated with such investments is set forth below. PURCHASING PUT AND CALL OPTIONS. The Portfolio may purchase put and call options on securities eligible for purchase by the Portfolio and on securities indices. Put and call options are derivative securities traded on U.S. exchanges. If the Portfolio purchases a put option, it acquires the right to sell the underlying security or index value at a specified price at any time during the term of the option. If the Portfolio purchases a call option, it acquires the right to purchase the underlying security or index value at a specified price at any time during the term of the option. Prior to exercise or expiration, the Portfolio may sell an option when through a "closing sale transaction," which is accomplished by selling an option of the same series as the option previously purchased. The Portfolio generally will purchase only those options for which the investment adviser believes there is an active secondary market to facilitate closing transactions. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. The Portfolio will purchase put options to hedge against a decrease in the price of securities it holds. Such hedge protection is provided during the life of the put option since the Portfolio, as the holder of the put option, is able to sell the underlying security at the exercise price regardless of any decrease in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decrease sufficiently below the exercise price to cover the premium and transaction costs. WRITING CALL OPTIONS. The Portfolio may write covered call options on securities eligible for purchase by the Portfolio. A call option is "covered" if the Portfolio owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, it may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option. Effecting a closing transaction in the case of a written call option will permit the Portfolio to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction allows the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of the Portfolio. If the Portfolio desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. The Portfolio realizes a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. The Portfolio realizes a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, appreciation of the underlying security owned by the Portfolio generally offsets, in whole or in part, any loss to the Portfolio resulting from the repurchase of a call option. RISK FACTORS IN OPTIONS TRANSACTIONS. The successful use of options by the Portfolio depends on the ability of the Adviser to forecast correctly interest rate and market movements. For example, if the Portfolio were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Portfolio were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When the Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Portfolio will lose part or all of its investment in the option. This contrasts with an investment by the Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Adviser deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. If a secondary market in options were to become unavailable, the Portfolio could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events -- such as volume in excess of trading or clearing capability -- were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or an options clearing corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unit asset valuable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, an options clearing corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If an options clearing corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. DEALER OPTIONS. The Portfolio may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While the Portfolio might look to an exchange's clearing corporation to exercise exchange-traded options, if the Portfolio purchases a dealer option it must rely on the selling dealer to perform if the Portfolio exercises the option. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, the Portfolio can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when the Portfolio writes a dealer option, the Portfolio can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and can enter into closing transactions with the Portfolio, no assurance exists that the Portfolio will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Portfolio, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Portfolio may be unable to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because the Portfolio must maintain a secured position with respect to any call option on a security it writes, the Portfolio may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Portfolio's ability to sell portfolio securities at a time when such sale might be advantageous. The staff of the SEC takes the position that purchased dealer options are illiquid securities. The Portfolio may treat the cover used for written dealer options as liquid if the dealer agrees that the Portfolio may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. With that exception, however, the Portfolios will treat dealer options as subject to the Portfolios' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Portfolios will change their treatment of such instruments accordingly. INVESTMENT RESTRICTIONS - - -------------------------------------------------------------------------------- The investment restrictions of the Portfolio may be changed only with the approval of the holders of a majority of the Portfolio's outstanding voting securities. 1. The Portfolio will not act as underwriter for securities of other issuers. 2. The Portfolio will not make loans. 3. With respect to 50% of its total assets, the Portfolio will not invest in the securities of any issuer if as a result the Portfolio holds more than 10% of the outstanding securities or more than 10% of the outstanding voting securities of such issuer. 4. The Portfolio will not borrow money or pledge, mortgage, or hypothecate its assets except to facilitate redemption requests that might otherwise require the untimely disposition of portfolio securities and then only from banks and in amounts not exceeding the lesser of 10% of its total assets valued at cost or 5% of its total assets valued at market at the time of such borrowing, pledge, mortgage, or hypothecation and except that the Portfolio may enter into futures contracts and related options. 5. The Portfolio will not invest more than 10% of the value of its net assets in illiquid securities, restricted securities, and other securities for which market quotations are not readily available. 6. The Portfolio will not invest in the securities of any one industry, with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and instrumentality's, if as a result, more than 20% of the Portfolio's total assets would be invested in the securities of such industry. Except during temporary defensive periods, at least 65% of the Portfolio's total assets will be invested in the securities of domestic and foreign small capitalization companies that provide attractive valuation opportunities due to lack of institutional ownership, lack of significant analyst coverage, or a short-term earnings disappointments. 7. The Portfolio will not purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs or real estate except that the Portfolio may purchase and sell securities of companies that deal in oil, gas, or mineral exploration or development programs or interests therein. 8. The Portfolio will not issue senior securities. If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in value in the Portfolio's portfolio securities will not constitute a violation of such limitation. (D) TEMPORARY DEFENSIVE POSITION TEMPORARY INVESTMENTS - - -------------------------------------------------------------------------------- In order to have funds available for redemption and investment opportunities, the Portfolio may also hold a portion of its assets in cash or U.S. short-term money market instruments. Certificates of deposit purchased by the Portfolio will be those of U.S. banks having total assets at the time of purchase in excess of $1 billion, and bankers' acceptances purchased by the Portfolio will be guaranteed by U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion. The Portfolio anticipates that not more than 10% of its total assets will be so invested or held in cash at any given time, except when the Portfolio is in a temporary defensive posture. (E) PORTFOLIO TURNOVER PORTFOLIO TURNOVER - - -------------------------------------------------------------------------------- In order to qualify for the beneficial tax treatment afforded regulated investment companies, and to be relieved of Federal tax liabilities, the Portfolio must distribute substantially all of their net income to shareholders generally on an annual basis. Thus, the Portfolio may have to dispose of portfolio securities under disadvantageous circumstances to generate cash or borrow cash in order to satisfy the distribution requirement. The Portfolio does not trade in securities for short-term profits but, when circumstances warrant, securities may be sold without regard to the length of time they have been held. ITEM 13. MANAGEMENT OF THE PORTFOLIO MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- BOARD OF TRUSTEES The management and affairs of the Portfolio are supervised by the Board of Trustees of the Trust. The Board consists of eight individuals, five of whom are not "interested" persons of the Portfolio as that term is defined in the 1940 Act. The Trustees are fiduciaries for the Portfolio's investors and are governed by the laws of the State of Delaware in this regard They establish policies for the operation of the Portfolio and appoint the officers who conduct the daily business of the Portfolio. Officers and Trustees of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. "Interested" Trustees are designated by an asterisk that appears beside their names.
- - ----------------------------------- --------- ------------------------ ------------------------------------------- NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Steven R. Samson 45 President & Chairman President and CEO, Kinetics Asset 342 Madison Avenue of the Board Management, Inc. (1999 to Present); New York, NY 10173 President, The Internet Fund, Inc. (1999 to Present); Managing Director, Chase Manhattan Bank (1993 to 1999); President and Chairman of the Board of Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Kathleen Campbell 34 Trustee Attorney, Campbell and Campbell, 2 Madison Avenue Counselors-at-Law (1995 to Present); Valhalla, NY 10595 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Murray Stahl 46 Trustee President, Horizon Asset Management, an 342 Madison Avenue investment adviser (1994 to Present); New York, NY 10173 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Steven T. Russell 36 Trustee Attorney and Counselor at Law, 146 Fairview Avenue Steven Russell Law Firm (1994 to Bayport, NY 117045 Present); Professor of Business Law, Suffolk County Community College (1997 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Douglas Cohen, C.P.A. 36 Trustee Wagner, Awerma & Strinberg, LLP Certified 6 Saywood Lane Public Accountant (1997 to present); Stonybrook, NY 11790 Director, Kinetics Mutual Funds, Inc. (1999 to Present); Leon D. Alpern & Co. (1985 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- William J. Graham 37 Trustee Attorney, Bracken & Margolin, LLP (1997 20 Franklin Boulevard to Present); Director, Kinetics Mutual Long Beach, NY 11561 Funds, Inc. (1999 to Present); Gabor & Gabor (1995 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Joseph E. Breslin 45 Trustee Senior Vice President, Marketing & Sales, One State Street IBJ Whitehall Financial Group, a New York, NY 10004 financial services company (1999 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present); formerly President, J.E. Breslin & Co., an investment management consulting firm (1994 to 1999. - - ----------------------------------- --------- ------------------------ ------------------------------------------- John J. Sullivan 68 Trustee Director, Kinetics Mutual Funds, Inc. 31 Hemlock Drive (1999 to Present); Retired; Senior Sleepy Hollow, NY 10591 Advisor, Long Term Credit Bank of Japan, Ltd.; Executive Vice President, LTCB Trust Company; - - ----------------------------------- --------- ------------------------ ------------------------------------------- Lee W. Schultheis 43 Vice President & Managing Director & COO of Kinetics Asset 342 Madison Avenue Treasurer of the Trust Management (1999 to Present); Vice New York, NY 10173 President and Treasurer Kinetics Mutual Funds, Inc. (1999 to Present); President & Director of Business. Development, Vista Fund Distributors, Inc. (1995 to 1999); Managing Director, Forum Financial Group, a mutual fund services company. - - ----------------------------------- --------- ------------------------ -------------------------------------------
COMPENSATION Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust , Kinetics Mutual Funds, Inc. or Kinetics Asset Management, Inc. receive an aggregate annual fee of $15,000 per year for their services as Trustees or directors of all open-end investment companies distributed by Kinetics Funds Distributors, Inc. and $1,000 per meeting attended, as well as reimbursement for expenses incurred in connection with attendance at such meetings. In addition, each committee chairman of the Company and the Trust (such as the Audit committee or Pricing committee) receives an additional fee of $5,000 per year for his service as chairman.. Payment of the annual fees is allocated among such investment companies based on their relative net assets. Payment of meeting fees are allocated only among those investment companies to which such meetings relate. The "interested" Trustees of the Portfolio receive no compensation for their service as Trustees. None of the executive officers receive compensation from the Portfolio. The following tables provide compensation information for the Trustees for the year-ended December 31, 1999.
KINETICS PORTFOLIOS TRUST COMPENSATION TABLE - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND FROM FUND PART OF FUND EXPENSES RETIREMENT COMPLEX PAID TO DIRECTORS** - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ Steven R. Samson* None None None None Chairman and Director Kathleen Campbell* None None None None Director Murray Stahl*** None None None $3,844 Director Steven T. Russell None None None $5,500 Independent Director Douglas Cohen None None None $6,094 Independent Director William J. Graham None None None $5,500 Independent Director Joseph E. Breslin None None None $4,500 Independent Director John J. Sullivan None None None $5,500 Independent Director - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
* "Interested person" as defined under the 1940 Act. ** Includes compensation paid by Kinetics Mutual Funds, Inc. *** Murray Stahl became an "interested person" of the Fund (as defined under the 1940 Act) as of December 15, 1999. Previous to becoming an interested person, Mr. Stahl received $3844 as total compensation from the Fund and Fund complex for being an independent director. ITEM 14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES (A) CONTROL PERSONS & (B) PRINCIPAL HOLDERS CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - - -------------------------------------------------------------------------------- A control person is one who owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. As of the commencement of investment operations, the Portfolio could be deemed to be under the control of The Small Cap Opportunities Fund, a series of Kinetics Mutual Funds, Inc. and the sole investor in the Portfolio as of the date of this SAI. Similarly, as of such time, Kinetics Mutual Funds, Inc. through its series, The Internet Fund, The Internet Emerging Growth Fund, The Internet Global Growth Fund, The Internet Infrastructure Fund, The Internet New Paradigm Fund, The Small Cap Opportunities Fund, The Middle East Growth Fund, The Medical Fund, and The Kinetics Government Money Market Fund (each a "Fund" and collectively the "Funds"), was the owner of 100% of the value of the outstanding interests in the Trust. Any investor owning more than 50% of the value of the outstanding interests in the Portfolio may take actions without the approval of any other investor who invests in the Portfolio. Kinetics Mutual Funds, Inc. has informed the Trust that whenever The Small Cap Opportunities Fund is requested to vote on a matter pertaining to the Portfolio, The Small Cap Opportunities Fund will hold a meeting of its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by The Small Cap Opportunities Fund's shareholders. It is anticipated that other registered investment companies investing in the Portfolio, if any, will follow the same or a similar practice, although, as of May 1, 2000, there were no other investors in the Portfolio. (c) Management Ownership MANAGEMENT OWNERSHIP The percentage of the Portfolio's interests owned or controlled by the executive officers and Trustees of the Portfolio and the Trust is less than 1% of the interests of the Portfolio. ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES (A) INVESTMENT ADVISER INVESTMENT ADVISER - - -------------------------------------------------------------------------------- Kinetics Asset Management, Inc. ("Kinetics" or the "Adviser") is a New York corporation that serves as the investment adviser to the Portfolio. Peter B. Doyle is the Chairman of the Board of Directors and Chief Investment Strategist of Kinetics. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has over 24 years experience in the mutual funds and financial services industries. Mr. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics and has more than 20 years experience in the mutual funds and financial services industries. On April 25, 2000 the Board of the Trustees of the Trust, on behalf of the Portfolio, approved a management and advisory contract (the "Agreement") with Kinetics. This Agreement will remain in effect for a term of two years and will continue on a year-to-year basis thereafter provided that specific approval is voted at least annually by the Board of Trustees of the Trust or by the vote of the holders of a majority of the outstanding voting securities of the Portfolio. In either event, it must also be approved by a majority of the Trustees of the Trust who are neither parties to the Agreement nor "interested" persons as defined in the 1940 Act at a meeting called for the purpose of voting on such approval. The Adviser's investment decisions are made subject to the direction and supervision of the Board of Trustees. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Ultimate decisions as to the investment policy and as to individual purchases and sales of securities are made by the Portfolio's officers and the Trustees. (B) PRINCIPAL UNDERWRITER PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. (C) SERVICES PROVIDED BY THE INVESTMENT ADVISER AND PORTFOLIO EXPENSES PAID BY THIRD PARTIES Under the Agreement, Kinetics furnishes investment advice to the Portfolio by continuously reviewing the portfolio and recommending to the Portfolio to what extent, securities should be purchased or disposed. Pursuant to the Agreement, the Adviser: (1) renders research, statistical and advisory services to the Portfolio; (2) makes specific recommendations based on the Portfolio's investment requirements; (3) pays the salaries of those of the Portfolio's employees who may be officers or directors or employees of the investment adviser. For these services, the Portfolio has agreed to pay to Kinetics an annual fee of 1.25% of the Portfolio's average daily net assets. All fees are computed on the average daily closing net asset value ("NAV") of the Portfolio and are payable monthly. The fee is higher than the fee paid by most other funds. Kinetics has also entered into a Research Agreement with Horizon Assets Management, Inc. ("Horizon") for which it is solely responsible for the payment of all fees owing to Horizon. Fees of the custodian, administrator, transfer agent and Portfolio accountant are paid by the Portfolio. (D) SERVICE AGREEMENTS ADMINISTRATIVE SERVICES - - -------------------------------------------------------------------------------- Kinetics also serves as Administrator of the Portfolio. Under an Administrative Services Agreement with the Portfolio, Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets of which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. Firstar, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, also serves as the Portfolio's accountant and transfer agent. As such, Firstar provides certain investor services and record management services as well as acts as the Portfolio's dividend disbursement agent. Administrative services include, but are not limited to, providing office space, equipment, telephone facilities, various personnel, including clerical and supervisory, and computers, as is necessary or beneficial to: |X| establish and maintain investors' accounts and records, |X| process purchase and redemption transactions, |X| process automatic investments of client account cash balances, |X| answer routine client inquiries regarding the Portfolio, |X| assist clients in changing dividend options, |X| account designations, and addresses, and |X| providing such other services as the Portfolio may reasonably request. CUSTODIAN - - -------------------------------------------------------------------------------- Firstar Bank, N.A. ("Firstar Bank") is custodian for the securities and cash of the Portfolio. Under a Custody Agreement, Firstar Bank holds the Portfolio's assets in safekeeping and keeps all necessary records and documents relating to its duties. Firstar Bank receives an annual fee equal to 0.010% of the Portfolio's average daily net assets with a minimum annual fee of $3,000. Independent Public Accountants - - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. Their services include examination of the Trust's financial statements and the performance of other related audit and tax services. ITEM 16. BROKERAGE ALLOCATION AND OTHER PRACTICES BROKERAGE - - -------------------------------------------------------------------------------- The Portfolio's assets are invested by the Adviser in a manner consistent with its investment objective, strategies, policies and restrictions and with any instructions the Board of Trustees may issue from time to time. Within this framework, the Adviser is responsible for making all determinations as to the purchase and sale of portfolio securities and for taking all steps necessary to implement securities transactions on behalf of the Portfolio. Transactions on U.S. stock exchanges, commodities markets and futures markets and other agency transactions may involve the payment by the Adviser on behalf of the Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Adviser usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Adviser on behalf of the Portfolio includes a disclosed, fixed commission or discount retained by the underwriter or dealer. U.S. Government securities generally are traded in the over-the-counter market through broker-dealers. A broker-dealer is a securities firm or bank that makes a market for securities by offering to buy at one price and sell at a slightly higher price. The difference between the prices is known as a spread. In placing orders for the purchase and sale of portfolio securities for the Portfolio, the Adviser seeks to obtain the best price and execution, taking into account such factors as price, size of order, difficulty and risk of execution and operational facilities of the firm involved. For securities traded in the over-the-counter markets, the Adviser deals directly with the dealers who make markets in these securities unless better prices and execution are available elsewhere. The Adviser negotiates commission rates with brokers based on the quality and quantity of services provided in light of generally prevailing rates, and while the Adviser generally seeks reasonably competitive commission rates, the Portfolio does not necessarily pay the lowest commissions available. The Board of Trustees periodically reviews the commission rates and allocation of orders. When consistent with the objectives of best price and execution, business may be placed with broker-dealers who furnish investment research or services to the Adviser. Such research or services include advice, both orally and in writing, as to the value of securities; the advisability of investing in, purchasing or selling securities; and the availability of securities, or purchasers or sellers of securities; as well as analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser, the Adviser receives a benefit, not capable of evaluation in dollar amounts, without providing any direct monetary benefit to the Portfolio from these transactions. The Adviser believes that most research services obtained by it generally benefit several or all of the investment companies and private accounts which it manages, as opposed to solely benefiting one specific managed fund or account. The same security may be suitable for the Portfolio, another portfolio series of the Trust or other private accounts managed by the Adviser. If and when the Portfolio and two or more accounts simultaneously purchase or sell the same security, the transactions will be allocated as to price and amount in accordance with arrangements equitable to the Portfolio and the accounts. The simultaneous purchase or sale of the same securities by the Portfolio and other accounts may have a detrimental effect on the Portfolio, as this may affect the price paid or received by the Portfolio or the size of the position obtainable or able to be sold by the Portfolio. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc. and subject to seeking the most favorable price and execution available and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Portfolio as a factor in the selection of broker-dealers to execute portfolio transactions for the Portfolio. ITEM 17. CAPITAL STOCK AND OTHER SECURITIES (a) Capital Stock CAPITALIZATION - - -------------------------------------------------------------------------------- The authorized capitalization of Kinetics Portfolio Trust consists of 1 billion shares of beneficial interest of $0.001 par value per share. Each share has equal dividend, distribution and liquidation rights. There are no conversion or preemptive rights applicable to any shares of the Portfolio. All shares issued are fully paid and non-assessable. Each holder of beneficial interest has one vote for each share held. Each investor in a Portfolio is entitled to participate equally in the Portfolio's earnings and assets and to vote in proportion to the amount of its investment in the Portfolio. Voting rights are non-cumulative. Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment therein. Investors in the Portfolio will all vote together in certain circumstances (e.g., election of the Trustees and ratification of auditors, as required by the 1940 Act and the rules thereunder). One or more Portfolios could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust or in a Portfolio, as the case may be, may control the outcome of votes. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when (1) a majority of the Trustees determines to do so or (2) investors holding at least 10% of the interests in a Portfolio (if the meeting relates solely to that Portfolio), or investors holding at least 10% of the aggregate interests in the Trust (if the meeting relates to the Trust and not specifically to a Portfolio) requests in writing a meeting of investors. Changes in fundamental policies or limitations will be submitted to investors for approval. The Trust is organized as a business trust under the laws of the State of Delaware. Investors in a Portfolio will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest in the Portfolio. The Declaration of Trust also provides that, subject to the provisions of the 1940 Act, the Trust may maintain insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Portfolio, investors, Trustees, officers, employees, and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of such liability would be limited to circumstances in which the Portfolio had inadequate insurance and was unable to meet its obligations out of its assets. ITEM 18. PURCHASE, REDEMPTION AND PRICING OF SHARES (A) PURCHASE OF SHARES PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. (C) REDEMPTION OF SHARES REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. (B) OFFERING PRICE VALUATION OF SHARES - - -------------------------------------------------------------------------------- Shares of the Portfolio are sold at the NAV per share next computed following acceptance of an order by the Portfolio. The Portfolio's NAV per share for the purpose of pricing purchase and redemption orders is determined at the close of normal trading (currently 4:00 p.m. EST) on each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Portfolio's investment securities are valued each day at the last quoted sales price on the securities principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees. The Portfolio may use independent pricing services to assist in calculating the NAV of the Portfolio's shares. The Portfolio's investment securities that are listed on a U.S. securities exchange or NASDAQ for which market quotations are readily available are valued at the last quoted sale price on the day the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded. Options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the mean of the most recent quoted bid and asked price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed-income securities purchased with remaining maturities of 60 days or less are valued at amortized cost if it reflects fair value. In the event that amortized cost does not reflect market, market prices as determined above will be used. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Portfolio. ITEM 19. TAXATION OF THE PORTFOLIO TAXES - - -------------------------------------------------------------------------------- The Portfolio will be classified for federal income tax purposes as a partnership that is not a "publicly traded partnership." As a result, the Portfolio is not subject to federal income tax; instead, each Interestholder in the Portfolio is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, and credits, without regard to whether it has received any cash distributions from the Portfolio. The Portfolio also is not subject to Delaware income or franchise tax. A holder of beneficial interest in the Portfolio (an "Interestholder") is deemed to own a proportionate share of the Portfolio's assets and to earn a proportionate share of the Portfolio's income, for, among other things, purposes of determining whether the Interestholder satisfies the requirements to qualify as a regulated investment company ("RIC"). Accordingly, the Portfolio intends to conduct its operations so that its Interestholders that invest substantially all of their assets in the Portfolio and intend to qualify as RICs should be able to satisfy all those requirements. Distributions to an Interestholder from the Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Interestholder's recognition of any gain or loss for federal income tax purposes, except that: (1) gain will be recognized to the extent any cash that is distributed exceeds the Interestholder's basis for its interest in the Portfolio before the distribution; (2) income or gain will be recognized if the distribution is in liquidation of the Interestholder's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio; (3) loss will be recognized to the extent that a liquidation distribution consisting solely of cash and/or unrealized receivables is less than the Interestholder's basis for its interest in the Portfolio prior to the distribution; and (4) gain or loss may be recognized on a distribution to an Interestholder that contributed property to the Portfolio. An Interestholder's basis for its interest in the Portfolio generally will equal the amount of cash and the basis of any property it invests in the Portfolio, increased by the Interestholder's share of the Portfolio's net income and gains and decreased by (a) the amount of cash and the basis of any property the Portfolio distributes to the Interestholder and (b) the Interestholder's share of the Portfolio's losses. The income tax and estate tax consequences to a non-U.S. Interestholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. Interestholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Non-U.S. Interestholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Portfolio. The foregoing discussion relates only to federal income tax law. Income from the Portfolio also may be subject to foreign, state and local taxes, and their treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Interestholders should consult their tax advisors with respect to particular questions of federal, state and local taxation. ITEM 20. UNDERWRITERS PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. ITEM 21. CALCULATION OF PERFORMANCE DATA PERFORMANCE INFORMATION - - -------------------------------------------------------------------------------- (1) AVERAGE ANNUAL TOTAL RETURN QUOTATION TOTAL RETURN Average annual total return quotations used in the Portfolio's advertising and promotional materials are calculated according to the following formula: P(1+T)n = ERV where P equals a hypothetical initial payment of $1,000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. CUMULATIVE TOTAL RETURN Cumulative total return represents the simple change in value of an investment over a stated period and may be quoted as a percentage or as a dollar amount. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship between these factors and their contributions to total return. (2) Yield Quotation YIELD Annualized yield quotations used in the Portfolio's advertising and promotional materials are calculated by dividing the Portfolio's interest income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the NAV per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2[(A-B + 1)6 - 1] --- c-d where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and "d" equals the maximum offering price per share on the last day of the period. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. OTHER INFORMATION The Portfolio's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in the Portfolio will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. If permitted by applicable law, the Portfolio may advertise the performance of registered investment companies or private accounts that have investment objectives, policies and strategies substantially similar to those of the Portfolio. COMPARISON OF PORTFOLIO PERFORMANCE The performance of the Portfolio may be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue Organization, Inc. or other independent services which monitor the performance of investment companies, and may be quoted in advertising in terms of its ranking in each applicable universe. In addition, the Portfolio may use performance data reported in financial and industry publications, including Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal and USA Today. The Portfolio may from time to time use the following unmanaged indices for performance comparison purposes: o S&P 500 - The S&P 500 is an unmanaged mutual fund index of 500 stocks designed to mimic the overall equity market's industry weightings. Most, but not all, large capitalization stocks are in the index. There are also some small capitalization names in the index. The list is maintained by Standard & Poor's Corporation. It is market capitalization weighted. There are always 500 issuers in the S&P 500. Changes are made by Standard & Poor's as needed. o Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000, a market value weighted index of the 3,000 largest U.S. publicly-traded companies. ITEM 22. FINANCIAL STATEMENTS FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS ASSETS Cash $ 100,000 NET ASSETS $ 100,000 Kinetics Portfolios Trust FINANCIAL STATEMENT APRIL 27, 2000 Report of Independent Accountants To the Shareholder and Board of Trustees of Kinetics Portfolios Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Kinetics Portfolios Trust (hereafter referred to as the "Trust") at April 27, 2000, in conformity with accounting principles generally accepted in the United States. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin April 27, 2000 KINETICS PORTFOLIOS TRUST STATEMENT OF ASSETS AND LIABILITIES - - -------------------------------------------------------------------------------- AS OF APRIL 27, 2000 The accompanying notes are an integral part of this financial statement. [OBJECT OMITTED] KINETICS PORTFOLIOS TRUST NOTES TO FINANCIAL STATEMENT AS OF APRIL 27, 2000 - - -------------------------------------------------------------------------------- 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Business Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Internet Global Growth Portfolio, The Internet New Paradigm Portfolio, The Internet Infrastructure Portfolio, The Medical Portfolio, The Kinetics Government Money Market Portfolio, The Small Cap Opportunities Portfolio and The Middle East Growth Portfolio (the "Portfolios"). Pursuant to the 1940 Act, the Portfolios are "non-diversified" series of the Trust. The Trust has had no operations other than the contribution by Kinetics Asset Management, Inc., the Portfolios' Adviser ("Adviser"), of $100,000, representing a beneficial interest in the Trust. The Portfolios have had no operations through April 27, 2000. On April 28, 2000, the Trust intends to distribute the Adviser's $100,000 contribution to the Portfolios, at which time the Adviser will become a partner in each of the Portfolios. In addition, on April 28, 2000 various feeder funds ("Funds") sponsored by the Adviser will invest their investable assets in the corresponding Portfolios under a master-feeder capital structure. 2. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION COSTS Expenses in connection with the organization of the Trust have been absorbed by the Funds prior to their conversion to the master-feeder capital structure. Accordingly, no statement of operations of the Trust has been provided. FEDERAL INCOME TAXES Each Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Portfolios will be taxed on its allocable share of the Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Actual results could differ from those estimates. 1. 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Portfolios. Under the terms of the Agreement, the Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of the Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Portfolio's average daily net assets. The Adviser also serves as administrator to the Portfolios. Under an Administrative Services Agreement with the Trust on behalf of the Portfolios, the Adviser receives an annual administration fee equal to 0.10% of the Portfolio's average daily net assets from which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolios by Firstar. THE MIDDLE EAST GROWTH PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST 1311 Mamaroneck Avenue White Plains, New York 10605 (800) 930-3828 April 28, 2000 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") provides general information about The Middle-East Growth Portfolio (the "Portfolio"). The Portfolio is a series of Kinetics Portfolios Trust (the "Trust"), a Delaware business trust. This SAI is not a prospectus and should be read in conjunction with the Portfolio's current Prospectus dated April 28, 2000, as supplemented and amended from time to time, which is incorporated hereto by reference. To obtain a copy of the Prospectus, please write the Portfolio at the address set forth above or call the telephone number shown above. This SAI is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended ("1933 Act"), because such interests are issued solely to in private placement transactions to eligible investors that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Portfolio may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts and certain qualified pension and retirement plans. Neither this SAI nor the Registration Statement as a whole constitutes an offer to sell or the solicitation of an offer to buy any beneficial interests in this Portfolio or any other portfolio series of the Trust. THE MIDDLE EAST GROWTH PORTFOLIO The Portfolio..................................................................3 Investment Policies and Associated Risks.......................................3 Investment Policies and Associated Risks.......................................3 Investment Restrictions........................................................9 Temporary Investments.........................................................10 Portfolio Turnover............................................................10 Management of the Portfolio...................................................11 Control Persons and Principal Holders of Securities...........................13 Investment Adviser............................................................14 Administrative Services.......................................................15 Custodian.....................................................................15 Brokerage.....................................................................16 Capitalization................................................................17 Purchase of Shares............................................................18 Redemption of Shares..........................................................18 Valuation of Shares...........................................................19 Taxes.........................................................................19 Performance Information.......................................................20 Financial Statements..........................................................22 Appendix......................................................................23 ITEM 11. PORTFOLIO HISTORY THE PORTFOLIO - - -------------------------------------------------------------------------------- The Portfolio is a series of Kinetics Portfolios Trust, a business trust organized pursuant to a Declaration of Trust under the laws of the State of Delaware on March 14, 2000. The Portfolio's principal office is located at 1311 Mamaroneck Avenue, White Plains, New York 10605 ITEM 12. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS (A) CLASSIFICATION The Portfolio is a non-diversified, open-end management investment company. (B) INVESTMENT STRATEGIES AND RISKS INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The Portfolio's primary investment objective is long-term growth of capital. Except during temporary, defensive periods, at least 65% of the Portfolio's total assets will be invested in securities of foreign and U.S. companies that are engaged in business activities in the Middle East. The Portfolio is designed for long-term investors who understand and are willing to accept the risk of loss involved in investing in a mutual fund seeking long-term capital growth. (C) PORTFOLIO POLICIES INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The following paragraphs provide a more detailed description of the Portfolio's investment policies and risks identified in the Prospectus. Unless otherwise noted, the policies described in this SAI are not fundamental and may be changed by the Board of Trustees of the Trust. COMMON AND PREFERRED STOCK Common stocks are units of ownership of a corporation. Preferred stocks are stocks that often pay dividends at a specific rate and have a preference over common stocks in dividend payments and liquidation of assets. Some preference stocks may be convertible into common stock. Convertible securities are securities that may be converted into or exchanged for a specified amount of common stock of the same or different issuer within a particular period of time at a specified price or formula. CONVERTIBLE DEBT SECURITIES The Portfolio may invest in debt securities convertible into common stocks. Debt purchased by the Portfolio will consist of obligations of medium-grade or higher, having at least adequate capacity to pay interest and repay principal. Non-convertible debt obligations will be rated BBB or higher by S&P, or Baa or higher by Moody's. Convertible debt obligations will be rated B or higher by S&P or B or higher by Moody's. Securities rated Baa by Moody's are considered by Moody's to be medium-grade securities and have adequate capacity to pay principal and interest. Bonds in the lowest investment grade category (BBB) have speculative characteristics, with changes in the economy or other circumstances more likely to lead to a weakened capacity of the bonds to make principal and interest payments than would occur with bonds rated in higher categories. Securities rated B are referred to as "high-risk" securities, generally lack characteristics of a desirable investment, and are deemed speculative with respect to the issuer's capacity to pay interest and repay principal over a long period of time. See "Appendix" to this SAI for a description of debt security ratings. FIXED-INCOME SECURITIES The fixed-income securities in which the Portfolio may invest are generally subject to two kinds of risk: credit risk and market risk. CREDIT RISK relates to the ability of the issuer to meet interest and principal payments, as they come due. The ratings given a security by Moody's and S&P provide a generally useful guide as to such credit risk. The lower the rating given a security by such rating service, the greater the credit risk such rating service perceives to exist with respect to such security. Increasing the amount of Portfolio assets invested in unrated or lower-grade securities, while intended to increase the yield produced by those assets, will also increase the credit risk to which those assets are subject. MARKET RISK relates to the fact that the market values of securities in which the Portfolio may invest generally will be affected by changes in the level of interest rates. An increase in interest rates will tend to reduce the market values of such securities, whereas a decline in interest rates will tend to increase their values. Medium- and lower-rated securities (Baa or BBB and lower) and non-rated securities of comparable quality tend to be subject to wilder fluctuations in yields and market values than higher-rated securities. Medium-rated securities (those rated Baa or BBB) have speculative characteristics while lower-rated securities are predominantly speculative. The Portfolio is not required to dispose of debt securities whose ratings are downgraded below these ratings subsequent to the Portfolio's purchase of the securities. Relying in part on ratings assigned by credit agencies in making investments will not protect the Portfolio from the risk that fixed-income securities in which the Portfolio invests will decline in value, since credit ratings represent evaluations of the safety of principal, dividend and interest payments on preferred stocks and debt securities, not the market values of such securities, and such ratings may not be changed on a timely basis to reflect subsequent events. At no time will the Portfolio have more than 5% of its total assets invested in any fixed-income securities that are unrated or rated below investment grade either at the time of purchase or as a result of a reduction in rating after purchase. DEPOSITARY RECEIPTS. The Portfolio may invest in American Depositary Receipts ("ADRs") or other forms of depositary receipts, such as International Depositary Receipts ("IDRs"). Depositary receipts are typically issued in connection with a U.S. or foreign bank or trust company and evidence ownership of underlying securities issued by a foreign corporation. Investments in these types of securities involve certain inherent risks generally associated with investments in foreign securities, including the following: POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain countries may 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, diversification and balance of payments position. The internal politics of certain foreign countries may not be as stable as those of the United States. Governments in certain foreign countries also continue to participate to a significant degree, through ownership interest or regulation, in their respective economies. Action by these governments could include restrictions on foreign investment, nationalization, expropriation of goods or imposition of taxes, and could have a significant effect on market prices of securities and payment of interest. The economies of many foreign countries are heavily dependent upon international trade and are accordingly affected by the trade policies and economic conditions of their trading partners. Enactment by these trading partners of protectionist trade legislation could have a significant adverse effect upon the securities markets of such countries. CURRENCY FLUCTUATIONS. A change in the value of any foreign currency against the U.S. dollar will result in a corresponding change in the U.S. dollar value of an ADR's underlying portfolio securities denominated in that currency. Such changes will affect the Portfolio to the extent that the Portfolio is invested in ADR's comprised of foreign securities. TAXES. The interest and dividends payable on certain foreign securities comprising an ADR may be subject to foreign withholding taxes, thus reducing the net amount of income to be paid to the Portfolio and that may, ultimately, be available for distribution to the Portfolio's investors. SPECIAL CONSIDERATIONS OF THE MIDDLE EAST As a non-diversified fund, the Portfolio has no limit on the percentage of assets that it may invest in any single issuer. An investment in the Portfolio, therefore, will entail greater risk than would exist in a diversified investment company because the higher percentage of investments among fewer issuers may result in greater fluctuation in the total market value of the Portfolio's securities. Any economic, political, or regulatory developments affecting the value of securities in the Portfolio's portfolio securities will have a greater impact on the total value of the portfolio than would be the case if the portfolio were diversified among more issuers. The Portfolio intends to comply with Subchapter M of the Internal Revenue Code. This undertaking requires that at the end of each quarter of the taxable year, the aggregate value of all investments in any one issuer (except U.S. government obligations, cash and cash items) that exceed 5% of the Portfolio's total assets shall not exceed 50% of the value of its total assets. In addition, not more than 25% of its total assets will be invested in the securities of any one issuer, except government securities or securities of regulated investment companies. The Portfolio defines the "Middle East" to be that region ranging from Morocco on the North African coast, including Algeria, Tunisia, Libya, Egypt, Sudan and Chad, to the Persian Gulf region, including Israel, Lebanon, Jordan, Syria, Iraq, Iran, Saudi Arabia, Yemen, People's Republic of Yemen, Oman, United Arab Emirates, Qatar and Kuwait). Based on their gross domestic products and stock market capitalizations, it is expected that Israel and Egypt will represent the largest country investments in the Portfolio. The following information is a brief summary of the prevailing economic conditions and general summary of the market in the Middle East. The Middle East securities markets are dominated by the Tel Aviv Stock Exchange ("TASE") and the Egyptian Stock Exchange. The TASE accounts for approximately one half of the aggregate value of the Middle East stock exchanges, and the TASE and Egyptian Stock Exchange together account for approximately two-thirds. Measured by gross domestic product ("GDP"), Israel and Egypt together account for approximately two-thirds of the aggregate GDP of those Middle East nations with active stock exchanges. Accordingly, these two markets are anticipated to represent significant areas of investment for the Portfolio. They are, nevertheless, relatively illiquid, with a combined market capitalization of less than $75 billion. In contrast each of the 25 largest companies in the S&P 500 have a market capitalization that exceeds $100 billion. These markets are also relatively concentrated. For instance, two-thirds of the shares on the TASE are held by insiders, corporate cross-ownership arrangements and the government, so that the effective float is quite limited. These markets are therefore expected to be volatile in the future, as has been the experience in the past. The Middle East markets are also characterized by extreme variations in economic development. Measured by per-capita wealth and certain other demographic measures such as education, industrialization and infant mortality, Israel, with per-capita GDP of approximately $18,000, is most closely associated with European developed nations, while most other Middle East countries, such as Egypt and Jordan, with per-capita GDP of approximately $3,000, would be categorized as developing nations. Many of the most important Mid-East stock markets, including the TASE, the Egyptian Stock Exchange and the Amman Financial Market, have been experiencing a variety of market-oriented reforms in recent years. Since the mid 1990s, the Alexandria and Cairo stock exchanges, inactive for 30 years, have been reactivated, consolidated and, in coordination with the government's economic reform program, reorganized. In 1998, among other modernization initiatives, the Exchange undertook the development of standardized arbitration procedures and a share clearing and settlement system that conforms to international standards. This has resulted in a substantial increase in the number of Exchange-listed companies. The TASE has been undergoing a series of market oriented reforms, including a gradual but continuing privatization program for the substantial portfolio of state-owned enterprises; the expansion of investment options for provident funds (similar to a pooled, bank-managed version of an IRA in the U.S.) such that these large pools of capital may now invest in equity securities; deregulation, as of the communications services industry; and relaxation of restrictions on currency exchange. Israeli companies, particularly in the technology sector, have been quite successful at raising foreign investment capital, both domestically and in the U.S., where Israel ranks second in terms of the number of non-American public share listings on U.S. stock exchanges. The securities on the primary Middle East stock exchanges are subject to substantial volatility relative to the political and military tensions endemic to this region, most particularly between Israel and the Arab nations and the Palestinians. Aside from the significant risk discount that can apply to the equities in such markets, there is also an economic drain in the form of expenditures for defense, including the cost in the diversion of productive manpower, which absorbs a significant proportion of regional GDP. Despite these pressures, economic growth in Israel, for instance, has generally been quite robust. The potential economic and market benefits on a regional basis from progress in peace negotiations, much less from substantive cross-border economic cooperation, could therefore be quite significant, particularly given the highly complementary physical, technological and human resources that exist but have yet to be capitalized. The Portfolio's concentration in securities issued in the Middle East provides a greater level of risk than a fund whose assets are diversified across numerous countries. The stability of Middle East companies will depend on the economic, political and demographic conditions within the Middle East and the underlying fiscal condition of the Middle East. OPTIONS Most mutual funds that use option strategies to hedge portfolio positions do not depend solely on the option profit or loss to justify the use of options, because such funds also take into account the profit or loss of the underlying securities. A more detailed discussion of writing covered and uncovered options on securities generally and the investment risks associated with such investments is set forth below. PURCHASING PUT AND CALL OPTIONS. The Portfolio may purchase put and call options on securities eligible for purchase by the Portfolio and on securities indices. Put and call options are derivative securities traded on U.S. exchanges. If the Portfolio purchases a put option, it acquires the right to sell the underlying security or index value at a specified price at any time during the term of the option. If the Portfolio purchases a call option, it acquires the right to purchase the underlying security or index value at a specified price at any time during the term of the option. Prior to exercise or expiration, the Portfolio may sell an option when through a "closing sale transaction," which is accomplished by selling an option of the same series as the option previously purchased. The Portfolio generally will purchase only those options for which the investment adviser believes there is an active secondary market to facilitate closing transactions. The Portfolio may purchase call options to hedge against an increase in the price of securities that the Portfolio wants ultimately to buy. Such hedge protection is provided during the life of the call option since the Portfolio, as holder of the call option, is able to buy the underlying security at the exercise price regardless of any increase in the underlying security's market price. In order for a call option to be profitable, the market price of the underlying security must rise sufficiently above the exercise price to cover the premium and transaction costs. The Portfolio will purchase put options to hedge against a decrease in the price of securities it holds. Such hedge protection is provided during the life of the put option since the Portfolio, as the holder of the put option, is able to sell the underlying security at the exercise price regardless of any decrease in the underlying security's market price. In order for a put option to be profitable, the market price of the underlying security must decrease sufficiently below the exercise price to cover the premium and transaction costs. WRITING CALL OPTIONS. The Portfolio may write covered call options on securities eligible for purchase by the Portfolio. A call option is "covered" if the Portfolio owns the security underlying the call or has an absolute right to acquire the security without additional cash consideration (or, if additional cash consideration is required, cash or cash equivalents in such amount as are held in a segregated account by the Custodian). The writer of a call option receives a premium and gives the purchaser the right to buy the security underlying the option at the exercise price. The writer has the obligation upon exercise of the option to deliver the underlying security against payment of the exercise price during the option period. If the writer of an exchange-traded option wishes to terminate his obligation, it may effect a "closing purchase transaction." This is accomplished by buying an option of the same series as the option previously written. A writer may not effect a closing purchase transaction after it has been notified of the exercise of an option. Effecting a closing transaction in the case of a written call option will permit the Portfolio to write another call option on the underlying security with either a different exercise price, expiration date or both. Also, effecting a closing transaction allows the cash or proceeds from the concurrent sale of any securities subject to the option to be used for other investments of the Portfolio. If the Portfolio desires to sell a particular security from its portfolio on which it has written a call option, it will effect a closing transaction prior to or concurrent with the sale of the security. The Portfolio realizes a gain from a closing transaction if the cost of the closing transaction is less than the premium received from writing the option or if the proceeds from the closing transaction are more than the premium paid to purchase the option. The Portfolio realizes a loss from a closing transaction if the cost of the closing transaction is more than the premium received from writing the option or if the proceeds from the closing transaction are less than the premium paid to purchase the option. However, because increases in the market price of a call option will generally reflect increases in the market price of the underlying security, appreciation of the underlying security owned by the Portfolio generally offsets, in whole or in part, any loss to the Portfolio resulting from the repurchase of a call option. RISK FACTORS IN OPTIONS TRANSACTIONS. The successful use of options by the Portfolio depends on the ability of the Adviser to forecast correctly interest rate and market movements. For example, if the Portfolio were to write a call option based on the Adviser's expectation that the price of the underlying security would fall, but the price were to rise instead, the Portfolio could be required to sell the security upon exercise at a price below the current market price. Similarly, if the Portfolio were to write a put option based on the Adviser's expectation that the price of the underlying security would rise, but the price were to fall instead, the Portfolio could be required to purchase the security upon exercise at a price higher than the current market price. When the Portfolio purchases an option, it runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Portfolio exercises the option or enters into a closing sale transaction before the option's expiration. If the price of the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the option premium and transaction costs, the Portfolio will lose part or all of its investment in the option. This contrasts with an investment by the Portfolio in the underlying security, since the Portfolio will not realize a loss if the security's price does not change. The effective use of options also depends on the Portfolio's ability to terminate option positions at times when the Adviser deems it desirable to do so. There is no assurance that the Portfolio will be able to effect closing transactions at any particular time or at an acceptable price. If a secondary market in options were to become unavailable, the Portfolio could no longer engage in closing transactions. Lack of investor interest might adversely affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular option or options generally. In addition, a market could become temporarily unavailable if unusual events -- such as volume in excess of trading or clearing capability -- were to interrupt its normal operations. A market may at times find it necessary to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying security ceases to meet qualifications imposed by the market or an options clearing corporation, new series of options on that security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If an options market were to become unit asset valuable, the Portfolio as a holder of an option would be able to realize profits or limit losses only by exercising the option, and the Portfolio, as option writer, would remain obligated under the option until expiration or exercise. Disruptions in the markets for the securities underlying options purchased or sold by the Portfolio could result in losses on the options. If trading is interrupted in an underlying security, the trading of options on that security is normally halted as well. As a result, the Portfolio as purchaser or writer of an option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if trading in the security reopens at a substantially different price. In addition, an options clearing corporation or other options markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also been halted, the Portfolio as purchaser or writer of an option will be locked into its position until one of the two restrictions has been lifted. If an options clearing corporation were to determine that the available supply of an underlying security appears insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely the exercise of put options. The Portfolio, as holder of such a put option, could lose its entire investment if the prohibition remained in effect until the put option's expiration. DEALER OPTIONS. The Portfolio may engage in transactions involving dealer options as well as exchange-traded options. Certain risks are specific to dealer options. While the Portfolio might look to an exchange's clearing corporation to exercise exchange-traded options, if the Portfolio purchases a dealer option it must rely on the selling dealer to perform if the Portfolio exercises the option. Failure by the dealer to do so would result in the loss of the premium paid by the Portfolio as well as loss of the expected benefit of the transaction. Exchange-traded options generally have a continuous liquid market while dealer options may not. Consequently, the Portfolio can realize the value of a dealer option it has purchased only by exercising or reselling the option to the issuing dealer. Similarly, when the Portfolio writes a dealer option, the Portfolio can close out the option prior to its expiration only by entering into a closing purchase transaction with the dealer. While the Portfolio will seek to enter into dealer options only with dealers who will agree to and can enter into closing transactions with the Portfolio, no assurance exists that the Portfolio will at any time be able to liquidate a dealer option at a favorable price at any time prior to expiration. Unless the Portfolio, as a covered dealer call option writer, can effect a closing purchase transaction, it will not be able to liquidate securities (or other assets) used as cover until the option expires or is exercised. In the event of insolvency of the other party, the Portfolio may be unable to liquidate a dealer option. With respect to options written by the Portfolio, the inability to enter into a closing transaction may result in material losses to the Portfolio. For example, because the Portfolio must maintain a secured position with respect to any call option on a security it writes, the Portfolio may not sell the assets which it has segregated to secure the position while it is obligated under the option. This requirement may impair the Portfolio's ability to sell portfolio securities at a time when such sale might be advantageous. The staff of the SEC takes the position that purchased dealer options are illiquid securities. The Portfolio may treat the cover used for written dealer options as liquid if the dealer agrees that the Portfolio may repurchase the dealer option it has written for a maximum price to be calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum purchase price under the formula exceeds the intrinsic value of the option. With that exception, however, the Portfolios will treat dealer options as subject to the Portfolios' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the Portfolios will change their treatment of such instruments accordingly. INVESTMENT RESTRICTIONS - - -------------------------------------------------------------------------------- The investment restrictions of the Portfolio may be changed only with the approval of the holders of a majority of the Portfolio's outstanding voting securities. 1. The Portfolio will not act as underwriter for securities of other issuers. 2. The Portfolio will not make loans. 3. With respect to 50% of its total assets, the Portfolio will not invest in the securities of any issuer if as a result the Portfolio holds more than 10% of the outstanding securities or more than 10% of the outstanding voting securities of such issuer. 4. The Portfolio will not borrow money or pledge, mortgage, or hypothecate its assets except to facilitate redemption requests that might otherwise require the untimely disposition of portfolio securities and then only from banks and in amounts not exceeding the lesser of 10% of its total assets valued at cost or 5% of its total assets valued at market at the time of such borrowing, pledge, mortgage, or hypothecation and except that the Portfolio may enter into futures contracts and related options. 5. The Portfolio will not invest more than 10% of the value of its net assets in illiquid securities, restricted securities, and other securities for which market quotations are not readily available. 6. The Portfolio will not invest in the securities of any one industry except in foreign and U.S. companies that are engaged in business activities in the Middle East, with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and instrumentality's, if as a result, more than 20% of the Portfolio's total assets would be invested in the securities of such industry. Except during temporary defensive periods, at least 65% of the Portfolio's total assets will be invested in the securities of foreign and U.S. companies that are engaged in business activities in the Middle East. 7. The Portfolio will not purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs or real estate except that the Portfolio may purchase and sell securities of companies that deal in oil, gas, or mineral exploration or development programs or interests therein. 8. The Portfolio will not issue senior securities. If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in value in the Portfolio's portfolio securities will not constitute a violation of such limitation. (D) TEMPORARY DEFENSIVE POSITION TEMPORARY INVESTMENTS - - -------------------------------------------------------------------------------- In order to have funds available for redemption and investment opportunities, the Portfolio may also hold a portion of its assets in cash or U.S. short-term money market instruments. Certificates of deposit purchased by the Portfolio will be those of U.S. banks having total assets at the time of purchase in excess of $1 billion, and bankers' acceptances purchased by the Portfolio will be guaranteed by U.S. or foreign banks having total assets at the time of purchase in excess of $1 billion. The Portfolio anticipates that not more than 10% of its total assets will be so invested or held in cash at any given time, except when the Portfolio is in a temporary defensive posture. (E) PORTFOLIO TURNOVER PORTFOLIO TURNOVER - - -------------------------------------------------------------------------------- Due to the changing nature of the business activities in the Middle East, its economy and market conditions, the Portfolio may, as a temporary defensive measure, invest without limitation, in short-term debt securities and money market securities with a rating of A2-P2 or higher. In order to qualify for the beneficial tax treatment afforded regulated investment companies, and to be relieved of Federal tax liabilities, the Portfolio must distribute substantially all of their net income to shareholders generally on an annual basis. Thus, the Portfolio may have to dispose of portfolio securities under disadvantageous circumstances to generate cash or borrow cash in order to satisfy the distribution requirement. The Portfolio does not trade in securities for short-term profits but, when circumstances warrant, securities may be sold without regard to the length of time they have been held. ITEM 13. MANAGEMENT OF THE PORTFOLIO MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- BOARD OF TRUSTEES The management and affairs of the Portfolio are supervised by the Board of Trustees of the Trust. The Board consists of eight individuals, five of whom are not "interested" persons of the Portfolio as that term is defined in the 1940 Act. The Trustees are fiduciaries for the Portfolio's investors and are governed by the laws of the State of Delaware in this regard They establish policies for the operation of the Portfolio and appoint the officers who conduct the daily business of the Portfolio. Officers and Trustees of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. "Interested" Trustees are designated by an asterisk that appears beside their names.
- - ----------------------------------- --------- ------------------------ ------------------------------------------- NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Steven R. Samson 45 President & Chairman President and CEO, Kinetics Asset 342 Madison Avenue of the Board Management, Inc. (1999 to Present); New York, NY 10173 President, The Internet Fund, Inc. (1999 to Present); Managing Director, Chase Manhattan Bank (1993 to 1999); President and Chairman of the Board of Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Kathleen Campbell 34 Trustee Attorney, Campbell and Campbell, 2 Madison Avenue Counselors-at-Law (1995 to Present); Valhalla, NY 10595 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Murray Stahl 46 Trustee President, Horizon Asset Management, an 342 Madison Avenue investment adviser (1994 to Present); New York, NY 10173 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Steven T. Russell 36 Trustee Attorney and Counselor at Law, 146 Fairview Avenue Steven Russell Law Firm (1994 to Bayport, NY 117045 Present); Professor of Business Law, Suffolk County Community College (1997 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Douglas Cohen, C.P.A. 36 Trustee Wagner, Awerma & Strinberg, LLP Certified 6 Saywood Lane Public Accountant (1997 to present); Stonybrook, NY 11790 Director, Kinetics Mutual Funds, Inc. (1999 to Present); Leon D. Alpern & Co. (1985 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- William J. Graham 37 Trustee Attorney, Bracken & Margolin, LLP (1997 20 Franklin Boulevard to Present); Director, Kinetics Mutual Long Beach, NY 11561 Funds, Inc. (1999 to Present); Gabor & Gabor (1995 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Joseph E. Breslin 45 Trustee Senior Vice President, Marketing & Sales, One State Street IBJ Whitehall Financial Group, a New York, NY 10004 financial services company (1999 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present); formerly President, J.E. Breslin & Co., an investment management consulting firm (1994 to 1999. - - ----------------------------------- --------- ------------------------ ------------------------------------------- John J. Sullivan 68 Trustee Director, Kinetics Mutual Funds, Inc. 31 Hemlock Drive (1999 to Present); Retired; Senior Sleepy Hollow, NY 10591 Advisor, Long Term Credit Bank of Japan, Ltd.; Executive Vice President, LTCB Trust Company; - - ----------------------------------- --------- ------------------------ ------------------------------------------- Lee W. Schultheis 43 Vice President & Managing Director & COO of Kinetics Asset 342 Madison Avenue Treasurer of the Trust Management (1999 to Present); Vice New York, NY 10173 President and Treasurer Kinetics Mutual Funds, Inc. (1999 to Present); President & Director of Business. Development, Vista Fund Distributors, Inc. (1995 to 1999); Managing Director, Forum Financial Group, a mutual fund services company. - - ----------------------------------- --------- ------------------------ -------------------------------------------
COMPENSATION Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust , Kinetics Mutual Funds, Inc. or Kinetics Asset Management, Inc. receive an aggregate annual fee of $15,000 per year for their services as Trustees or directors of all open-end investment companies distributed by Kinetics Funds Distributors, Inc. and $1,000 per meeting attended, as well as reimbursement for expenses incurred in connection with attendance at such meetings. In addition, each committee chairman of the Company and the Trust (such as the Audit committee or Pricing committee) receives an additional fee of $5,000 per year for his service as chairman.. Payment of the annual fees is allocated among such investment companies based on their relative net assets. Payment of meeting fees are allocated only among those investment companies to which such meetings relate. The "interested" Trustees of the Portfolio receive no compensation for their service as Trustees. None of the executive officers receive compensation from the Portfolio. The following tables provide compensation information for the Trustees for the year-ended December 31, 1999.
KINETICS PORTFOLIOS TRUST COMPENSATION TABLE - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND FROM FUND PART OF FUND EXPENSES RETIREMENT COMPLEX PAID TO DIRECTORS** - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ Steven R. Samson* None None None None Chairman and Director Kathleen Campbell* None None None None Director Murray Stahl*** None None None $3,844 Director Steven T. Russell None None None $5,500 Independent Director Douglas Cohen None None None $6,094 Independent Director William J. Graham None None None $5,500 Independent Director Joseph E. Breslin None None None $4,500 Independent Director John J. Sullivan None None None $5,500 Independent Director - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
* "Interested person" as defined under the 1940 Act. ** Includes compensation paid by Kinetics Mutual Funds, Inc. *** Murray Stahl became an "interested person" of the Fund (as defined under the 1940 Act) as of December 15, 1999. Previous to becoming an interested person, Mr. Stahl received $3844 as total compensation from the Fund and Fund complex for being an independent director. ITEM 14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES (A) CONTROL PERSONS & (B) PRINCIPAL HOLDERS CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - - -------------------------------------------------------------------------------- A control person is one who owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. As of the commencement of investment operations, the Portfolio could be deemed to be under the control of The Middle-East Growth Fund, a series of Kinetics Mutual Funds, Inc. and the sole investor in the Portfolio as of the date of this SAI. Similarly, as of such time, Kinetics Mutual Funds, Inc. through its series, The Internet Fund, The Internet Emerging Growth Fund, The Internet Global Growth Fund, The Internet Infrastructure Fund, The Internet New Paradigm Fund, The Small Cap Opportunities Fund, The Middle East Growth Fund, The Medical Fund, and The Kinetics Government Money Market Fund (each a "Fund" and collectively the "Funds"), was the owner of 100% of the value of the outstanding interests in the Trust. Any investor owning more than 50% of the value of the outstanding interests in the Portfolio may take actions without the approval of any other investor who invests in the Portfolio. Kinetics Mutual Funds, Inc. has informed the Trust that whenever The Middle-East Growth Fund is requested to vote on a matter pertaining to the Portfolio, The Middle-East Growth Fund will hold a meeting of its shareholders and will vote its interest in the Portfolio in proportion to the votes cast The Middle-East Growth Fund's shareholders. It is anticipated that other registered investment companies investing in the Portfolio, if any, will follow the same or a similar practice, although, as of May 1, 2000, there were no other investors in the Portfolio. (c) Management Ownership MANAGEMENT OWNERSHIP The percentage of the Portfolio's interests owned or controlled by the executive officers and Trustees of the Portfolio and the Trust is less than 1% of the interests of the Portfolio. ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES (A) INVESTMENT ADVISER INVESTMENT ADVISER - - -------------------------------------------------------------------------------- Kinetics Asset Management, Inc. ("Kinetics" or the "Adviser") is a New York corporation that serves as the investment adviser to the Portfolio. Peter B. Doyle is the Chairman of the Board of Directors and Chief Investment Strategist of Kinetics. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has over 24 years experience in the mutual funds and financial services industries. Mr. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics and has more than 20 years experience in the mutual funds and financial services industries. On April 25, 2000 the Board of the Trustees of the Trust, on behalf of the Portfolio, approved a management and advisory contract (the "Agreement") with Kinetics. This Agreement will remain in effect for a term of two years and will continue on a year-to-year basis thereafter provided that specific approval is voted at least annually by the Board of Trustees of the Trust or by the vote of the holders of a majority of the outstanding voting securities of the Portfolio. In either event, it must also be approved by a majority of the Trustees of the Trust who are neither parties to the Agreement nor "interested" persons as defined in the 1940 Act at a meeting called for the purpose of voting on such approval. The Adviser's investment decisions are made subject to the direction and supervision of the Board of Trustees. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Ultimate decisions as to the investment policy and as to individual purchases and sales of securities are made by the Portfolio's officers and the Trustees. (B) PRINCIPAL UNDERWRITER PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. (C) SERVICES PROVIDED BY THE INVESTMENT ADVISER AND PORTFOLIO EXPENSES PAID BY THIRD PARTIES Under the Agreement, Kinetics furnishes investment advice to the Portfolio by continuously reviewing the portfolio and recommending to the Portfolio to what extent, securities should be purchased or disposed. Pursuant to the Agreement, the Adviser: (1) renders research, statistical and advisory services to the Portfolio; (2) makes specific recommendations based on the Portfolio's investment requirements; (3) pays the salaries of those of the Portfolio's employees who may be officers or directors or employees of the investment adviser. For these services, the Portfolio has agreed to pay to Kinetics an annual fee of 1.25% of the Portfolio's average daily net assets. All fees are computed on the average daily closing net asset value ("NAV") of the Portfolio and are payable monthly. The fee is higher than the fee paid by most other funds. Kinetics has also entered into a Research Agreement with Horizon Assets Management, Inc. ("Horizon") for which it is solely responsible for the payment of all fees owing to Horizon. Fees of the custodian, administrator, transfer agent and Portfolio accountant are paid by the Portfolio. (D) SERVICE AGREEMENTS ADMINISTRATIVE SERVICES - - -------------------------------------------------------------------------------- Kinetics also serves as Administrator of the Portfolio. Under an Administrative Services Agreement with the Portfolio, Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets of which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. Firstar, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, also serves as the Portfolio's accountant and transfer agent. As such, Firstar provides certain investor services and record management services as well as acts as the Portfolio's dividend disbursement agent. Administrative services include, but are not limited to, providing office space, equipment, telephone facilities, various personnel, including clerical and supervisory, and computers, as is necessary or beneficial to: |X| establish and maintain investors' accounts and records, |X| process purchase and redemption transactions, |X| process automatic investments of client account cash balances, |X| answer routine client inquiries regarding the Portfolio, |X| assist clients in changing dividend options, |X| account designations, and addresses, and |X| providing such other services as the Portfolio may reasonably request. CUSTODIAN - - -------------------------------------------------------------------------------- Firstar Bank, N.A. ("Firstar Bank") is custodian for the securities and cash of the Portfolio. Under a Custody Agreement, Firstar Bank holds the Portfolio's assets in safekeeping and keeps all necessary records and documents relating to its duties. Firstar Bank receives an annual fee equal to 0.010% of the Portfolio's average daily net assets with a minimum annual fee of $3,000. Independent Public Accountants - - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. Their services include examination of the Trust's financial statements and the performance of other related audit and tax services. ITEM 16. BROKERAGE ALLOCATION AND OTHER PRACTICES BROKERAGE - - -------------------------------------------------------------------------------- The Portfolio's assets are invested by the Adviser in a manner consistent with its investment objective, strategies, policies and restrictions and with any instructions the Board of Trustees may issue from time to time. Within this framework, the Adviser is responsible for making all determinations as to the purchase and sale of portfolio securities and for taking all steps necessary to implement securities transactions on behalf of the Portfolio. Transactions on U.S. stock exchanges, commodities markets and futures markets and other agency transactions may involve the payment by the Adviser on behalf of the Portfolio of negotiated brokerage commissions. Such commissions vary among different brokers. A particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions in foreign investments often involve the payment of fixed brokerage commissions, which may be higher than those in the United States. There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by the Adviser usually includes an undisclosed dealer commission or mark-up. In underwritten offerings, the price paid by the Adviser on behalf of the Portfolio includes a disclosed, fixed commission or discount retained by the underwriter or dealer. U.S. Government securities generally are traded in the over-the-counter market through broker-dealers. A broker-dealer is a securities firm or bank that makes a market for securities by offering to buy at one price and sell at a slightly higher price. The difference between the prices is known as a spread. In placing orders for the purchase and sale of portfolio securities for the Portfolio, the Adviser seeks to obtain the best price and execution, taking into account such factors as price, size of order, difficulty and risk of execution and operational facilities of the firm involved. For securities traded in the over-the-counter markets, the Adviser deals directly with the dealers who make markets in these securities unless better prices and execution are available elsewhere. The Adviser negotiates commission rates with brokers based on the quality and quantity of services provided in light of generally prevailing rates, and while the Adviser generally seeks reasonably competitive commission rates, the Portfolio does not necessarily pay the lowest commissions available. The Board of Trustees periodically reviews the commission rates and allocation of orders. When consistent with the objectives of best price and execution, business may be placed with broker-dealers who furnish investment research or services to the Adviser. Such research or services include advice, both orally and in writing, as to the value of securities; the advisability of investing in, purchasing or selling securities; and the availability of securities, or purchasers or sellers of securities; as well as analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts. To the extent portfolio transactions are effected with broker-dealers who furnish research services to the Adviser, the Adviser receives a benefit, not capable of evaluation in dollar amounts, without providing any direct monetary benefit to the Portfolio from these transactions. The Adviser believes that most research services obtained by it generally benefit several or all of the investment companies and private accounts which it manages, as opposed to solely benefiting one specific managed fund or account. The same security may be suitable for the Portfolio, another portfolio series of the Trust or other private accounts managed by the Adviser. If and when the Portfolio and two or more accounts simultaneously purchase or sell the same security, the transactions will be allocated as to price and amount in accordance with arrangements equitable to the Portfolio and the accounts. The simultaneous purchase or sale of the same securities by the Portfolio and other accounts may have a detrimental effect on the Portfolio, as this may affect the price paid or received by the Portfolio or the size of the position obtainable or able to be sold by the Portfolio. Consistent with the Conduct Rules of the National Association of Securities Dealers, Inc. and subject to seeking the most favorable price and execution available and such other policies as the Trustees may determine, the Adviser may consider sales of shares of the Portfolio as a factor in the selection of broker-dealers to execute portfolio transactions for the Portfolio. ITEM 17. CAPITAL STOCK AND OTHER SECURITIES (a) Capital Stock CAPITALIZATION - - -------------------------------------------------------------------------------- The authorized capitalization of Kinetics Portfolio Trust consists of 1 billion shares of beneficial interest of $0.001 par value per share. Each share has equal dividend, distribution and liquidation rights. There are no conversion or preemptive rights applicable to any shares of the Portfolio. All shares issued are fully paid and non-assessable. Each holder of beneficial interest has one vote for each share held. Each investor in a Portfolio is entitled to participate equally in the Portfolio's earnings and assets and to vote in proportion to the amount of its investment in the Portfolio. Voting rights are non-cumulative. Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment therein. Investors in the Portfolio will all vote together in certain circumstances (e.g., election of the Trustees and ratification of auditors, as required by the 1940 Act and the rules thereunder). One or more Portfolios could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust or in a Portfolio, as the case may be, may control the outcome of votes. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when (1) a majority of the Trustees determines to do so or (2) investors holding at least 10% of the interests in a Portfolio (if the meeting relates solely to that Portfolio), or investors holding at least 10% of the aggregate interests in the Trust (if the meeting relates to the Trust and not specifically to a Portfolio) requests in writing a meeting of investors. Changes in fundamental policies or limitations will be submitted to investors for approval. The Trust is organized as a business trust under the laws of the State of Delaware. Investors in a Portfolio will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest in the Portfolio. The Declaration of Trust also provides that, subject to the provisions of the 1940 Act, the Trust may maintain insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Portfolio, investors, Trustees, officers, employees, and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of such liability would be limited to circumstances in which the Portfolio had inadequate insurance and was unable to meet its obligations out of its assets. ITEM 18. PURCHASE, REDEMPTION AND PRICING OF SHARES (A) PURCHASE OF SHARES PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. (C) REDEMPTION OF SHARES REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. (B) OFFERING PRICE VALUATION OF SHARES - - -------------------------------------------------------------------------------- Shares of the Portfolio are sold at the NAV per share next computed following acceptance of an order by the Portfolio. The Portfolio's NAV per share for the purpose of pricing purchase and redemption orders is determined at the close of normal trading (currently 4:00 p.m. EST) on each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr.'s Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Portfolio's investment securities are valued each day at the last quoted sales price on the securities principal exchange. If market quotations are not readily available, securities will be valued at their fair market value as determined in good faith in accordance with procedures approved by the Board of Trustees. The Portfolio may use independent pricing services to assist in calculating the NAV of the Portfolio's shares. The Portfolio's investment securities that are listed on a U.S. securities exchange or NASDAQ for which market quotations are readily available are valued at the last quoted sale price on the day the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded. Options, futures, unlisted U.S. securities and listed U.S. securities not traded on the valuation date for which market quotations are readily available are valued at the mean of the most recent quoted bid and asked price. Fixed-income securities (other than obligations having a maturity of 60 days or less) are normally valued on the basis of quotes obtained from pricing services, which take into account appropriate factors such as institutional sized trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Fixed-income securities purchased with remaining maturities of 60 days or less are valued at amortized cost if it reflects fair value. In the event that amortized cost does not reflect market, market prices as determined above will be used. Other assets and securities for which no quotations are readily available (including restricted securities) will be valued in good faith at fair value using methods determined by the Board of Trustees of the Portfolio. ITEM 19. TAXATION OF THE PORTFOLIO TAXES - - -------------------------------------------------------------------------------- The Portfolio will be classified for federal income tax purposes as a partnership that is not a "publicly traded partnership." As a result, the Portfolio is not subject to federal income tax; instead, each Interestholder in the Portfolio is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, and credits, without regard to whether it has received any cash distributions from the Portfolio. The Portfolio also is not subject to Delaware income or franchise tax. A holder of beneficial interest in the Portfolio (an "Interestholder") is deemed to own a proportionate share of the Portfolio's assets and to earn a proportionate share of the Portfolio's income, for, among other things, purposes of determining whether the Interestholder satisfies the requirements to qualify as a regulated investment company ("RIC"). Accordingly, the Portfolio intends to conduct its operations so that its Interestholders that invest substantially all of their assets in the Portfolio and intend to qualify as RICs should be able to satisfy all those requirements. Distributions to an Interestholder from the Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Interestholder's recognition of any gain or loss for federal income tax purposes, except that: (1) gain will be recognized to the extent any cash that is distributed exceeds the Interestholder's basis for its interest in the Portfolio before the distribution; (2) income or gain will be recognized if the distribution is in liquidation of the Interestholder's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio; (3) loss will be recognized to the extent that a liquidation distribution consisting solely of cash and/or unrealized receivables is less than the Interestholder's basis for its interest in the Portfolio prior to the distribution; and (4) gain or loss may be recognized on a distribution to an Interestholder that contributed property to the Portfolio. An Interestholder's basis for its interest in the Portfolio generally will equal the amount of cash and the basis of any property it invests in the Portfolio, increased by the Interestholder's share of the Portfolio's net income and gains and decreased by (a) the amount of cash and the basis of any property the Portfolio distributes to the Interestholder and (b) the Interestholder's share of the Portfolio's losses. The income tax and estate tax consequences to a non-U.S. Interestholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. Interestholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Non-U.S. Interestholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Portfolio. The foregoing discussion relates only to federal income tax law. Income from the Portfolio also may be subject to foreign, state and local taxes, and their treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Interestholders should consult their tax advisors with respect to particular questions of federal, state and local taxation. ITEM 20. UNDERWRITERS PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. ITEM 21. CALCULATION OF PERFORMANCE DATA PERFORMANCE INFORMATION - - -------------------------------------------------------------------------------- (1) AVERAGE ANNUAL TOTAL RETURN QUOTATION TOTAL RETURN Average annual total return quotations used in the Portfolio's advertising and promotional materials are calculated according to the following formula: P(1+T)n = ERV where P equals a hypothetical initial payment of $1,000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. CUMULATIVE TOTAL RETURN Cumulative total return represents the simple change in value of an investment over a stated period and may be quoted as a percentage or as a dollar amount. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship between these factors and their contributions to total return. (2) Yield Quotation YIELD Annualized yield quotations used in the Portfolio's advertising and promotional materials are calculated by dividing the Portfolio's interest income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the NAV per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2[(A-B + 1)6 - 1] --- c-d where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and "d" equals the maximum offering price per share on the last day of the period. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. OTHER INFORMATION The Portfolio's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in the Portfolio will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. If permitted by applicable law, the Portfolio may advertise the performance of registered investment companies or private accounts that have investment objectives, policies and strategies substantially similar to those of the Portfolio. COMPARISON OF PORTFOLIO PERFORMANCE The performance of the Portfolio may be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue Organization, Inc. or other independent services which monitor the performance of investment companies, and may be quoted in advertising in terms of its ranking in each applicable universe. In addition, the Portfolio may use performance data reported in financial and industry publications, including Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal and USA Today. The Portfolio may from time to time use the following unmanaged indices for performance comparison purposes: o S&P 500 - The S&P 500 is an unmanaged mutual fund index of 500 stocks designed to mimic the overall equity market's industry weightings. Most, but not all, large capitalization stocks are in the index. There are also some small capitalization names in the index. The list is maintained by Standard & Poor's Corporation. It is market capitalization weighted. There are always 500 issuers in the S&P 500. Changes are made by Standard & Poor's as needed. o Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000, a market value weighted index of the 3,000 largest U.S. publicly-traded companies. ITEM 22. FINANCIAL STATEMENTS FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- There is no Annual Report available at this time. FINANCIAL STATEMENTS ASSETS Cash $ 100,000 NET ASSETS $ 100,000 Kinetics Portfolios Trust FINANCIAL STATEMENT APRIL 27, 2000 Report of Independent Accountants To the Shareholder and Board of Trustees of Kinetics Portfolios Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Kinetics Portfolios Trust (hereafter referred to as the "Trust") at April 27, 2000, in conformity with accounting principles generally accepted in the United States. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin April 27, 2000 KINETICS PORTFOLIOS TRUST STATEMENT OF ASSETS AND LIABILITIES - - -------------------------------------------------------------------------------- AS OF APRIL 27, 2000 The accompanying notes are an integral part of this financial statement. [OBJECT OMITTED] KINETICS PORTFOLIOS TRUST NOTES TO FINANCIAL STATEMENT AS OF APRIL 27, 2000 - - -------------------------------------------------------------------------------- 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Business Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Internet Global Growth Portfolio, The Internet New Paradigm Portfolio, The Internet Infrastructure Portfolio, The Medical Portfolio, The Kinetics Government Money Market Portfolio, The Small Cap Opportunities Portfolio and The Middle East Growth Portfolio (the "Portfolios"). Pursuant to the 1940 Act, the Portfolios are "non-diversified" series of the Trust. The Trust has had no operations other than the contribution by Kinetics Asset Management, Inc., the Portfolios' Adviser ("Adviser"), of $100,000, representing a beneficial interest in the Trust. The Portfolios have had no operations through April 27, 2000. On April 28, 2000, the Trust intends to distribute the Adviser's $100,000 contribution to the Portfolios, at which time the Adviser will become a partner in each of the Portfolios. In addition, on April 28, 2000 various feeder funds ("Funds") sponsored by the Adviser will invest their investable assets in the corresponding Portfolios under a master-feeder capital structure. 2. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION COSTS Expenses in connection with the organization of the Trust have been absorbed by the Funds prior to their conversion to the master-feeder capital structure. Accordingly, no statement of operations of the Trust has been provided. FEDERAL INCOME TAXES Each Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Portfolios will be taxed on its allocable share of the Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Actual results could differ from those estimates. 1. 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Portfolios. Under the terms of the Agreement, the Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of the Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Portfolio's average daily net assets. The Adviser also serves as administrator to the Portfolios. Under an Administrative Services Agreement with the Trust on behalf of the Portfolios, the Adviser receives an annual administration fee equal to 0.10% of the Portfolio's average daily net assets from which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolios by Firstar. APPENDIX - - -------------------------------------------------------------------------------- STANDARD & POOR'S ("S&P") CORPORATE BOND RATING DEFINITIONS AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree. A-Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions. CI-The rating "CI" is reversed for income bonds on which no interest is being paid. D-Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA-Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated "A" possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the near future. BAA-Bonds which are rated "Baa" are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BA-Bonds which are "Ba" are judged to have speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA-Bonds which are "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS AAA-Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA-Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A-Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB-Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB-Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B-Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC-Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC-Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C-Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D-Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. PART B.: INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION ITEM 10.: COVER PAGE AND TABLE OF CONTENTS THE KINETICS GOVERNMENT MONEY MARKET PORTFOLIO A SERIES OF KINETICS PORTFOLIOS TRUST 1311 Mamaroneck Avenue White Plains, New York 10605 (800) 930-3828 April 28, 2000 STATEMENT OF ADDITIONAL INFORMATION This Statement of Additional Information ("SAI") provides general information about The Kinetics Government Money Market Portfolio (the "Portfolio"). The Portfolio is a series of Kinetics Portfolios Trust (the "Trust"), a Delaware business trust. This SAI is not a prospectus and should be read in conjunction with the Portfolio's current Prospectus dated April 28, 2000, as supplemented and amended from time to time, which is incorporated hereto by reference. To obtain a copy of the Prospectus, please write the Portfolio at the address set forth above or call the telephone number shown above. This SAI is being filed as a part of the Registration Statement filed by the Trust pursuant to Section 8(b) of the Investment Company Act of 1940, as amended ("1940 Act"). Nevertheless, beneficial interests of each portfolio series of the Trust are not being registered under the Securities Act of 1933, as amended ("1933 Act"), because such interests are issued solely to in private placement transactions to eligible investors that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Accordingly, investments in the Portfolio may currently be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, segregated asset accounts and certain qualified pension and retirement plans. Neither this SAI nor the Registration Statement as a whole constitutes an offer to sell or the solicitation of an offer to buy any beneficial interests in this Portfolio or any other portfolio series of the Trust. THE KINETICS GOVERNMENT MONEY MARKET PORTFOLIO The Portfolio..................................................................3 Investment Objective, Strategies, and Risks....................................3 Investment Policies and Associated Risks.......................................3 Investment Restrictions........................................................4 Management of the Portfolio....................................................5 Control Persons and Principal Holders of Securities............................7 Investment Adviser.............................................................8 Administrative Services.......................................................10 Custodian.....................................................................10 Brokerage.....................................................................10 Capitalization................................................................11 Purchase of Shares............................................................12 Redemption of Shares..........................................................12 Valuation of Shares...........................................................12 Taxes.........................................................................13 Performance Information.......................................................14 Financial Statements..........................................................15 Appendix......................................................................16 ITEM 11. PORTFOLIO HISTORY THE PORTFOLIO - - -------------------------------------------------------------------------------- The Portfolio is a series of Kinetics Portfolios Trust, a business trust organized pursuant to a Declaration of Trust under the laws of the State of Delaware on March 14, 2000. The Portfolio's principal office is located at 1311 Mamaroneck Avenue, White Plains, New York 10605 ITEM 12. DESCRIPTION OF THE PORTFOLIO AND ITS INVESTMENTS AND RISKS (A) CLASSIFICATION The Portfolio is a non-diversified, open-end management investment company. INVESTMENT OBJECTIVE, STRATEGIES, AND RISKS - - -------------------------------------------------------------------------------- (B) INVESTMENT STRATEGIES AND RISKS The investment objective of the Portfolio is to provide current income consistent with the preservation of capital and maintenance of liquidity. The Portfolio seeks to achieve its investment objective by investing primarily in money market instruments issued or guaranteed, as to principal and interest, by the U.S. Government, its agencies or instrumentalities. The Portfolio also seeks to achieve its investment objective as set forth in this SAI in strict compliance with applicable laws and regulations, including the provisions and regulations of the 1940 Act. In particular, the Portfolio will comply with the various requirements of Rule 2a-7, which regulates money market mutual funds. The Portfolio will also determine the effective maturity of their investments, as well as their ability to consider a security as having received the requisite short-term ratings by any nationally recognized statistical rating organization (NRSRO) according to Rule 2a-7. The Portfolio may change these operational policies to reflect changes in the laws and regulations without the approval of shareholders. (C) PORTFOLIO POLICIES INVESTMENT POLICIES AND ASSOCIATED RISKS - - -------------------------------------------------------------------------------- The following paragraphs provide a more detailed description of the Portfolio's investment policies and risks identified in the Prospectus. Unless otherwise noted, the policies described in this SAI are not fundamental and may be changed by the Board of Trustees of the Trust. REPURCHASE AGREEMENTS The Portfolio may invest in repurchase agreements which are arrangements with banks, broker/dealers, and other recognized financial institutions to sell securities to the Portfolio and to repurchase them at a mutually agreed upon time and price within one year from the date of acquisition. The Portfolio or its custodian will take possession of the securities subject to the terms of the repurchase agreements, and these securities will be marked to market daily. To the extent that the original seller does not repurchase the securities from the Portfolio, the Portfolio could receive less than the repurchase price on any sale of such securities. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by the Portfolio might be delayed pending court action. The Portfolio believes that under the regular procedures normally in effect for custody of the Portfolio's assets subject to repurchase agreements, a court of competent jurisdiction would rule in favor of the Portfolio and allow retention or disposition of such securities. The Portfolio will only enter into repurchase agreements with banks and other recognized financial institutions, such as broker/dealers, which are deemed by the Portfolio's adviser to be creditworthy pursuant to guidelines established by the Board of Trustees. WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS The Portfolio may purchase short-term obligations on a when-issued or delayed delivery basis. These transactions are arrangements in which the Portfolio purchases securities with payment and delivery scheduled for a future time. The seller's failure to complete these transactions may cause the Portfolio to miss a price or yield considered advantageous. Settlement dates may be a month or more after entering into these transactions and the market values of the securities purchased may vary from the purchase prices. The Portfolio may dispose of a commitment prior to settlement if the investment adviser deems it appropriate to do so. In addition, the Portfolio may enter into transactions to sell its purchase commitments to third parties at current market values and simultaneously acquire other commitments to purchase similar securities at later dates. The Portfolio may realize short-term profits or losses upon the sale of such commitments. These transactions are made to secure what is considered to be an advantageous price or yield for the Portfolio. No fees or other expenses, other than normal transaction costs, are incurred. However, liquid assets of the Portfolio sufficient to make payment for the securities to be purchased are segregated on the Portfolio's records at the trade date. These assets are marked to market daily and are maintained until the transaction is settled. The Portfolio does not intend to engage in when-issued and delayed delivery transactions to an extent that would cause the segregation of more than 20% of the total value of its assets. OTHER MONEY MARKET FUNDS As an efficient means of carrying out the investment policies, the Portfolio may invest in the securities of other money market funds. A disadvantage to investing in other money market funds is that they also carry certain expenses such as management fees. As a result, any investment by the Portfolio in shares of other money market funds may duplicate certain shareholder expenses. INVESTMENT RESTRICTIONS - - -------------------------------------------------------------------------------- The investment restrictions of the Portfolio may be changed only with the approval of the holders of a majority of the Portfolio's outstanding voting securities. 1. The Portfolio will not act as underwriter for securities of other issuers. 2. The Portfolio will not make loans. 3. With respect to 75% of its total assets, the Portfolio will not invest more than 5% of its total assets in securities of any one issuer (other than U.S. Government Securities). 4. The Portfolio will not borrow money or pledge, mortgage, or hypothecate its assets except to facilitate redemption requests that might otherwise require the untimely disposition of portfolio securities and then only from banks and in amounts not exceeding the lesser of 10% of its total assets valued at cost or 5% of its total assets valued at market at the time of such borrowing, pledge, mortgage, or hypothecation and except that the Portfolio may enter into futures contracts and related options. 5. The Portfolio will not invest in the securities of any one industry with the exception of securities issued or guaranteed by the U.S. Government, its agencies, and instrumentality's, if as a result, more than 25% of the Portfolio's total assets would be invested in the securities of such industry. 6. The Portfolio will not purchase or sell commodities or commodity contracts, or invest in oil, gas or mineral exploration or development programs or real estate. 7. The Portfolio will not issue senior securities. If a percentage limitation is satisfied at the time of investment, a later increase or decrease in such percentage resulting from a change in value in the securities held by the Portfolio will not constitute a violation of such limitation. ITEM 13. MANAGEMENT OF THE PORTFOLIO MANAGEMENT OF THE PORTFOLIO - - -------------------------------------------------------------------------------- BOARD OF TRUSTEES The management and affairs of the Portfolio are supervised by the Board of Trustees of the Trust. The Board consists of eight individuals, five of whom are not "interested" persons of the Portfolio as that term is defined in the 1940 Act. The Trustees are fiduciaries for the Portfolio's investors and are governed by the laws of the State of Delaware in this regard They establish policies for the operation of the Portfolio and appoint the officers who conduct the daily business of the Portfolio. Officers and Trustees of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. "Interested" Trustees are designated by an asterisk that appears beside their names.
- - ----------------------------------- --------- ------------------------ ------------------------------------------- NAME AND ADDRESS AGE POSITION PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Steven R. Samson 45 President & Chairman President and CEO, Kinetics Asset 342 Madison Avenue of the Board Management, Inc. (1999 to Present); New York, NY 10173 President, The Internet Fund, Inc. (1999 to Present); Managing Director, Chase Manhattan Bank (1993 to 1999); President and Chairman of the Board of Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Kathleen Campbell 34 Trustee Attorney, Campbell and Campbell, 2 Madison Avenue Counselors-at-Law (1995 to Present); Valhalla, NY 10595 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- *Murray Stahl 46 Trustee President, Horizon Asset Management, an 342 Madison Avenue investment adviser (1994 to Present); New York, NY 10173 Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Steven T. Russell 36 Trustee Attorney and Counselor at Law, 146 Fairview Avenue Steven Russell Law Firm (1994 to Bayport, NY 117045 Present); Professor of Business Law, Suffolk County Community College (1997 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Douglas Cohen, C.P.A. 36 Trustee Wagner, Awerma & Strinberg, LLP Certified 6 Saywood Lane Public Accountant (1997 to present); Stonybrook, NY 11790 Director, Kinetics Mutual Funds, Inc. (1999 to Present); Leon D. Alpern & Co. (1985 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- William J. Graham 37 Trustee Attorney, Bracken & Margolin, LLP (1997 20 Franklin Boulevard to Present); Director, Kinetics Mutual Long Beach, NY 11561 Funds, Inc. (1999 to Present); Gabor & Gabor (1995 to 1997). - - ----------------------------------- --------- ------------------------ ------------------------------------------- Joseph E. Breslin 45 Trustee Senior Vice President, Marketing & Sales, One State Street IBJ Whitehall Financial Group, a New York, NY 10004 financial services company (1999 to Present); Director, Kinetics Mutual Funds, Inc. (1999 to Present); formerly President, J.E. Breslin & Co., an investment management consulting firm (1994 to 1999. - - ----------------------------------- --------- ------------------------ ------------------------------------------- John J. Sullivan 68 Trustee Director, Kinetics Mutual Funds, Inc. 31 Hemlock Drive (1999 to Present); Retired; Senior Sleepy Hollow, NY 10591 Advisor, Long Term Credit Bank of Japan, Ltd.; Executive Vice President, LTCB Trust Company; - - ----------------------------------- --------- ------------------------ ------------------------------------------- Lee W. Schultheis 43 Vice President & Managing Director & COO of Kinetics Asset 342 Madison Avenue Treasurer of the Trust Management (1999 to Present); Vice New York, NY 10173 President and Treasurer Kinetics Mutual Funds, Inc. (1999 to Present); President & Director of Business. Development, Vista Fund Distributors, Inc. (1995 to 1999); Managing Director, Forum Financial Group, a mutual fund services company. - - ----------------------------------- --------- ------------------------ -------------------------------------------
COMPENSATION Trustees who are not "interested persons" (as defined in the 1940 Act) of the Trust , Kinetics Mutual Funds, Inc. or Kinetics Asset Management, Inc. receive an aggregate annual fee of $15,000 per year for their services as Trustees or directors of all open-end investment companies distributed by Kinetics Funds Distributors, Inc. and $1,000 per meeting attended, as well as reimbursement for expenses incurred in connection with attendance at such meetings. In addition, each committee chairman of the Company and the Trust (such as the Audit committee or Pricing committee) receives an additional fee of $5,000 per year for his service as chairman.. Payment of the annual fees is allocated among such investment companies based on their relative net assets. Payment of meeting fees are allocated only among those investment companies to which such meetings relate. The "interested" Trustees of the Portfolio receive no compensation for their service as Trustees. None of the executive officers receive compensation from the Portfolio. The following tables provide compensation information for the Trustees for the year-ended December 31, 1999.
KINETICS PORTFOLIOS TRUST COMPENSATION TABLE - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ NAME AND POSITION AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION COMPENSATION BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND FROM FUND PART OF FUND EXPENSES RETIREMENT COMPLEX PAID TO DIRECTORS** - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------ Steven R. Samson* None None None None Chairman and Director Kathleen Campbell* None None None None Director Murray Stahl*** None None None $3,844 Director Steven T. Russell None None None $5,500 Independent Director Douglas Cohen None None None $6,094 Independent Director William J. Graham None None None $5,500 Independent Director Joseph E. Breslin None None None $4,500 Independent Director John J. Sullivan None None None $5,500 Independent Director - - ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
* "Interested person" as defined under the 1940 Act. ** Includes compensation paid by Kinetics Mutual Funds, Inc. *** Murray Stahl became an "interested person" of the Fund (as defined under the 1940 Act) as of December 15, 1999. Previous to becoming an interested person, Mr. Stahl received $3844 as total compensation from the Fund and Fund complex for being an independent director. ITEM 14. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES (A) CONTROL PERSONS & (B) PRINCIPAL HOLDERS CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES - - -------------------------------------------------------------------------------- A control person is one who owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. As of the commencement of investment operations, the Portfolio could be deemed to be under the control of The Kinetics Government Money Market Fund, a series of Kinetics Mutual Funds, Inc. and the sole investor in the Portfolio as of the date of this SAI. Similarly, as of such time, Kinetics Mutual Funds, Inc. through its series, The Internet Fund, The Internet Emerging Growth Fund, The Internet Global Growth Fund, The Internet Infrastructure Fund, The Internet New Paradigm Fund, The Small Cap Opportunities Fund, The Middle East Growth Fund, The Medical Fund, and The Kinetics Government Money Market Fund (each a "Fund" and collectively the "Funds"), was the owner of 100% of the value of the outstanding interests in the Trust. Any investor owning more than 50% of the value of the outstanding interests in the Portfolio may take actions without the approval of any other investor who invests in the Portfolio. Kinetics Mutual Funds, Inc. has informed the Trust that whenever of The Kinetics Government Money Market Fund is requested to vote on a matter pertaining to the Portfolio, The Kinetics Government Money Market Fund will hold a meeting of its shareholders and will vote its interest in the Portfolio in proportion to the votes cast by The Kinetics Government Money Market Fund's shareholders. It is anticipated that other registered investment companies investing in the Portfolio, if any, will follow the same or a similar practice, although, as of May 1, 2000, there were no other investors in the Portfolio. (c) Management Ownership MANAGEMENT OWNERSHIP The percentage of the Portfolio's interests owned or controlled by the executive officers and Trustees of the Portfolio and the Trust is less than 1% of the interests of the Portfolio. ITEM 15. INVESTMENT ADVISORY AND OTHER SERVICES (A) INVESTMENT ADVISER INVESTMENT ADVISER - - -------------------------------------------------------------------------------- Kinetics Asset Management, Inc. ("Kinetics" or the "Adviser") is a New York corporation that serves as the investment adviser to the Portfolio. Peter B. Doyle is the Chairman of the Board of Directors and Chief Investment Strategist of Kinetics. Steven R. Samson is the President and Chief Executive Officer of Kinetics. Mr. Samson has over 24 years experience in the mutual funds and financial services industries. Mr. Lee Schultheis is the Managing Director and Chief Operating Officer of Kinetics and has more than 20 years experience in the mutual funds and financial services industries. On April 25, 2000 the Board of the Trustees of the Trust, on behalf of the Portfolio, approved a management and advisory contract (the "Agreement") with Kinetics. This Agreement will remain in effect for a term of two years and will continue on a year-to-year basis thereafter provided that specific approval is voted at least annually by the Board of Trustees of the Trust or by the vote of the holders of a majority of the outstanding voting securities of the Portfolio. In either event, it must also be approved by a majority of the Trustees of the Trust who are neither parties to the Agreement nor "interested" persons as defined in the 1940 Act at a meeting called for the purpose of voting on such approval. The Adviser's investment decisions are made subject to the direction and supervision of the Board of Trustees. The Agreement may be terminated at any time, without the payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio. Ultimate decisions as to the investment policy and as to individual purchases and sales of securities are made by the Portfolio's officers and the Trustees. (B) PRINCIPAL UNDERWRITER PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. (C) SERVICES PROVIDED BY THE INVESTMENT ADVISER AND PORTFOLIO EXPENSES PAID BY THIRD PARTIES Under the Agreement, Kinetics furnishes investment advice to the Portfolio by continuously reviewing the portfolio and recommending to the Portfolio to what extent, securities should be purchased or disposed. Pursuant to the Agreement, the Adviser: (1) renders research, statistical and advisory services to the Portfolio; (2) makes specific recommendations based on the Portfolio's investment requirements; (3) pays the salaries of those of the Portfolio's employees who may be officers or directors or employees of the investment adviser. For these services, the Portfolio has agreed to pay to Kinetics an annual fee of 0.50% of the Portfolio's average daily net assets. All fees are computed on the average daily closing net asset value ("NAV") of the Portfolio and are payable monthly. The fee is higher than the fee paid by most other funds. Kinetics has also entered into a Research Agreement with Horizon Assets Management, Inc. ("Horizon") for which it is solely responsible for the payment of all fees owing to Horizon. Fees of the custodian, administrator, transfer agent and Portfolio accountant are paid by the Portfolio. (D) SERVICE AGREEMENTS ADMINISTRATIVE SERVICES - - -------------------------------------------------------------------------------- Kinetics also serves as Administrator of the Portfolio. Under an Administrative Services Agreement with the Portfolio, Kinetics will be entitled to receive an annual administration fee equal to 0.10% of the Portfolio's average daily net assets of which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolio by Firstar. Firstar, located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, also serves as the Portfolio's accountant and transfer agent. As such, Firstar provides certain investor services and record management services as well as acts as the Portfolio's dividend disbursement agent. Administrative services include, but are not limited to, providing office space, equipment, telephone facilities, various personnel, including clerical and supervisory, and computers, as is necessary or beneficial to: |X| establish and maintain investors' accounts and records, |X| process purchase and redemption transactions, |X| process automatic investments of client account cash balances, |X| answer routine client inquiries regarding the Portfolio, |X| assist clients in changing dividend options, |X| account designations, and addresses, and |X| providing such other services as the Portfolio may reasonably request. CUSTODIAN - - -------------------------------------------------------------------------------- Firstar Bank, N.A. ("Firstar Bank") is custodian for the securities and cash of the Portfolio. Under a Custody Agreement, Firstar Bank holds the Portfolio's assets in safekeeping and keeps all necessary records and documents relating to its duties. Firstar Bank receives an annual fee equal to 0.010% of the Portfolio's average daily net assets with a minimum annual fee of $3,000. Independent Public Accountants - - -------------------------------------------------------------------------------- PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Suite 1500, Milwaukee, Wisconsin has been selected as the independent auditor for the Trust for the year ending December 31, 2000. Their services include examination of the Trust's financial statements and the performance of other related audit and tax services. ITEM 16. BROKERAGE ALLOCATION AND OTHER PRACTICES BROKERAGE - - -------------------------------------------------------------------------------- The Adviser requires all brokers to effect transactions in portfolio securities in such a manner as to get prompt execution of the orders at the most favorable price. The Adviser selects brokers who, in addition to meeting primary requirements of execution and price, may furnish statistical or other factual information and services, which, in the opinion of the Adviser, are helpful or necessary to the Portfolio's normal operations. Information or services may include economic studies, industry studies, statistical analysis, corporate reports or other forms of assistance to the Portfolio or its Adviser. No effort is made to determine the value of these services or the amount they might have reduced expenses of the Adviser. Other than set forth above, the Portfolio has no fixed policy, formula, method or criteria that it uses in allocating brokerage business to brokers furnishing these materials and services. The Board of Trustees evaluates and reviews the reasonableness of brokerage commissions paid semiannually. ITEM 17. CAPITAL STOCK AND OTHER SECURITIES (a) Capital Stock CAPITALIZATION - - -------------------------------------------------------------------------------- The authorized capitalization of Kinetics Portfolio Trust consists of 1 billion shares of beneficial interest of $0.001 par value per share. Each share has equal dividend, distribution and liquidation rights. There are no conversion or preemptive rights applicable to any shares of the Portfolio. All shares issued are fully paid and non-assessable. Each holder of beneficial interest has one vote for each share held. Each investor in a Portfolio is entitled to participate equally in the Portfolio's earnings and assets and to vote in proportion to the amount of its investment in the Portfolio. Voting rights are non-cumulative. Each investor in the Portfolio is entitled to a vote in proportion to the amount of its investment therein. Investors in the Portfolio will all vote together in certain circumstances (e.g., election of the Trustees and ratification of auditors, as required by the 1940 Act and the rules thereunder). One or more Portfolios could control the outcome of these votes. Investors do not have cumulative voting rights, and investors holding more than 50% of the aggregate beneficial interests in the Trust or in a Portfolio, as the case may be, may control the outcome of votes. The Trust is not required and has no current intention to hold annual meetings of investors, but the Trust will hold special meetings of investors when (1) a majority of the Trustees determines to do so or (2) investors holding at least 10% of the interests in a Portfolio (if the meeting relates solely to that Portfolio), or investors holding at least 10% of the aggregate interests in the Trust (if the meeting relates to the Trust and not specifically to a Portfolio) requests in writing a meeting of investors. Changes in fundamental policies or limitations will be submitted to investors for approval. The Trust is organized as a business trust under the laws of the State of Delaware. Investors in a Portfolio will be held personally liable for its obligations and liabilities, subject, however, to indemnification by the Trust in the event that there is imposed upon an investor a greater portion of the liabilities and obligations than its proportionate beneficial interest in the Portfolio. The Declaration of Trust also provides that, subject to the provisions of the 1940 Act, the Trust may maintain insurance (for example, fidelity bonding and errors and omissions insurance) for the protection of the Portfolio, investors, Trustees, officers, employees, and agents covering possible tort and other liabilities. Thus, the risk of an investor incurring financial loss on account of such liability would be limited to circumstances in which the Portfolio had inadequate insurance and was unable to meet its obligations out of its assets. ITEM 18. PURCHASE, REDEMPTION AND PRICING OF SHARES (A) PURCHASE OF SHARES PURCHASE OF SHARES - - -------------------------------------------------------------------------------- Shares of beneficial interest in the Portfolio are sold without a sales load, at the NAV next determined after an order is received by the Portfolio. Shares in the Portfolio are sold solely in private placement transactions that do not involve any "public offering" within the meaning of Section 4(2) of the 1933 Act. Investments in the Portfolio may be made only by regulated investment companies, unregulated foreign investment companies, U.S. and non-U.S. institutional investors, S corporations, insurance company separate accounts, and certain qualified pension and retirement plans. This Registration Statement does not constitute an offer to sell, or the solicitation of an offer to buy, any "security" within the meaning of the 1933 Act. There is no minimum initial or subsequent investment in the Portfolio. The Portfolio reserves the right to cease accepting investments at any time or to reject any investment order. (C) REDEMPTION OF SHARES REDEMPTION OF SHARES - - -------------------------------------------------------------------------------- An investor in the Portfolio may redeem all or any portion of its investment at the NAV next determined after a redemption request in good order is received by the Portfolio. The proceeds of a redemption will be paid by the Portfolio in federal funds normally on the Business Day that the redemption is effected, but in any event within three business days, except as extensions may be permitted by law. The Portfolio reserves the right to pay redemptions in kind. Unless requested by an investor or deemed by the Adviser to be in the best interests of the investors in the Portfolio as a group, the Portfolio will not pay a redemption in kind to an investor, except in situations where that investor may pay redemptions in kind. The right of any investor to receive payment with respect to any redemption may be suspended, or the payment of the redemption proceeds postponed, during any period in which the NYSE is closed or trading on the NYSE is restricted or to the extent otherwise permitted by the 1940 Act. (B) OFFERING PRICE VALUATION OF SHARES - - -------------------------------------------------------------------------------- Shares of the Fund are sold on a continual basis at net asset value per share ("NAV"), which is determined by the Fund as of 12:00 p.m. Eastern time each day the New York Stock Exchange ("NYSE") is open for unrestricted business. The NYSE is closed on the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Portfolio will utilize the amortized cost method in valuing its portfolio securities. This method involves valuing a security at its cost adjusted by a constant amortization to maturity of any discount or premium, regardless of the impact of fluctuating interest rates on the market value of the instrument. The purpose of this method of calculation is to facilitate the maintenance of a consistent net asset value per share for the Fund and the Portfolio of $1.00. However, there is no assurance that the $1.00 net asset value per share will be maintained. ITEM 19. TAXATION OF THE PORTFOLIO TAXES - - -------------------------------------------------------------------------------- The Portfolio will be classified for federal income tax purposes as a partnership that is not a "publicly traded partnership." As a result, the Portfolio is not subject to federal income tax; instead, each Interestholder in the Portfolio is required to take into account in determining its federal income tax liability its share of the Portfolio's income, gains, losses, deductions, and credits, without regard to whether it has received any cash distributions from the Portfolio. The Portfolio also is not subject to Delaware income or franchise tax. A holder of beneficial interest in the Portfolio (an "Interestholder") is deemed to own a proportionate share of the Portfolio's assets and to earn a proportionate share of the Portfolio's income, for, among other things, purposes of determining whether the Interestholder satisfies the requirements to qualify as a regulated investment company ("RIC"). Accordingly, the Portfolio intends to conduct its operations so that its Interestholders that invest substantially all of their assets in the Portfolio and intend to qualify as RICs should be able to satisfy all those requirements. Distributions to an Interestholder from the Portfolio (whether pursuant to a partial or complete withdrawal or otherwise) will not result in the Interestholder's recognition of any gain or loss for federal income tax purposes, except that: (1) gain will be recognized to the extent any cash that is distributed exceeds the Interestholder's basis for its interest in the Portfolio before the distribution; (2) income or gain will be recognized if the distribution is in liquidation of the Interestholder's entire interest in the Portfolio and includes a disproportionate share of any unrealized receivables held by the Portfolio; (3) loss will be recognized to the extent that a liquidation distribution consisting solely of cash and/or unrealized receivables is less than the Interestholder's basis for its interest in the Portfolio prior to the distribution; and (4) gain or loss may be recognized on a distribution to an Interestholder that contributed property to the Portfolio. An Interestholder's basis for its interest in the Portfolio generally will equal the amount of cash and the basis of any property it invests in the Portfolio, increased by the Interestholder's share of the Portfolio's net income and gains and decreased by (a) the amount of cash and the basis of any property the Portfolio distributes to the Interestholder and (b) the Interestholder's share of the Portfolio's losses. The income tax and estate tax consequences to a non-U.S. Interestholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. Interestholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Non-U.S. Interestholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Portfolio. The foregoing discussion relates only to federal income tax law. Income from the Portfolio also may be subject to foreign, state and local taxes, and their treatment under foreign, state and local income tax laws may differ from the federal income tax treatment. Interestholders should consult their tax advisors with respect to particular questions of federal, state and local taxation. ITEM 20. UNDERWRITERS PRIVATE PLACEMENT AGENT Kinetics Funds Distributor, Inc. ("KFDI"), serves as the private placement agent for the shares of the Portfolio on a best efforts basis. KFDI is a registered broker-dealer and member of the National Association of Securities Dealers, Inc. Beneficial interests in the Portfolio are issued continuously. ITEM 21. CALCULATION OF PERFORMANCE DATA PERFORMANCE INFORMATION - - -------------------------------------------------------------------------------- (1) AVERAGE ANNUAL TOTAL RETURN QUOTATION TOTAL RETURN Average annual total return quotations used in the Portfolio's advertising and promotional materials are calculated according to the following formula: P(1+T)n = ERV where P equals a hypothetical initial payment of $1,000; T equals average annual total return; n equals the number of years; and ERV equals the ending redeemable value at the end of the period of a hypothetical $1,000 payment made at the beginning of the period. Under the foregoing formula, the time periods used in advertising will be based on rolling calendar quarters, updated to the last day of the most recent quarter prior to submission of the advertising for publication. Average annual total return, or "T" in the above formula, is computed by finding the average annual compounded rates of return over the period that would equate the initial amount invested to the ending redeemable value. Average annual total return assumes the reinvestment of all dividends and distributions. CUMULATIVE TOTAL RETURN Cumulative total return represents the simple change in value of an investment over a stated period and may be quoted as a percentage or as a dollar amount. Total returns may be broken down into their components of income and capital (including capital gains and changes in share price) in order to illustrate the relationship between these factors and their contributions to total return. (2) Yield Quotation YIELD Annualized yield quotations used in the Portfolio's advertising and promotional materials are calculated by dividing the Portfolio's interest income for a specified thirty-day period, net of expenses, by the average number of shares outstanding during the period, and expressing the result as an annualized percentage (assuming semi-annual compounding) of the NAV per share at the end of the period. Yield quotations are calculated according to the following formula: YIELD = 2[(A-B + 1)6 - 1] --- c-d where "a" equals dividends and interest earned during the period; "b" equals expenses accrued for the period, net of reimbursements; "c" equals the average daily number of shares outstanding during the period that are entitled to receive dividends; and "d" equals the maximum offering price per share on the last day of the period. For purposes of these calculations, the maturity of an obligation with one or more call provisions is assumed to be the next date on which the obligation reasonably can be expected to be called or, if none, the maturity date. OTHER INFORMATION The Portfolio's performance data quoted in advertising and other promotional materials represents past performance and is not intended to predict or indicate future results. The return and principal value of an investment in the Portfolio will fluctuate, and an investor's redemption proceeds may be more or less than the original investment amount. If permitted by applicable law, the Portfolio may advertise the performance of registered investment companies or private accounts that have investment objectives, policies and strategies substantially similar to those of the Portfolio. COMPARISON OF PORTFOLIO PERFORMANCE The performance of the Portfolio may be compared to data prepared by Lipper Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar, Inc., the Donoghue Organization, Inc. or other independent services which monitor the performance of investment companies, and may be quoted in advertising in terms of its ranking in each applicable universe. In addition, the Portfolio may use performance data reported in financial and industry publications, including Barron's, Business Week, Forbes, Fortune, Investor's Daily, IBC/Donoghue's Money Fund Report, Money Magazine, The Wall Street Journal and USA Today. The Portfolio may from time to time use the following unmanaged indices for performance comparison purposes: o S&P 500 - The S&P 500 is an unmanaged mutual fund index of 500 stocks designed to mimic the overall equity market's industry weightings. Most, but not all, large capitalization stocks are in the index. There are also some small capitalization names in the index. The list is maintained by Standard & Poor's Corporation. It is market capitalization weighted. There are always 500 issuers in the S&P 500. Changes are made by Standard & Poor's as needed. o Russell 2000 - The Russell 2000 is composed of the 2,000 smallest stocks in the Russell 3000, a market value weighted index of the 3,000 largest U.S. publicly-traded companies. ITEM 22. FINANCIAL STATEMENTS FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- FINANCIAL STATEMENTS ASSETS Cash $ 100,000 NET ASSETS $ 100,000 Kinetics Portfolios Trust FINANCIAL STATEMENT APRIL 27, 2000 Report of Independent Accountants To the Shareholder and Board of Trustees of Kinetics Portfolios Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of Kinetics Portfolios Trust (hereafter referred to as the "Trust") at April 27, 2000, in conformity with accounting principles generally accepted in the United States. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Milwaukee, Wisconsin April 27, 2000 KINETICS PORTFOLIOS TRUST STATEMENT OF ASSETS AND LIABILITIES - - -------------------------------------------------------------------------------- AS OF APRIL 27, 2000 The accompanying notes are an integral part of this financial statement. [OBJECT OMITTED] KINETICS PORTFOLIOS TRUST NOTES TO FINANCIAL STATEMENT AS OF APRIL 27, 2000 - - -------------------------------------------------------------------------------- 1. ORGANIZATION The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware Business Trust on March 14, 2000 and is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company issuing its beneficial interests in series, each series representing a distinct portfolio with its own investment objectives and policies. The series currently authorized are The Internet Portfolio, The Internet Emerging Growth Portfolio, The Internet Global Growth Portfolio, The Internet New Paradigm Portfolio, The Internet Infrastructure Portfolio, The Medical Portfolio, The Kinetics Government Money Market Portfolio, The Small Cap Opportunities Portfolio and The Middle East Growth Portfolio (the "Portfolios"). Pursuant to the 1940 Act, the Portfolios are "non-diversified" series of the Trust. The Trust has had no operations other than the contribution by Kinetics Asset Management, Inc., the Portfolios' Adviser ("Adviser"), of $100,000, representing a beneficial interest in the Trust. The Portfolios have had no operations through April 27, 2000. On April 28, 2000, the Trust intends to distribute the Adviser's $100,000 contribution to the Portfolios, at which time the Adviser will become a partner in each of the Portfolios. In addition, on April 28, 2000 various feeder funds ("Funds") sponsored by the Adviser will invest their investable assets in the corresponding Portfolios under a master-feeder capital structure. 2. SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION COSTS Expenses in connection with the organization of the Trust have been absorbed by the Funds prior to their conversion to the master-feeder capital structure. Accordingly, no statement of operations of the Trust has been provided. FEDERAL INCOME TAXES Each Portfolio intends to qualify as a partnership for federal income tax purposes. Therefore, the Portfolios believe they will not be subject to any federal income tax on their income and net realized capital gains (if any). However, each investor in the Portfolios will be taxed on its allocable share of the Portfolio's income and capital gains for purposes of determining its federal income tax liability. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements. Actual results could differ from those estimates. 1. 3. INVESTMENT ADVISER The Trust has an Investment Advisory Agreement (the "Agreement") with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers and trustees of the Trust are affiliated, to furnish investment advisory services to the Portfolios. Under the terms of the Agreement, the Portfolios compensate the Adviser for its management services at the annual rate of 1.25% of the Portfolio's average daily net assets, except for The Kinetics Government Money Market Portfolio, which compensates the Adviser at a rate of 0.50% of the Portfolio's average daily net assets. The Adviser also serves as administrator to the Portfolios. Under an Administrative Services Agreement with the Trust on behalf of the Portfolios, the Adviser receives an annual administration fee equal to 0.10% of the Portfolio's average daily net assets from which the Adviser will be responsible for the payment of a portion of such fees to Firstar Mutual Fund Services, LLC ("Firstar") for certain sub-administrative services rendered to the Portfolios by Firstar. APPENDIX - - -------------------------------------------------------------------------------- STANDARD & POOR'S ("S&P") CORPORATE BOND RATING DEFINITIONS AAA-Debt rated "AAA" has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA-Debt rated "AA" has a very strong capacity to pay interest and repay principal and differs from the higher-rated issues only in small degree. A-Debt rated "A" has a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. BBB-Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher-rated categories. BB, B, CCC, CC-Debt rated "BB", "B", "CCC", and "CC" is regarded, on balance, as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree of speculation. While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties of major risk exposures to adverse conditions. CI-The rating "CI" is reversed for income bonds on which no interest is being paid. D-Debt rated "D" is in default, and payment of interest and/or repayment of principal is in arrears. MOODY'S INVESTORS SERVICE, INC. CORPORATE BOND RATING DEFINITIONS AAA-Bonds which are rated "Aaa" are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. AA-Bonds which are rated "Aa" are judged to be of high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present that make the long-term risks appear somewhat larger than in Aaa securities. A-Bonds which are rated "A" possess many favorable investment attributes and are to be considered as upper medium-grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment sometime in the near future. BAA-Bonds which are rated "Baa" are considered as medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BA-Bonds which are "Ba" are judged to have speculative elements; their future cannot be considered well assured. Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B-Bonds which are rated "B" generally lack characteristics of a desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. CAA-Bonds which are rated "Caa" are of poor standing. Such issues may be in default or there may be present elements of danger with respect to principal or interest. CA-Bonds which are "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. C-Bonds which are rated "C" are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. FITCH INVESTORS SERVICE, INC. BOND RATING DEFINITIONS AAA-Bonds considered to be investment grade and of the highest credit quality. The obligor has an exceptionally strong ability to pay interest and repay principal, which is unlikely to be affected by reasonably foreseeable events. AA-Bonds considered to be investment grade and of very high credit quality. The obligor's ability to pay interest and repay principal is very strong, although not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and "AA" categories are not significantly vulnerable to foreseeable future developments, short-term debt of these issuers is generally rated "F-1+." A-Bonds considered to be investment grade and of high credit quality. The obligor's ability to pay interest and repay principal is considered strong, but may be more vulnerable to adverse changes in economic conditions and circumstances than bonds with higher ratings. BBB-Bonds considered to be investment grade and of satisfactory credit quality. The obligor's ability to pay interest and repay principal is considered to be adequate. Adverse changes in economic conditions and circumstances, however, are more likely to have adverse impact on these bonds, and therefore impair timely payment. The likelihood that the ratings of these bonds will fall below investment grade is higher than for bonds with higher ratings. BB-Bonds are considered speculative. The obligor's ability to pay interest and repay principal may be affected over time by adverse economic changes. However, business and financial alternatives can be identified which could assist the obligor in satisfying its debt service requirements. B-Bonds are considered highly speculative. While bonds in this class are currently meeting debt service requirements, the probability of continued timely payment of principal and interest reflects the obligor's limited margin of safety and the need for reasonable business and economic activity throughout the life of the issue. CCC-Bonds have certain identifiable characteristics which, if not remedied, may lead to default. The ability to meet obligations requires an advantageous business and economic environment. CC-Bonds are minimally protected. Default in payment of interest and/or principal seems probable over time. C-Bonds are in imminent default in payment of interest or principal. DDD, DD, AND D-Bonds are in default on interest and/or principal payments. Such bonds are extremely speculative and should be valued on the basis of their ultimate recovery value in liquidation or reorganization of the obligor. "DDD" represents the highest potential for recovery on these bonds, and "D" represents the lowest potential for recovery. KINETICS PORTFOLIOS TRUST PART C OTHER INFORMATION ITEM 23. EXHIBITS (a) CERTIFICATE OF TRUST AND DECLARATION OF TRUST1 (b) BY-LAWS1 (c) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS. Incorporated by reference to the Declaration of Trust and the By-Laws. (d) INVESTMENT ADVISORY AGREEMENTS between Registrant, on behalf of each series, and Kinetics Asset Management, Inc.1 (e) UNDERWRITING CONTRACTS. Not Applicable (f) BONUS OR PROFIT SHARING CONTRACTS. Not applicable. (g) CUSTODIAN CONTRACT between Registrant and Firstar Bank, N.A. to be filed by subsequent amendment. (h) OTHER MATERIAL CONTRACTS (1) ADMINISTRATIVE SERVICES AGREEMENT between Registrant and Kinetics Asset Management, Inc.1 (2) FUND ACCOUNTING SERVICING AGREEMENT between Registrant and Firstar Mutual Fund Services, LLC. to be filed by subsequent amendment. (3) TRANSFER AGENT AGREEMENT between Registrant and Firstar Mutual Fund Services, LLC to be filed by subsequent amendment. (4) AGREEMENT OF THE JOINT INSUREDS between Registrant and The Internet Fund, Inc. (5) PLACEMENT AGENCY Agreement between Registrant and Kinetics Funds Distributors, Inc.1 (i) LEGAL OPINION (1) OF SPITZER & FELDMAN P.C. (TRUST COUNSEL)1 (2) OF RICHARDS, LAYTON & FINGER ON MATTERS PERTAINING TO DELAWARE LAW1 (j) OTHER OPINIONS. (1) CONSENT OF AUDITORS 1 (k) OMITTED FINANCIAL STATEMENTS. Not applicable. (l) INITIAL CAPITAL UNDERSTANDING. Not Applicable. (m) RULE 12B-1 PLAN. Not applicable. (n) FINANCIAL DATA SCHEDULES - Not applicable. (o) RULE 18F-3 PLAN. Not applicable. 1 Filed Herewith. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Registrant is not controlled by or under common control with any person. ITEM 25. INDEMNIFICATION Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER: Besides serving as investment adviser to the Portfolios and to Kinetics Mutual Funds, Inc., the Adviser is not currently (and has not during the past two years) engaged in any other business, profession, vocation or employment of a substantial nature. Information regarding the business, vocation or employment of a substantial nature of the Adviser and its officers is incorporated by reference to the information contained in Part B of this Registration Statement. ITEM 27. PRINCIPAL UNDERWRITERS: (a) As of the date of filing, Kinetics Funds Distributor, Inc. ("KFDI"), the private placement agent for shares of the Registrant, also serves as the Co-Distributor of the shares of common stock of Kinetics Mutual Funds, Inc. (b) To the best of Registrant's knowledge, as of the date of filing, Lee W. Schultheis is the President and sole director of KFDI. The address of KFDI is 1311 Mamaroneck Avenue, White Plains, New York 10605. Mr. Schultheis is the Vice President and Treasurer of the Registrant. (c) None. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS: All accounts and records required to be maintained by Section 31(a) of the Investment Company Act of 1940 and Rules 31a-1 through 31a-3 promulgated thereunder are maintained at the following locations: RECORDS RELATING TO: ARE LOCATED AT: - - -------------------- --------------- (1) Registrant's portfolio accounting Firstar Mutual Funds Services, LLC servicing agent, and sub-administrator 615 East Michigan Street Milwaukee, Wisconsin 53202 (2) Registrant's investment adviser, Kinetics Asset Management, Inc administrator 1311 Mamaroneck Avenue White Plains, NY 10605 (3) Registrant's custodian Firstar Bank, N.A. 777 E. Wisconsin Avenue Milwaukee, WI 53202 ITEM 29. MANAGEMENT SERVICES: Not applicable. ITEM 30. UNDERTAKINGS: Not applicable. SIGNATURES Pursuant to the requirements of the Investment Company Act of 1940, the Registrant, KINETICS PORTFOLIOS TRUST, has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of White Plains and State of New York, on the 28th day of April, 2000. KINETICS PORTFOLIOS TRUST /S/ STEVEN R. SAMSON -------------------- Steven R. Samson, President EX-99.A 2 CERTIFICATE OF TRUST AND DECLARATION OF TRUST CERTIFICATE OF TRUST OF KINETICS PORTFOLIOS TRUST THIS CERTIFICATE OF TRUST of Kinetics Portfolios Trust (the "Trust") is being duly executed and filed on behalf of the Trust by the undersigned, as trustee, to form a business trust under the Delaware Business Trust Act (12 DEL.C. ss. 3801, ET SEQ.) (the "Act"). 1. NAME. The name of the business trust formed by this Certificate of Trust is Kinetics Portfolios Trust. 2. REGISTERED OFFICE; REGISTERED AGENT. The business address of the Trust's registered office in the State of Delaware is 1013 Centre Road, City of Wilmington 19805, County of New Castle. The name of the Trust's registered agent at such address is Corporation Service Company. 3. INVESTMENT COMPANY. The Trust will be a registered investment company under the Investment Company Act of 1940, as amended. 4. SERIES. Pursuant to Section 3806(b)(2) of the Act, the Trust shall issue one or more series of beneficial interests having the rights and preferences set forth in the governing instrument of the Trust, as the same may be amended from time to time (each a "Series"). 5. NOTICE OF LIMITATION OF LIABILITIES OF EACH SERIES. Pursuant to Section 3804(a) of the Act, there shall be a limitation on liabilities of each Series such that (a) the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular Series shall be enforceable against the assets of such Series only, and not against the assets of the Trust generally or the assets of any other Series thereof and (b) none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Trust generally or any other Series thereof shall be enforceable against the assets of such Series. 6. EFFECTIVE DATE. This Certificate of Trust shall be effective upon filing with the Secretary of State. IN WITNESS WHEREOF, the undersigned has duly executed this Certificate of Trust in accordance with Section 3811(a) of the Act. By: _______________________________ Name: Steven R. Samson Title: Trustee By: _______________________________ Name: Lee W. Schultheis Title: Trustee By: _______________________________ Name: Brooke B. Connell Title: Trustee KINETICS PORTFOLIOS TRUST DECLARATION OF TRUST Dated: March 14, 2000 TABLE OF CONTENTS Table of Contents PAGE ARTICLE I NAME AND DEFINITIONS Section 1.1. Name............................................................1 Section 1.2. Definitions.....................................................1 ARTICLE II TRUSTEES Section 2.1. Number of Trustees and Qualification............................4 Section 2.2. Term and Election...............................................5 Section 2.3. Resignation and Removal.........................................5 Section 2.4. Vacancies.......................................................5 Section 2.5. Meetings........................................................5 Section 2.6. Officers; Chairman..............................................6 Section 2.7. By-Laws.........................................................6 ARTICLE III POWERS OF TRUSTEES Section 3.1. General.........................................................6 Section 3.2. Activities and Investments......................................7 Section 3.3. Legal Title.....................................................8 Section 3.4. Sale of Interests; Reclassification.............................9 Section 3.5. Borrowing Money; Pledging Trust Assets; Lending Property........9 Section 3.6. Delegation; Committees..........................................9 Section 3.7. Collection and Payment..........................................9 Section 3.8. Expenses.......................................................10 Section 3.9. Common Items...................................................10 Section 3.10. Litigation....................................................10 Section 3.11. Tax Matters...................................................10 Section 3.12. Miscellaneous Powers..........................................11 Section 3.13. Manner of Acting..............................................11 ARTICLE IV INVESTMENT ADVISORY, ADMINISTRATIVE SERVICES AND PLACEMENT AGENT ARRANGEMENTS;, CUSTODIAN Section 4.1. Investment Advisory and Other Arrangements.....................11 Section 4.2. Parties to Contract............................................12 Section 4.3. Custodian......................................................12 ARTICLE V INTERESTS IN THE TRUST Section 5.1. Interests......................................................12 Section 5.2. Establishment and Designation of Series........................13 Section 5.3. Rights of Holders..............................................14 Section 5.4. Purchase of or Increase in Interests...........................15 Section 5.5. Register of Interests..........................................15 Section 5.6. Nontransferability.............................................15 Section 5.7. Notices........................................................15 Section 5.8. Limitation on Number of Holders................................15 Section 5.9. No Liability of Holders........................................15 Section 5.10. Classes of Interests..........................................16 ARTICLE VI DECREASES AND WITHDRAWALS Section 6.1. Decreases and Withdrawals......................................16 ARTICLE VII DETERMINATION OF BOOK CAPITAL ACCOUNT BALANCES, NET INCOME AND DISTRIBUTIONS Section 7.1. Book Capital Account Balances..................................16 Section 7.2. Allocations and Distributions to Holders.......................17 Section 7.3. Power to Modify Foregoing Procedures...........................17 ARTICLE VIII LIABILITY FOR TRUST OBLIGATIONS Section 8.1. Liabilities of Series..........................................17 Section 8.2. No Personal Liability of Trustees, etc.........................18 Section 8.3. Indemnification................................................18 Section 8.4. No Protection Against Certain 1940 Act Liabilities.............19 Section 8.5. No Bond Required of Trustees...................................19 Section 8.6. No Duty of Investigation; Notice in Trust Instruments, etc.....19 Section 8.7. Insurance......................................................20 Section 8.8. Reliance on Experts, etc.......................................20 Section 8.9. Accounting.....................................................20 ARTICLE IX HOLDERS Section 9.1. Meetings of Holders............................................20 Section 9.2. Notice of Meetings.............................................21 Section 9.3. Record Date for Meetings.......................................21 Section 9.4. Proxies, etc...................................................21 Section 9.5. Reports........................................................22 Section 9.6. Inspection of Records..........................................22 Section 9.7. Holder Action by Written Consent...............................22 ARTICLE X DURATION; TERMINATION OF TRUST OR SERIES; AMENDMENT; MERGERS; ETC. Section 10.1. Duration......................................................22 Section 10.2. Dissolution of Series or Trust................................22 Section 10.3. Termination of Trust or Series................................22 Section 10.4. Amendment Procedure...........................................23 Section 10.5. Merger, Consolidation, Conversion and Sale of Assets..........24 ARTICLE XI MISCELLANEOUS Section 11.1. Certificate of Trust; Registered Agent........................25 Section 11.2. Governing Law.................................................25 Section 11.3. Counterparts..................................................25 Section 11.4. Reliance by Third Parties.....................................25 Section 11.5. Provisions in Conflict with Law or Regulations................25 Section 11.6. Trust Only....................................................26 SIGNATURE PAGE..............................................................27 DECLARATION OF TRUST of Kinetics Portfolios Trust made as of this 14th day of March, 2000, by Steven R. Samson, Lee W. Schultheis and Brooke B. Campbell, as trustees (such individuals, so long as they shall continue in office in accordance with the provisions of this Declaration of Trust, and all other Persons who may hereafter be duly elected or appointed, qualified and serving as trustees in accordance with the provisions hereof, being hereinafter called "Trustees"). W I T N E S S E T H: WHEREAS, the Trustees desire to establish a business trust under the Delaware Business Trust Act, 12 DEL. C.ss.3801, ET SEQ. (the "Act") consisting of one or more series for the investment and reinvestment of funds contributed thereto; NOW, THEREFORE, the Trustees hereby declare that all money and property hereafter contributed to the Series established hereby shall be held and managed in trust for the benefit of the Holders of beneficial interests issued hereunder with respect to each respective Series from time to time and subject to the provisions hereof, to wit: ARTICLE I NAME AND DEFINITIONS SECTION 1.1. NAME. The name of the trust established hereby (the "Trust") is "Kinetics Portfolios Trust," and, insofar as may be practicable, the Trust shall conduct its activities, execute all documents and sue or be sued under that name, which name (and the word "Trust" wherever herein used) shall refer to the Trust as a separate legal entity, and shall not refer to the Trustees, officers, agents, employees or Holders. If the Trustees determine that the Trust's use of such name is not advisable, the Trustees may adopt such other name for the Trust as they deem proper and the Trust may hold its property and conduct its activities under such other name. Any name change shall become effective upon the execution by a majority of the then Trustees of an instrument setting forth the new name and the filing of a Certificate of Amendment under the Act. Any such instrument shall have the status of an amendment to this Declaration. SECTION 1.2. DEFINITIONS. Wherever they are used herein, the following terms have the respective meanings assigned to them below: (a) "Act" shall mean the Delaware Business Trust Act, 12 DEL. C.ss.3801, ET SEQ., as the same may be amended from time to time. (b) "Administrator" shall mean any party furnishing services to the Trust and the Series pursuant to any administrative services contract described in Section 4.1. (c) "Affiliated Person" has the meaning assigned to it in Section 2(a)(3) of the 1940 Act. (d) "Assets belonging to" a Series shall have the meaning ascribed in Section 5.2(a). (e) "Assistant Secretary" means the Person appointed as such pursuant to Section 2.6. (f) "Assistant Treasurer" means the Person appointed as such pursuant to Section 2.6. (g) "Book Capital Account" shall mean, for any Holder at any time, the Book Capital Account of the Holder at such time with respect to such Holder's interest in the Trust Property of any Series, determined in accordance with generally accepted accounting principles and the provisions of the 1940 Act, and each Holder shall have a separate Book Capital Account for each Series in which it holds an Interest. (h) "By-Laws" means the By-Laws referred to in Section 2.7 hereof, as amended and in effect from time to time. (i) "Code" shall mean the Internal Revenue Code of 1986 and the rules and regulations thereunder, each as amended from time to time. (j) "Commission" means the Securities and Exchange Commission. (k) "Custodian" means the party, other than the Trust or the Series, to the agreement described in Section 4.3 hereof. (l) "Declaration" means this Declaration of Trust, as amended and in effect from time to time. Reference in this Declaration of Trust to "Declaration," "hereof," "herein," "hereby" and "hereunder" shall be deemed to refer to this Declaration rather than the article or section in which such words appear. (m) "Fundamental Policies" means the investment policies and restrictions applicable to any Series that are set forth and designated as fundamental policies in the Registration Statement. (n) "Holders" shall mean as of any particular time all holders of record of Interests in the Trust Property of any Series or class at such time. (o) "Institutional Investor(s)" shall mean any registered investment company (including a unit investment trust), insurance company separate account, common or commingled trust fund, group trust or similar organization or entity that is an "accredited investor" within the meaning of Regulation D under the Securities Act of 1933. (p) "Interested Person" has the meaning ascribed to it in Section 2(a)(19) of the 1940 Act. (q) "Interest(s)" shall mean the interest of a Holder in the Trust Property of any Series or class, including all rights, powers and privileges accorded to Holders in this Declaration, which interest may be expressed as a percentage, determined by calculating, as the Trustees shall from time to time determine, the ratio of each Holder's Book Capital Account balance in the Trust Property of any Series or class to the total of all Holders' Book Capital Account balances in the Trust Property of any such Series or class. Reference herein to a specific percentage in, or fraction of, Interests of the Holders means Holders whose combined Book Capital Accounts represent such specified percentage or fraction of the Book Capital Accounts of all Holders of the Trust Property of any Series or class or of the Trust as a whole (as the context may require). (r) "Investment Adviser" means the party, other than the Trust or the Series, to any investment advisory contract described in Section 4.1 hereof. (s) "Liabilities belonging to" a Series shall have the meaning ascribed in Section 5.2(b). (t) "1940 Act" means the provisions of the Investment Company Act of 1940 and the rules and regulations thereunder as amended from time to time and any order or orders thereunder which may from time to time be applicable to the Trust. (u) "Person" means and includes individuals, corporations, partnerships, trusts, associations, joint ventures and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof. (v) "President" means the Person elected by the Trustees pursuant to Section 2.6. (w) "Registered Agent" means the Person appointed as such pursuant to Section 11.1 (x) "Registration Statement" means the Trust's currently effective Registration Statement under the 1940 Act, as it may be amended or supplemented from time to time. (y) "Secretary" means the Person elected by the Trustees pursuant to Section 2.6. (z) "Series" means each Series of the Trust established and designated under or in accordance with Sections 3804(a) and 3806(b)(2) of the Act and the provisions of Article V hereof, each of which shall be accounted for and maintained as a separate series of the Trust. (aa) "Special Meetings" means meetings of the Trustees called in accordance with Section 2.5. (bb) "Treasurer" means the Person elected by the Trustees pursuant to Section 2.6. (cc) "Trust" means the master trust established hereby by whatever name it may then be known, inclusive of each and every Series established hereunder. (dd) "Trust Property" means any and all assets, real or personal, tangible or intangible, that are owned or held by the Trust, each and every asset of which shall be allocated and belong to a specific Series to the exclusion of all other Series. (ee) "Trustees" means the individuals who have signed this Declaration, so long as they shall continue in office in accordance with the provisions hereof, and all other Persons who may from time to time be duly elected or appointed, qualified and serving as Trustees in accordance with the provisions hereof, and reference herein to a Trustee or the Trustees shall refer to such individuals or Persons in their capacity as trustees hereunder. (ff) The use herein of the masculine or feminine gender or the neutral shall be construed to refer to the other gender or the neutral as well, and the use herein of the singular shall be construed to include the plural and the plural to include the singular, as the context may require. ARTICLE II TRUSTEES SECTION 2.1. NUMBER OF TRUSTEES AND QUALIFICATION. The number of Trustees shall initially be three (3) and shall thereafter be such number as shall be fixed from time to time by a written instrument signed by a majority of the Trustees then in office, provided, however, that the number of Trustees shall, subsequent to any sale of Interests other than sales made solely for the purposes of meeting any applicable seed money requirement under the 1940 Act, in no event be less than three (3) or more than fifteen (15). Any vacancy created by an increase in Trustees may be filled by the appointment of any Person having the qualifications described in this Article made by a written instrument signed by a majority of the Trustees then in office. Any such appointment shall not become effective, however, until the Person named in the written instrument of appointment shall have accepted in writing such appointment and agreed in writing to be bound by the terms of this Declaration. No reduction in the number of Trustees shall have the effect of removing any Trustee from office. Whenever a vacancy in the number of Trustees shall occur, until such vacancy is filled as provided in this Section and Section 2.4 hereof, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration. SECTION 2.2. TERM AND ELECTION. Each Trustee named herein, or elected or appointed prior to the first meeting of the Holders, shall (except in the event of resignations or removals or vacancies pursuant to Section 2.3 or 2.4 hereof) hold office until his successor has been elected at such meeting and has qualified to serve as Trustee, as required under the 1940 Act. Beginning with the Trustees elected at the first meeting of Holders, each Trustee shall hold office during the lifetime of this Trust and until its termination as hereinafter provided unless such Trustee resigns or is removed as provided in Section 2.3 below. SECTION 2.3. RESIGNATION AND REMOVAL. Any Trustee may resign (without need for prior or subsequent accounting) by an instrument in writing signed by him or her and delivered to the other Trustees, and such resignation shall be effective upon such delivery or at any later date according to the terms of the instrument. Any of the Trustees may be removed by the action of two-thirds of the remaining Trustees; provided, that if the removal of one or more Trustees would have the effect of reducing the number of remaining Trustees below the minimum number prescribed by Section 2.1 hereof, then subject to Section 16(a) of the 1940 Act, at the time of the removal of such Trustee or Trustees, the remaining Trustees shall elect or appoint a number of additional Trustees at least sufficient to increase the number of Trustees holding office to the minimum number prescribed by Section 2.1 hereof. Upon the resignation or removal of a Trustee, or his or her otherwise ceasing to be a Trustee due to death or legal disability, he or she shall execute and deliver such documents as the remaining Trustees shall require for the purpose of conveying to the Trust or the remaining Trustees any Trust Property held in his or her name. Upon the death or legal disability of any Trustee, his or her legal representative shall execute and deliver on his or her behalf such documents as the remaining Trustees shall require as provided in the preceding sentence. However, the execution and delivery of such documents by a former Trustee or his or her legal representative shall not be requisite to the vesting of title to the Trust Property in the remaining Trustees as provided in Section 3.3 hereof SECTION 2.4. VACANCIES. The term of office of a Trustee shall terminate and a vacancy shall occur in the event of such Trustee's death, resignation, removal, bankruptcy, adjudicated incompetence or other legal disability to perform the duties of the office of Trustee. No such vacancy shall operate to annul this Declaration or to revoke any existing obligations created pursuant to the terms of this Declaration. In the case of a vacancy, the Holders of at least a majority of the Interests entitled to vote, acting at any meeting of the Holders held in accordance with Section 9.1 hereof, or, to the extent permitted by the 1940 Act, a majority vote of the Trustees continuing in office acting by written instrument or instruments, may fill such vacancy, and any Trustee so elected by the Trustees or the Holders shall hold office as provided in this Declaration. SECTION 2.5. MEETINGS. Regular meetings of the Trustees may be held on such notice at such place or places and times as may be fixed by the By-Laws or by resolution of the Trustees. Special Meetings of the Trustees shall be held upon the call of the Chairman, if any, the president, the secretary or any two Trustees, by oral or electronic or written notice duly served on or sent, mailed or sent by telecopy or e-mail to each Trustee not less than one day before the meeting. No notice need be given to any Trustee who attends in person or to any Trustee who, in writing signed and filed with the records of the meeting either before or after the holding thereof, waives notice. Notice or waiver of notice need not state the purpose or purposes of the meeting. The Trustees may act with or without a meeting, subject to the requirements of the 1940 Act. A quorum for all meetings of the Trustees shall be a majority of the Trustees. Unless provided otherwise in this Declaration, any action of the Trustees may be taken at a meeting by vote of a majority of the Trustees present (a quorum being present) or without a meeting by written consent of a majority of the Trustees. Any committee of the Trustees, including an executive committee, if any, may act with or without a meeting. A quorum for all meetings of any such committee shall be a majority of the members thereof. Unless provided otherwise in this Declaration, any action of any such committee may be taken at a meeting by vote of a majority of the members present (a quorum being present) or without a meeting by written consent of a majority of the members. With respect to actions of the Trustees and any committee of the Trustees, Trustees who are Interested Persons of the Trust within the meaning of Section 1.2 hereof or otherwise interested in any action to be taken may be counted for quorum purposes under this Section 2.5 and shall be entitled to vote to the extent permitted by the 1940 Act. All or any one or more Trustees may participate in a meeting of the Trustees or any committee thereof by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to such communications system shall constitute presence in person at such meeting. SECTION 2.6. OFFICERS; CHAIRMAN. The Trustees shall, from time to time, elect a President, a Secretary, and a Treasurer, who shall be deemed officers of the Trust in accordance with this Declaration. The Trustees may appoint an Assistant Secretary and an Assistant Treasurer as the Trustees deem advisable. The Trustees may elect or appoint, from time to time, a Chairman who shall preside at all meetings of the Trustees and carry out such other duties as the Trustees shall designate. The Trustees may elect or appoint or authorize the President to appoint such other officers or agents with such powers as the Trustees may deem to be advisable. The President, the Secretary and the Treasurer may, but need not, be Trustees, and shall be agents of the Trust within the meaning of Section 3806(b)(7) of the Act. SECTION 2.7. BY-LAWS. The Trustees may adopt By-Laws not inconsistent with this Declaration for the conduct of activities of the Trust and may amend or repeal such By-laws to the extent such power is not reserved to the Holders by express provision of such By-laws. This Declaration and the By-Laws shall together constitute the "governing instrument" of the Trust within the meaning of Section 3801(f) of the Act. ARTICLE III POWERS OF TRUSTEES SECTION 3.1. GENERAL. The Trustees shall have exclusive and absolute control over the Trust Property and over the activities of the Trust and each Series to the fullest extent permitted by Section 3806(a) of the Act and other applicable law, but with such powers of delegation as may be permitted by this Declaration. The Trustees shall have power to conduct the activities of the Trust and any Series and to carry on their operations and maintain offices both within and outside of the State of Delaware, in any and all states of the United States of America, and in the District of Columbia, in any foreign country, and in any and all commonwealths, territories, dependencies, colonies, possessions, agencies or instrumentalities of the United States of America and of foreign governments, and to do all such other things and execute all such instruments as they deem necessary, proper or desirable in order to promote the interests of the Trust and each Series although such things are not herein specifically mentioned. Any determination as to what is in the interests of the Trust or any Series made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration, the presumption shall be in favor of a grant of power to the Trustees. The Trustees will not be required to obtain any court order to deal with Trust Property. The enumeration of any specific power herein shall not be construed as limiting the aforesaid powers. Such powers of the Trustees may be exercised without order of or resort to any court. SECTION 3.2. ACTIVITIES AND INVESTMENTS. The Trustees shall have the power with respect to the Trust and each Series: (a) to conduct, operate and carry on the activities of an investment company, and, in connection therewith: (i) to subscribe for, purchase or otherwise acquire and invest and reinvest in, to hold for investment or otherwise, to sell, transfer, assign, negotiate, exchange, lend or otherwise dispose of, and to turn to account or realize upon and generally deal in and with, domestic or foreign securities (which term, "securities," shall include without limitation any and all bills, notes, bonds, debentures or other obligations or evidences of indebtedness, certificates of deposit, bankers acceptances, commercial paper, repurchase agreements or other money market instruments; stocks, shares or other equity ownership interests (including non-publicly traded or illiquid securities and those securities the disposition of which is restricted under the Federal securities laws); convertible securities; mortgage-backed or other asset-backed securities; and warrants, options or other instruments representing rights to subscribe for, purchase, receive or otherwise acquire or to sell, transfer, assign or otherwise dispose of, and scrip, certificates, receipts or other instruments evidencing any ownership rights or interests in, any of the foregoing; and "forward commitment," "when issued" and "delayed delivery" contracts for securities, issued, guaranteed or sponsored by any governments, political subdivisions or governmental authorities, agencies or instrumentalities, by any individuals, firms, companies, corporations, syndicates, associations or trusts, or by any other organizations or entities whatsoever, irrespective of their forms or the names by which they may be described, whether or not they be organized and operated for profit, and whether they be domestic or foreign with respect to the State of Delaware or the United States of America); and (ii) to acquire and become the owner of or interested in any securities by delivering or issuing in exchange or payment therefor, in any lawful manner, any of the Trust Property; and (iii) to exercise while the owner of any securities or interests therein any and all of the rights, powers and privileges of ownership of such securities or interests, including without limitation any and all voting rights and rights of assent, consent or dissent pertaining thereto, and to do any and all acts and things for the preservation, protection, improvement and enhancement in value thereof; and (iv) to purchase, sell and hold currencies and enter into contracts for the future purchase or sale of currencies, including but not limited to forward foreign currency exchange contracts; and (v) to enter into futures and forward contracts, and to purchase and write put and call options on futures contracts, securities, currencies and securities indexes; and (vi) to make loans to the extent provided in the Registration Statement from time to time; and (vii) to engage in such other activities as may be disclosed in the Registration Statement from time to time; and (b) to conduct, operate and carry on any other lawful activities which the Trustees, in their sole and absolute discretion, consider to be (i) incidental to the activities of the Trust and each Series as an investment company, (ii) conducive to or expedient for the benefit or protection of the Trust or any Series or the Holders, or (iii) calculated in any other manner to promote the interests of the Trust or any Series or the Holders. The Trustees shall not be limited to investing in securities maturing before the possible termination of the Trust or any Series, nor shall the Trustees be limited by any law limiting the investments that may be made by fiduciaries. Notwithstanding anything to the contrary herein contained but consistent with the applicable investment objectives, the Trust and each Series shall be managed in compliance with the requirements of the Code applicable to regulated investment companies as though such requirements were applied at the Series level. SECTION 3.3. LEGAL TITLE. Legal title to all the Trust Property shall be vested in the Trust as a separate legal entity, except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees or in the name of any Series of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine, provided, that the interest of the Trust or any Series therein is appropriately protected. The right, title and interest of the Trustees in the Trust Property shall vest automatically in each Person who may hereafter become a Trustee. Upon the termination of the term of office of a Trustee as provided in Section 2.2 or 2.4 hereof, such Trustee shall automatically cease to have any right, title or interest in any of the Trust Property, and all right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered as provided in Section 2.3 hereof. SECTION 3.4. SALE OF INTERESTS; RECLASSIFICATION. Subject to more detailed provisions set forth in Article V and the Trustees' duty of impartiality to the Holders, the Trustees shall have the power to permit Persons to purchase Interests and to add to or reduce, in whole or in part, their Interests in any Series or class, provided that from and after the commencement of the private placement of Interests, Interests shall be sold only to Eligible Investors as set forth in each Series' Prospectus ("Eligible Investors"). The Trustees shall also have the power to acquire, hold, resell, dispose of, transfer, classify, reclassify and otherwise deal in Interests of the Trust or any Series or class. The Trustees may hold as treasury Interests (without such Interests being deemed to be canceled), re-issue for such consideration and on such terms as they determine, or cancel, in their discretion from time to time, any Interests of any Series or class thereof reacquired by the Trust. SECTION 3.5. BORROWING MONEY; PLEDGING TRUST ASSETS; LENDING PROPERTY. Subject to any applicable Fundamental Policies of the Trust or any Series or any applicable provision of the By-Laws, the Trustees shall have the power, on behalf of the Trust or any Series, to borrow money or otherwise obtain credit and to secure the same by mortgaging, pledging or otherwise subjecting as security any of the Trust Property, to endorse, guarantee or undertake the performance of any obligation, contract or engagement of any other Person and to lend Trust Property; provided that Trust Property belonging to a Series shall not be pledged, encumbered or subject to liabilities belonging to any other Series. SECTION 3.6. DELEGATION; COMMITTEES. The Trustees shall have the power, consistent with their continuing exclusive authority over the management of the Trust, each Series and the Trust Property, to delegate from time to time to such committee or committees as they may from time to time appoint from among their own number or to such officers, employees or agents of the Trust as they may from time to time designate the doing of such things and the execution of such instruments either in the name of the Trust or any Series or the names of the Trustees or otherwise as the Trustees may deem expedient. SECTION 3.7. COLLECTION AND PAYMENT. The Trustees shall have the power to collect all property due to the Trust or any Series; to pay all claims, including taxes, against the Trust Property; to prosecute, defend, compromise or abandon any claims relating to the Trust Property; to foreclose any security interest securing any obligations by virtue of which any property is owed to the Trust or any Series; and to enter into releases, agreements and other instruments. SECTION 3.8. EXPENSES. The Trustees shall have the power to incur and pay, out of the income or the principal of the Trust Property of the Series, any expenses which, in the opinion of the Trustees, are necessary or incidental to carrying out any of the purposes of this Declaration, and to pay reasonable compensation from the funds of the Trust to themselves as Trustees; provided that no Series will be liable for the debts and obligations of any other Series, and expenses, fees, charges, taxes and liabilities incurred or arising in connection with a particular Series, or in connection with the management thereof, shall be paid out of the Trust Property belonging to that Series and not out of the Trust Property belonging to any other Series. The Trustees shall not be obligated to account to the Holders for the retention of compensation, and each Holder agrees that compliance with the accounting requirements of the 1940 Act and of this Declaration shall constitute satisfactory accounting with respect to all acts of the Trustees. The Trustees shall fix the compensation of all officers, employees and Trustees of the Trust and may pay such compensation out of the Trust Property without reduction of the Trustees' compensation. SECTION 3.9. COMMON ITEMS. All expenses and other items of the Trust that are common to the Series shall be borne by or allocated to the Series proportionately based upon the relative net asset values of each. Such common items shall include, but not be limited to, Trustees' fees; 1940 Act registration expenses; organizational expenses of the Trust, exclusive of organizational expenses attributable to any specific Series; and accounting expenses relating to the Trust that are not attributable to any specific Series. SECTION 3.10. LITIGATION. The Trustees shall have the power to engage in and to prosecute, defend, compromise, abandon or adjust, by arbitration or otherwise, any actions, suits, proceedings, disputes, claims and demands relating to the Trust or any Series or the Trust Property, and, out of the Trust Property, to pay or to satisfy any debts, claims or expenses incurred in connection therewith, including those of litigation, and such power shall include without limitation the power of the Trustees or any appropriate committee thereof, in the exercise of their or its good faith business judgment, consenting to dismiss any action, suit, proceeding, dispute, claim or demand, brought by any Person, including, to the extent permitted by applicable law, a Holder in such Holder's own name or in the name of the Trust or any Series, whether or not the Trust, a Series or any of the Trustees may be named individually therein or the subject matter arises by reason of business for or on behalf of the Trust or any Series. SECTION 3.11. TAX MATTERS. The Trustees shall have the exclusive power, authority and responsibility with respect to the Trust and the Series regarding (i) preparation and filing of tax returns; (ii) providing reports to the Holders regarding tax information necessary to the filing of their respective tax returns; (iii) making any and all available elections with respect to the tax treatment of the Series and their investments; (iv) representing the Series before the Internal Revenue Service and/or any state taxing authority and exercising the powers and authorities of a tax matters partner under the Code with respect to the Series' partnership tax returns; (v) exercising such responsibility as may be imposed by law with respect to withholding from a Holder's share of income or distributions; (vi) providing to the accountants of the Series such instructions regarding allocations of realized income, gains and losses as may be necessary or appropriate to assure compliance with applicable provisions of the Code and Treasury Regulations; and (vii) any and all other tax matters. SECTION 3.12. MISCELLANEOUS POWERS. The Trustees shall have the power to: (a) employ or contract with such Persons as the Trustees may deem desirable for the transaction of the activities of the Trust or any Series and eliminate such employees or contractual relationships as they consider appropriate; (b) enter into joint ventures, partnerships and any other combinations or associations; (c) remove Trustees or fill vacancies in or add to their number, subject to and in accordance with Sections 2.3 and 2.4 hereof; elect and remove at will such officers and appoint and terminate such agents or employees as they consider appropriate; and appoint from their own number and terminate at will any one or more committees that may exercise some or all of the power and authority of the Trustees as the Trustees may determine; (d) purchase, and pay for out of Trust Property, insurance policies insuring the Trust Property, and, to the extent permitted by law and not inconsistent with any applicable provision of this Declaration or the By-Laws, insuring the Investment Adviser, Administrator, placement agent, Holders, Trustees, officers, employees, agents or independent contractors of the Trust or any Series against all claims arising by reason of holding any such position or by reason of any action taken or omitted to be taken by any such Person in such capacity, whether or not constituting negligence, or whether or not the Trust or any Series would have the power to indemnify such Person against such liability; (e) indemnify any person with whom the Trust or any Series has dealings, including the Holders, Trustees, officers, employees, agents, Investment Adviser, Administrator, placement agent and independent contractors of the Trust or any Series, to such extent permitted by law and not inconsistent with the applicable provisions of this Declaration; (f) subject to applicable Fundamental Policies, guarantee indebtedness or contractual obligations of others; (h) determine and change the fiscal year of the Trust or any Series and the method by which its accounts shall be kept; and (g) adopt a seal for the Trust or any Series, but the absence of such seal shall not impair the validity of any instrument executed on behalf of the Trust or Series. SECTION 3.13. MANNER OF ACTING. Except as otherwise provided herein, in the By-laws, in the 1940 Act or in any other applicable provision of law, any action to be taken by the Trustees may be taken in the manner set forth in Section 2.5 hereof. ARTICLE IV INVESTMENT ADVISORY, ADMINISTRATIVE SERVICES AND PLACEMENT AGENT ARRANGEMENTS; CUSTODIAN SECTION 4.1. INVESTMENT ADVISORY AND OTHER ARRANGEMENTS. The Trustees may in their discretion, from time to time, cause the Series to separately enter into investment advisory and administrative services contracts or placement agent agreements whereby the other party to such contract or agreement shall undertake to furnish to the Series specified therein such investment advisory, administrative, placement agent and/or other services as the Trustees shall, from time to time, consider desirable with respect to such Series and all upon such terms and conditions as the Trustees may in their discretion determine. Notwithstanding any other provisions of this Declaration, the Trustees may authorize any Investment Adviser (subject to such general or specific instructions as the Trustees may, from time to time, adopt) to effect purchases, sales, loans or exchanges of Trust Property on behalf of any Series or may authorize any officer, employee or Trustee to effect such purchases, sales, loans or exchanges pursuant to recommendations of any such Investment Adviser (and all without further action by the Trustees). Any such purchase, sales, loans and exchanges shall be deemed to have been authorized by all of the Trustees. The Trust hereby appoints Kinetics Asset Management, Inc. as the initial Investment Advisor. SECTION 4.2. PARTIES TO CONTRACT. Any contract of the character described in Section 4.1 of this Article IV or in the By-Laws of the Trust may be entered into with any corporation, firm, trust or association, although one or more of the Trustees or officers of the Trust may be an officer, director, trustee, shareholder or member of such other party to the contract; and no such contract shall be invalidated or rendered voidable by reason of the existence of any such relationship, nor shall any person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust or any Series under or by reason of said contract or accountable for any profit realized directly or indirectly therefrom, provided that the contract when entered into was reasonable and fair and not inconsistent with the provisions of this Article IV or the By-Laws. The same Person (including a firm, corporation, trust or association) may be the other party to contracts entered into pursuant to Section 4.1 above or the By-Laws of the Trust, and any individual may be financially interested or otherwise affiliated with Persons who are parties to any or all of the contracts mentioned in this Section 4.2. SECTION 4.3. CUSTODIAN. The Trustees may appoint one or more banks or trust companies as custodian of the securities and cash belonging to the Series. The agreement providing for such appointment shall contain such terms and conditions as the Trustees in their discretion determine to be not inconsistent with this Declaration, the applicable provisions of the 1940 Act and any applicable provisions of the By-Laws of the Trust. One or more subcustodians may be appointed in a manner not inconsistent with this Declaration, the applicable provisions of the 1940 Act and any applicable provisions of the By-Laws of the Trust. ARTICLE V INTERESTS IN THE TRUST SECTION 5.1. INTERESTS. Subject to the limitations contained in Section 5.8 relating to the number of permitted Holders, the beneficial interests in the Trust Property shall consist of an unlimited number of nontransferable Interests that shall be denominated in dollars corresponding to the value of such Interests determined by reference to the corresponding Book Capital Accounts. All Interests shall be validly issued, fully paid and nonassessable when issued for such consideration as the Trustees shall determine. The Trustees may permit the purchase of Interests (for cash or other consideration acceptable to the Trustees, subject to the requirements of the 1940 Act) but only if the purchaser is an Institutional Investor, except as set forth in each Series' Prospectus. Subject to applicable law, the provisions hereof and such restrictions as may be adopted by the Trustees, a Holder may increase its Interest by contributions or decrease its Interest by withdrawals without limitation. Pursuant to Section 3806(b)(2) of the Act, the Trustees shall have authority, from time to time, to establish Interests of a Series, each of which shall be separate and distinct from the Interests in any other Series. The Series shall include, without limitation, those Series specifically established and designated in Section 5.2 hereof, and such other Series as the Trustees may deem necessary or desirable. The Trustees shall have exclusive power without the requirement of Holder approval to establish and designate such separate and distinct Series, and, subject to the provisions of this Declaration and the 1940 Act, to fix and determine the rights of Holders of Interests in such Series, including with respect to the price, terms and manner of purchase and redemption, dividends and other distributions, rights on liquidation, sinking or purchase fund provisions, conversion rights and conditions under which the Holders of the several Series shall have separate voting rights or no voting rights. The Trust is a series trust pursuant to Sections 3804(a) and 3806(b)(2) of the Act, and each Series shall be a separate series of the Trust within the meaning of Section 3806(b)(2) of the Act. As such, separate and distinct records shall be maintained for each Series and the assets of the Trust associated with each Series shall be held and accounted for separately from the other assets of the Trust or any other Series. The debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to each Series shall be enforceable against the assets of such Series only, and not against the assets of the Trust generally or the assets of any other Series, nor shall the assets of any Series be charged with the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to another Series or, except as otherwise provided herein, the Trust generally. SECTION 5.2. ESTABLISHMENT AND DESIGNATION OF SERIES. The establishment and designation of any Series shall be effective upon the execution by the Secretary or an Assistant Secretary of the Trust, pursuant to authorization by a majority of the Trustees, of an instrument setting forth such establishment and designation and the relative rights and preferences of the Interests of such Series, or as otherwise provided in such instrument. At any time the Trustees may by resolution adopted by a majority of their number, and evidenced by an instrument executed by the Secretary or an Assistant Secretary of the Trust, abolish that Series and the establishment and designation thereof and redeem the Interests therein. Each instrument referred to in this paragraph shall have the status of an amendment to this Declaration of Trust. Without limiting the authority of the Trustees set forth above to establish and designate further Series, the Trustees hereby establish and designate nine (9) Series: (1) The Internet Portfolio, (2) The Internet Emerging Growth Portfolio, (3) The Internet Global Growth Portfolio, (4) The Internet New Paradigm Portfolio, (5) The Internet Infrastructure Portfolio, (6) The Medical Portfolio, (7) The Kinetics Government Money Market Portfolio, (8) Small Cap Opportunities Portfolio, and (9) The Middle East Growth Portfolio. The Interests of each of these Series and any Interests of any subsequent Series that may from time to time be established and designated by the Trustees shall (unless the Trustees otherwise determine with respect to some further Series at the time of establishing and designating the same) have the following relative rights and preferences: (a) ASSETS BELONGING TO SERIES. All consideration received by the Trust for the issue or sale of Interests of a particular Series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall be held by the Trustees in a separate account for the benefit of the Holders of Interests of that Series and shall irrevocably belong to that Series for all purposes, and shall be so recorded upon the books of account of the Trust. Such consideration, assets, income, earnings, profits and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets belonging to" that Series. No Series shall have any right to or interest in the assets belonging to any other Series, and no Holder shall have any right or interest with respect to the assets belonging to any Series in which it does not hold an Interest. (b) LIABILITIES BELONGING TO SERIES. The assets belonging to each particular Series shall be charged with the liabilities in respect of that Series and all expenses, costs, charges and reserves attributable to that Series. The liabilities, expenses, costs, charges and reserves so charged to a Series are herein referred to as "liabilities belonging to" that Series. Subject to Section 8.1 hereof, no Series shall be liable for or charged with the liabilities belonging to any other Series. (c) VOTING. On each matter submitted to a vote of the Holders, each Holder of an Interest in each Series shall be entitled to a vote proportionate to its Interest in such Series as recorded on the books of the Trust and all Holders of Interests in each Series shall vote as a separate class except as to voting for Trustees and as otherwise required by the 1940 Act, in which case all Holders shall vote together as a single class. As to any matter that does not affect the interest of a particular Series or class, only the Holders of Interests of the one or more affected Series or class shall be entitled to vote. SECTION 5.3. RIGHTS OF HOLDERS. The ownership of the Trust Property of every description and the right to conduct any activities hereinbefore described shall be vested exclusively in the Trust, and the Holders shall have no interest therein other than the beneficial interest conferred by their Interests, and they shall have no right to call for any partition or division of any property, profits, rights or interests of the Trust or any Series. No Holder shall have any interest in or rights with respect to any Series in which it does not hold an Interest. The Interests shall be personal property giving only the rights specifically set forth in this Declaration. The Holders shall have no right to demand payment for their Interests or any other rights of dissenting shareholders in the event the Trust participates in any transaction that would give rise to appraisal or dissenter's rights by a shareholder of a corporation organized under the General Corporation Law of the State of Delaware or otherwise. Holders shall have no preemptive or other rights to subscribe for additional Interests or other securities issued by the Trust. No action may be brought by a Holder on behalf of the Trust or any Series thereof unless Holders owning, in the aggregate, not less than 25% of the then-outstanding Interests of the Trust or such Series join in the bringing of such action. All Persons, by virtue of acquiring an Interest in the Trust and being registered as a Holder in accordance with Section 5.5 hereof, shall be deemed to have assented to, and shall be bound by, this Declaration to the same extent as if such Person was a party hereto. SECTION 5.4. PURCHASE OF OR INCREASE IN INTERESTS. The Trustees, in their discretion, may, from time to time, without a vote of the Holders, permit the purchase of additional Interests of any Series by such Person or Persons (including existing Holders), subject to the provisions of Section 5.1 hereof, and for such type of consideration, including cash or property, at such time or times (including, without limitation, each business day), and on such terms as the Trustees may deem best, and may in such manner acquire other assets (including the acquisition of assets subject to, and in connection with the assumption of, liabilities) and businesses. SECTION 5.5. REGISTER OF INTERESTS. A register shall be kept by the Trustees or an officer of the Trust, on behalf of the Trust, that shall contain the names and addresses of the Holders and the Book Capital Account balances of each Holder in each Series. Each such register shall be conclusive as to who the Holders are and who shall be entitled to payments of distributions or otherwise to exercise or enjoy the rights of Holders. No Holder shall be entitled to receive payment of any distribution, nor to have notice given to it as herein provided, until it has given its address to such officer or agent of the Trust as shall keep the said register for entry thereon. SECTION 5.6. NONTRANSFERABILITY. To the fullest extent permitted by law, Interests shall not be transferable and no transferee shall be recognized as a Holder except with the prior written consent of all of the Trustees and all remaining Holders of Interests. SECTION 5.7. NOTICES. Any and all notices to which any Holder hereunder may be entitled and any and all communications shall be deemed duly served or given if mailed, postage prepaid, addressed to any Holder of record at its last known address as recorded on the register of the Trust or transmitted to the Holders by any other method permitted by law. SECTION 5.8. LIMITATION ON NUMBER OF HOLDERS. Notwithstanding any provision hereof to the contrary, the number of Holders of Interests in any Series shall be limited to fewer than 100. Solely for purposes of determining the number of Holders of Interests in any Series under this Section 5.8, each beneficial owner of a grantor trust that is itself a Holder shall be treated as a Holder of such Interest. SECTION 5.9. NO LIABILITY OF HOLDERS. All Interests, when issued in accordance with this Declaration, shall be fully paid and nonassessable. Holders shall be entitled to the full protection against personal liability for the obligations of the Trust under Section 3803(a) of the Act. The Trust shall indemnify and hold each Holder harmless from and against any claim or liability to which such Holder may become subject solely by reason of his or her being or having been a Holder and not because of such Holder's acts or omissions or for some other reason, and shall reimburse such Holder for all legal and other expenses reasonably incurred by him or her in connection with any such claim or liability (upon proper and timely request by the Holder); provided, however, that no Holder shall be entitled to indemnification by any Series unless such Holder is a Holder of Interests of such Series. SECTION 5.10. CLASSES OF INTERESTS. The Trustees may, without approval of the Holders of any Interests, establish and designate classes of Interests of any Series or divide Interests of any previously established Series into two or more classes, Interests of each class having such preferences and special or relative rights and privileges (including conversion rights, if any) as the Trustees may determine in their sole discretion. The fact that a Series shall have initially been established without classes (i.e., that all Interests of such Series are initially of a single class), or that a Series shall have more than one established class, shall not limit the authority of the Trustees to establish separate classes, or one or more further classes, of such Series without approval of the Holders of the initial class thereof, or previously established class or classes thereof. The establishment and designation of any class of Interests shall be effective upon the execution by the Secretary or an Assistant Secretary of the Trust, pursuant to authorization by a majority of the Trustees, of an instrument setting forth such establishment and designation and the relative rights and preferences of such class. The Trustees may amend the By-laws providing for class votes and meetings and related matters. Notwithstanding anything set forth in Section 5.10, classes of Interests within a Series shall not be required to vote or receive distributions on a pro rata basis unless required by applicable law or the terms of the instrument establishing such class. ARTICLE VI DECREASES AND WITHDRAWALS SECTION 6.1. DECREASES AND WITHDRAWALS. A Holder shall have the right on any day the New York Stock Exchange is open to decrease its Interest in any Series, and to withdraw completely from any Series, at the next determined net asset value attributable to the Interest (or portion thereof) being withdrawn, and an appropriate adjustment therefor shall be made to such Holder's Book Capital Account. The rights of a Holder upon withdrawal from a Series shall be limited to the assets belonging to the Series from which the withdrawal is made. The Trust may, subject to compliance with the 1940 Act, charge fees for effecting such decrease or withdrawal, at such rates as the Trustees may establish, and may at any time and from time to time, suspend such right of decrease or withdrawal. The procedures for effecting decreases or withdrawals shall be as determined by the Trustees from time to time, subject to the requirements of the 1940 Act. ARTICLE VII DETERMINATION OF BOOK CAPITAL ACCOUNT BALANCES, NET INCOME AND DISTRIBUTIONS SECTION 7.1. BOOK CAPITAL ACCOUNT BALANCES. The Book Capital Account balances of Holders of the Trust with respect to each Series shall be determined on such days and at such time or times as the Trustees may determine, consistent with the requirements of the 1940 Act, with income, gains and losses of each Series or class thereof determined in accordance with generally accepted accounting principles to be allocated among the Holders of such Series or class thereof in accordance with their Interests. The power and duty to make calculations of the Book Capital Account balances of the Holders may be delegated by the Trustees to the Investment Adviser, Administrator, Custodian or such other person as the Trustees may determine. SECTION 7.2. ALLOCATIONS AND DISTRIBUTIONS TO HOLDERS. In compliance with the Treasury Regulations promulgated under applicable provisions of the Code, the Trustees shall (i) allocate items of taxable income, gain, loss and deduction with respect to each Series to Holders of the Interests in such Series, provided that, except as may otherwise be specifically provided in the Treasury Regulations, in all cases allocations of specific types of income shall be proportionate to the Interests of the Holders in that Series or class thereof; and (ii) upon liquidation of a Series, make final distribution of the net assets of such Series among the Holders of the Interests in such Series in accordance with their respective Book Capital Accounts. The Trustees shall provide each Holder that is a regulated investment company, as defined in Section 851(a) of the Code, information that will enable it to take into account its share of items of taxable income, gain, loss and deduction as they are taken into account by the Series in order to facilitate compliance with Code Section 4982. Any income tax withholding or other withholding of taxes required by law with respect to the allocable share of income of, or distributions to, a Holder shall be accounted for as a distribution to and charged to the Book Capital Account of such Holder at the time of payment of such taxes to the applicable taxing authority. The Trustees may always retain from the assets belonging to a Series such amount as they may deem necessary to pay the liabilities belonging to that Series. SECTION 7.3. POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding any of the foregoing provisions of this Article VII the Trustees may prescribe, in their absolute discretion, such other bases and times for determining the net income and net assets of the Trust and of each Series as they may deem necessary or desirable to enable the Trust to comply with any provision of the 1940 Act, any rule or regulation thereunder, or any order of exemption issued by said Commission, all as in effect now or hereafter amended or modified. ARTICLE VIII LIABILITY FOR TRUST OBLIGATIONS SECTION 8.1. LIABILITIES OF SERIES. Without limitation of the provisions of Section 5.2(b) hereof, but subject to the right of the Trustees in their discretion to allocate general liabilities, expenses, costs, charges or services as herein provided, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular Series shall be enforceable against the assets of such Series only, and not against the assets of any other Series or the Trust generally. Notice of this limitation on interseries liabilities shall be set forth in the certificate of trust of the Trust (whether originally or by amendment) as filed or to be filed in the Office of the Secretary of State of the State of Delaware pursuant to Section 3810 of the Act, and upon the giving of such notice in the certificate of trust, the statutory provisions of Section 3804(a) of the Act relating to limitations on interseries liabilities (and the statutory effect under Section 3804(a) of setting forth such notice in the certificate of trust) shall become applicable to the Trust and each Series. Every note, bond, contract or other undertaking issued by or on behalf of a particular Series shall include a recitation limiting the obligation represented thereby to that Series and its assets. SECTION 8.2. NO PERSONAL LIABILITY OF TRUSTEES, ETC. (a) TRUSTEES. The Trustees shall be entitled to the protection against personal liability for the obligations of the Trust under Section 3803(b) of the Act. No Trustee shall be liable to the Trust, its Holders or to any Trustee, officer, employee or agent thereof for any action or failure to act (including, without limitation, the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties. (b) OFFICERS, EMPLOYEES OR AGENTS OF THE TRUST. The officers, employees and agents of the Trust shall be entitled to the protection against personal liability for the obligations of the Trust under Section 3803(c) of the Act. No officer, employee or agent of the Trust shall be liable to the Trust, its Holders or to any Trustee, officer, employee or agent thereof for any action or failure to act (including, without limitation, the failure to compel in any way any former or acting Trustee to redress any breach of trust) except for his own bad faith, willful misfeasance, gross negligence or reckless disregard of his duties. (c) The provisions of this Declaration, to the extent that they expand or restrict the duties and liabilities of the Trustees, officers, employees or agents of the Trust otherwise existing at law or in equity, are agreed by the Holders to modify to that extent such other duties and liabilities. SECTION 8.3. INDEMNIFICATION. The Trust shall indemnify each of its Trustees, officers, employees and agents (including persons who serve at its request as directors, officers or trustees of another organization in which it 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 and penalties, and as counsel fees) reasonably incurred by him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be involved or with which he may be threatened, while in office or thereafter, by reason of his being or having been such a Trustee, officer, employee or agent, except with respect to any matter as to which he shall have been adjudicated to have acted in bad faith, willful misfeasance, gross negligence or reckless disregard of his duties, such liabilities and expenses being liabilities belonging to the Series out of which such claim for indemnification arises; provided, however, that as to any matter disposed of by a compromise payment by such Person, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless there has been a determination that such Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by the court or other body approving the settlement or other disposition or, in the absence of a judicial determination, by a reasonable determination, based upon a review of readily available facts (as opposed to a full trial-type inquiry), that he did not engage in such conduct, which determination shall be made by a majority of a quorum of Trustees who are neither Interested Persons of the Trust nor parties to the action, suit or proceeding, or by written opinion from independent legal counsel approved by the Trustees. The rights accruing to any Person under these provisions shall not exclude any other right to which he may be lawfully entitled; provided that no Person may satisfy any right of indemnity or reimbursement granted herein or to which he may be otherwise entitled except out of the Trust Property. The Trustees may make advance payments in connection with indemnification under this Section 8.3; provided that any advance payment of expenses by the Trust to any Trustee, officer, employee or agent shall be made only upon the undertaking by such Trustee, officer, employee or agent to repay the advance unless it is ultimately determined that he is entitled to indemnification as above provided, and only if one of the following conditions is met: (i) the Trustee, officer, employee or agent to be indemnified provides a security for his undertaking; (ii) the Trust shall be insured against losses arising by reason of any lawful advances; or (iii) there is a determination, based on a review of readily available facts, that there is reason to believe that the Trustee, officer, employee or agent to be indemnified ultimately will be entitled to indemnification, which determination shall be made by a majority of a quorum of Trustees who are neither Interested Persons of the Trust nor parties to the Proceedings, or an independent legal counsel in a written opinion. SECTION 8.4. NO PROTECTION AGAINST CERTAIN 1940 ACT LIABILITIES. Nothing contained in Sections 8.1, 8.2 or 8.3 hereof shall protect any Trustee or officer of the Trust from any liability to the Trust or its Holders to which he would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Nothing contained in Sections 8.1, 8.2 or 8.3 hereof or in any agreement of the character described in Section 4.1 or 4.2 hereof shall protect any Investment Adviser to the Trust or any Series against any liability to the Trust or any Series to which he would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of his or its duties to the Trust or Series, or by reason of his or its reckless disregard to his or its obligations and duties under the agreement pursuant to which he serves as Investment Adviser to the Trust or any Series. SECTION 8.5. NO BOND REQUIRED OF TRUSTEES. No Trustee shall be obligated to give any bond or other security for the performance of any of his duties hereunder. SECTION 8.6. NO DUTY OF INVESTIGATION; NOTICE IN TRUST INSTRUMENTS, ETC. No purchaser, lender, seller or other Person dealing with the Trustees or with any officer, employee or agent of the Trust shall be bound to make any inquiry concerning the validity of any transaction purporting to be made by the Trustees or by said officer, employee or agent or be liable for the application of money or property paid, lent or delivered to or on the order of the Trustees or of said officer, employee or agent. Every contract, undertaking, instrument, certificate, interest or obligation or other security of the Trust, and every other act or thing whatsoever executed in connection with the Trust, shall be conclusively presumed to have been executed or done by the executors thereof only in their capacity as Trustees under this Declaration or in their capacity as officers, employees or agents of the Trust. Every written obligation, contract, instrument, certificate or other interest or undertaking of the Trust made or sold by the Trustees or by any officer, employee or agent of the Trust, in his capacity as such, may contain an appropriate recital to the effect that the Holders, Trustees, officers, employees and agents of the Trust shall not personally be bound by or liable thereunder, nor shall resort be had to their private property for the satisfaction of any obligation or claim thereunder, and appropriate references shall be made therein to the Declaration, and may contain any further recital that they may deem appropriate, but the omission of such recital shall not operate to impose personal liability on any of the Holders, Trustees, officers, employees or agents of the Trust. SECTION 8.7. INSURANCE. The Trustees may maintain insurance for the protection of the Trust Property, its Holders, Trustees, officers, employees and agents in such amount as the Trustees shall deem adequate to cover possible tort liability, and such other insurance as the Trustees in their sole judgment shall deem advisable. SECTION 8.8. RELIANCE ON EXPERTS, ETC. Each Trustee, officer or employee of the Trust shall, in the performance of his duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of its officers or employees or by any Investment Adviser, the Administrator, accountant, appraiser or other expert or consultant selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee; provided that nothing in this Section shall be deemed to exonerate the Trustees from their duties of reasonable care, diligence and prudence or any other duties imposed by the 1940 Act. SECTION 8.9. ACCOUNTING. The Trustees shall not be required to file any inventory or accounting with any court or officer of any court, unless specifically ordered to do so on the application of the Trustees or on the application of the Holders of Interests of the Trust, or on the court's own motion. ARTICLE IX HOLDERS SECTION 9.1. MEETINGS OF HOLDERS. Meetings of the Holders may be called at any time by a majority of the Trustees and shall be called by any Trustee upon written request of Holders holding, in the aggregate, not less than 10% of the Interests of a Series (if the meeting relates solely to that Series), or not less than 10% of the Interests of the Trust (if the meeting relates to the Trust and not solely to a particular Series), such request specifying the purpose or purposes for which such meeting is to be called. Any such meeting shall be held within or outside of the State of Delaware on such day and at such time as the Trustees shall designate. Holders of at least one-third of the Interests of the Series (if the meeting relates solely to that Series) or Holders of at least one-third of the Interests of the Trust (if the meeting relates to the Trust and not solely to a particular Series), present in person or by proxy, shall constitute a quorum for the transaction of any business, except as may otherwise be required by the 1940 Act or other applicable law or by this Declaration or the By-Laws of the Trust. If a quorum is present at a meeting, an affirmative vote by the Holders present, in person or by proxy, holding more than 50% of the total Interests of the Holders present, either in person or by proxy, at such meeting constitutes the action of the Holders, unless the 1940 Act, other applicable law, this Declaration or the By-Laws of the Trust require a greater number of affirmative votes. SECTION 9.2. NOTICE OF MEETINGS. Notice of all meetings of the Holders stating the time, place and purposes of the meeting shall be given by the Trustees by mail to each Holder of the Series or class thereof or the Trust, as the case may be, at his registered address or transmitted to the Holders by any other method permitted by law, sent at least 10 days and not more than 90 days before the meeting. At any such meeting, any business properly before the meeting may be considered whether or not stated in the notice of the meeting. Any adjourned meeting may be held as adjourned without further notice. SECTION 9.3. RECORD DATE FOR MEETINGS. For the purpose of determining Holders who are entitled to notice of and to vote at any meeting, or to participate in any distribution, or for the purpose of any other action, the Trustees may from time to time fix a date, not more than 90 days prior to the date of any meeting of the Holders or payment of distributions or other action, as the case may be, as a record date for the determination of the Persons to be treated as Holders of record of a particular Series or the Trust for such purposes. SECTION 9.4. PROXIES, ETC. At any meeting of Holders, any Holder entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Secretary, or with such other officer or agent of the Trust as the Secretary may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a resolution of a majority of the Trustees, proxies may be solicited in the name of one or more Trustees or one or more of the officers of the Trust. Only Holders of record shall be entitled to vote. Each Holder shall be entitled to vote proportionate to his Interest in the Trust or in any Series (as the context may require). When Interests are held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Interest, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Interest. A proxy purporting to be executed by or on behalf of a Holder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. If the Holder is a minor or a person of unsound mind, and subject to guardianship or to the legal control of any other person as regards the charge or management of his Interest, he may vote by his guardian or such other person appointed or having such control, and such vote may be given in person or by proxy. SECTION 9.5. REPORTS. The Trustees shall cause to be prepared, at least annually, a report of operations containing a balance sheet and statement of income and undistributed income of each Series prepared in conformity with generally accepted accounting principles and an opinion of an independent public accountant on such financial statements. The Trustees shall, in addition, furnish to the Holders at least semiannually interim reports containing an unaudited balance sheet as of the end of such period and an unaudited statement of income and surplus for the period from the beginning of the current fiscal year to the end of such period. SECTION 9.6. INSPECTION OF RECORDS. Subject to such restrictions as the Trustees may reasonably impose, the records of the Trust shall be open to inspection by Holders during normal business hours for any purpose not harmful to the Trust. SECTION 9.7. HOLDER ACTION BY WRITTEN CONSENT. Any action that may be taken by Holders may be taken without a meeting if Holders holding, in the aggregate, more than 50% of the total Interests entitled to vote (or such larger proportion thereof as shall be required by any express provision of this Declaration) shall consent to the action in writing or by any other method permitted by law and evidence of the consents are filed with the records of the meetings of Holders. Such consent shall be treated for all purposes as a vote taken at a meeting of Holders. ARTICLE X DURATION; TERMINATION OF TRUST OR SERIES; AMENDMENT; MERGERS; ETC. SECTION 10.1. DURATION. Subject to possible dissolution or termination in accordance with Sections 10.2 and 10.3, respectively, the Trust created hereby shall have perpetual existence. SECTION 10.2. DISSOLUTION OF SERIES OR TRUST. Any Series shall be dissolved by unanimous consent/resolution adopted by a majority of the Trustees by notice of dissolution to the Holders of the Interests of the Series. The Trust shall be dissolved upon the dissolution of the last remaining Series. SECTION 10.3. TERMINATION OF TRUST OR SERIES. (a) Upon an event of dissolution of the Trust or a Series, the Trust or Series shall be terminated in accordance with the following provisions: (i) The Trust (or Series, as applicable) shall thereafter carry on no business except for the purpose of winding up its affairs. (ii) The Trustees shall proceed to wind up the affairs of the Trust (or Series, as applicable) in accordance with Section 3808 of the Act, and all of the powers of the Trustees under this Declaration shall continue until the affairs of the Trust (or Series, as applicable) shall have been wound up, including the power to fulfill or discharge the contracts of the Trust (or Series, as applicable), collect its assets, sell, convey, assign, exchange, transfer or otherwise dispose of all or any part of the remaining Trust Property (or assets belonging to the Series, as applicable) to one or more persons at public or private sale for consideration that may consist in whole or in part of cash, securities or other property of any kind, discharge or pay its liabilities, and to do all other acts appropriate to liquidate its business. (iii) After paying or adequately providing for the payment of all liabilities belonging to the Series subject of termination and upon receipt of such releases, indemnities and refunding agreements as they deem necessary for their protection, the Trustees may distribute the remaining Trust Property or assets belonging to such Series, in cash or in kind or partly each, among the Holders of such Series according to their Book Capital Accounts in such Series. In all cases, as herein provided, the rights of Holders of Interests in a Series upon termination and liquidation of that Series shall be limited to the assets belonging to that Series. (b) After termination of the Trust or Series and distribution to the Holders as herein provided, a majority of the Trustees shall execute and lodge among the records of the Trust an instrument in writing setting forth the fact of such termination. Upon termination of the Trust, the Trustees shall file a certificate of cancellation in accordance with Section 3810 of the Act and such Trustees shall, subject to Section 3808 of the Act, thereupon be discharged from all further liabilities and duties hereunder, and the rights and interests of all Holders shall thereupon cease. SECTION 10.4. AMENDMENT PROCEDURE. (a) Two-thirds (2/3) of the Trustees then in office may amend this Declaration at any time for any purpose without the approval of the Holders of Interests; provided, that the vote or a written or other legally permissible form of consent of Holders holding, in the aggregate, more than 50% of the total outstanding Interests or of Holders of 67% or more of the Interests voting or consenting, if Holders of at least 50% of such Interests vote or consent, shall be necessary to approve any amendment whenever such vote or consent is required under the 1940 Act. (b) Nothing contained in this Declaration shall permit the amendment of this Declaration to impair the exemption from personal liability of Holders, Trustees, officers, employees and agents of the Trust. (c) A certificate signed by a Trustee or by the Secretary or any Assistant Secretary of the Trust, setting forth an amendment and reciting that it was duly adopted by the Holders or by the Trustees as aforesaid or a copy of the Declaration, as amended, certified by a Trustee or the Secretary or any Assistant Secretary of the Trust, certifying that such Declaration is a true and correct copy of the Declaration as amended, shall be conclusive evidence of such amendment when lodged among the records of the Trust. Notwithstanding any other provision hereof, until such time as Interests are first sold to an Institutional Investor, this Declaration may be terminated or amended in any respect by vote or written consent of the Trustees. SECTION 10.5. MERGER, CONSOLIDATION, CONVERSION AND SALE OF ASSETS. (a) The Trust may convert or merge into or consolidate with any corporation, association, other trust or other organization or the Trust or any Series thereof may sell, lease or exchange all or substantially all of the Trust Property belonging to such Series, including its good will, upon such terms and conditions and for such consideration when and as authorized by vote or written or other legally permissible form of consent of two-thirds (2/3) of the Trustees then in office; provided that any sale, conveyance, assignment, exchange, transfer or other disposition of all or substantially all of the Trust Property or substantially all of the assets belonging to a particular Series other than for cash, shall require approval of the principal terms of the transaction and the nature and amount of the consideration by the vote at a meeting, or by written consent, of Holders holding, in the aggregate, more than 50% of the total outstanding Interests of the Trust or Series, as the case may be, entitled to vote. In accordance with Section 3815(f) of the Act, an agreement of merger or consolidation may effect any amendment to this Declaration or the By-Laws or effect the adoption of a new declaration or by-laws of the Trust if the Trust is the surviving or resulting entity. (b) The Trustees may cause to be organized or assist in organizing a corporation or corporations under the laws of any jurisdiction or any other trust, partnership, association or other organization to take over all of the Trust Property, or Series thereof or to carry on any business in which the Trust shall directly or indirectly have any interest, and to sell, convey and transfer the Trust Property or Series thereof to any such corporation, trust, association or organization in exchange for the equity interests thereof or otherwise, and to lend money to, subscribe for the equity interests of, and enter into any contracts with any such corporation, trust, partnership, association or organization, or any corporation, partnership, trust, association or organization in which the Trust holds or is about to acquire equity interests. The Trustees may also cause a merger or consolidation between the Trust or any successor thereto and any such corporation, trust, partnership, association or other organization if and to the extent permitted by law, as provided under the law then in effect. Nothing contained herein shall be construed as requiring approval of the Holders for the Trustees to organize or assist in organizing one or more corporations, trusts, partnerships, associations or other organizations and selling, conveying or transferring a portion of the Trust Property to such organizations or entities. ARTICLE XI MISCELLANEOUS SECTION 11.1. CERTIFICATE OF TRUST; REGISTERED AGENT. (a) The initial Trustees are hereby authorized and directed to execute and deliver, and shall file a certificate of trust in accordance with Section 3810 of the Act. (b) The Trust shall comply with Section 3807(b) of the Act by having and maintaining a registered office in Delaware and by designating a registered agent for service of process on the Trust, which agent shall have the same business office as the Trust's registered office. The Trust initially appoints Corporation Service Company as the Registered Agent of the Trust. SECTION 11.2. GOVERNING LAW. This Declaration is executed by all of the Trustees and delivered with reference to the Act and the laws of the State of Delaware, and the rights of all parties and the validity and construction of every provision hereof shall be governed by, subject to and construed according to the Act and the laws of the State of Delaware (unless and to the extent otherwise provided for and/or preempted by the 1940 Act or other applicable federal securities laws); provided, however, that there shall not be applicable to the Trust, the Trustees, the Holders or this Declaration (a) the provisions of Section 3540 of Title 12 of the Delaware Code or (b) any provisions of the laws (statutory or common) of the State of Delaware (other than the Act) pertaining to trusts that are inconsistent with the rights, duties, powers, limitations or liabilities of the Trustees or the Holders set forth or referenced in this Declaration. SECTION 11.3. COUNTERPARTS. The Declaration may be simultaneously executed in several counterparts, each of which shall be deemed to be an original, and such counterparts, together, shall constitute one and the same instrument, which shall be sufficiently evidenced by any such original counterpart. SECTION 11.4. RELIANCE BY THIRD PARTIES. Any certificate executed by an individual who, according to the records of the Trust, appears to be a Trustee hereunder, or Secretary, Assistant Secretary, Treasurer or Assistant Treasurer of the Trust, certifying to: (a) the number or identity of Trustees or Holders, (b) the due authorization of the execution of any instrument or writing, (c) the form of any vote passed at a meeting of Trustees or Holders, (d) the fact that the number of Trustees or Holders present at any meeting or executing any written instrument satisfies the requirements of this Declaration, (e) the form of any By-Laws adopted by or the identity of any officers elected by the Trustees, or (f) the existence of any fact or facts that in any manner relate to the affairs of the Trust, shall be conclusive evidence as to the matters so certified in favor of any Person dealing with the Trustees and their successors. SECTION 11.5. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS. (a) The provisions of this Declaration are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions are in conflict with the 1940 Act, the regulated investment company provisions of the Code, the Act or, consistent with Section 11.2, any other applicable Delaware law regarding administration of trusts, or with other applicable laws and regulations, the conflicting provisions shall be deemed superseded by such law or regulation to the extent necessary to eliminate such conflict; provided, however, that such determination shall not affect any of the remaining provisions of this Declaration or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of this Declaration shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall pertain only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration in any jurisdiction. SECTION 11.6. TRUST ONLY. It is the intention of the Trustees to create only a business trust under the Act with the relationship of trustee and beneficiary between the Trustees and each Holder from time to time. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment or any form of legal relationship other than a Delaware business trust except to the extent such trust is deemed to constitute a partnership under the Code and applicable state tax laws. Nothing in this Declaration shall be construed to make the Holders, either by themselves or with the Trustees, partners or members of a joint stock association. IN WITNESS WHEREOF, the undersigned have executed this instrument as of the 14th day of March, 2000. Steven R. Samson, as Trustee Lee W. Schultheis, as Trustee Brooke B. Connell, as Trustee EX-99.B 3 BY-LAWS BY-LAWS OF KINETICS PORTFOLIOS TRUST These By-Laws are made and adopted pursuant to Section 2.7 of the Declaration of Trust establishing Kinetics Portfolios Trust (the "Trust"), dated March 14, 2000, as from time to time amended (the "Declaration"). All words and terms capitalized in these By-Laws that are not otherwise defined herein shall have the meaning or meanings set forth for such words or terms in the Declaration. ARTICLE I HOLDERS MEETINGS Section 1.1. Chairman. Subject to Section 3.6 of these By-Laws, the President shall act as chairman at all meetings of the Holders, or the Trustees present at each meeting may elect a temporary chairman for the meeting, who may be a Trustee. Section 1.2. Proxies; voting. Holders may vote either in person or by duly executed proxy and each Holder shall be entitled to a vote proportionate to his Interest in each Series in the Trust, all as provided in Article IX of the Declaration. No proxy shall be valid after eleven (11) months from the date of its execution, unless a longer period is expressly stated in such proxy. Section 1.3. Fixing Record Dates. For the purpose of determining the Holders who are entitled to notice of or to vote or act at a meeting, including any adjournment thereof, the Trustees may from time to time fix a record date in the manner provided in Section 9.3 of the Declaration. If the Trustees do not, prior to any meeting of the Holders, so fix a record date, then the record date for determining Holders entitled to notice of or to vote at the meeting of Holders shall be the thirtieth day before the meeting. Section 1.4. Inspectors of Election. In advance of any meeting of the Holders, the Trustees may appoint one or more Inspectors of Election to act at the meeting or any adjournment thereof. If Inspectors of Election are not appointed in advance by the Trustees, the chairman, if any, of any meeting of the Holders may, and on the request of any Holder or his proxy shall, appoint one or more Inspectors of Election of the meeting. In case any person appointed as Inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Trustees in advance of the convening of the meeting or at the meeting by the person acting as chairman. The Inspectors of Election shall determine the Interests owned by Holders, the Interests represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, shall receive votes, ballots or consents, shall hear and determine all challenges and questions in any way arising in connection with the right to vote, shall count and tabulate all votes or consents, determine the results, and do such other acts as may be proper to conduct the election or vote with fairness to all Holders. If there is more than one Inspector of Election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all Inspectors of Election. On request of the chairman, if any, of the meeting, or of any Holder or his proxy, the Inspectors of Election shall make a report in writing of any challenge or question or matter determined by them and shall execute a certificate of any facts found by them. Section 1.5. Records at Holders' Meetings: Inspection of Records. At each meeting of the Holders there shall be open for inspection the minutes of the last previous meeting of Holders of the Trust and a list of the Holders of the Trust, certified to be true and correct by the secretary or other proper agent of the Trust, as of the record date of the meeting. Such list of Holders shall contain the name of each Holder in alphabetical order and the address and Interests owned by such Holder. Subject to such restrictions as the Trustees may reasonably impose, the Holders shall have the right to inspect books and records of the Trust during normal business hours and for any purpose not harmful to the Trust. ARTICLE II TRUSTEES Section 2.1. Annual and Regular Meetings. The Trustees shall hold an annual meeting for the election of officers and the transaction of other business which may come before such meeting. Regular meetings of the Trustees may be held on such notice at such place or places and times as the Trustees may by resolution provide from time to time. Section 2.2. Special Meetings. Special Meetings of the Trustees shall be held upon the call of the Chairman, if any, the President, the Secretary or any two Trustees, by oral, telegraphic, telephonic or written notice duly served on or sent or mailed to each Trustee not less than one day before the meeting. No notice need be given to any Trustee who attends in person or to any Trustee who, in writing signed and filed with the records of the meeting either before or after the holding thereof, waives notice. Notice or waiver of notice need not state the purpose or purposes of the meeting. Section 2.3. Chairman: Records. The Chairman, if any, shall act as chairman at all meetings of the Trustees; in his absence the President shall act as chairman; and, in the absence of the Chairman and the President, the Trustees present shall elect one of their number to act as temporary chairman. The results of all actions taken at a meeting of the Trustees, or by written consent of the Trustees, shall be recorded by the Secretary. ARTICLE III OFFICERS Section 3.1. Executive Officers. The executive officers of the Trust shall be the President, SECRETARY, and Treasurer. If the Trustees shall elect a Chairman pursuant to Section 3.6 of these By-Laws, then the Chairman shall also be an executive officer of the Trust. If the Trustees shall elect one or more vice Presidents, each such vice President shall be an executive officer. The Chairman, if there be one, shall be elected from among the Trustees, but no other executive officer need be a Trustee. Any two or more executive offices, except those of President and Vice President, may be held by the same person. A person holding more than one office may not act in more than one capacity to execute, acknowledge or verify on behalf of the Trust an instrument required by law to be executed, acknowledged and verified by more than one officer. The executive officers of the Trust shall be elected at each annual meeting of Trustees. Section 3.2. Other Officers and Agents. The Trustees may also elect one or more Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers, and such other officers and agents as the Trustees shall at any time and from time to time deem to be advisable. The President may also appoint, rename, or fix the duties, compensations or terms of office of one or more Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers as may be necessary or appropriate to facilitate management of the Trust's affairs. Section 3.3. Election and Tenure. At the initial organization meeting and thereafter at each annual meeting of the Trustees, the Trustees shall elect the Chairman, if any, President, Secretary, or Treasurer and such other officers as the Trustees shall deem necessary or appropriate in order to carry out the business of the Trust. Such officers shall hold office until their successors have been duly elected and qualified. The Trustees may fill any vacancy in office or add any additional officers at any time. Section 3.4. Removal of officers. Any officer may be removed at any time, with or without cause, by action of a majority of the Trustees. This provision shall not prevent the making of a contract of employment for a definite term with any officer and shall have no effect upon any cause of action which any officer may have as a result of removal in breach of a contract of employment. Any officer may resign at any time by notice in writing signed by such officer and delivered or mailed to the Chairman, if any, President, or Secretary, and such resignation shall take effect immediately, or at a later date according to the terms of such notice in writing. Section 3.5. Authority and Duties. All officers as between themselves and the Trust shall have such powers, perform such duties and be subject to such restrictions, if any, in the management of the Trust as may be provided in these By-Laws and the Declaration, or, to the extent not so provided, as may be prescribed by the Trustees or by the president acting under authority delegated by the Trustees pursuant to Section 3.2 of these By-Laws. Section 3.6. Chairman. When and if the Trustees deem such action to be necessary or appropriate, they may elect a Chairman from among the Trustees. The Chairman shall preside at meetings of the Holders and of the Trustees and he shall have such other powers and duties as may be prescribed by the Trustees. The Chairman shall in the absence or disability of the President exercise the powers and perform the duties of the President. Section 3.7. President. The President shall be the chief executive officer of the Trust. He shall have general and active management of the activities of the Trust, shall see to it that all orders, policies and resolutions of the Trustees are carried into effect, and, in connection therewith, shall be authorized to delegate to any Vice President of the Trust such of his powers and duties as President and at such times and in such manner as he shall deem advisable. In the absence or disability of the Chairman, or if there be no Chairman, the President shall preside at all meetings of the Holders and of the Trustees and he shall have such other powers and perform such other duties as are incident to the office of a corporate president and as the Trustees may from time to time prescribe. The President shall be, ex officio, a member of all standing committees, subject to the direction of the Trustees, the President shall have the power, in the name and on behalf of the Trust, to execute any and all loan documents, contracts, agreements, deeds, mortgages, and other instruments in writing, and to employ and discharge employees and agents of the Trust. Unless otherwise directed by the Trustees, the President shall have full authority and power, on behalf of all of the Trustees, to attend and to act and to vote, on behalf of the Trust at any meetings of business organizations in which the Trust holds an interest or to confer such powers upon any other persons, by executing any proxies duly authorizing such persons. Section 3.8. Vice Presidents. The Vice President, if any, or, if there be more than one, the Vice Presidents, shall assist the President in the management of the activities of the Trust and the implementation of orders, policies and resolutions of the Trustees at such times and in such manner as the President may deem to be advisable. If there be more than one Vice President, the Trustees may designate one as the Executive Vice President, in which case he shall be first in order of seniority, and the Trustees may also grant to other Vice Presidents such titles as shall be descriptive of their respective functions or indicative of their relative seniority. In the absence or disability of both the President and the Chairman, or in the absence or disability of the President if there be no Chairman, the Vice President, or, if there be more than one, the Vice Presidents in the order of their relative seniority, shall exercise the powers and perform the duties of those officers. Subject to the direction of the President, each Vice President shall have the power in the name and on behalf of the Trust to execute any and all loan documents, contracts, agreements, deeds, mortgages and other instruments in writing, and, in addition, shall have such other powers and perform such other duties as from time to time may be prescribed by the president or by the Trustees. Section 3.9. Assistant Vice President. The Assistant Vice President, if any, or if there be more than one, the Assistant Vice Presidents, shall perform such duties as may from time to time be prescribed by the Trustees or by the President acting under authority delegated by the Trustees pursuant to Section 3.7 of these By-Laws. Section 3.10. Secretary. The Secretary shall (a) keep the minutes of the meetings and proceedings and any written consents evidencing actions of the Holders, the Trustees and any committees of the Trustees in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; (c) be custodian of the corporate records and of the seal of the Trust and, when authorized by the Trustees, cause the seal of the Trust to be affixed to any document requiring it, and when so affixed attested by his signature as Secretary or by the signature of an Assistant Secretary; (d) perform any other duties commonly incident to the office of secretary in a business trust organized under the laws of the State of Delaware; and (e) in general, perform such other duties as from time to time may be assigned to him by the President or by the Trustees. Section 3.11. Assistant Secretaries. The Assistant Secretary, if any, or, if there be more than one, the Assistant Secretaries in the order determined by the Trustees or by the President, shall in the absence or disability of the Secretary exercise the powers and perform the duties of the Secretary, and he or she or they shall perform such other duties as the Trustees, the President or the Secretary may from time to time prescribe. Section 3.12. Treasurer. The Treasurer shall be the chief financial officer of the Trust. The Treasurer shall keep full and accurate accounts of receipts and disbursements in books belonging to the Trust, shall deposit all monies and other valuable effects in the name and to the credit of the Trust in such depositories as may be designated by the Trustees, and shall render to the Trustees and the President, at regular meetings of the Trustees or whenever they or the President may require it, an account of all his or her transactions as Treasurer and of the financial condition of the Trust. Certain of the duties of the Treasurer may be delegated to a chief accounting officer. Section 3.13. Assistant Treasurers. The Assistant Treasurer, if any, or, if there be more than one, the Assistant Treasurers in the order determined by the Trustees or by the President, shall in the absence or disability of the Treasurer exercise the powers and perform the duties of the Treasurer, and he or she or they shall perform such other duties as the Trustees, the President or the Treasurer may from time to time prescribe. ARTICLE IV INDEMNIFICATION Section 4.1. Compromise Payment. As to any matter disposed of (whether by a compromise payment, pursuant to a consent decree or otherwise) without an adjudication in a decision on the merits by a court, or by any other body before which the proceeding was brought, a Person entitled to be indemnified under the Declaration (hereinafter referred to as a "Covered Person") either (a) did not act in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust or (b) is liable to the Trust or its Holders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office, indemnification shall be provided if (a) approved as in the best interests of the Trust, after notice that it involves such indemnification, by at least a majority of the Trustees who are disinterested persons and are not Interested Persons (provided that a majority of such Trustees then in office act on the matter, upon a determination, based upon a review of readily available facts (but not a full trial-type inquiry) that such Covered Person acted in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust and is not liable to the Trust or its Holders by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office, or (b) there has been obtained an opinion in writing of independent legal counsel, based upon a review of readily available facts (but not a full trial-type inquiry) to the effect that such Covered Person appears to have acted in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust and that such indemnification would not protect such Covered Person against any liability to the Trust to which such Covered person would otherwise be subject by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office. Any approval pursuant to this Section shall not prevent the recovery from any Covered Person of any amount paid to such Covered Person in accordance with this Section as indemnification if such Covered Person is subsequently adjudicated by a court of competent jurisdiction not to have acted in good faith in the reasonable belief that such Covered Person's action was in the best interests of the Trust or to have been liable to the Trust or its Holders by reason of wilful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Covered Person's office. Section 4.2. Indemnification Not Exclusive. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any such Covered Person may be entitled. As used in this Article 4, the term "Covered Person" shall include such person's heirs, executors and administrators, and a "disinterested person" is a person against whom none of the actions, suits or other proceedings in question or another action, suit, or other proceeding on the same or similar grounds is then or has been pending. Nothing contained in this article shall affect any rights to indemnification to which personnel of the Trust, other than Trustees and officers, and other persons may be entitled by contract or otherwise under law, nor the power of the Trust to purchase and maintain liability insurance on behalf of such person. Section 4.3. Limitation. Notwithstanding any provisions in the Declaration and these By-Laws pertaining to indemnification, all such provisions are limited by the following undertaking set forth in the rules promulgated by the Securities and Exchange Commission: In the event that a claim for indemnification is asserted by a Trustee, officer or controlling person of the Trust in connection with the registered securities of the Trust, the Trust will not make such indemnification unless (i) the Trust has submitted, before a court or other body, the question of whether the person to be indemnified was liable by reason of wilful misfeasance, bad faith, gross negligence, or reckless disregard of duties, and has obtained a final decision on the merits that such person was not liable by reason of such conduct or (ii) in the absence of such decision, the Trust shall have obtained a reasonable determination, based upon a review of the facts, that such person was not liable by virtue of such conduct, by (a) the vote of a majority of Trustees who are neither interested persons as such term is defined in the Investment Company Act of 1940, nor parties to the proceeding or (b) an independent legal counsel in a written opinion. The Trust will not advance attorneys' fees or other expenses incurred by the person to be indemnified unless the Trust shall have (i) received an undertaking by or on behalf of such person to repay the advance unless it is ultimately determined that such person is entitled to indemnification and one of the following conditions shall have occurred: (x) such person shall provide security for his undertaking, (y) the Trust shall be insured against losses arising by reason of any lawful advances or (z) a majority of the disinterested, non-party Trustees of the Trust, or an independent legal counsel in a written opinion, shall have determined that based on a review of readily available facts there is a reason to believe that such person ultimately will be found entitled to indemnification. ARTICLE V COMMITTEES Section 5.1. Appointment. The Trustees may appoint from their number an executive committee and other committees. Except as the Trustees otherwise may determine, any such committees may make rules for conduct of its business. Section 5.2. Quorum; Voting. A majority of the members of any Committee of the Trustees shall constitute a quorum for the transaction of business, and any action of such a committee may be taken at a meeting by the vote of a majority of the members present (a quorum being present). ARTICLE VI MISCELLANEOUS Section 6.1. Depositories. Subject to Section 7.1 of the Declaration, the funds of the Trust shall be deposited in such depositories as the Trustees shall designate and shall be drawn out on checks, drafts or other orders signed by such officer, officers, agent or agents (including any adviser, administrator or manager), as the Trustees may from time to time authorize. Section 6.2. Seal. The seal of the Trust, if any, may be affixed to any document, and the seal and its attestation may be lithographed, engraved or otherwise printed on any document with the same force and effect as if it had been imprinted and attested manually in the same manner and with the same effect as if done by a Delaware corporation. Section 6.3. Execution of Papers. Except as the Trustees generally or in particular cases may authorize the execution thereof by such officer, officers or agents, as provided in these By-Laws or as the Trustees may from time to time by resolution provide, all deeds, leases, contracts, notes and other obligations made by the Trustees shall be signed by the President, any Vice President, or by the Treasurer and need not bear the seal of the Trust. ARTICLE VII INTEREST CERTIFICATES Section 7.1. Interest Certificates. In lieu of issuing certificates for Interests ("Interest Certificates"), the Trustees either may issue receipts therefor or may keep accounts upon the books of the Trust for the record holders of such Interests, who shall in either case, for all purposes hereunder, be deemed to be the holders of certificates for such Interests as if they have accepted such certificates and shall be held to have expressly assented and agreed to the terms hereof. The Trustees at any time may authorize the issuance of Interest Certificates. In that event, each Holder shall be entitled to a certificate stating the number of Interests and the value of such Interests in the Trust or any Series thereof, owned by such Holder, in such form as shall be prescribed from time to time by the Trustees. Such Interest Certificate shall be signed by the President or Vice President and by the Treasurer or Assistant Treasurer. Such signatures may be facsimile if the Interest Certificate is signed by a registrar, other than a Trustee, officer or employee of the Trust. In case any officer who has signed or whose facsimile signature has been placed on such Interest Certificate shall cease to be such officer before such Interest Certificate is issued, it may be issued by the Trust with the same effect as if he or she were such officer at the time of its issuance. Section 7.2. Loss of Interest Certificates. The Trust, or if any agent is appointed for the Trust to have such powers, such agent with the approval of any two officers of the Trust, is authorized to issue and countersign replacement Interest Certificates for the Interests of the Trust which have been lost, stolen or destroyed subject to the deposit of a bond or other indemnity in such form and with such security, if any, as the Trustees may require. Section 7.3. Discontinuance of Issuance of Certificates. The Trustees at any time may discontinue the issuance of Interest Certificates and by written notice to each Holder, may require the surrender of Interest Certificates to the Trust for cancellation. Such surrender and cancellation shall not affect the ownership of Interests in the Trust. ARTICLE VIII NON-TRANSFERABILITY OF INTERESTS Section 8.1. Non-Transferability of interests. Except as provided in Section 5.6 of the Declaration, Interests shall not be transferable. Except as otherwise provided by law, the Trust shall be entitled to recognize the exclusive right of a person in whose name Interests stand on the record of Holders as the owner of such Interests for all purposes, including, without limitation, the rights to receive distributions, and to vote as such owner, and the Trust shall not be bound to recognize any equitable or legal claim to or interest in any such Interests on the part of any other person. Section 8.2. Regulations. The Trustees may make such additional rules and regulations, not inconsistent with these By-Laws, as they may deem expedient concerning the sale and purchase of interests of the Trust. ARTICLE IX AMENDMENT; LIMITATION OF LIABILITY Section 9.1. Amendment and Repeal of By-Laws. In accordance with Section 2.7 of the Declaration, the Trustees shall have the power to alter, amend or repeal the By-Laws or adopt new By-Laws at any time. Action by the Trustees with respect to the By-Laws shall be taken by an affirmative vote of majority of the Trustees. The Trustees shall in no event adopt By-Laws which are in conflict with the Declaration. Section 9.2. Limitation of Liability. The Declaration refers to the Trustees as Trustees, but not as individuals or personally; and no Trustee, officer, employee or agent of the Trust shall be held to any personal liability, nor shall resort be had to their private property for the satisfaction of any obligation or claim or otherwise in connection with the affairs of the Trust; provided, that nothing contained in the Declaration or the By-Laws shall protect any Trustee or officer of the Trust from any liability to the Trust or its Holders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. EX-99.D 4 INVESTMENT ADVISORY AGREEMENT KINETICS PORTFOLIOS TRUST INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT is made as of the 1st day of May, 2000, by and between KINETICS PORTFOLIOS TRUST, a Delaware business trust (the "Trust") on behalf of its series the Internet Portfolio (the "Portfolio") and KINETICS ASSET MANAGEMENT, INC., a New York corporation (the "Adviser"). W I T N E S S E T H : WHEREAS, the Trust is an open-end management investment company, registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 and is engaged in the business of providing investment advice to investment companies; and WHEREAS, the Trust, on behalf of the Portfolio, desires to retain the Adviser to render advice and services to the Portfolio pursuant to the terms and provisions of this Agreement, and the Adviser desires to furnish said advice and services. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, intending to be legally bound hereby, mutually agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser and the Adviser hereby accepts such employment, to render investment advice and related services with respect to the assets of the Portfolio for the period and on the terms set forth in this Agreement, subject to the supervision and direction of the Board of Trustees. 2. DUTIES OF ADVISER. (a) GENERAL DUTIES. The Adviser shall act as investment adviser to the Portfolio and shall supervise investments of the Portfolio in accordance with the investment objective, policies and restrictions of the Portfolio as set forth inthe Portfolio's governing documents, including, without limitation, the Fund'sCertificate of Trust, as amended, Declaration of Trust, as amended, and Bylaws,as amended, the prospectus and statement of additional information; and suchother limitations, policies and procedures as the Trustees may impose from timeto time in writing to the Adviser. In providing such services, the Adviser shallat all times adhere to the provisions and restrictions contained in the federalsecurities laws, applicable state securities laws, the Internal Revenue Code,the Uniform Commercial Code and other applicable law. Without limiting the generality of the foregoing, the Adviser shall: (i)furnish the Portfolio with advice and recommendations with respect to the investment of the Portfolio's assets and the purchase and sale of portfoliosecurities for the Portfolio, including the taking of such steps as may benecessary to implement such advice and recommendations (I.E., placing the orders); (ii) manage and oversee the investments of the Portfolio, subject to the ultimate supervision and direction of the Board of Trustees; (iii) vote proxies for the Portfolio, file ownership reports under Section 13 of the Securities Exchange Act of 1934 for the Portfolio, and take other actions on behalf of the Portfolio; (iv) maintain the books and records required to be maintained by the Portfolio except to the extent arrangements have been made for such books and records to be maintained by Firstar Mutual Fund Services LLC, a Wisconsin limited liability company (the "Sub-Administrator") or another agent of the Portfolio; (v) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Portfolio's assets which the Board of Trustees or the officers of the Portfolio may reasonably request; and (vi) render to the Board of Trustees such periodic and special reports with respect to the Portfolio's investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board of Trustees. (b) BROKERAGE. The Adviser shall be responsible for decisions to buy and sell securities for the Portfolio, for broker-dealer selection, and for negotiation of brokerage commission rates, provided that the Adviser shall not direct ordersto an affiliated person of the Adviser without general prior authorization to use such affiliated broker or dealer from the Board of Trustees. The Adviser'sprimary consideration in effecting a securities transaction will be execution atthe most favorable price. In selecting a broker-dealer to execute eachparticular transaction, the Adviser may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. The price to the Portfolio in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Portfolio to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Adviser an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Portfolio. The Adviser is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers or dealers who also provide research or statistical material, or other services, to the Portfolio, the Adviser, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser shall report on such allocations regularly to the Portfolio, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Adviser is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as of other clients (to the extent that the Adviser may, in the future, have other clients), the Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. 3. REPRESENTATIONS OF THE ADVISER. (a) The Adviser shall use its best judgment and efforts in rendering the advice and services to the Portfolio as contemplated by this Agreement. (b) The Adviser shall maintain all licenses and registrations necessary to perform its duties hereunder in good order. (c) The Adviser shall conduct its operations at all times in conformance with the Investment Advisers Act of 1940, the Investment Company Act of 1940, and any other applicable state and/or self-regulatory organization regulations. 4. INDEPENDENT CONTRACTOR. The Adviser shall, for all purposes herein, be deemed to be an independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Portfolio in any way, or in any way be deemed an agent for the Portfolio. It is expressly understood and agreed that the services to be rendered by the Adviser to the Portfolio under the provisions of this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. 5. ADVISER'S PERSONNEL. The Adviser shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Adviser shall be deemed to include persons employed or retained by the Adviser to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Adviser or the Board of Trustees may desire and reasonably request. 6.EXPENSES. (a) With respect to the operation of the Portfolio, the Adviser shall beresponsible for (i) providing the personnel, office space and equipment reasonably necessary for the investment management of the Portfolio, and (ii) the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Adviser. If the Adviser has agreed to limit the operating expenses of the Portfolio, the Adviser shall also be responsible on a monthly basis for any operating expenses that exceed the agreed upon expense limitation. (b)The Portfolio is responsible for and has assumed the obligation for payment of all of its expenses, other than as stated in Subparagraph 6(a) above, including but not limited to: investment advisory, administrative and sub-administrative fees payable to the Adviser or the Sub-Administrator under the appropriate agreements entered into with the Adviser or the Sub-Administrator, as the case may be; fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Portfolio including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the Investment Company Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Portfolio's shareholders and Board of Trustees that are properly payable by the Portfolio; salaries and expenses of officers and fees and expenses of members of the Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Adviser or the Sub-Administrator; insurance premiums on property or personnel of the Portfolio which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of the Portfolio or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Portfolio; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as herein otherwise prescribed. (c) The Adviser may voluntarily absorb certain Portfolio expenses or waive the Adviser's own advisory fee. (d) To the extent the Adviser incurs any costs by assuming expenses which are an obligation of the Portfolio as set forth herein, the Portfolio shall promptly reimburse the Adviser for such costs and expenses, except to the extent the Adviser has otherwise agreed to bear such expenses. To the extent the services for which the Portfolio is obligated to pay are performed by the Adviser, the Adviser shall be entitled to recover from the Portfolio to the extent of the Adviser's actual costs for providing such services. In determining the Adviser's actual costs, the Adviser may take into account an allocated portion of the salaries and overhead of personnel performing such services. 7. INVESTMENT ADVISORY FEE. (a) The Portfolio shall pay to the Adviser, and the Adviser agrees to accept, as full compensation for all investment and advisory services furnished or provided to the Portfolio pursuant to this Agreement, an annual investment advisory fee at the rate set forth in Schedule A to this Agreement. (b) The investment advisory fee shall be accrued daily by the Portfolio and paid to the Adviser on the first business day of the succeeding month. (c) The initial fee under this Agreement shall be payable on the first business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Adviser shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination. (d) The fee payable to the Adviser under this Agreement will be reduced to the extent of any receivable owed by the Adviser to the Portfolio and as required under any expense limitation applicable to th Portfolio. (e) The Adviser voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility of the Portfolio under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Adviser hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis. (f) Any fee withheld or voluntarily reduced and any Portfolio expense absorbed by the Adviser voluntarily or pursuant to an agreed upon expense cap shall be reimbursed by the Portfolio to the Adviser, if so requested by the Adviser, no later than the fifth fiscal year succeeding the fiscal year of the withholding, reduction or absorption if the aggregate amount actually paid by the Portfolio toward the operating expenses for such fiscal year (taking into account the reimbursement) do not exceed the applicable limitation on Portfolio expenses. Such reimbursement may be paid prior to the Portfolio's payment of current expenses if so requested by the Adviser even if such practice may require the Adviser to waive, reduce or absorb current Portfolio expenses. (g) The Adviser may agree not to require payment of any portion of the compensation or reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future compensation or reimbursement due to the Adviser hereunder. 8. NO SHORTING; NO BORROWING. The Adviser agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Portfolio. This prohibition shall not prevent the purchase of such shares by any of the officers or employees of the Adviser or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Adviser agrees that neither it nor any of its officers or employees shall borrow from the Portfolio or pledge or use the Portfolio's assets in connection with any borrowing not directly for the Portfolio's benefit. For this purpose, failure to pay any amount due and payable to the Portfolio for a period of more than thirty (30) days shall constitute a borrowing. 9. CONFLICTS WITH THE PORTFOLIO'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing herein contained shall be deemed to require the Portfolio to take any action contrary to its Certificate of Trust, as amended, Declaration of Trust, as amended, Bylaws, as amended, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Portfolio. In this connection, the Adviser acknowledges that the Trustees retain ultimate plenary authority over the Portfolio and may take any and all actions necessary and reasonable to protect the interests of shareholders. 10.REPORTS AND ACCESS. The Adviser agrees to supply such information to the Sub-Administrator and to permit such compliance inspections by the Sub-Administrator as shall be reasonably necessary to permit the Sub-Administrator to satisfy its obligations and respond to the reasonable requests of the Trustees. 11.ADVISER'S LIABILITIES AND INDEMNIFICATION. (a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of the statements in the Portfolio's offering materials (including the prospectus, the statement of additional information, advertising and sales materials), except for information supplied by the Sub-Administrator or the Portfolio or another third party for inclusion therein. (b) The Adviser shall be liable to the Portfolio for any loss (including brokerage charges) incurred by the Portfolio as a result of any improper investment made by the Adviser. (c) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Portfolio. (d) Each party to this Agreement shall indemnify and hold harmless the other party and the shareholders, directors, trustees, officers and employees of the other party (any such person, an "Indemnified Party") against any loss, liability, claim, damage or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage or expenses and reasonable counsel fees incurred in connection therewith) arising out of the Indemnified Party's performance or nonperformance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties under this Agreement. (e) No provision of this Agreement shall be construed to protect any Trustee or officer of the Portfolio, or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the Investment Company Act. 12. NON-EXCLUSIVITY; TRADING FOR ADVISER'S OWN ACCOUNT. The Portfolio's employment of the Adviser is not an exclusive arrangement. The Portfolio may from time to time employ other individuals or entities to furnish it with the services provided for herein. Likewise, the Adviser may act as investment adviser for any other person, and shall not in any way be limited or restricted from having, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Adviser expressly represents that it will undertake no activities which will adversely affect the performance of its obligations to the Portfolio under this Agreement; and provided further that the Adviser will adhere to a code of ethics governing employee trading and trading for proprietary accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act of 1940 and has been approved by the Portfolio's Board of Trustees. 13. TERM. This Agreement shall become effective on September 1, 1999 and shall remain in effect for a period of two (2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Portfolio at least annually by (i) the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio and (ii) the vote of a majority of the Trustees of the Portfolio who are not parties to this Agreement nor interested persons thereof, cast in person at a meeting called for the purpose of voting on such approval. The terms "majority of the outstanding voting securities" and "interested persons" shall have the meanings as set forth in the Investment Company Act. 14. TERMINATION; NO ASSIGNMENT. (a) This Agreement may be terminated by the Portfolio at any time without payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio, upon sixty (60) days' written notice to the Adviser, and by the Adviser upon sixty (60) days' written notice to the Portfolio. In the event of a termination, the Adviser shall cooperate in the orderly transfer of the Portfolio's affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Portfolio maintained by the Adviser on behalf of the Portfolio. (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the Investment Company Act. 15. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby. 16. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the Investment Advisers Act of 1940 and any rules and regulations promulgated thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all on the day and year first above written. KINETICS PORTFOLIOS TRUST KINETICS ASSET MANAGEMENT, INC. on behalf of its series, The Internet Portfolio By:_________________________________ By:_________________________________ Name: Name: Title: Title: 129261 SCHEDULE A ANNUAL FEE RATE The Internet Portfolio 1.25% of average daily net assets KINETICS PORTFOLIOS TRUST INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT is made as of the 1st day of May, 2000, by and between KINETICS PORTFOLIOS TRUST, a Delaware business trust (the "Trust") on behalf of its series the Internet Infrastructure Portfolio (the "Portfolio") and KINETICS ASSET MANAGEMENT, INC., a New York corporation (the "Adviser"). W I T N E S S E T H : WHEREAS, the Trust is an open-end management investment company, registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 and is engaged in the business of providing investment advice to investment companies; and WHEREAS, the Trust, on behalf of the Portfolio, desires to retain the Adviser to render advice and services to the Portfolio pursuant to the terms and provisions of this Agreement, and the Adviser desires to furnish said advice and services. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, intending to be legally bound hereby, mutually agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser and the Adviser hereby accepts such employment, to render investment advice and related services with respect to the assets of the Portfolio for the period and on the terms set forth in this Agreement, subject to the supervision and direction of the Board of Trustees. 2. DUTIES OF ADVISER. (a) GENERAL DUTIES. The Adviser shall act as investment adviser to the Portfolio and shall supervise investments of the Portfolio in accordance with the investment objective, policies and restrictions of the Portfolio as set forth in the Portfolio's governing documents, including, without limitation, the Fund's Certificate of Trust, as amended, Declaration of Trust, as amended, and Bylaws, as amended, the prospectus and statement of additional information; and such other limitations, policies and procedures as the Trustees may impose from time to time in writing to the Adviser. In providing such services, the Adviser shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Internal Revenue Code, the Uniform Commercial Code and other applicable law. Without limiting the generality of the foregoing, the Adviser shall: (i) furnish the Portfolio with advice and recommendations with respect to the investment of the Portfolio's assets and the purchase and sale of portfolio securities for the Portfolio, including the taking of such steps as may be necessary to implement such advice and recommendations (I.E., placing the orders); (ii) manage and oversee the investments of the Portfolio, subject to the ultimate supervision and direction of the Board of Trustees; (iii) vote proxies for the Portfolio, file ownership reports under Section 13 of the Securities Exchange Act of 1934 for the Portfolio, and take other actions on behalf of the Portfolio; (iv) maintain the books and records required to be maintained by the Portfolio except to the extent arrangements have been made for such books and records to be maintained by Firstar Mutual Fund Services LLC, a Wisconsin limited liability company (the "Sub-Administrator") or another agent of the Portfolio; (v) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Portfolio's assets which the Board of Trustees or the officers of the Portfolio may reasonably request; and (vi) render to the Board of Trustees such periodic and special reports with respect to the Portfolio's investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board of Trustees. (b) BROKERAGE. The Adviser shall be responsible for decisions to buy and sell securities for the Portfolio, for broker-dealer selection, and for negotiation of brokerage commission rates, provided that the Adviser shall not direct orders to an affiliated person of the Adviser without general prior authorization to use such affiliated broker or dealer from the Board of Trustees. The Adviser's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Adviser may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. The price to the Portfolio in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Portfolio to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Adviser an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Portfolio. The Adviser is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers or dealers who also provide research or statistical material, or other services, to the Portfolio, the Adviser, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser shall report on such allocations regularly to the Portfolio, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Adviser is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as of other clients (to the extent that the Adviser may, in the future, have other clients), the Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. 3. REPRESENTATIONS OF THE ADVISER. (a) The Adviser shall use its best judgment and efforts in rendering the advice and services to the Portfolio as contemplated by this Agreement. (b) The Adviser shall maintain all licenses and registrations necessary to perform its duties hereunder in good order. (c) The Adviser shall conduct its operations at all times in conformance with the Investment Advisers Act of 1940, the Investment Company Act of 1940, and any other applicable state and/or self-regulatory organization regulations. 4. INDEPENDENT CONTRACTOR. The Adviser shall, for all purposes herein, be deemed to be an independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Portfolio in any way, or in any way be deemed an agent for the Portfolio. It is expressly understood and agreed that the services to be rendered by the Adviser to the Portfolio under the provisions of this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. 5. ADVISER'S PERSONNEL. The Adviser shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Adviser shall be deemed to include persons employed or retained by the Adviser to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Adviser or the Board of Trustees may desire and reasonably request. 6. EXPENSES. (a) With respect to the operation of the Portfolio, the Adviser shall be responsible for (i) providing the personnel, office space and equipment reasonably necessary for the investment management of the Portfolio, and (ii) the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Adviser. If the Adviser has agreed to limit the operating expenses of the Portfolio, the Adviser shall also be responsible on a monthly basis for any operating expenses that exceed the agreed upon expense limitation. (b) The Portfolio is responsible for and has assumed the obligation for payment of all of its expenses, other than as stated in Subparagraph 6(a) above, including but not limited to: investment advisory, administrative and sub-administrative fees payable to the Adviser or the Sub-Administrator under the appropriate agreements entered into with the Adviser or the Sub-Administrator, as the case may be; fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash,securities and other property of the Portfolio including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the Investment Company Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Portfolio's shareholders and Board of Trustees that are properly payable by the Portfolio; salaries and expenses of officers and fees and expenses of members of the Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Adviser or the Sub-Administrator; insurance premiums on property or personnel of the Portfolio which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of the Portfolio or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Portfolio; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as herein otherwise prescribed. (c) The Adviser may voluntarily absorb certain Portfolio expenses or waive the Adviser's own advisory fee. (d) To the extent the Adviser incurs any costs by assuming expenses which are an obligation of the Portfolio as set forth herein, the Portfolio shall promptly reimburse the Adviser for such costs and expenses, except to the extent the Adviser has otherwise agreed to bear such expenses. To the extent the services for which the Portfolio is obligated to pay are performed by the Adviser, the Adviser shall be entitled to recover from the Portfolio to the extent of the Adviser's actual costs for providing such services. In determining the Adviser's actual costs, the Adviser may take into account an allocated portion of the salaries and overhead of personnel performing such services. 7. INVESTMENT ADVISORY FEE. (a) The Portfolio shall pay to the Adviser, and the Adviser agrees to accept, as full compensation for all investment and advisory services furnished or provided to the Portfolio pursuant to this Agreement, an annual investment advisory fee at the rate set forth in Schedule A to this Agreement. (b) The investment advisory fee shall be accrued daily by the Portfolio and paid to the Adviser on the first business day of the succeeding month. (c) The initial fee under this Agreement shall be payable on the first business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Adviser shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination. (d) The fee payable to the Adviser under this Agreement will be reduced to the extent of any receivable owed by the Adviser to the Portfolio and as required under any expense limitation applicable to the Portfolio. (e) The Adviser voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility of the Portfolio under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Adviser hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis. (f) Any fee withheld or voluntarily reduced and any Portfolio expense absorbed by the Adviser voluntarily or pursuant to an agreed upon expense cap shall be reimbursed by the Portfolio to the Adviser, if so requested by the Adviser, no later than the fifth fiscal year succeeding the fiscal year of the withholding, reduction or absorption if the aggregate amount actually paid by the Portfolio toward the operating expenses for such fiscal year (taking into account the reimbursement) do not exceed the applicable limitation on Portfolio expenses. Such reimbursement may be paid prior to the Portfolio's payment of current expenses if so requested by the Adviser even if such practice may require the Adviser to waive, reduce or absorb current Portfolio expenses. (g) The Adviser may agree not to require payment of any portion of the compensation or reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future compensation or reimbursement due to the Adviser hereunder. 8. NO SHORTING; NO BORROWING. The Adviser agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Portfolio. This prohibition shall not prevent the purchase of such shares by any of the officers or employees of the Adviser or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Adviser agrees that neither it nor any of its officers or employees shall borrow from the Portfolio or pledge or use the Portfolio's assets in connection with any borrowing not directly for the Portfolio's benefit. For this purpose, failure to pay any amount due and payable to the Portfolio for a period of more than thirty (30) days shall constitute a borrowing. 9. CONFLICTS WITH THE PORTFOLIO'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing herein contained shall be deemed to require the Portfolio to take any action contrary to its Certificate of Trust, as amended, Declaration of Trust, as amended, Bylaws, as amended, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Portfolio. In this connection, the Adviser acknowledges that the Trustees retain ultimate plenary authority over the Portfolio and may take any and all actions necessary and reasonable to protect the interests of shareholders. 10. REPORTS AND ACCESS. The Adviser agrees to supply such information to the Sub-Administrator and to permit such compliance inspections by the Sub-Administrator as shall be reasonably necessary to permit the Sub-Administrator to satisfy its obligations and respond to the reasonable requests of the Trustees. 11. ADVISER'S LIABILITIES AND INDEMNIFICATION. (a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of the statements in the Portfolio's offering materials (including the prospectus, the statement of additional information, advertising and sales materials), except for information supplied by the Sub-Administrator or the Portfolio or another third party for inclusion therein. (b) The Adviser shall be liable to the Portfolio for any loss (including brokerage charges) incurred by the Portfolio as a result of any improper investment made by the Adviser. (c) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Portfolio. (d) Each party to this Agreement shall indemnify and hold harmless the other party and the shareholders, directors, trustees, officers and employees of the other party (any such person, an "Indemnified Party") against any loss, liability, claim, damage or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage or expenses and reasonable counsel fees incurred in connection therewith) arising out of the Indemnified Party's performance or nonperformance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties under this Agreement. (e) No provision of this Agreement shall be construed to protect any Trustee or officer of the Portfolio, or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the Investment Company Act. 12. NON-EXCLUSIVITY; TRADING FOR ADVISER'S OWN ACCOUNT. The Portfolio's employment of the Adviser is not an exclusive arrangement. The Portfolio may from time to time employ other individuals or entities to furnish it with the services provided for herein. Likewise, the Adviser may act as investment adviser for any other person, and shall not in any way be limited or restricted from having, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Adviser expressly represents that it will undertake no activities which will adversely affect the performance of its obligations to the Portfolio under this Agreement; and provided further that the Adviser will adhere to a code of ethics governing employee trading and trading for proprietary accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act of 1940 and has been approved by the Portfolio's Board of Trustees. 13. TERM. This Agreement shall become effective on September 1, 1999 and shall remain in effect for a period of two (2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Portfolio at least annually by (i) the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio and (ii) the vote of a majority of the Trustees of the Portfolio who are not parties to this Agreement nor interested persons thereof, cast in person at a meeting called for the purpose of voting on such approval. The terms "majority of the outstanding voting securities" and "interested persons" shall have the meanings as set forth in the Investment Company Act. 14. TERMINATION; NO ASSIGNMENT. (a) This Agreement may be terminated by the Portfolio at any time without payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio, upon sixty (60) days' written notice to the Adviser, and by the Adviser upon sixty (60) days' written notice to the Portfolio. In the event of a termination, the Adviser shall cooperate in the orderly transfer of the Portfolio's affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Portfolio maintained by the Adviser on behalf of the Portfolio. (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the Investment Company Act. 15. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby. 16. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the Investment Advisers Act of 1940 and any rules and regulations promulgated thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all on the day and year first above written. KINETICS PORTFOLIOS TRUST KINETICS ASSET MANAGEMENT, INC. on behalf of its series, The Internet Infrastructure Portfolio By:_________________________________ By:_________________________________ Name: Name: Title: Title: SCHEDULE A ANNUAL FEE RATE The Internet Infrastructure Portfolio 1.25% of average daily net assets KINETICS PORTFOLIOS TRUST INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT is made as of the 1st day of May, 2000, by and between KINETICS PORTFOLIOS TRUST, a Delaware business trust (the "Trust") on behalf of its series the Internet Emerging Growth Portfolio (the "Portfolio") and KINETICS ASSET MANAGEMENT, INC., a New York corporation (the "Adviser"). W I T N E S S E T H : WHEREAS, the Trust is an open-end management investment company, registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 and is engaged in the business of providing investment advice to investment companies; and WHEREAS, the Trust, on behalf of the Portfolio, desires to retain the Adviser to render advice and services to the Portfolio pursuant to the terms and provisions of this Agreement, and the Adviser desires to furnish said advice and services. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, intending to be legally bound hereby, mutually agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser and the Adviser hereby accepts such employment, to render investment advice and related services with respect to the assets of the Portfolio for the period and on the terms set forth in this Agreement, subject to the supervision and direction of the Board of Trustees. 2. DUTIES OF ADVISER. (a) GENERAL DUTIES. The Adviser shall act as investment adviser to the Portfolio and shall supervise investments of the Portfolio in accordance with the investment objective, policies and restrictions of the Portfolio as set forth in the Portfolio's governing documents, including, without limitation, the Fund's Certificate of Trust, as amended, Declaration of Trust, as amended, and Bylaws, as amended, the prospectus and statement of additional information; and such other limitations, policies and procedures as the Trustees may impose from time to time in writing to the Adviser. In providing such services, the Adviser shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Internal Revenue Code, the Uniform Commercial Code and other applicable law. Without limiting the generality of the foregoing, the Adviser shall: (i) furnish the Portfolio with advice and recommendations with respect to the investment of the Portfolio's assets and the purchase and sale of portfolio securities for the Portfolio, including the taking of such steps as may be necessary to implement such advice and recommendations (I.E., placing the orders); (ii) manage and oversee the investments of the Portfolio, subject to the ultimate supervision and direction of the Board of Trustees; (iii) vote proxies for the Portfolio, file ownership reports under Section 13 of the Securities Exchange Act of 1934 for the Portfolio, and take other actions on behalf of the Portfolio; (iv) maintain the books and records required to be maintained by the Portfolio except to the extent arrangements have been made for such books and records to be maintained by Firstar Mutual Fund Services LLC, a Wisconsin limited liability company (the "Sub-Administrator") or another agent of the Portfolio; (v) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Portfolio's assets which the Board of Trustees or the officers of the Portfolio may reasonably request; and (vi) render to the Board of Trustees such periodic and special reports with respect to the Portfolio's investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board of Trustees. (b) BROKERAGE. The Adviser shall be responsible for decisions to buy and sell securities for the Portfolio, for broker-dealer selection, and for negotiation of brokerage commission rates, provided that the Adviser shall not direct orders to an affiliated person of the Adviser without general prior authorization to use such affiliated broker or dealer from the Board of Trustees. The Adviser's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Adviser may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. The price to the Portfolio in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Portfolio to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Adviser an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Portfolio. The Adviser is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers or dealers who also provide research or statistical material, or other services, to the Portfolio, the Adviser, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser shall report on such allocations regularly to the Portfolio, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Adviser is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as of other clients (to the extent that the Adviser may, in the future, have other clients), the Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. 3. REPRESENTATIONS OF THE ADVISER. (a) The Adviser shall use its best judgment and efforts in rendering the advice and services to the Portfolio as contemplated by this Agreement. (b) The Adviser shall maintain all licenses and registrations necessary to perform its duties hereunder in good order. (c) The Adviser shall conduct its operations at all times in conformance with the Investment Advisers Act of 1940, the Investment Company Act of 1940, and any other applicable state and/or self-regulatory organization regulations. 4. INDEPENDENT CONTRACTOR. The Adviser shall, for all purposes herein, be deemed to be an independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Portfolio in any way, or in any way be deemed an agent for the Portfolio. It is expressly understood and agreed that the services to be rendered by the Adviser to the Portfolio under the provisions of this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. 5. ADVISER'S PERSONNEL. The Adviser shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Adviser shall be deemed to include persons employed or retained by the Adviser to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Adviser or the Board of Trustees may desire and reasonably request. 6. EXPENSES. (a) With respect to the operation of the Portfolio, the Adviser shall be responsible for (i) providing the personnel, office space and equipment reasonably necessary for the investment management of the Portfolio, and (ii) the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Adviser. If the Adviser has agreed to limit the operating expenses of the Portfolio, the Adviser shall also be responsible on a monthly basis for any operating expenses that exceed the agreed upon expense limitation. (b) The Portfolio is responsible for and has assumed the obligation for payment of all of its expenses, other than as stated in Subparagraph 6(a) above, including but not limited to: investment advisory, administrative and sub-administrative fees payable to the Adviser or the Sub-Administrator under the appropriate agreements entered into with the Adviser or the Sub-Administrator, as the case may be; fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Portfolio including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the Investment Company Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Portfolio's shareholders and Board of Trustees that are properly payable by the Portfolio; salaries and expenses of officers and fees and expenses of members of the Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Adviser or the Sub-Administrator; insurance premiums on property or personnel of the Portfolio which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of the Portfolio or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Portfolio; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as herein otherwise prescribed. (c) The Adviser may voluntarily absorb certain Portfolio expenses or waive the Adviser's own advisory fee. (d) To the extent the Adviser incurs any costs by assuming expenses which are an obligation of the Portfolio as set forth herein, the Portfolio shall promptly reimburse the Adviser for such costs and expenses, except to the extent the Adviser has otherwise agreed to bear such expenses. To the extent the services for which the Portfolio is obligated to pay are performed by the Adviser, the Adviser shall be entitled to recover from the Portfolio to the extent of the Adviser's actual costs for providing such services. In determining the Adviser's actual costs, the Adviser may take into account an allocated portion of the salaries and overhead of personnel performing such services. 7. INVESTMENT ADVISORY FEE. (a) The Portfolio shall pay to the Adviser, and the Adviser agrees to accept, as full compensation for all investment and advisory services furnished or provided to the Portfolio pursuant to this Agreement, an annual investment advisory fee at the rate set forth in Schedule A to this Agreement. (b) The investment advisory fee shall be accrued daily by the Portfolio and paid to the Adviser on the first business day of the succeeding month. (c) The initial fee under this Agreement shall be payable on the first business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Adviser shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination. (d) The fee payable to the Adviser under this Agreement will be reduced to the extent of any receivable owed by the Adviser to the Portfolio and as required under any expense limitation applicable to the Portfolio. (e) The Adviser voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility of the Portfolio under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Adviser hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis. (f) Any fee withheld or voluntarily reduced and any Portfolio expense absorbed by the Adviser voluntarily or pursuant to an agreed upon expense cap shall be reimbursed by the Portfolio to the Adviser, if so requested by the Adviser, no later than the fifth fiscal year succeeding the fiscal year of the withholding, reduction or absorption if the aggregate amount actually paid by the Portfolio toward the operating expenses for such fiscal year (taking into account the reimbursement) do not exceed the applicable limitation on Portfolio expenses. Such reimbursement may be paid prior to the Portfolio's payment of current expenses if so requested by the Adviser even if such practice may require the Adviser to waive, reduce or absorb current Portfolio expenses. (g) The Adviser may agree not to require payment of any portion of the compensation or reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future compensation or reimbursement due to the Adviser hereunder. 8. NO SHORTING; NO BORROWING. The Adviser agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Portfolio. This prohibition shall not prevent the purchase of such shares by any of the officers or employees of the Adviser or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Adviser agrees that neither it nor any of its officers or employees shall borrow from the Portfolio or pledge or use the Portfolio's assets in connection with any borrowing not directly for the Portfolio's benefit. For this purpose, failure to pay any amount due and payable to the Portfolio for a period of more than thirty (30) days shall constitute a borrowing. 9. CONFLICTS WITH THE PORTFOLIO'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing herein contained shall be deemed to require the Portfolio to take any action contrary to its Certificate of Trust, as amended, Declaration of Trust, as amended, Bylaws, as amended, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Portfolio. In this connection, the Adviser acknowledges that the Trustees retain ultimate plenary authority over the Portfolio and may take any and all actions necessary and reasonable to protect the interests of shareholders. 10. REPORTS AND ACCESS. The Adviser agrees to supply such information to the Sub-Administrator and to permit such compliance inspections by the Sub-Administrator as shall be reasonably necessary to permit the Sub-Administrator to satisfy its obligations and respond to the reasonable requests of the Trustees. 11. ADVISER'S LIABILITIES AND INDEMNIFICATION. (a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of the statements in the Portfolio's offering materials (including the prospectus, the statement of additional information, advertising and sales materials), except for information supplied by the Sub-Administrator or the Portfolio or another third party for inclusion therein. (b) The Adviser shall be liable to the Portfolio for any loss (including brokerage charges) incurred by the Portfolio as a result of any improper investment made by the Adviser. (c) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Portfolio. (d) Each party to this Agreement shall indemnify and hold harmless the other party and the shareholders, directors, trustees, officers and employees of the other party (any such person, an "Indemnified Party") against any loss, liability, claim, damage or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage or expenses and reasonable counsel fees incurred in connection therewith) arising out of the Indemnified Party's performance or nonperformance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties under this Agreement. (e) No provision of this Agreement shall be construed to protect any Trustee or officer of the Portfolio, or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the Investment Company Act. 12. NON-EXCLUSIVITY; TRADING FOR ADVISER'S OWN ACCOUNT. The Portfolio's employment of the Adviser is not an exclusive arrangement. The Portfolio may from time to time employ other individuals or entities to furnish it with the services provided for herein. Likewise, the Adviser may act as investment adviser for any other person, and shall not in any way be limited or restricted from having, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Adviser expressly represents that it will undertake no activities which will adversely affect the performance of its obligations to the Portfolio under this Agreement; and provided further that the Adviser will adhere to a code of ethics governing employee trading and trading for proprietary accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act of 1940 and has been approved by the Portfolio's Board of Trustees. 13. TERM. This Agreement shall become effective on September 1, 1999 and shall remain in effect for a period of two (2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Portfolio at least annually by (i) the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio and (ii) the vote of a majority of the Trustees of the Portfolio who are not parties to this Agreement nor interested persons thereof, cast in person at a meeting called for the purpose of voting on such approval. The terms "majority of the outstanding voting securities" and "interested persons" shall have the meanings as set forth in the Investment Company Act. 14. TERMINATION; NO ASSIGNMENT. (a) This Agreement may be terminated by the Portfolio at any time without payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio, upon sixty (60) days' written notice to the Adviser, and by the Adviser upon sixty (60) days' written notice to the Portfolio. In the event of a termination, the Adviser shall cooperate in the orderly transfer of the Portfolio's affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Portfolio maintained by the Adviser on behalf of the Portfolio. (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the Investment Company Act. 15. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby. 16. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the Investment Advisers Act of 1940 and any rules and regulations promulgated thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all on the day and year first above written. KINETICS PORTFOLIOS TRUST KINETICS ASSET MANAGEMENT, INC. on behalf of its series, The Internet Emerging Growth Portfolio By:_________________________________ By:_________________________________ Name: Name: Title: Title: SCHEDULE A ANNUAL FEE RATE The Internet Emerging Growth Portfolio 1.25% of average daily net assets KINETICS PORTFOLIOS TRUST INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT is made as of the 1st day of May, 2000, by and between KINETICS PORTFOLIOS TRUST, a Delaware business trust (the "Trust") on behalf of its series the Internet Global Growth Portfolio (the "Portfolio") and KINETICS ASSET MANAGEMENT, INC., a New York corporation (the "Adviser"). W I T N E S S E T H : WHEREAS, the Trust is an open-end management investment company, registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 and is engaged in the business of providing investment advice to investment companies; and WHEREAS, the Trust, on behalf of the Portfolio, desires to retain the Adviser to render advice and services to the Portfolio pursuant to the terms and provisions of this Agreement, and the Adviser desires to furnish said advice and services. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, intending to be legally bound hereby, mutually agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser and the Adviser hereby accepts such employment, to render investment advice and related services with respect to the assets of the Portfolio for the period and on the terms set forth in this Agreement, subject to the supervision and direction of the Board of Trustees. 2. DUTIES OF ADVISER. (a) GENERAL DUTIES. The Adviser shall act as investment adviser to the Portfolio and shall supervise investments of the Portfolio in accordance with the investment objective, policies and restrictions of the Portfolio as set forth in the Portfolio's governing documents, including, without limitation, the Fund's Certificate of Trust, as amended, Declaration of Trust, as amended, and Bylaws, as amended, the prospectus and statement of additional information; and such other limitations, policies and procedures as the Trustees may impose from time to time in writing to the Adviser. In providing such services, the Adviser shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Internal Revenue Code, the Uniform Commercial Code and other applicable law. Without limiting the generality of the foregoing, the Adviser shall: (i) furnish the Portfolio with advice and recommendations with respect to the investment of the Portfolio's assets and the purchase and sale of portfolio securities for the Portfolio, including the taking of such steps as may be necessary to implement such advice and recommendations (I.E., placing the orders); (ii) manage and oversee the investments of the Portfolio, subject to the ultimate supervision and direction of the Board of Trustees; (iii) vote proxies for the Portfolio, file ownership reports under Section 13 of the Securities Exchange Act of 1934 for the Portfolio, and take other actions on behalf of the Portfolio; (iv) maintain the books and records required to be maintained by the Portfolio except to the extent arrangements have been made for such books and records to be maintained by Firstar Mutual Fund Services LLC, a Wisconsin limited liability company (the "Sub-Administrator") or another agent of the Portfolio; (v) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Portfolio's assets which the Board of Trustees or the officers of the Portfolio may reasonably request; and (vi) render to the Board of Trustees such periodic and special reports with respect to the Portfolio's investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board of Trustees. (b) BROKERAGE. The Adviser shall be responsible for decisions to buy and sell securities for the Portfolio, for broker-dealer selection, and for negotiation of brokerage commission rates, provided that the Adviser shall not direct orders to an affiliated person of the Adviser without general prior authorization to use such affiliated broker or dealer from the Board of Trustees. The Adviser's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Adviser may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. The price to the Portfolio in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Portfolio to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Adviser an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Portfolio. The Adviser is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers or dealers who also provide research or statistical material, or other services, to the Portfolio, the Adviser, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser shall report on such allocations regularly to the Portfolio, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Adviser is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as of other clients (to the extent that the Adviser may, in the future, have other clients), the Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. 3. REPRESENTATIONS OF THE ADVISER. (a) The Adviser shall use its best judgment and efforts in rendering the advice and services to the Portfolio as contemplated by this Agreement. (b) The Adviser shall maintain all licenses and registrations necessary to perform its duties hereunder in good order. (c) The Adviser shall conduct its operations at all times in conformance with the Investment Advisers Act of 1940, the Investment Company Act of 1940, and any other applicable state and/or self-regulatory organization regulations. 4. INDEPENDENT CONTRACTOR. The Adviser shall, for all purposes herein, be deemed to be an independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Portfolio in any way, or in any way be deemed an agent for the Portfolio. It is expressly understood and agreed that the services to be rendered by the Adviser to the Portfolio under the provisions of this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. 5. ADVISER'S PERSONNEL. The Adviser shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Adviser shall be deemed to include persons employed or retained by the Adviser to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Adviser or the Board of Trustees may desire and reasonably request. 6. EXPENSES. (a) With respect to the operation of the Portfolio, the Adviser shall be responsible for (i) providing the personnel, office space and equipment reasonably necessary for the investment management of the Portfolio, and (ii) the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Adviser. If the Adviser has agreed to limit the operating expenses of the Portfolio, the Adviser shall also be responsible on a monthly basis for any operating expenses that exceed the agreed upon expense limitation. (b) The Portfolio is responsible for and has assumed the obligation for payment of all of its expenses, other than as stated in Subparagraph 6(a) above, including but not limited to: investment advisory, administrative and sub-administrative fees payable to the Adviser or the Sub-Administrator under the appropriate agreements entered into with the Adviser or the Sub-Administrator, as the case may be; fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Portfolio including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the Investment Company Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Portfolio's shareholders and Board of Trustees that are properly payable by the Portfolio; salaries and expenses of officers and fees and expenses of members of the Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Adviser or the Sub-Administrator; insurance premiums on property or personnel of the Portfolio which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of the Portfolio or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Portfolio; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as herein otherwise prescribed. (c) The Adviser may voluntarily absorb certain Portfolio expenses or waive the Adviser's own advisory fee. (d) To the extent the Adviser incurs any costs by assuming expenses which are an obligation of the Portfolio as set forth herein, the Portfolio shall promptly reimburse the Adviser for such costs and expenses, except to the extent the Adviser has otherwise agreed to bear such expenses. To the extent the services for which the Portfolio is obligated to pay are performed by the Adviser, the Adviser shall be entitled to recover from the Portfolio to the extent of the Adviser's actual costs for providing such services. In determining the Adviser's actual costs, the Adviser may take into account an allocated portion of the salaries and overhead of personnel performing such services. 7. INVESTMENT ADVISORY FEE. (a) The Portfolio shall pay to the Adviser, and the Adviser agrees to accept, as full compensation for all investment and advisory services furnished or provided to the Portfolio pursuant to this Agreement, an annual investment advisory fee at the rate set forth in Schedule A to this Agreement. (b) The investment advisory fee shall be accrued daily by the Portfolio and paid to the Adviser on the first business day of the succeeding month. (c) The initial fee under this Agreement shall be payable on the first business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Adviser shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination. (d) The fee payable to the Adviser under this Agreement will be reduced to the extent of any receivable owed by the Adviser to the Portfolio and as required under any expense limitation applicable to the Portfolio. (e) The Adviser voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility of the Portfolio under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Adviser hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis. (f) Any fee withheld or voluntarily reduced and any Portfolio expense absorbed by the Adviser voluntarily or pursuant to an agreed upon expense cap shall be reimbursed by the Portfolio to the Adviser, if so requested by the Adviser, no later than the fifth fiscal year succeeding the fiscal year of the withholding, reduction or absorption if the aggregate amount actually paid by the Portfolio toward the operating expenses for such fiscal year (taking into account the reimbursement) do not exceed the applicable limitation on Portfolio expenses. Such reimbursement may be paid prior to the Portfolio's payment of current expenses if so requested by the Adviser even if such practice may require the Adviser to waive, reduce or absorb current Portfolio expenses. (g) The Adviser may agree not to require payment of any portion of the compensation or reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future compensation or reimbursement due to the Adviser hereunder. 8. NO SHORTING; NO BORROWING. The Adviser agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Portfolio. This prohibition shall not prevent the purchase of such shares by any of the officers or employees of the Adviser or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Adviser agrees that neither it nor any of its officers or employees shall borrow from the Portfolio or pledge or use the Portfolio's assets in connection with any borrowing not directly for the Portfolio's benefit. For this purpose, failure to pay any amount due and payable to the Portfolio for a period of more than thirty (30) days shall constitute a borrowing. 9. CONFLICTS WITH THE PORTFOLIO'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing herein contained shall be deemed to require the Portfolio to take any action contrary to its Certificate of Trust, as amended, Declaration of Trust, as amended, Bylaws, as amended, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Portfolio. In this connection, the Adviser acknowledges that the Trustees retain ultimate plenary authority over the Portfolio and may take any and all actions necessary and reasonable to protect the interests of shareholders. 10. REPORTS AND ACCESS. The Adviser agrees to supply such information to the Sub-Administrator and to permit such compliance inspections by the Sub-Administrator as shall be reasonably necessary to permit the Sub-Administrator to satisfy its obligations and respond to the reasonable requests of the Trustees. 11. ADVISER'S LIABILITIES AND INDEMNIFICATION. (a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of the statements in the Portfolio's offering materials (including the prospectus, the statement of additional information, advertising and sales materials), except for information supplied by the Sub-Administrator or the Portfolio or another third party for inclusion therein. (b) The Adviser shall be liable to the Portfolio for any loss (including brokerage charges) incurred by the Portfolio as a result of any improper investment made by the Adviser. (c) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Portfolio. (d) Each party to this Agreement shall indemnify and hold harmless the other party and the shareholders, directors, trustees, officers and employees of the other party (any such person, an "Indemnified Party") against any loss, liability, claim, damage or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage or expenses and reasonable counsel fees incurred in connection therewith) arising out of the Indemnified Party's performance or nonperformance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties under this Agreement. (e) No provision of this Agreement shall be construed to protect any Trustee or officer of the Portfolio, or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the Investment Company Act. 12. NON-EXCLUSIVITY; TRADING FOR ADVISER'S OWN ACCOUNT. The Portfolio's employment of the Adviser is not an exclusive arrangement. The Portfolio may from time to time employ other individuals or entities to furnish it with the services provided for herein. Likewise, the Adviser may act as investment adviser for any other person, and shall not in any way be limited or restricted from having, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Adviser expressly represents that it will undertake no activities which will adversely affect the performance of its obligations to the Portfolio under this Agreement; and provided further that the Adviser will adhere to a code of ethics governing employee trading and trading for proprietary accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act of 1940 and has been approved by the Portfolio's Board of Trustees. 13. TERM. This Agreement shall become effective on September 1, 1999 and shall remain in effect for a period of two (2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Portfolio at least annually by (i) the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio and (ii) the vote of a majority of the Trustees of the Portfolio who are not parties to this Agreement nor interested persons thereof, cast in person at a meeting called for the purpose of voting on such approval. The terms "majority of the outstanding voting securities" and "interested persons" shall have the meanings as set forth in the Investment Company Act. 14. TERMINATION; NO ASSIGNMENT. (a) This Agreement may be terminated by the Portfolio at any time without payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio, upon sixty (60) days' written notice to the Adviser, and by the Adviser upon sixty (60) days' written notice to the Portfolio. In the event of a termination, the Adviser shall cooperate in the orderly transfer of the Portfolio's affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Portfolio maintained by the Adviser on behalf of the Portfolio. (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the Investment Company Act. 15. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby. 16. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the Investment Advisers Act of 1940 and any rules and regulations promulgated thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all on the day and year first above written. KINETICS PORTFOLIOS TRUST KINETICS ASSET MANAGEMENT, INC. on behalf of its series, The Internet Global Growth Portfolio By:_________________________________ By:_________________________________ Name: Name: Title: Title: SCHEDULE A ANNUAL FEE RATE The Internet Global Growth Portfolio 1.25% of average daily net assets KINETICS PORTFOLIOS TRUST INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT is made as of the 1st day of May, 2000, by and between KINETICS PORTFOLIOS TRUST, a Delaware business trust (the "Trust") on behalf of its series the Internet New Paradigm Portfolio (the "Portfolio") and KINETICS ASSET MANAGEMENT, INC., a New York corporation (the "Adviser"). W I T N E S S E T H : WHEREAS, the Trust is an open-end management investment company, registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 and is engaged in the business of providing investment advice to investment companies; and WHEREAS, the Trust, on behalf of the Portfolio, desires to retain the Adviser to render advice and services to the Portfolio pursuant to the terms and provisions of this Agreement, and the Adviser desires to furnish said advice and services. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, intending to be legally bound hereby, mutually agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser and the Adviser hereby accepts such employment, to render investment advice and related services with respect to the assets of the Portfolio for the period and on the terms set forth in this Agreement, subject to the supervision and direction of the Board of Trustees. 2. DUTIES OF ADVISER. (a) GENERAL DUTIES. The Adviser shall act as investment adviser to the Portfolio and shall supervise investments of the Portfolio in accordance with the investment objective, policies and restrictions of the Portfolio as set forth in the Portfolio's governing documents, including, without limitation, the Fund's Certificate of Trust, as amended, Declaration of Trust, as amended, and Bylaws, as amended, the prospectus and statement of additional information; and such other limitations, policies and procedures as the Trustees may impose from time to time in writing to the Adviser. In providing such services, the Adviser shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Internal Revenue Code, the Uniform Commercial Code and other applicable law. Without limiting the generality of the foregoing, the Adviser shall: (i) furnish the Portfolio with advice and recommendations with respect to the investment of the Portfolio's assets and the purchase and sale of portfolio securities for the Portfolio, including the taking of such steps as may be necessary to implement such advice and recommendations (I.E., placing the orders); (ii) manage and oversee the investments of the Portfolio, subject to the ultimate supervision and direction of the Board of Trustees; (iii) vote proxies for the Portfolio, file ownership reports under Section 13 of the Securities Exchange Act of 1934 for the Portfolio, and take other actions on behalf of the Portfolio; (iv) maintain the books and records required to be maintained by the Portfolio except to the extent arrangements have been made for such books and records to be maintained by Firstar Mutual Fund Services LLC, a Wisconsin limited liability company (the "Sub-Administrator") or another agent of the Portfolio; (v) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Portfolio's assets which the Board of Trustees or the officers of the Portfolio may reasonably request; and (vi) render to the Board of Trustees such periodic and special reports with respect to the Portfolio's investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board of Trustees. (b) BROKERAGE. The Adviser shall be responsible for decisions to buy and sell securities for the Portfolio, for broker-dealer selection, and for negotiation of brokerage commission rates, provided that the Adviser shall not direct orders to an affiliated person of the Adviser without general prior authorization to use such affiliated broker or dealer from the Board of Trustees. The Adviser's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Adviser may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. The price to the Portfolio in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Portfolio to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Adviser an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Portfolio. The Adviser is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers or dealers who also provide research or statistical material, or other services, to the Portfolio, the Adviser, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser shall report on such allocations regularly to the Portfolio, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Adviser is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as of other clients (to the extent that the Adviser may, in the future, have other clients), the Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. 3. REPRESENTATIONS OF THE ADVISER. (a) The Adviser shall use its best judgment and efforts in rendering the advice and services to the Portfolio as contemplated by this Agreement. (b) The Adviser shall maintain all licenses and registrations necessary to perform its duties hereunder in good order. (c) The Adviser shall conduct its operations at all times in conformance with the Investment Advisers Act of 1940, the Investment Company Act of 1940, and any other applicable state and/or self-regulatory organization regulations. 4. INDEPENDENT CONTRACTOR. The Adviser shall, for all purposes herein, be deemed to be an independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Portfolio in any way, or in any way be deemed an agent for the Portfolio. It is expressly understood and agreed that the services to be rendered by the Adviser to the Portfolio under the provisions of this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. 5. ADVISER'S PERSONNEL. The Adviser shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Adviser shall be deemed to include persons employed or retained by the Adviser to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Adviser or the Board of Trustees may desire and reasonably request. 6. EXPENSES. (a) With respect to the operation of the Portfolio, the Adviser shall be responsible for (i) providing the personnel, office space and equipment reasonably necessary for the investment management of the Portfolio, and (ii) the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Adviser. If the Adviser has agreed to limit the operating expenses of the Portfolio, the Adviser shall also be responsible on a monthly basis for any operating expenses that exceed the agreed upon expense limitation. (b) The Portfolio is responsible for and has assumed the obligation for payment of all of its expenses, other than as stated in Subparagraph 6(a) above, including but not limited to: investment advisory, administrative and sub-administrative fees payable to the Adviser or the Sub-Administrator under the appropriate agreements entered into with the Adviser or the Sub-Administrator, as the case may be; fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Portfolio including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the Investment Company Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Portfolio's shareholders and Board of Trustees that are properly payable by the Portfolio; salaries and expenses of officers and fees and expenses of members of the Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Adviser or the Sub-Administrator; insurance premiums on property or personnel of the Portfolio which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of the Portfolio or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Portfolio; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as herein otherwise prescribed. (c) The Adviser may voluntarily absorb certain Portfolio expenses or waive the Adviser's own advisory fee. (d) To the extent the Adviser incurs any costs by assuming expenses which are an obligation of the Portfolio as set forth herein, the Portfolio shall promptly reimburse the Adviser for such costs and expenses, except to the extent the Adviser has otherwise agreed to bear such expenses. To the extent the services for which the Portfolio is obligated to pay are performed by the Adviser, the Adviser shall be entitled to recover from the Portfolio to the extent of the Adviser's actual costs for providing such services. In determining the Adviser's actual costs, the Adviser may take into account an allocated portion of the salaries and overhead of personnel performing such services. 7. INVESTMENT ADVISORY FEE. (a) The Portfolio shall pay to the Adviser, and the Adviser agrees to accept, as full compensation for all investment and advisory services furnished or provided to the Portfolio pursuant to this Agreement, an annual investment advisory fee at the rate set forth in Schedule A to this Agreement. (b) The investment advisory fee shall be accrued daily by the Portfolio and paid to the Adviser on the first business day of the succeeding month. (c) The initial fee under this Agreement shall be payable on the first business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Adviser shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination. (d) The fee payable to the Adviser under this Agreement will be reduced to the extent of any receivable owed by the Adviser to the Portfolio and as required under any expense limitation applicable to the Portfolio. (e) The Adviser voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility of the Portfolio under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Adviser hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis. (f) Any fee withheld or voluntarily reduced and any Portfolio expense absorbed by the Adviser voluntarily or pursuant to an agreed upon expense cap shall be reimbursed by the Portfolio to the Adviser, if so requested by the Adviser, no later than the fifth fiscal year succeeding the fiscal year of the withholding, reduction or absorption if the aggregate amount actually paid by the Portfolio toward the operating expenses for such fiscal year (taking into account the reimbursement) do not exceed the applicable limitation on Portfolio expenses. Such reimbursement may be paid prior to the Portfolio's payment of current expenses if so requested by the Adviser even if such practice may require the Adviser to waive, reduce or absorb current Portfolio expenses. (g) The Adviser may agree not to require payment of any portion of the compensation or reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future compensation or reimbursement due to the Adviser hereunder. 8. NO SHORTING; NO BORROWING. The Adviser agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Portfolio. This prohibition shall not prevent the purchase of such shares by any of the officers or employees of the Adviser or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Adviser agrees that neither it nor any of its officers or employees shall borrow from the Portfolio or pledge or use the Portfolio's assets in connection with any borrowing not directly for the Portfolio's benefit. For this purpose, failure to pay any amount due and payable to the Portfolio for a period of more than thirty (30) days shall constitute a borrowing. 9. CONFLICTS WITH THE PORTFOLIO'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing herein contained shall be deemed to require the Portfolio to take any action contrary to its Certificate of Trust, as amended, Declaration of Trust, as amended, Bylaws, as amended, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Portfolio. In this connection, the Adviser acknowledges that the Trustees retain ultimate plenary authority over the Portfolio and may take any and all actions necessary and reasonable to protect the interests of shareholders. 10. REPORTS AND ACCESS. The Adviser agrees to supply such information to the Sub-Administrator and to permit such compliance inspections by the Sub-Administrator as shall be reasonably necessary to permit the Sub-Administrator to satisfy its obligations and respond to the reasonable requests of the Trustees. 11. ADVISER'S LIABILITIES AND INDEMNIFICATION. (a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of the statements in the Portfolio's offering materials (including the prospectus, the statement of additional information, advertising and sales materials), except for information supplied by the Sub-Administrator or the Portfolio or another third party for inclusion therein. (b) The Adviser shall be liable to the Portfolio for any loss (including brokerage charges) incurred by the Portfolio as a result of any improper investment made by the Adviser. (c) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Portfolio. (d) Each party to this Agreement shall indemnify and hold harmless the other party and the shareholders, directors, trustees, officers and employees of the other party (any such person, an "Indemnified Party") against any loss, liability, claim, damage or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage or expenses and reasonable counsel fees incurred in connection therewith) arising out of the Indemnified Party's performance or nonperformance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties under this Agreement. (e) No provision of this Agreement shall be construed to protect any Trustee or officer of the Portfolio, or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the Investment Company Act. 12. NON-EXCLUSIVITY; TRADING FOR ADVISER'S OWN ACCOUNT. The Portfolio's employment of the Adviser is not an exclusive arrangement. The Portfolio may from time to time employ other individuals or entities to furnish it with the services provided for herein. Likewise, the Adviser may act as investment adviser for any other person, and shall not in any way be limited or restricted from having, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Adviser expressly represents that it will undertake no activities which will adversely affect the performance of its obligations to the Portfolio under this Agreement; and provided further that the Adviser will adhere to a code of ethics governing employee trading and trading for proprietary accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act of 1940 and has been approved by the Portfolio's Board of Trustees. 13. TERM. This Agreement shall become effective on September 1, 1999 and shall remain in effect for a period of two (2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Portfolio at least annually by (i) the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio and (ii) the vote of a majority of the Trustees of the Portfolio who are not parties to this Agreement nor interested persons thereof, cast in person at a meeting called for the purpose of voting on such approval. The terms "majority of the outstanding voting securities" and "interested persons" shall have the meanings as set forth in the Investment Company Act. 14. TERMINATION; NO ASSIGNMENT. (a) This Agreement may be terminated by the Portfolio at any time without payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio, upon sixty (60) days' written notice to the Adviser, and by the Adviser upon sixty (60) days' written notice to the Portfolio. In the event of a termination, the Adviser shall cooperate in the orderly transfer of the Portfolio's affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Portfolio maintained by the Adviser on behalf of the Portfolio. (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the Investment Company Act. 15. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby. 16. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the Investment Advisers Act of 1940 and any rules and regulations promulgated thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all on the day and year first above written. KINETICS PORTFOLIOS TRUST KINETICS ASSET MANAGEMENT, INC. on behalf of its series, The Internet New Paradigm Portfolio By:_________________________________ By:_________________________________ Name: Name: Title: Title: SCHEDULE A ANNUAL FEE RATE The Internet New Paradigm Portfolio 1.25% of average daily net assets KINETICS PORTFOLIOS TRUST INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT is made as of the 1st day of May, 2000, by and between KINETICS PORTFOLIOS TRUST, a Delaware business trust (the "Trust") on behalf of its series the Medical Portfolio (the "Portfolio") and KINETICS ASSET MANAGEMENT, INC., a New York corporation (the "Adviser"). W I T N E S S E T H : WHEREAS, the Trust is an open-end management investment company, registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 and is engaged in the business of providing investment advice to investment companies; and WHEREAS, the Trust, on behalf of the Portfolio, desires to retain the Adviser to render advice and services to the Portfolio pursuant to the terms and provisions of this Agreement, and the Adviser desires to furnish said advice and services. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, intending to be legally bound hereby, mutually agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser and the Adviser hereby accepts such employment, to render investment advice and related services with respect to the assets of the Portfolio for the period and on the terms set forth in this Agreement, subject to the supervision and direction of the Board of Trustees. 2. DUTIES OF ADVISER. (a) GENERAL DUTIES. The Adviser shall act as investment adviser to the Portfolio and shall supervise investments of the Portfolio in accordance with the investment objective, policies and restrictions of the Portfolio as set forth in the Portfolio's governing documents, including, without limitation, the Fund's Certificate of Trust, as amended, Declaration of Trust, as amended, and Bylaws, as amended, the prospectus and statement of additional information; and such other limitations, policies and procedures as the Trustees may impose from time to time in writing to the Adviser. In providing such services, the Adviser shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Internal Revenue Code, the Uniform Commercial Code and ther applicable law. Without limiting the generality of the foregoing, the Adviser shall: (i) furnish the Portfolio with advice and recommendations with respect to the investment of the Portfolio's assets and the purchase and sale of portfolio securities for the Portfolio, including the taking of such steps as may be necessary to implement such advice and recommendations (I.E., placing the orders); (ii) manage and oversee the investments of the Portfolio, subject to the ultimate supervision and direction of the Board of Trustees; (iii) vote proxies for the Portfolio, file ownership reports under Section 13 of the Securities Exchange Act of 1934 for the Portfolio, and take other actions on behalf of the Portfolio; (iv) maintain the books and records required to be maintained by the Portfolio except to the extent arrangements have been made for such books and records to be maintained by Firstar Mutual Fund Services LLC, a Wisconsin limited liability company (the "Sub-Administrator") or another agent of the Portfolio; (v) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Portfolio's assets which the Board of Trustees or the officers of the Portfolio may reasonably request; and (vi) render to the Board of Trustees such periodic and special reports with respect to the Portfolio's investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board of Trustees. (b) BROKERAGE. The Adviser shall be responsible for decisions to buy and sell securities for the Portfolio, for broker-dealer selection, and for negotiation of brokerage commission rates, provided that the Adviser shall not direct orders to an affiliated person of the Adviser without general prior authorization to use such affiliated broker or dealer from the Board of Trustees. The Adviser's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Adviser may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. The price to the Portfolio in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Portfolio to pay a broker or dealer that provides (directly or indirectly)brokerage or research services to the Adviser an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Portfolio. The Adviser is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers or dealers who also provide research or statistical material, or other services, to the Portfolio, the Adviser, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser shall report on such allocations regularly to the Portfolio, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Adviser is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Adviser deems the purchase or sale of a security to bein the best interest of the Portfolio as well as of other clients (to the extent that the Adviser may, in the future, have other clients), the Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. 3. REPRESENTATIONS OF THE ADVISER. (a) The Adviser shall use its best judgment and efforts in rendering the advice and services to the Portfolio as contemplated by this Agreement. (b) The Adviser shall maintain all licenses and registrations necessary to perform its duties hereunder in good order. (c) The Adviser shall conduct its operations at all times in conformance with the Investment Advisers Act of 1940, the Investment Company Act of 1940, and any other applicable state and/or self-regulatory organization regulations. 4. INDEPENDENT CONTRACTOR. The Adviser shall, for all purposes herein, be deemed to be an independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Portfolio in any way, or in any way be deemed an agent for the Portfolio. It is expressly understood and agreed that the services to be rendered by the Adviser to the Portfolio under the provisions of this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. 5. ADVISER'S PERSONNEL. The Adviser shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Adviser shall be deemed to include persons employed or retained by the Adviser to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Adviser or the Board of Trustees may desire and reasonably request. 6. EXPENSES. (a) With respect to the operation of the Portfolio, the Adviser shall be responsible for (i) providing the personnel, office space and equipment reasonably necessary for the investment management of the Portfolio, and (ii) the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Adviser. If the Adviser has agreed to limit the operating expenses of the Portfolio, the Adviser shall also be responsible on a monthly basis for any operating expenses that exceed the agreed upon expense limitation. (b) The Portfolio is responsible for and has assumed the obligation for payment of all of its expenses, other than as stated in Subparagraph 6(a) above, including but not limited to: investment advisory, administrative and sub-administrative fees payable to the Adviser or the Sub-Administrator under the appropriate agreements entered into with the Adviser or the Sub-Administrator, as the case may be; fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Portfolio including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the Investment Company Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Portfolio's shareholders and Board of Trustees that are properly payable by the Portfolio; salaries and expenses of officers and fees and expenses of members of the Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Adviser or the Sub-Administrator; insurance premiums on property or personnel of the Portfolio which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of the Portfolio or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Portfolio; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as herein otherwise prescribed. (c) The Adviser may voluntarily absorb certain Portfolio expenses or waive the Adviser's own advisory fee. (d) To the extent the Adviser incurs any costs by assuming expenses which are an obligation of the Portfolio as set forth herein, the Portfolio shall promptly reimburse the Adviser for such costs and expenses, except to the extent the Adviser has otherwise agreed to bear such expenses. To the extent the services for which the Portfolio is obligated to pay are performed by the Adviser, the Adviser shall be entitled to recover from the Portfolio to the extent of the Adviser's actual costs for providing such services. In determining the Adviser's actual costs, the Adviser may take into account an allocated portion of the salaries and overhead of personnel performing such services. 7. INVESTMENT ADVISORY FEE. (a) The Portfolio shall pay to the Adviser, and the Adviser agrees to accept, as full compensation for all investment and advisory services furnished or provided to the Portfolio pursuant to this Agreement, an annual investment advisory fee at the rate set forth in Schedule A to this Agreement. (b) The investment advisory fee shall be accrued daily by the Portfolio and paid to the Adviser on the first business day of the succeeding month. (c) The initial fee under this Agreement shall be payable on the first business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Adviser shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination. (d) The fee payable to the Adviser under this Agreement will be reduced to the extent of any receivable owed by the Adviser to the Portfolio and as required under any expense limitation applicable to the Portfolio. (e) The Adviser voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility of the Portfolio under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Adviser hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis. (f) Any fee withheld or voluntarily reduced and any Portfolio expense absorbed by the Adviser voluntarily or pursuant to an agreed upon expense cap shall be reimbursed by the Portfolio to the Adviser, if so requested by the Adviser, no later than the fifth fiscal year succeeding the fiscal year of the withholding, reduction or absorption if the aggregate amount actually paid by the Portfolio toward the operating expenses for such fiscal year (taking into account the reimbursement) do not exceed the applicable limitation on Portfolio expenses. Such reimbursement may be paid prior to the Portfolio's payment of current expenses if so requested by the Adviser even if such practice may require the Adviser to waive, reduce or absorb current Portfolio expenses. (g) The Adviser may agree not to require payment of any portion of the compensation or reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future compensation or reimbursement due to the Adviser hereunder. 8. NO SHORTING; NO BORROWING. The Adviser agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Portfolio. This prohibition shall not prevent the purchase of such shares by any of the officers or employees of the Adviser or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Adviser agrees that neither it nor any of its officers or employees shall borrow from the Portfolio or pledge or use the Portfolio's assets in connection with any borrowing not directly for the Portfolio's benefit. For this purpose, failure to pay any amount due and payable to the Portfolio for a period of more than thirty (30) days shall constitute a borrowing. 9. CONFLICTS WITH THE PORTFOLIO'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing herein contained shall be deemed to require the Portfolio to take any action contrary to its Certificate of Trust, as amended, Declaration of Trust, as amended, Bylaws, as amended, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Portfolio. In this connection, the Adviser acknowledges that the Trustees retain ultimate plenary authority over the Portfolio and may take any and all actions necessary and reasonable to protect the interests of shareholders. 10. REPORTS AND ACCESS. The Adviser agrees to supply such information to the Sub-Administrator and to permit such compliance inspections by the Sub-Administrator as shall be reasonably necessary to permit the Sub-Administrator to satisfy its obligations and respond to the reasonable requests of the Trustees. 11. ADVISER'S LIABILITIES AND INDEMNIFICATION. (a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of the statements in the Portfolio's offering materials (including the prospectus, the statement of additional information, advertising and sales materials), except for information supplied by the Sub-Administrator or the Portfolio or another third party for inclusion therein. (b) The Adviser shall be liable to the Portfolio for any loss (including brokerage charges) incurred by the Portfolio as a result of any improper investment made by the Adviser. (c) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Portfolio. (d) Each party to this Agreement shall indemnify and hold harmless the other party and the shareholders, directors, trustees, officers and employees of the other party (any such person, an "Indemnified Party") against any loss, liability, claim, damage or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage or expenses and reasonable counsel fees incurred in connection therewith) arising out of the Indemnified Party's performance or nonperformance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties under this Agreement. (e) No provision of this Agreement shall be construed to protect any Trustee or officer of the Portfolio, or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the Investment Company Act. 12. NON-EXCLUSIVITY; TRADING FOR ADVISER'S OWN ACCOUNT. The Portfolio's employment of the Adviser is not an exclusive arrangement. The Portfolio may from time to time employ other individuals or entities to furnish it with the services provided for herein. Likewise, the Adviser may act as investment adviser for any other person, and shall not in any way be limited or restricted from having, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Adviser expressly represents that it will undertake no activities which will adversely affect the performance of its obligations to the Portfolio under this Agreement; and provided further that the Adviser will adhere to a code of ethics governing employee trading and trading for proprietary accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act of 1940 and has been approved by the Portfolio's Board of Trustees. 13. TERM. This Agreement shall become effective on September 1, 1999 and shall remain in effect for a period of two (2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Portfolio at least annually by (i) the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio and (ii) the vote of a majority of the Trustees of the Portfolio who are not parties to this Agreement nor interested persons thereof, cast in person at a meeting called for the purpose of voting on such approval. The terms "majority of the outstanding voting securities" and "interested persons" shall have the meanings as set forth in the Investment Company Act. 14. TERMINATION; NO ASSIGNMENT. (a) This Agreement may be terminated by the Portfolio at any time without payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio, upon sixty (60) days' written notice to the Adviser, and by the Adviser upon sixty (60) days' written notice to the Portfolio. In the event of a termination, the Adviser shall cooperate in the orderly transfer of the Portfolio's affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Portfolio maintained by the Adviser on behalf of the Portfolio. (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the Investment Company Act. 15. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby. 16. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the Investment Advisers Act of 1940 and any rules and regulations promulgated thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all on the day and year first above written. KINETICS PORTFOLIOS TRUST KINETICS ASSET MANAGEMENT, INC. on behalf of its series, The Medical Portfolio By:_________________________________ By:_________________________________ Name: Name: Title: Title: SCHEDULE A ANNUAL FEE RATE The Medical Portfolio 1.25% of average daily net assets KINETICS PORTFOLIOS TRUST INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT is made as of the 1st day of May, 2000, by and between KINETICS PORTFOLIOS TRUST, a Delaware business trust (the "Trust") on behalf of its series the Small Cap Opportunities Portfolio (the "Portfolio") and KINETICS ASSET MANAGEMENT, INC., a New York corporation (the "Adviser"). W I T N E S S E T H : WHEREAS, the Trust is an open-end management investment company, registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 and is engaged in the business of providing investment advice to investment companies; and WHEREAS, the Trust, on behalf of the Portfolio, desires to retain the Adviser to render advice and services to the Portfolio pursuant to the terms and provisions of this Agreement, and the Adviser desires to furnish said advice and services. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, intending to be legally bound hereby, mutually agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser and the Adviser hereby accepts such employment, to render investment advice and related services with respect to the assets of the Portfolio for the period and on the terms set forth in this Agreement, subject to the supervision and direction of the Board of Trustees. 2. DUTIES OF ADVISER. (a) GENERAL DUTIES. The Adviser shall act as investment adviser to the Portfolio and shall supervise investments of the Portfolio in accordance with the investment objective, policies and restrictions of the Portfolio as set forth in the Portfolio's governing documents, including, without limitation, the Fund's Certificate of Trust, as amended, Declaration of Trust, as amended, and Bylaws, as amended, the prospectus and statement of additional information; and such other limitations, policies and procedures as the Trustees may impose from time to time in writing to the Adviser. In providing such services, the Adviser shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Internal Revenue Code, the Uniform Commercial Code and other applicable law. Without limiting the generality of the foregoing, the Adviser shall: (i) furnish the Portfolio with advice and recommendations with respect to the investment of the Portfolio's assets and the purchase and sale of portfolio securities for the Portfolio, including the taking of such steps as may be necessary to implement such advice and recommendations (I.E., placing the orders); (ii) manage and oversee the investments of the Portfolio, subject to the ultimate supervision and direction of the Board of Trustees; (iii) vote proxies for the Portfolio, file ownership reports under Section 13 of the Securities Exchange Act of 1934 for the Portfolio, and take other actions on behalf of the Portfolio; (iv) maintain the books and records required to be maintained by the Portfolio except to the extent arrangements have been made for such books and records to be maintained by Firstar Mutual Fund Services LLC, a Wisconsin limited liability company (the "Sub-Administrator") or another agent of the Portfolio; (v) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Portfolio's assets which the Board of Trustees or the officers of the Portfolio may reasonably request; and (vi) render to the Board of Trustees such periodic and special reports with respect to the Portfolio's investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board of Trustees. (b) BROKERAGE. The Adviser shall be responsible for decisions to buy and sell securities for the Portfolio, for broker-dealer selection, and for negotiation of brokerage commission rates, provided that the Adviser shall not direct orders to an affiliated person of the Adviser without general prior authorization to use such affiliated broker or dealer from the Board of Trustees. The Adviser's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Adviser may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. The price to the Portfolio in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Portfolio to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Adviser an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Portfolio. The Adviser is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers or dealers who also provide research or statistical material, or other services, to the Portfolio, the Adviser, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser shall report on such allocations regularly to the Portfolio, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Adviser is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfoliotransactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as of other clients (to the extent that the Adviser may, in the future, have other clients), the Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. 3. REPRESENTATIONS OF THE ADVISER. (a) The Adviser shall use its best judgment and efforts in rendering the advice and services to the Portfolio as contemplated by this Agreement. (b) The Adviser shall maintain all licenses and registrations necessary to perform its duties hereunder in good order. (c) The Adviser shall conduct its operations at all times in conformance with the Investment Advisers Act of 1940, the Investment Company Act of 1940, and any other applicable state and/or self-regulatory organization regulations. 4. INDEPENDENT CONTRACTOR. The Adviser shall, for all purposes herein, be deemed to be an independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Portfolio in any way, or in any way be deemed an agent for the Portfolio. It is expressly understood and agreed that the services to be rendered by the Adviser to the Portfolio under the provisions of this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. 5. ADVISER'S PERSONNEL. The Adviser shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Adviser shall be deemed to include persons employed or retained by the Adviser to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Adviser or the Board of Trustees may desire and reasonably request. 6. EXPENSES. (a) With respect to the operation of the Portfolio, the Adviser shall be responsible for (i) providing the personnel, office space and equipment reasonably necessary for the investment management of the Portfolio, and (ii) the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Adviser. If the Adviser has agreed to limit the operating expenses of the Portfolio, the Adviser shall also be responsible on a monthly basis for any operating expenses that exceed the agreed upon expense limitation. (b) The Portfolio is responsible for and has assumed the obligation for payment of all of its expenses, other than as stated in Subparagraph 6(a) above, including but not limited to: investment advisory, administrative and sub-administrative fees payable to the Adviser or the Sub-Administrator under the appropriate agreements entered into with the Adviser or the Sub-Administrator, as the case may be; fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Portfolio including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the Investment Company Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Portfolio's shareholders and Board of Trustees that are properly payable by the Portfolio; salaries and expenses of officers and fees and expenses of members of the Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Adviser or the Sub-Administrator; insurance premiums on property or personnel of the Portfolio which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of the Portfolio or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Portfolio; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as herein otherwise prescribed. (c) The Adviser may voluntarily absorb certain Portfolio expenses or waive the Adviser's own advisory fee. (d) To the extent the Adviser incurs any costs by assuming expenses which are an obligation of the Portfolio as set forth herein, the Portfolio shall promptly reimburse the Adviser for such costs and expenses, except to the extent the Adviser has otherwise agreed to bear such expenses. To the extent the services for which the Portfolio is obligated to pay are performed by the Adviser, the Adviser shall be entitled to recover from the Portfolio to the extent of the Adviser's actual costs for providing such services. In determining the Adviser's actual costs, the Adviser may take into account an allocated portion of the salaries and overhead of personnel performing such services. 7. INVESTMENT ADVISORY FEE. (a) The Portfolio shall pay to the Adviser, and the Adviser agrees to accept, as full compensation for all investment and advisory services furnished or provided to the Portfolio pursuant to this Agreement, an annual investment advisory fee at the rate set forth in Schedule A to this Agreement. (b) The investment advisory fee shall be accrued daily by the Portfolio and paid to the Adviser on the first business day of the succeeding month. (c) The initial fee under this Agreement shall be payable on the first business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Adviser shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination. (d) The fee payable to the Adviser under this Agreement will be reduced to the extent of any receivable owed by the Adviser to the Portfolio and as required under any expense limitation applicable to the Portfolio. (e) The Adviser voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility of the Portfolio under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Adviser hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis. (f) Any fee withheld or voluntarily reduced and any Portfolio expense absorbed by the Adviser voluntarily or pursuant to an agreed upon expense cap shall be reimbursed by the Portfolio to the Adviser, if so requested by the Adviser, no later than the fifth fiscal year succeeding the fiscal year of the withholding, reduction or absorption if the aggregate amount actually paid by the Portfolio toward the operating expenses for such fiscal year (taking into account the reimbursement) do not exceed the applicable limitation on Portfolio expenses. Such reimbursement may be paid prior to the Portfolio's payment of current expenses if so requested by the Adviser even if such practice may require the Adviser to waive, reduce or absorb current Portfolio expenses. (g) The Adviser may agree not to require payment of any portion of the compensation or reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future compensation or reimbursement due to the Adviser hereunder. 8. NO SHORTING; NO BORROWING. The Adviser agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Portfolio. This prohibition shall not prevent the purchase of such shares by any of the officers or employees of the Adviser or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Adviser agrees that neither it nor any of its officers or employees shall borrow from the Portfolio or pledge or use the Portfolio's assets in connection with any borrowing not directly for the Portfolio's benefit. For this purpose, failure to pay any amount due and payable to the Portfolio for a period of more than thirty (30) days shall constitute a borrowing. 9. CONFLICTS WITH THE PORTFOLIO'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing herein contained shall be deemed to require the Portfolio to take any action contrary to its Certificate of Trust, as amended, Declaration of Trust, as amended, Bylaws, as amended, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Portfolio. In this connection, the Adviser acknowledges that the Trustees retain ultimate plenary authority over the Portfolio and may take any and all actions necessary and reasonable to protect the interests of shareholders. 10. REPORTS AND ACCESS. The Adviser agrees to supply such information to the Sub-Administrator and to permit such compliance inspections by the Sub-Administrator as shall be reasonably necessary to permit the Sub-Administrator to satisfy its obligations and respond to the reasonable requests of the Trustees. 11. ADVISER'S LIABILITIES AND INDEMNIFICATION. (a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of the statements in the Portfolio's offering materials (including the prospectus, the statement of additional information, advertising and sales materials), except for information supplied by the Sub-Administrator or the Portfolio or another third party for inclusion therein. (b) The Adviser shall be liable to the Portfolio for any loss (including brokerage charges) incurred by the Portfolio as a result of any improper investment made by the Adviser. (c) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Portfolio. (d) Each party to this Agreement shall indemnify and hold harmless the other party and the shareholders, directors, trustees, officers and employees of the other party (any such person, an "Indemnified Party") against any loss, liability, claim, damage or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage or expenses and reasonable counsel fees incurred in connection therewith) arising out of the Indemnified Party's performance or nonperformance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties under this Agreement. (e) No provision of this Agreement shall be construed to protect any Trustee or officer of the Portfolio, or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the Investment Company Act. 12. NON-EXCLUSIVITY; TRADING FOR ADVISER'S OWN ACCOUNT. The Portfolio's employment of the Adviser is not an exclusive arrangement. The Portfolio may from time to time employ other individuals or entities to furnish it with the services provided for herein. Likewise, the Adviser may act as investment adviser for any other person, and shall not in any way be limited or restricted from having, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Adviser expressly represents that it will undertake no activities which will adversely affect the performance of its obligations to the Portfolio under this Agreement; and provided further that the Adviser will adhere to a code of ethics governing employee trading and trading for proprietary accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act of 1940 and has been approved by the Portfolio's Board of Trustees. 13. TERM. This Agreement shall become effective on September 1, 1999 and shall remain in effect for a period of two (2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Portfolio at least annually by (i) the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio and (ii) the vote of a majority of the Trustees of the Portfolio who are not parties to this Agreement nor interested persons thereof, cast in person at a meeting called for the purpose of voting on such approval. The terms "majority of the outstanding voting securities" and "interested persons" shall have the meanings as set forth in the Investment Company Act. 14.TERMINATION; NO ASSIGNMENT. (a) This Agreement may be terminated by the Portfolio at any time without payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio, upon sixty (60) days' written notice to the Adviser, and by the Adviser upon sixty (60) days' written notice to the Portfolio. In the event of a termination, the Adviser shall cooperate in the orderly transfer of the Portfolio's affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Portfolio maintained by the Adviser on behalf of the Portfolio. (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the Investment Company Act. 15. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby. 16. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the Investment Advisers Act of 1940 and any rules and regulations promulgated thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all on the day and year first above written. KINETICS PORTFOLIOS TRUST KINETICS ASSET MANAGEMENT, INC. on behalf of its series, The Small Cap Opportunities Portfolio By:_________________________________ By:_________________________________ Name: Name: Title: Title: SCHEDULE A ANNUAL FEE RATE The Small Cap Opportunities Portfolio 1.25% of average daily net assets KINETICS PORTFOLIOS TRUST INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT is made as of the 1st day of May, 2000, by and between KINETICS PORTFOLIOS TRUST, a Delaware business trust (the "Trust") on behalf of its series the Middle East Growth Portfolio (the "Portfolio") and KINETICS ASSET MANAGEMENT, INC., a New York corporation (the "Adviser"). W I T N E S S E T H : WHEREAS, the Trust is an open-end management investment company, registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 and is engaged in the business of providing investment advice to investment companies; and WHEREAS, the Trust, on behalf of the Portfolio, desires to retain the Adviser to render advice and services to the Portfolio pursuant to the terms and provisions of this Agreement, and the Adviser desires to furnish said advice and services. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, intending to be legally bound hereby, mutually agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser and the Adviser hereby accepts such employment, to render investment advice and related services with respect to the assets of the Portfolio for the period and on the terms set forth in this Agreement, subject to the supervision and direction of the Board of Trustees. 2. DUTIES OF ADVISER. (a)GENERAL DUTIES. The Adviser shall act as investment adviser to the Portfolio and shall supervise investments of the Portfolio in accordance with the investment objective, policies and restrictions of the Portfolio as set forth in the Portfolio's governing documents, including, without limitation, the Fund's Certificate of Trust, as amended, Declaration of Trust, as amended, and Bylaws, as amended, the prospectus and statement of additional information; and such other limitations, policies and procedures as the Trustees may impose from time to time in writing to the Adviser. In providing such services, the Adviser shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Internal Revenue Code, the Uniform Commercial Code and other applicable law. Without limiting the generality of the foregoing, the Adviser shall: (i) furnish the Portfolio with advice and recommendations with respect to the investment of the Portfolio's assets and the purchase and sale of portfolio securities for the Portfolio, including the taking of such steps as may be necessary to implement such advice and recommendations (I.E., placing the orders); (ii) manage and oversee the investments of the Portfolio, subject to the ultimate supervision and direction of the Board of Trustees; (iii) vote proxies for the Portfolio, file ownership reports under Section 13 of the Securities Exchange Act of 1934 for the Portfolio, and take other actions on behalf of the Portfolio; (iv) maintain the books and records required to be maintained by the Portfolio except to the extent arrangements have been made for such books and records to be maintained by Firstar Mutual Fund Services LLC, a Wisconsin limited liability company (the "Sub-Administrator") or another agent of the Portfolio; (v) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Portfolio's assets which the Board of Trustees or the officers of the Portfolio may reasonably request; and (vi) render to the Board of Trustees such periodic and special reports with respect to the Portfolio's investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board of Trustees. (b)BROKERAGE. The Adviser shall be responsible for decisions to buy and sell securities for the Portfolio, for broker-dealer selection, and for negotiation of brokerage commission rates, provided that the Adviser shall not direct orders to an affiliated person of the Adviser without general prior authorization to use such affiliated broker or dealer from the Board of Trustees. The Adviser's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Adviser may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. The price to the Portfolio in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Portfolio to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Adviser an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Portfolio. The Adviser is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers or dealers who also provide research or statistical material, or other services, to the Portfolio, the Adviser, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser shall report on such allocations regularly to the Portfolio, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Adviser is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as of other clients (to the extent that the Adviser may, in the future, have other clients), the Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. 3. REPRESENTATIONS OF THE ADVISER. (a) The Adviser shall use its best judgment and efforts in rendering the advice and services to the Portfolio as contemplated by this Agreement. (b) The Adviser shall maintain all licenses and registrations necessary to perform its duties hereunder in good order. (c) The Adviser shall conduct its operations at all times in conformance with the Investment Advisers Act of 1940, the Investment Company Act of 1940, and any other applicable state and/or self-regulatory organization regulations. 4. INDEPENDENT CONTRACTOR. The Adviser shall, for all purposes herein, be deemed to be an independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Portfolio in any way, or in any way be deemed an agent for the Portfolio. It is expressly understood and agreed that the services to be rendered by the Adviser to the Portfolio under the provisions of this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. 5. ADVISER'S PERSONNEL. The Adviser shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Adviser shall be deemed to include persons employed or retained by the Adviser to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Adviser or the Board of Trustees may desire and reasonably request. 6. EXPENSES. (a) With respect to the operation of the Portfolio, the Adviser shall be responsible for (i) providing the personnel, office space and equipment reasonably necessary for the investment management of the Portfolio, and (ii) the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Adviser. If the Adviser has agreed to limit the operating expenses of the Portfolio, the Adviser shall also be responsible on a monthly basis for any operating expenses that exceed the agreed upon expense limitation. (b) The Portfolio is responsible for and has assumed the obligation for payment of all of its expenses, other than as stated in Subparagraph 6(a) above, including but not limited to: investment advisory, administrative and sub-administrative fees payable to the Adviser or the Sub-Administrator under the appropriate agreements entered into with the Adviser or the Sub-Administrator, as the case may be; fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Portfolio including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the Investment Company Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Portfolio's shareholders and Board of Trustees that are properly payable by the Portfolio; salaries and expenses of officers and fees and expenses of members of the Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Adviser or the Sub-Administrator; insurance premiums on property or personnel of the Portfolio which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of the Portfolio or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Portfolio; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as herein otherwise prescribed. (c) The Adviser may voluntarily absorb certain Portfolio expenses or waive the Adviser's own advisory fee. (d) To the extent the Adviser incurs any costs by assuming expenses which are an obligation of the Portfolio as set forth herein, the Portfolio shall promptly reimburse the Adviser for such costs and expenses, except to the extent the Adviser has otherwise agreed to bear such expenses. To the extent the services for which the Portfolio is obligated to pay are performed by the Adviser, the Adviser shall be entitled to recover from the Portfolio to the extent of the Adviser's actual costs for providing such services. In determining the Adviser's actual costs, the Adviser may take into account an allocated portion of the salaries and overhead of personnel performing such services. 7. INVESTMENT ADVISORY FEE. (a) The Portfolio shall pay to the Adviser, and the Adviser agrees to accept, as full compensation for all investment and advisory services furnished or provided to the Portfolio pursuant to this Agreement, an annual investment advisory fee at the rate set forth in Schedule A to this Agreement. (b) The investment advisory fee shall be accrued daily by the Portfolio and paid to the Adviser on the first business day of the succeeding month. (c) The initial fee under this Agreement shall be payable on the first business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Adviser shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination. (d) The fee payable to the Adviser under this Agreement will be reduced to the extent of any receivable owed by the Adviser to the Portfolio and as required under any expense limitation applicable to the Portfolio. (e) The Adviser voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility of the Portfolio under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Adviser hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis. (f) Any fee withheld or voluntarily reduced and any Portfolio expense absorbed by the Adviser voluntarily or pursuant to an agreed upon expense cap shall be reimbursed by the Portfolio to the Adviser, if so requested by the Adviser, no later than the fifth fiscal year succeeding the fiscal year of the withholding, reduction or absorption if the aggregate amount actually paid by the Portfolio toward the operating expenses for such fiscal year (taking into account the reimbursement) do not exceed the applicable limitation on Portfolio expenses. Such reimbursement may be paid prior to the Portfolio's payment of current expenses if so requested by the Adviser even if such practice may require the Adviser to waive, reduce or absorb current Portfolio expenses. (g) The Adviser may agree not to require payment of any portion of the compensation or reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future compensation or reimbursement due to the Adviser hereunder. 8. NO SHORTING; NO BORROWING. The Adviser agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Portfolio. This prohibition shall not prevent the purchase of such shares by any of the officers or employees of the Adviser or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Adviser agrees that neither it nor any of its officers or employees shall borrow from the Portfolio or pledge or use the Portfolio's assets in connection with any borrowing not directly for the Portfolio's benefit. For this purpose, failure to pay any amount due and payable to the Portfolio for a period of more than thirty (30) days shall constitute a borrowing. 9. CONFLICTS WITH THE PORTFOLIO'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing herein contained shall be deemed to require the Portfolio to take any action contrary to its Certificate of Trust, as amended, Declaration of Trust, as amended, Bylaws, as amended, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Portfolio. In this connection, the Adviser acknowledges that the Trustees retain ultimate plenary authority over the Portfolio and may take any and all actions necessary and reasonable to protect the interests of shareholders. 10. REPORTS AND ACCESS. The Adviser agrees to supply such information to the Sub-Administrator and to permit such compliance inspections by the Sub-Administrator as shall be reasonably necessary to permit the Sub-Administrator to satisfy its obligations and respond to the reasonable requests of the Trustees. 11. ADVISER'S LIABILITIES AND INDEMNIFICATION. (a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of the statements in the Portfolio's offering materials (including the prospectus, the statement of additional information, advertising and sales materials), except for information supplied by the Sub-Administrator or the Portfolio or another third party for inclusion therein. (b) The Adviser shall be liable to the Portfolio for any loss (including brokerage charges) incurred by the Portfolio as a result of any improper investment made by the Adviser. (c) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Portfolio. (d) Each party to this Agreement shall indemnify and hold harmless the other party and the shareholders, directors, trustees, officers and employees of the other party (any such person, an "Indemnified Party") against any loss, liability, claim, damage or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage or expenses and reasonable counsel fees incurred in connection therewith) arising out of the Indemnified Party's performance or nonperformance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties under this Agreement. (e)No provision of this Agreement shall be construed to protect any Trustee or officer of the Portfolio, or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the Investment Company Act. 12. NON-EXCLUSIVITY; TRADING FOR ADVISER'S OWN ACCOUNT. The Portfolio's employment of the Adviser is not an exclusive arrangement. The Portfolio may from time to time employ other individuals or entities to furnish it with the services provided for herein. Likewise, the Adviser may act as investment adviser for any other person, and shall not in any way be limited or restricted from having, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Adviser expressly represents that it will undertake no activities which will adversely affect the performance of its obligations to the Portfolio under this Agreement; and provided further that the Adviser will adhere to a code of ethics governing employee trading and trading for proprietary accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act of 1940 and has been approved by the Portfolio's Board of Trustees. 13. TERM. This Agreement shall become effective on September 1, 1999 and shall remain in effect for a period of two (2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Portfolio at least annually by (i) the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio and (ii) the vote of a majority of the Trustees of the Portfolio who are not parties to this Agreement nor interested persons thereof, cast in person at a meeting called for the purpose of voting on such approval. The terms "majority of the outstanding voting securities" and "interested persons" shall have the meanings as set forth in the Investment Company Act. 14. TERMINATION; NO ASSIGNMENT. (a) This Agreement may be terminated by the Portfolio at any time without payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio, upon sixty (60) days' written notice to the Adviser, and by the Adviser upon sixty (60) days' written notice to the Portfolio. In the event of a termination, the Adviser shall cooperate in the orderly transfer of the Portfolio's affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Portfolio maintained by the Adviser on behalf of the Portfolio. (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the Investment Company Act. 15. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby. 16. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the Investment Advisers Act of 1940 and any rules and regulations promulgated thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all on the day and year first above written. KINETICS PORTFOLIOS TRUST KINETICS ASSET MANAGEMENT, INC. on behalf of its series, The Middle East Growth Portfolio By:_________________________________ By:_________________________________ Name: Name: Title: Title: 129268 SCHEDULE A ANNUAL FEE RATE The Middle East Growth Portfolio 1.25% of average daily net assets KINETICS PORTFOLIOS TRUST INVESTMENT ADVISORY AGREEMENT THIS INVESTMENT ADVISORY AGREEMENT is made as of the 1st day of May, 2000, by and between KINETICS PORTFOLIOS TRUST, a Delaware business trust (the "Trust") on behalf of its series the Kinetics Government Money Market Portfolio (the "Portfolio") and KINETICS ASSET MANAGEMENT, INC., a New York corporation (the "Adviser"). W I T N E S S E T H : WHEREAS, the Trust is an open-end management investment company, registered as such under the Investment Company Act of 1940 (the "Investment Company Act"); WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940 and is engaged in the business of providing investment advice to investment companies; and WHEREAS, the Trust, on behalf of the Portfolio, desires to retain the Adviser to render advice and services to the Portfolio pursuant to the terms and provisions of this Agreement, and the Adviser desires to furnish said advice and services. NOW, THEREFORE, in consideration of the covenants and the mutual promises hereinafter set forth, the parties to this Agreement, intending to be legally bound hereby, mutually agree as follows: 1. APPOINTMENT OF ADVISER. The Trust hereby employs the Adviser and the Adviser hereby accepts such employment, to render investment advice and related services with respect to the assets of the Portfolio for the period and on the terms set forth in this Agreement, subject to the supervision and direction of the Board of Trustees. 2. DUTIES OF ADVISER. (a) GENERAL DUTIES. The Adviser shall act as investment adviser to the Portfolio and shall supervise investments of the Portfolio in accordance with the investment objective, policies and restrictions of the Portfolio as set forth in the Portfolio's governing documents, including, without limitation, the Fund's Certificate of Trust, as amended, Declaration of Trust, as amended, and Bylaws, as amended, the prospectus and statement of additional information; and such other limitations, policies and procedures as the Trustees may impose from time to time in writing to the Adviser. In providing such services, the Adviser shall at all times adhere to the provisions and restrictions contained in the federal securities laws, applicable state securities laws, the Internal Revenue Code, the Uniform Commercial Code and other applicable law. Without limiting the generality of the foregoing, the Adviser shall: (i) furnish the Portfolio with advice and recommendations with respect to the investment of the Portfolio's assets and the purchase and sale of portfolio securities for the Portfolio, including the taking of such steps as may be necessary to implement such advice and recommendations (I.E., placing the orders); (ii) manage and oversee the investments of the Portfolio, subject to the ultimate supervision and direction of the Board of Trustees; (iii) vote proxies for the Portfolio, file ownership reports under Section 13 of the Securities Exchange Act of 1934 for the Portfolio, and take other actions on behalf of the Portfolio; (iv) maintain the books and records required to be maintained by the Portfolio except to the extent arrangements have been made for such books and records to be maintained by Firstar Mutual Fund Services LLC, a Wisconsin limited liability company (the "Sub-Administrator") or another agent of the Portfolio; (v) furnish reports, statements and other data on securities, economic conditions and other matters related to the investment of the Portfolio's assets which the Board of Trustees or the officers of the Portfolio may reasonably request; and (vi) render to the Board of Trustees such periodic and special reports with respect to the Portfolio's investment activities as the Board may reasonably request, including at least one in-person appearance annually before the Board of Trustees. (b) BROKERAGE. The Adviser shall be responsible for decisions to buy and sell securities for the Portfolio, for broker-dealer selection, and for negotiation of brokerage commission rates, provided that the Adviser shall not direct orders to an affiliated person of the Adviser without general prior authorization to use such affiliated broker or dealer from the Board of Trustees. The Adviser's primary consideration in effecting a securities transaction will be execution at the most favorable price. In selecting a broker-dealer to execute each particular transaction, the Adviser may take the following into consideration: the best net price available; the reliability, integrity and financial condition of the broker-dealer; the size of and difficulty in executing the order; and the value of the expected contribution of the broker-dealer to the investment performance of the Portfolio on a continuing basis. The price to the Portfolio in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered. Subject to such policies as the Board of Trustees may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused the Portfolio to pay a broker or dealer that provides (directly or indirectly) brokerage or research services to the Adviser an amount of commission for effecting a portfolio transaction in excess of the amount of commission another broker or dealer would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker or dealer, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Portfolio. The Adviser is further authorized to allocate the orders placed by it on behalf of the Portfolio to such brokers or dealers who also provide research or statistical material, or other services, to the Portfolio, the Adviser, or any affiliate of either. Such allocation shall be in such amounts and proportions as the Adviser shall determine, and the Adviser shall report on such allocations regularly to the Portfolio, indicating the broker-dealers to whom such allocations have been made and the basis therefor. The Adviser is also authorized to consider sales of shares as a factor in the selection of brokers or dealers to execute portfolio transactions, subject to the requirements of best execution, I.E., that such brokers or dealers are able to execute the order promptly and at the best obtainable securities price. On occasions when the Adviser deems the purchase or sale of a security to be in the best interest of the Portfolio as well as of other clients (to the extent that the Adviser may, in the future, have other clients), the Adviser, to the extent permitted by applicable laws and regulations, may aggregate the securities to be so purchased or sold in order to obtain the most favorable price or lower brokerage commissions and the most efficient execution. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser in the manner it considers to be the most equitable and consistent with its fiduciary obligations to the Portfolio and to such other clients. 3. REPRESENTATIONS OF THE ADVISER. (a) The Adviser shall use its best judgment and efforts in rendering the advice and services to the Portfolio as contemplated by this Agreement. (b) The Adviser shall maintain all licenses and registrations necessary to perform its duties hereunder in good order. (c) The Adviser shall conduct its operations at all times in conformance with the Investment Advisers Act of 1940, the Investment Company Act of 1940, and any other applicable state and/or self-regulatory organization regulations. 4. INDEPENDENT CONTRACTOR. The Adviser shall, for all purposes herein, be deemed to be an independent contractor, and shall, unless otherwise expressly provided and authorized to do so, have no authority to act for or represent the Portfolio in any way, or in any way be deemed an agent for the Portfolio. It is expressly understood and agreed that the services to be rendered by the Adviser to the Portfolio under the provisions of this Agreement are not to be deemed exclusive, and the Adviser shall be free to render similar or different services to others so long as its ability to render the services provided for in this Agreement shall not be impaired thereby. 5. ADVISER'S PERSONNEL. The Adviser shall, at its own expense, maintain such staff and employ or retain such personnel and consult with such other persons as it shall from time to time determine to be necessary to the performance of its obligations under this Agreement. Without limiting the generality of the foregoing, the staff and personnel of the Adviser shall be deemed to include persons employed or retained by the Adviser to furnish statistical information, research, and other factual information, advice regarding economic factors and trends, information with respect to technical and scientific developments, and such other information, advice and assistance as the Adviser or the Board of Trustees may desire and reasonably request. 6. EXPENSES. (a) With respect to the operation of the Portfolio, the Adviser shall be responsible for (i) providing the personnel, office space and equipment reasonably necessary for the investment management of the Portfolio, and (ii) the costs of any special Board of Trustees meetings or shareholder meetings convened for the primary benefit of the Adviser. If the Adviser has agreed to limit the operating expenses of the Portfolio, the Adviser shall also be responsible on a monthly basis for any operating expenses that exceed the agreed upon expense limitation. (b) The Portfolio is responsible for and has assumed the obligation for payment of all of its expenses, other than as stated in Subparagraph 6(a) above, including but not limited to: investment advisory, administrative and sub-administrative fees payable to the Adviser or the Sub-Administrator under the appropriate agreements entered into with the Adviser or the Sub-Administrator, as the case may be; fees and expenses incurred in connection with the issuance, registration and transfer of its shares; brokerage and commission expenses; all expenses of transfer, receipt, safekeeping, servicing and accounting for the cash, securities and other property of the Portfolio including all fees and expenses of its custodian, shareholder services agent and accounting services agent; interest charges on any borrowings; costs and expenses of pricing and calculating its daily net asset value and of maintaining its books of account required under the Investment Company Act; taxes, if any; a pro rata portion of expenditures in connection with meetings of the Portfolio's shareholders and Board of Trustees that are properly payable by the Portfolio; salaries and expenses of officers and fees and expenses of members of the Board of Trustees or members of any advisory board or committee who are not members of, affiliated with or interested persons of the Adviser or the Sub-Administrator; insurance premiums on property or personnel of the Portfolio which inure to its benefit, including liability and fidelity bond insurance; the cost of preparing and printing reports, proxy statements, prospectuses and statements of additional information of the Portfolio or other communications for distribution to existing shareholders; legal, auditing and accounting fees; trade association dues; fees and expenses (including legal fees) of registering and maintaining registration of its shares for sale under federal and applicable state and foreign securities laws; all expenses of maintaining and servicing shareholder accounts, including all charges for transfer, shareholder recordkeeping, dividend disbursing, redemption, and other agents for the benefit of the Portfolio; and all other charges and costs of its operation plus any extraordinary and non-recurring expenses, except as herein otherwise prescribed. (c) The Adviser may voluntarily absorb certain Portfolio expenses or waive the Adviser's own advisory fee. (d) To the extent the Adviser incurs any costs by assuming expenses which are an obligation of the Portfolio as set forth herein, the Portfolio shall promptly reimburse the Adviser for such costs and expenses, except to the extent the Adviser has otherwise agreed to bear such expenses. To the extent the services for which the Portfolio is obligated to pay are performed by the Adviser, the Adviser shall be entitled to recover from the Portfolio to the extent of the Adviser's actual costs for providing such services. In determining the Adviser's actual costs, the Adviser may take into account an allocated portion of the salaries and overhead of personnel performing such services. 7. INVESTMENT ADVISORY FEE. (a) The Portfolio shall pay to the Adviser, and the Adviser agrees to accept, as full compensation for all investment and advisory services furnished or provided to the Portfolio pursuant to this Agreement, an annual investment advisory fee at the rate set forth in Schedule A to this Agreement. (b) The investment advisory fee shall be accrued daily by the Portfolio and paid to the Adviser on the first business day of the succeeding month. (c) The initial fee under this Agreement shall be payable on the first business day of the first month following the effective date of this Agreement and shall be prorated as set forth below. If this Agreement is terminated prior to the end of any month, the fee to the Adviser shall be prorated for the portion of any month in which this Agreement is in effect which is not a complete month according to the proportion which the number of calendar days in the month during which the Agreement is in effect bears to the number of calendar days in the month, and shall be payable within ten (10) days after the date of termination. (d) The fee payable to the Adviser under this Agreement will be reduced to the extent of any receivable owed by the Adviser to the Portfolio and as required under any expense limitation applicable to the Portfolio. (e) The Adviser voluntarily may reduce any portion of the compensation or reimbursement of expenses due to it pursuant to this Agreement and may agree to make payments to limit the expenses which are the responsibility of the Portfolio under this Agreement. Any such reduction or payment shall be applicable only to such specific reduction or payment and shall not constitute an agreement to reduce any future compensation or reimbursement due to the Adviser hereunder or to continue future payments. Any such reduction will be agreed to prior to accrual of the related expense or fee and will be estimated daily and reconciled and paid on a monthly basis. (f) Any fee withheld or voluntarily reduced and any Portfolio expense absorbed by the Adviser voluntarily or pursuant to an agreed upon expense cap shall be reimbursed by the Portfolio to the Adviser, if so requested by the Adviser, no later than the fifth fiscal year succeeding the fiscal year of the withholding, reduction or absorption if the aggregate amount actually paid by the Portfolio toward the operating expenses for such fiscal year (taking into account the reimbursement) do not exceed the applicable limitation on Portfolio expenses. Such reimbursement may be paid prior to the Portfolio's payment of current expenses if so requested by the Adviser even if such practice may require the Adviser to waive, reduce or absorb current Portfolio expenses. (g) The Adviser may agree not to require payment of any portion of the compensation or reimbursement of expenses otherwise due to it pursuant to this Agreement. Any such agreement shall be applicable only with respect to the specific items covered thereby and shall not constitute an agreement not to require payment of any future compensation or reimbursement due to the Adviser hereunder. 8. NO SHORTING; NO BORROWING. The Adviser agrees that neither it nor any of its officers or employees shall take any short position in the shares of the Portfolio. This prohibition shall not prevent the purchase of such shares by any of the officers or employees of the Adviser or any trust, pension, profit-sharing or other benefit plan for such persons or affiliates thereof, at a price not less than the net asset value thereof at the time of purchase, as allowed pursuant to rules promulgated under the Investment Company Act. The Adviser agrees that neither it nor any of its officers or employees shall borrow from the Portfolio or pledge or use the Portfolio's assets in connection with any borrowing not directly for the Portfolio's benefit. For this purpose, failure to pay any amount due and payable to the Portfolio for a period of more than thirty (30) days shall constitute a borrowing. 9. CONFLICTS WITH THE PORTFOLIO'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing herein contained shall be deemed to require the Portfolio to take any action contrary to its Certificate of Trust, as amended, Declaration of Trust, as amended, Bylaws, as amended, or any applicable statute or regulation, or to relieve or deprive the Board of Trustees of its responsibility for and control of the conduct of the affairs of the Portfolio. In this connection, the Adviser acknowledges that the Trustees retain ultimate plenary authority over the Portfolio and may take any and all actions necessary and reasonable to protect the interests of shareholders. 10. REPORTS AND ACCESS. The Adviser agrees to supply such information to the Sub-Administrator and to permit such compliance inspections by the Sub-Administrator as shall be reasonably necessary to permit the Sub-Administrator to satisfy its obligations and respond to the reasonable requests of the Trustees. 11. ADVISER'S LIABILITIES AND INDEMNIFICATION. (a) The Adviser shall have responsibility for the accuracy and completeness (and liability for the lack thereof) of the statements in the Portfolio's offering materials (including the prospectus, the statement of additional information, advertising and sales materials), except for information supplied by the Sub-Administrator or the Portfolio or another third party for inclusion therein. (b) The Adviser shall be liable to the Portfolio for any loss (including brokerage charges) incurred by the Portfolio as a result of any improper investment made by the Adviser. (c) In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of the obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Portfolio or to any shareholder of the Portfolio for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Portfolio. (d) Each party to this Agreement shall indemnify and hold harmless the other party and the shareholders, directors, trustees, officers and employees of the other party (any such person, an "Indemnified Party") against any loss, liability, claim, damage or expense (including the reasonable cost of investigating and defending any alleged loss, liability, claim, damage or expenses and reasonable counsel fees incurred in connection therewith) arising out of the Indemnified Party's performance or nonperformance of any duties under this Agreement provided, however, that nothing herein shall be deemed to protect any Indemnified Party against any liability to which such Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith or negligence in the performance of duties hereunder or by reason of reckless disregard of obligations and duties under this Agreement. (e) No provision of this Agreement shall be construed to protect any Trustee or officer of the Portfolio, or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the Investment Company Act. 12. NON-EXCLUSIVITY; TRADING FOR ADVISER'S OWN ACCOUNT. The Portfolio's employment of the Adviser is not an exclusive arrangement. The Portfolio may from time to time employ other individuals or entities to furnish it with the services provided for herein. Likewise, the Adviser may act as investment adviser for any other person, and shall not in any way be limited or restricted from having, selling or trading any securities for its or their own accounts or the accounts of others for whom it or they may be acting, provided, however, that the Adviser expressly represents that it will undertake no activities which will adversely affect the performance of its obligations to the Portfolio under this Agreement; and provided further that the Adviser will adhere to a code of ethics governing employee trading and trading for proprietary accounts that conforms to the requirements of the Investment Company Act and the Investment Advisers Act of 1940 and has been approved by the Portfolio's Board of Trustees. 13. TERM. This Agreement shall become effective on September 1, 1999 and shall remain in effect for a period of two (2) years, unless sooner terminated as hereinafter provided. This Agreement shall continue in effect thereafter for additional periods not exceeding one (1) year so long as such continuation is approved for the Portfolio at least annually by (i) the Board of Trustees or by the vote of a majority of the outstanding voting securities of the Portfolio and (ii) the vote of a majority of the Trustees of the Portfolio who are not parties to this Agreement nor interested persons thereof, cast in person at a meeting called for the purpose of voting on such approval. The terms "majority of the outstanding voting securities" and "interested persons" shall have the meanings as set forth in the Investment Company Act. 14. TERMINATION; NO ASSIGNMENT. (a) This Agreement may be terminated by the Portfolio at any time without payment of any penalty, by the Board of Trustees or by vote of a majority of the outstanding voting securities of the Portfolio, upon sixty (60) days' written notice to the Adviser, and by the Adviser upon sixty (60) days' written notice to the Portfolio. In the event of a termination, the Adviser shall cooperate in the orderly transfer of the Portfolio's affairs and, at the request of the Board of Trustees, transfer any and all books and records of the Portfolio maintained by the Adviser on behalf of the Portfolio. (b) This Agreement shall terminate automatically in the event of any transfer or assignment thereof, as defined in the Investment Company Act. 15. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute or rule, or shall be otherwise rendered invalid, the remainder of this Agreement shall not be affected thereby. 16. CAPTIONS. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction or effect. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to the conflict of laws principles thereof; provided that nothing herein shall be construed to preempt, or to be inconsistent with, any federal law, regulation or rule, including the Investment Company Act and the Investment Advisers Act of 1940 and any rules and regulations promulgated thereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers, all on the day and year first above written. KINETICS PORTFOLIOS TRUST KINETICS ASSET MANAGEMENT, INC. on behalf of its series, The Kinetics Government Money Market Portfolio By:_________________________________ By:_________________________________ Name: Name: Title: Title: SCHEDULE A ANNUAL FEE RATE The Kinetics Government Money Market Portfolio 0.50% of average daily net assets EX-99.H(1) 5 ADMINISTRATIVE SERVICES AGREEMENT ADMINISTRATIVE SERVICES AGREEMENT BETWEEN KINETICS PORTFOLIOS TRUST AND KINETICS ASSET MANAGEMENT, INC. (i) TABLE OF CONTENTS 1. Duties of the Administrator........................................... 2. Compensation of the Administrator..................................... 3. Indemnification....................................................... 4. Reports............................................................... 5. Delegation of Certain Duties to Sub-Administrator..................... 6. Activities of the Administrator....................................... 7. Confidentiality....................................................... 8. Duration and Termination of the Agreement............................. 9. Assignment............................................................ 10. Governing Law......................................................... 11. Amendments to this Agreement.......................................... 12. Merger of Agreement................................................... 13. Notices............................................................... 14. Regarding the Administrator........................................... SCHEDULE A..................................................................... SCHEDULE B..................................................................... ADMINISTRATIVE SERVICES AGREEMENT THIS AGREEMENT is dated as of ______________, 2000 by and between KINETICS PORTFOLIOS TRUST (the "Trust"), a Delaware business trust, having an office and place of business at 1311 Mamaroneck Avenue, White Plains, New York 10605 on behalf of each of the series listed on Schedule A to this Agreement, as amended from time to time (each a "Portfolio" and collectively the "Portfolios"), and KINETICS ASSET MANAGEMENT, INC., a New York corporation, having its place of business at 1311 Mamaroneck Avenue, White Plains, New York 10605 (the "Administrator"). BACKGROUND WHEREAS, the Trust is an open-end management investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the "1940 Act"); and WHEREAS, the Administrator is a corporation experienced in providing administrative services to mutual funds and possesses facilities sufficient to provide such services; and WHEREAS, the Trust, on behalf of the Portfolios, desires to avail itself of the experience, assistance and facilities of the Administrator and to have the Administrator perform for the Portfolios certain services appropriate to the operations of the Portfolios and the Administrator is willing to furnish such services in accordance with the terms hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: TERMS Subject to the terms and conditions set forth in this Agreement, the Portfolios hereby employ and appoint the Administrator to act as the Trust's administrator for the Portfolios' authorized and issued shares of beneficial interest, ("Shares"). 1. DUTIES OF THE ADMINISTRATOR. --------------------------- The Administrator agrees that it will provide all administrative services necessary and customary to administer a mutual fund, and will provide the Portfolios with the necessary office space, communication and data processing facilities and personnel to perform such services for the Portfolios, including: A. GENERAL PORTFOLIO MANAGEMENT. ---------------------------- (1) Act as liaison among the Portfolios' service providers. (2) Coordinate board communication by: (a) establishing all meeting agendas; (b) preparing and presenting board reports and collateral materials; (c) supervising preparation of board minutes; and (d) evaluating independent auditors and Trust counsel for board review and approval. (3) Coordinate all operations of the Portfolios. B. AUDITS. ------ (1) Provide central coordination of interactions with SEC and other regulatory agencies. (2) Provide office facilities to assist audit process. C. SEC REGISTRATION. ---------------- (1) Update prospectus, statement of additional information and proxies as required. (2) Coordinate updates with Trust Counsel. (3) Coordinate printing and distribution of required prospectus updates and proxies. D. TREASURY SERVICES. ----------------- (1) Provide staff to act as officers and signatories to the Portfolios to authorize official documents. (2) Review and approve all Portfolio expense items. (3) Maintain overall expense accrual targets for fiscal reporting periods and coordinate with Portfolio Accountant. E. DUTIES OF SUB-ADMINISTRATOR - FIRSTAR MUTUAL FUND SERVICES LLC ("FMFS"). --------------------------------------------------------------------- (1) Financial Reporting. (a) Prepare Annual and Semi-Annual Reports. (b) Prepare Financial Highlights and Expense Summary for prospectus updates. (c) Prepare Rule 24f-2 Notice. (d) Prepare financial reports and schedules for the Portfolios' independent auditors. (e) Prepare financials as required by the Administrator for inclusion in bond reports. (f) Supervise maintenance of the Portfolios' general ledger and the preparation of financial statements, expense accruals and payments, net asset value determination and the declaration and payment of dividends and other distributions to shareholders. F. TAX REPORTING. ------------- (1) Prepare and file on a timely basis federal and state tax returns, including forms 1120/8610 with any necessary schedules. (2) Prepare state income breakdowns where relevant. (3) File 1099 Miscellaneous for payments to trustees and other service promotions. (4) Monitor wash sales in portfolio. (5) Calculate eligible dividend income for corporate shareholders. G. PORTFOLIO REGULATORY COMPLIANCE. ------------------------------- (1) Monthly, quarterly and intra-month spot checks as needed to monitor compliance with Investment Company Act of 1940 requirements. (a) Asset diversification tests. (b) Total return and SEC yield calculations. (c) Maintenance of books and records under Rule 31a-3. (d) Code of ethics. (2) Periodically monitor each Portfolio's compliance with the policies and investment limitations of the Portfolios as set forth in their prospectuses and statements of additional information. (3) Calculate required distributions (including excise tax distributions). 1.1 ESTABLISHMENT OF PROCEDURE. Procedures applicable to certain of these services may be established from time to time by agreement between the Portfolios and the Administrator. 1.2 INDEPENDENT CONTRACTOR. The Administrator shall, for all purposes herein, be deemed to be an independent contractor and shall, unless otherwise expressly provided or authorized, have no authority to act for or represent the Portfolios in any way or otherwise be deemed an agent of the Portfolios. 2. COMPENSATION OF THE ADMINISTRATOR. In consideration of the services to be performed by the Administrator as set forth herein for the Portfolios, the Administrator shall be entitled to receive and the Portfolios each agree to pay the Administrator the fees and reimburse those of out-of-pocket expenses set forth on the fee schedule attached hereto as Schedule B. 3. INDEMNIFICATION. The Administrator shall not be responsible for, and the Portfolios shall indemnify and hold the Administrator harmless from and against, any and all losses, damages, costs, charges, reasonable counsel fees, payments, expenses and liability arising out of or attributable to: (a) All actions of the Administrator required to be taken or taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence or willful misconduct or violation of applicable law. (b) The Portfolios' refusal or failure to comply with the terms of this Agreement, or which arise out of the Portfolios' lack of good faith, negligence or willful misconduct or violation of applicable law. (c) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities laws or regulations of any state that such Shares be registered in such state or in violation of any stop order or other determination or ruling by any federal agency or any state with respect to the offer or sale of such Shares in such state, except if such sale is conducted with the knowledge of the Administrator or against the written advice of the Administrator. 3.1 RELIANCE UPON AUTHORITY. At any time the Administrator may apply to any officer of the Trust for instructions, and may consult with the Trust's legal counsel with respect to any matter arising in connection with the services to be performed by the Administrator under this Agreement, and the Administrator shall not be liable and shall be indemnified by the Portfolios for any action taken or omitted by it in reliance upon such instructions or upon the opinion of such counsel except if the Administrator knew or should have known that such conduct was illegal or improper. The Administrator shall be protected and indemnified in acting upon any paper or document furnished by or on behalf of the Trust or its Advisor, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided the Administrator by machine readable input, telex, CRT data entry or other similar means authorized by the Portfolios, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Portfolios. 3.2 FORCE MAJEURE, ETC. In the event either party is unable to perform its obligations under the terms of this Agreement because of acts of God, strikes, equipment or transmission failure or damage reasonably beyond its control, or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes. 3.3 CONSEQUENTIAL DAMAGES. Neither party to this Agreement shall be liable to the other party for consequential damages under any provision of this Agreement or for any act or failure to act hereunder. 3.4 LIABILITY OF ADMINISTRATOR. The Administrator shall indemnify and hold the Portfolios harmless from and against, any and all losses, damages, costs, charges, reasonable counsel fees, payments, expenses and liability arising out of or attributable to the Administrator's negligence or willful misconduct or violation of applicable law. 3.5 CLAIMS. In order that the indemnification provisions contained in this Article shall apply, upon the assertion of a claim for which either party may be required to indemnify the other, the party seeking indemnification shall promptly notify the other party of such assertion, and shall keep the other party advised with respect to all developments concerning such claim. The party who may be required to indemnify shall have the option to participate with the party seeking indemnification the defense of such claim. The party seeking indemnification shall in no case confess any claim or make any compromise in any case in which the other party may be required to indemnify it except with the other party's prior written consent. The party seeking indemnification shall notify the other party in a reasonable period of time after reviewing any claim. A copy of the claim shall accompany such notice. The other party shall have the right to choose counsel to defend against such claim after consultation with the party seeking indemnification. 4. REPORTS. The Administrator shall provide to the Board of Trustees of the Portfolios, on a quarterly basis, a report, in such a form as the Administrator and the Trust shall from time to time agree, representing that, to its knowledge, the Portfolios were in compliance with all requirements of applicable federal and state law, including without limitation, the rules and regulations of the Securities and Exchange Commission and the Internal Revenue Service, or specifying any instances in which the Portfolios were not so in compliance. Whenever, in the course of performing its duties under this Agreement, the Administrator determines, on the basis of information supplied to the Administrator by the Portfolios, that a violation of applicable law has occurred, or that, to its knowledge, a possible violation of applicable law may have occurred or, with the passage of time, could occur, the Administrator shall promptly notify the Trust and its counsel of such violation. 5. DELEGATION OF CERTAIN DUTIES TO SUB-ADMINISTRATOR. It is understood and agreed by the parties that the Administrator shall be entitled to delegate certain duties of the Administrator as set forth under Section 1 hereof, including but not limited, to financial reporting, tax reporting, portfolio compliance with the Investment Company Act of 1940, and "blue sky" filing obligations to Firstar Mutual Funds Services LLC, as sub-administrator, whose compensation shall be the sole responsibility of the Administrator. 6. ACTIVITIES OF THE ADMINISTRATOR. The Administrator shall be free to render similar services to others so long as its services hereunder are not impaired thereby. 7. CONFIDENTIALITY. The Administrator agrees that it will, on behalf of itself and its officers and employees, treat all transactions contemplated by this Agreement, and all other information germane thereto, as Confidential Information and such Confidential Information shall not be disclosed to any person except as may be authorized by the Trust. 8. DURATION AND TERMINATION OF THE AGREEMENT. This Agreement shall become effective as of the date hereof and, unless sooner terminated as provided herein, shall continue automatically in effect for successive annual periods. This Agreement may be terminated by either party upon ninety (90) days prior written notice to the other party or such shorter period as is mutually agreed upon by the parties. Upon termination of this Agreement, the Administrator shall deliver all documentation and other property belonging to the Portfolios, if any, including, but not limited to, all Shareholder records, books stock ledgers, instruments and other documents (including computer or other electronically stored information) made or accumulated in the performance of its duties hereunder (which Administrator acknowledges are the property of the Portfolios), along with a certified locator document clearly indicating the complete contents therein, to such successor as may be specified in a notice of termination or other instruction. 9. ASSIGNMENT. This Agreement shall extend to and shall be binding upon the parties hereto and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by the Trust without the prior written consent of the Administrator, or by the Administrator without the prior written consent of the Trust. 10. GOVERNING LAW. The provisions of this Agreement shall be construed and interpreted in accordance with the laws of the State of New York as at the time in effect and the applicable provisions of the 1940 Act. To the extent that the applicable law of the State of New York or any of the provisions herein, conflict with the applicable provisions of the 1940 Act, the latter shall control. 11. AMENDMENTS TO THIS AGREEMENT. This Agreement may be amended by the parties hereto only if such amendment is in writing and signed by both parties. 12. MERGER OF AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written. 13. NOTICES. All notices and other communications hereunder shall be in writing, shall be deemed to have been given when delivered in person or by certified mail, return receipt requested, or by telecopier and shall be given to the following addresses (or such other addresses as to which notice is given): TO THE PORTFOLIOS: Kinetics Portfolios Trust 1311 Mamaroneck Avenue White Plains, New York 10605 Fax No. (914) 285-9532 Attn: Mr. Lee W. Schultheis TO THE ADMINISTRATOR: Kinetics Asset Management, Inc. 477 Madison Avenue New York, NY 10173 Fax No.(212) 644-3050 Attn.: Mr. Lee W. Schultheis 14. REGARDING THE ADMINISTRATOR. The Administrator warrants and represents that it is duly authorized and permitted to act as transfer agent and dividend disbursing agent under all applicable laws and that it will immediately notify the Trust of any revocation of such authority or permission or of the commencement of any proceeding or other action which may lead to such revocation. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first set forth above. KINETICS PORTFOLIOS TRUST, KINETICS ASSET MANAGEMENT, INC. on behalf of each series listed on Schedule A By: _____________________________ By: ________________________________ Name:____________________________ Name:______________________________ Title:_____________________________ Title:______________________________ SCHEDULE A The following list comprises each of the series of KINETICS PORTFOLIOS TRUST covered by the foregoing Agreement: 1. The Medical Portfolio 2. The Internet Portfolio 3. The Internet Global Growth Portfolio 4. The Internet Emerging Growth Portfolio 5. The Internet Infrastructure Portfolio 6. The Internet New Paradigm Portfolio 7. The Small Cap Opportunities Portfolio 8. The Kinetics Government Money Market Portfolio 9. The Middle East Growth Portfolio SCHEDULE B (a) ADMINISTRATIVE SERVICE FEE. For the services rendered by the Administrator in its capacity as administrator, as specified in Paragraph 1, "DUTIES OF THE ADMINISTRATOR", the Portfolio shall pay the Administrator within ten (10) days after receipt of an invoice from the Administrator at the beginning of each month 1/12th of 0.10% per annum of the average net assets of the Portfolio: (b) EXPENSES. The Portfolio shall reimburse the Administrator for any direct out-of-pocket expenses, incurred by the Administrator in connection with the performance of its duties hereunder to include: costs for printing, and filing with the SEC via EDGAR when applicable, portfolio documents (i.e. shareholder transaction confirmation statements, periodic shareholder transaction statements, redemption/dividend checks, envelopes, financial statements, forms 1099 and 5498, proxy statements, portfolio prospectus, initial 800-line installation cost and monthly recurring invoice from AT&T for incoming calls, postage, costs incurred by a mail fulfillment house utilized for mailing the following (periodic shareholder account statements, semi-annual and annual financial statements, proxy statement, portfolio prospectus), pro rata portion (not to exceed $300) of annual SAS-70 audit letter, and any authorized courier charges. The Administrator shall provide the Portfolio with a monthly invoice of such expenses and the Portfolio shall reimburse the Administrator within fifteen (15) days after receipt thereof. Portfolio management reserves the right to approve the selection of the fulfillment house utilized or to utilize their internal facilities to do the mailing. (c) SPECIAL REPORTS. All reports and /or analyses requested by the Portfolio, its auditors, legal counsel, portfolio manager, or any regulatory agency having jurisdiction over the Portfolio, that are not in the normal course of portfolio administrative activities as specified in Section 1 of this Agreement shall be subject to an additional charge, agreed upon in advance, based upon the following rates: Labor: Senior staff - $150.00/hr. Junior staff - $ 75.00/hr. EX-99.H(5) 6 PLACEMENT AGENCY AGREEMENT PLACEMENT AGENCY AGREEMENT BETWEEN KINETICS PORTFOLIO TRUST AND KINETICS FUNDS DISTRIBUTOR, INC. THIS AGREEMENT is made effective as of the 1st day of May, 2000, by and between KINETICS PORTFOLIO TRUST, a business trust organized under the laws of the State of Delaware (the "Company") and KINETICS FUNDS DISTRIBUTOR, INC., a ___________ corporation ("KFDI"). WHEREAS, the Company is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end management investment company, and its shares of beneficial interest (the "Shares") will be issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the "1933 Act"); and WHEREAS, KFDI is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act") and under each state's securities laws, and is also a member of the National Association of Securities Dealers, Inc. (the "NASD"); and WHEREAS, the Company desires to retain KFDI as its private placement agent in connection with the private placement of the Shares of each current series of the Company (the "Fund" or the "Funds") and each subsequently created series as may be listed on Schedule A (as amended from time to time) attached hereto and KFDI is willing to act as private placement agent for the Fund or Funds on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is agreed between the parties hereto as follows: 1. APPOINTMENT. The Company hereby appoints KFDI as its agent to be the private placement agent of the Fund's Shares and to hold itself out as available to receive and accept orders for the purchase and redemption of the Shares on behalf of the Fund, subject to the terms and for the period set forth in this Agreement. KFDI hereby accepts such appointment and agrees to act hereunder. The Company understands that any private placement activities conducted on behalf of the Fund will be conducted primarily by employees of the Fund's adviser, KINETICS ASSET MANAGEMENT, INC. ("Kinetics" or the "Adviser"), who shall become registered representatives of KFDI. 2. SERVICES AND DUTIES OF KFDI. (a) KFDI agrees to privately place Fund Shares on a best efforts basis from time to time during the term of this Agreement as agent for the Company and upon the terms described in the Company's Registration Statement, as amended from time to time. As used in this Agreement, the term "Registration Statement" shall mean the currently effective registration statement of the Company, and any supplements thereto, under the 1940 Act. (b) KFDI, with the operational assistance of the Fund's transfer agent, will hold itself available to receive purchase and redemption orders satisfactory to KFDI for Shares and will accept such orders on behalf of each Fund. Such purchase orders shall be deemed effective at the time and in the manner set forth in the Registration Statement. (c) KFDI and its registered personnel shall provide to investors and potential investors only such information regarding a Fund as the Fund shall provide or approve. (d) The offering price of the Shares shall be the price determined in accordance with, and in the manner set forth in, the most-current Prospectus. The Fund shall make available to KFDI a statement of each computation of net asset value and the details of entering into such computation. (e) KFDI in its sole discretion may repurchase Shares offered for sale by the shareholders. Repurchase of Shares by KFDI shall be at the price determined in accordance with, and in the manner set forth in, the most current Prospectus. At the end of each business day, KFDI shall notify, by any appropriate means, the Fund and its transfer agent of the orders for repurchase of Fund Shares received by KFDI since the last such report, the amount to be paid for such Shares, and the identity of the shareholders offering Shares for repurchase. The Fund reserves the right to suspend such repurchase right upon written notice to KFDI. KFDI further agrees to act as agent for the Fund to receive and transmit promptly to the Fund's transfer agent shareholder requests for redemption of Shares. (f) KFDI shall not be obligated to sell any certain number of Shares. (g) KFDI shall prepare reports for the Board regarding its activities under this Agreement as from time to time shall be reasonably requested by the Board. (h) KFDI shall at all times during the term of this Agreement remain registered broker-dealer under the 1934 Act and with all fifty (50) states, and shall also remain a member in good standing of the NASD. KFDI shall immediately notify the Company in writing if it receives written notification that such registrations or membership have been temporarily or permanently suspended, limited or terminated. (i) KFDI will serve as licensing/regulatory agent for employees and other personnel of Kinetics, who will be registered as KFDI broker-dealer representatives. 3. DUTIES OF THE FUND. (a) The Company shall keep KFDI fully informed of its affairs and shall provide to KFDI from time to time copies of all information, financial statements, and other papers that KFDI may reasonably request for use in connection with the private placement of Shares, including, without limitation, certified copies of any financial statements prepared for the Fund by its independent public accountant and such reasonable number of copies of the most current Prospectus, Statement of Additional Information ("SAI"), and annual and interim reports as KFDI may request, and the Company shall fully cooperate in the efforts of KFDI to privately place and arrange for the private placement of Fund Shares. (b) The Company shall maintain a currently effective Registration Statement on Form N-1A with the Securities and Exchange Commission (the "SEC"), satisfy proper notice filing and fee payment provisions of applicable states and file such reports and other documents as may be required under applicable federal and state laws. The Company shall notify KFDI in writing of the states in which Fund Shares may be privately placed and shall notify KFDI in writing of any changes to such information. The Fund shall bear all expenses related to preparing and typesetting such Prospectuses, SAI and other materials required by law and such other expenses, including printing and mailing expenses, related to the Fund's communication with persons who are shareholders. (c) The Company shall not use any advertisements or other sales materials that have not been (i) submitted to KFDI for its review and approval, and (ii) if required, filed with the appropriate regulators. (d) The Company represents and warrants that its Registration Statement and any advertisements and sales literature (excluding statements relating to KFDI and the services it provides that are based upon written information furnished by KFDI expressly for inclusion therein) of the Fund shall not contain any untrue statement of material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and that all statements or information furnished to KFDI pursuant to Section 3(a) hereof, shall be true and correct in all material respects. 4. OTHER BROKER-DEALERS. KFDI in its discretion shall enter into agreements to privately place Shares with such registered and qualified retail dealers, as reasonably requested by the Company or Kinetics. In making agreements with such dealers, KFDI shall act only as principal and not as agent for the Company. The form of any such dealer agreement shall be mutually agreed upon and approved by the Company and KFDI. 5. WITHDRAWAL OF OFFERING. The Company reserves the right at any time to withdraw all offerings of any or all Shares by written notice to KFDI at its principal office. No Shares shall be privately placed by either KFDI or the Company under any provisions of this Agreement and no orders for the private placement of Shares hereunder shall be accepted by the Company if the Company's Shares are no longer issuable pursuant to an exemption from registration under the 1933 Act or, if and so long as effectiveness of the Registration Statement then in effect or any necessary amendments thereto shall be suspended under any of the provisions of the 1940 Act, or if and so long as a current prospectus as required by the 1940 Act is not on file with the SEC. 6. SERVICES NOT EXCLUSIVE. The services furnished by KFDI hereunder are not to be deemed exclusive. KFDI shall be free to furnish similar services to others so long as its services under this Agreement are not impaired thereby. The Company reserves the right to (i) privately place Shares to investors on applications received and accepted by the Fund; (ii) issue Shares in connection with a merger, consolidation, or recapitalization of the Fund; (iii) issue additional Shares to holders of Shares; or (iv) issue Shares in connection with any offer of exchange permitted by Section 11 of the 1940 Act. 7. EXPENSES OF THE FUND. The Fund shall bear all costs and expenses of registering the Shares with the SEC under the 1940 Act and qualifying for exemptions to registration under state and other regulatory bodies, and shall assume expenses related to communications with shareholders of the Fund including, but not limited to, (i) fees and disbursements of its counsel and independent public accountant; (ii) the preparation, filing, and printing of Registration Statements and/or Prospectuses or SAIs; (iii) the preparation and mailing of annual and interim reports, Prospectuses, SAIs, and proxy materials to shareholders; (iv) such other expenses related to the communications with persons who are shareholders of the Fund; and (v) the qualifications of Shares for private placement under the securities laws of such jurisdictions as shall be selected by the Fund pursuant to the Paragraph 3(b) hereof, and the costs and expenses payable to each jurisdiction for continuing qualification therein. KFDI does not assume responsibility for any expenses not assumed hereunder. 8. STATUS OF KFDI. KFDI is an independent contractor and shall be agent of the Company only with respect to the private placement and redemption of Shares. 9. INDEMNIFICATION. (a) The Company agrees to indemnify, defend, and hold KFDI, its officers, and directors, and any person who controls KFDI within the meaning of Section 15 of the 1933 Act, free and harmless from and against any and all claims, demands, or liabilities, and expenses (including the cost of investigating or defending such claims, demands, liabilities, and any counsel fees incurred in connection therewith) that KFDI, its officers and directors, or any such controlling person may incur under the 1933 Act, or under common law or otherwise, arising out of or based upon any (i) alleged untrue statement of a material fact contained in the Registration Statement, Prospectus, SAI, or sales literature; (ii) alleged omission to state a material fact required to be stated in the Company's registration statement or necessary to make the statements therein not misleading; or (iii) failure by the Company to comply with the terms of the Agreement; provided, that in no event shall anything contained herein be so construed as to protect KFDI against any liability to the Company or its shareholders to which KFDI would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations under this Agreement. (b) The Company shall not be liable to KFDI under this Agreement with respect to any claim made against KFDI or any person indemnified unless KFDI or other such person shall have notified the Company in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon KFDI or such other person (or after KFDI or other person shall have received notice of service on any designated agent). However, failure to notify the Company of any claim shall not relieve the Company from any liability that it may have to KFDI or any person against whom such action is brought otherwise than on account of this Agreement. (c) The Company shall be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce any claims subject to this Agreement. If the Company elects to assume the defense of any such claim, the defense shall be conducted by counsel chosen by the Company and satisfactory indemnified defendants in the suit whose consent shall not be unreasonably withheld. In the event that the Company elects to assume the defense of any suit and retain counsel, the indemnified defendants shall bear the fees and expenses of any additional counsel retained by them. If the Company does not elect to assume the defense of a suit, it will reimburse the indemnified defendants for the reasonable fees and expenses of any counsel retained by the indemnified defendants. The Company agrees to promptly notify KFDI of the commencement of any litigation or proceedings against it or any of its officers and directors in connection with the issuance or private placement of any of its Shares. (d) KFDI agrees to indemnify, defend, and hold the Company, its officers and directors, and any person who controls the Company within the meaning of Section 15 of the 1933 Act, free and harmless from and against any and all claims, demands, liabilities, and expenses (including the cost of investigating or defending against such claims, demands, or liabilities, and any counsel fees incurred in connection therewith) that the Company, its directors and officers, or any such controlling person may incur under the 1933 Act, or under common law or otherwise, resulting from KFDI' willful misfeasance, bad faith, or gross negligence in the performance of its obligations and duties under this Agreement, or arising out of or based upon any alleged untrue statement of a material fact contained in information furnished in writing by KFDI to the Company for use in the Registration Statement, Prospectus, or SAI arising out of or based upon any alleged omission to state a material fact in connection with such information required to be stated in any such document or necessary to make such information not misleading. (e) KFDI shall be entitled to participate, at its own expense, in the defense or, if it so elects, to assume the defense of any suit brought to enforce the claim, but if KFDI elects to assume the defense, the defense shall be conducted by counsel chosen by KFDI and satisfactory to the indemnified defendants whose approval shall not be unreasonably withheld. In the event that KFDI elects to assume the defense of any suit and retain counsel, the defendants in the suit shall bear the fees and expenses of any additional counsel retained by them. If KFDI does not elect to assume the defense of any suit, it will reimburse the indemnified defendants in the suit for the reasonable fees and expenses of any counsel retained by them. 10. DURATION AND TERMINATION. (a) This Agreement shall become effective on the date first written above or such later date as indicated in Schedule A and, will continue in effect for a minimum of one year from the above written date. Thereafter, if not terminated, this Agreement shall continue in effect for successive annual periods, provided that such continuance is specifically approved at least annually (i) by a vote of a majority of the Company's Board who are neither interested persons (as defined in the 1940 Act) of the Company ("Independent Directors") or KFDI cast in person at a meeting called for the purpose of voting on such approval, and (ii) by the Board or by vote of a majority of the outstanding voting securities of the Fund. (b) Notwithstanding the foregoing, this Agreement may be terminated in its entirety at any time, without the payment of any penalty, by vote of the Board, by vote of a majority of the Independent Directors, or by vote of a majority of the outstanding voting securities of the Fund on sixty (60) days' written notice to KFDI or by KFDI at any time, without the payment of any penalty, on sixty (60) days' written notice to the Company. This Agreement will automatically terminate in the event of its assignment. 11. AMENDMENT OF THIS AGREEMENT. No provision of this Agreement may be changed, waived, discharged, or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge, or termination is sought. This Agreement may be amended with the approval of the Board or of a majority of the outstanding voting securities of the Fund; provided, that in either case, such amendment also shall be approved by a majority of the Independent Directors. 12. LIMITATION OF LIABILITY. The Board and shareholders of the Fund shall not be personally liable for obligations of the Company in connection with any matter arising from or in connection with this Agreement. This Agreement is not binding upon any director, officer, or shareholder of the Fund individually, and no such person shall be individually liable with respect to any action or inaction resulting from this Agreement. 13. NOTICE. Any notice required or permitted to be given by either party to the other shall be deemed sufficient upon receipt in writing at the other party's principal offices. 14. MISCELLANEOUS. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule, or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors. As used in this Agreement, the terms "majority of the outstanding voting securities," "interested person" and "assignment" shall have the same meaning as such terms have in the 1940 Act. 15. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of New York and the 1940 Act (without regard, however, to the conflicts of law principles). To the extent that the applicable laws of the state of New York conflict with the applicable provisions of the 1940 Act, the latter shall control. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated as of the day and year first above written. KINETICS PORTFOLIO TRUST KINETICS FUNDS DISTRIBUTOR, INC. By:_________________________________ By:_________________________________ Print:_______________________________ Print:______________________________ Title:_______________________________ Title:______________________________ Date:_______________________________ Date:_______________________________ Attest:______________________________ Attest:_____________________________ Print:_______________________________ Print:______________________________ SCHEDULE A TO THE PLACEMENT AGENCY AGREEMENT BETWEEN KINETICS PORTFOLIO TRUST AND KINETICS FUNDS DISTRIBUTOR, INC. Pursuant to Section 1 of the Placement Agency Agreement between KINETICS PORTFOLIO TRUST (the "Company") and KINETICS FUNDS DISTRIBUTOR, INC. ("KFDI"), the Company hereby appoints KFDI as its agent to be the private placement agent of the Company with respect to its following series: THE INTERNET FUND THE INTERNET EMERGING GROWTH FUND THE INTERNET GLOBAL GROWTH FUND THE INTERNET INFRASTRUCTURE FUND THE INTERNET NEW PARADIGM FUND THE MEDICAL FUND THE MID EAST GROWTH FUND THE SMALL CAP OPPORTUNITIES FUND THE U.S. GOVERNMENT SECURITIES FUND Dated: May 1, 2000 EX-99.I(1) 7 SPITZER & FELDMAN SPITZER & FELDMAN P.C. 405 Park Avenue New York, NY 10022 April 28, 2000 Kinetics Portfolios Trust 1311 Mamaroneck Avenue White Plains, New York 10605 Gentlemen: We have acted as counsel to Kinetics Portfolios Trust (the "Trust"), a Delaware business trust, in connection with the preparation and filing of the Registration Statement of the Trust filed on Form N-1A (the "Registration Statement") covering shares of beneficial interest of the Trust, par value $.001 per share. We have examined originals or copies of the Certificate of Trust, Declaration of Trust, By-Laws of the Trust, the Registration Statement, and such other trust records, proceedings and documents, including the draft minutes of the Board of Trustees of the Trust, as we have deemed necessary for the purpose of this opinion. In our examination of such material, we have assumed the genuineness of all signatures and the conformity to original documents of all copies submitted to us. As to various questions of fact material to such opinion, we have relied upon statements and certificates of officers and representatives of the Trust and others. The opinions expressed herein are limited to matters governed by the laws of the State of New York and the Investment Company Act of 1940, as amended (the "1940 Act") and the rules and regulations promulgated thereunder. Matters governed by the laws of the State of Delaware have been addressed in a separate opinion letter issued by the firm of Richards, Layton & Finger, special Delaware counsel, a copy of which is attached hereto. Based upon and subject to the foregoing, we are of the opinion that the shares of beneficial interest, par value $.001 per share, of the Trust, to be issued in accordance with the terms of the limited offering, as set forth in the Prospectus and Statement of Additional Information included as part of the Registration Statement and when issued and paid for, will constitute validly authorized and legally issued shares of beneficial interest, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us in the Trust's Prospectus and the Statement of Additional Information, included as part of the Registration Statement. Very truly yours, Spitzer & Feldman P.C. EX-99.I(2) 8 RICHARDS, LAYTON & FINGER Richards, Layton & Finger One Rodney Square P.O. Box 551 Wilmington, Delaware 19899 Telephone: (302) 658-6541 Telecopier: (302) 658-6548 Website: www.rlf.com April 28, 2000 Kinetics Portfolios Trust 1311 Mamaroneck Avenue White Plains, New York 10605 RE: KINETICS PORTFOLIOS TRUST Ladies and Gentlemen: We have acted as special Delaware counsel to Kinetics Portfolios Trust, a Delaware business trust (the "Trust"), in connection with the transactions contemplated by the Declaration of Trust, dated as of March 14, 2000 ("Declaration"), by Steven R. Samson, Lee W. Schultheis and Brooke B. Campbell (collectively referred to as the "Trustees"). This opinion is being delivered pursuant to your request. Capitalized terms used herein and not otherwise defined shall have the respective meanings set forth in the Declaration, except that reference herein to any document shall mean such document as in effect on the date hereof. We have examined originals or copies of the following documents: (a) The Declaration; (b) A certified copy of the certificate of trust (the "Certificate of Trust") of the Trust which was filed with the Secretary of State of the State of Delaware (the "Secretary of State") on March 14, 2000; and (c) A Certificate of Good Standing for the Trust, dated April 28, 2000, obtained from the Secretary of State. We have not reviewed any documents other than the foregoing documents for purposes of rendering our opinions as expressed herein, and we have assumed that there exists no provision of any such other document that bears upon or is inconsistent with our opinions as expressed herein. We have conducted no independent factual investigation of our own but have relied solely upon the foregoing documents, the statements and information set forth therein and the additional matters recited or assumed herein, all of which we have assumed to be true, complete and accurate in all material respects. Based upon the foregoing and upon an examination of such questions of law as we have deemed necessary or appropriate, and subject to the assumptions, exceptions and qualifications set forth herein, we advise you that, in our opinion: 1. The Trust has been duly formed and is validly existing as a business trust under the Delaware Business Trust Act, 12 DEL. C.ss.3801, ET SEQ. (the "Act"). 2. The Declaration is a legal, valid and binding obligation of the Trustees, enforceable against the Trustees, in accordance with its terms. 3. The Trust has the authority under the Declaration and the Act to offer for sale and to issue the Interests pursuant to the terms of the Declaration, and when the Interests have been sold, issued and paid for as contemplated by the Declaration, such Interests will be validly issued, fully paid and nonassessable except to the extent as otherwise provided for in the Declaration. The foregoing opinions are subject to the following exceptions, qualifications and assumptions: A. We are admitted to practice law in the State of Delaware and we do not hold ourselves out as being experts on the law of any other jurisdiction. The foregoing opinions are limited to the laws of the State of Delaware currently in effect. We express no opinion with respect to (i) federal laws, including without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the Trust Indenture Act of 1939, as amended, and the Investment Company Act of 1940, as amended, (ii) state securities or blue sky laws or (iii) laws, rules and regulations relating to the particular nature of the Trust assets. B. We have assumed (i) except to the extent provided in paragraph 1 above, the valid existence of each party to the documents examined by us under the laws of the jurisdiction governing its organization, (ii) that each party has the power and authority to execute and deliver, and to perform its obligations under, the documents examined by us, (iii) the legal capacity of natural persons who are signatories to the documents examined by us, (iv) that each party has duly authorized, executed and delivered the documents examined by us, (v) that the Declaration constitutes the entire agreement among the parties thereto with respect to the subject matter thereof, including, without limitation, the creation, operation and termination of the Trust, and that the Declaration and the Certificate of Trust are in full force and effect and have not been amended, (vi) that the execution, delivery and performance of the documents examined by us by each of the parties thereto does not and will not violate or require any consent or approval of, the withholding of objection on the part of, the giving of notice to, the filing, registration or qualification with, or the taking of any other action under, any agreement, indenture or instrument to which it is a party or by which it is bound or any provision of any law, rule, regulation, judgment, order, writ, injunction or decree of any court or governmental authority applicable to it or any of its property; (vii) that the name and address of each Holder is properly registered by the Issuer in accordance with the Declaration; (viii) the payment by each Holder to the Trust of the full consideration due from it for the Interests subscribed to by it; and (ix) the Interests will be offered and sold as described in the Declaration. C. The foregoing opinion regarding enforceability is subject to (i) applicable bankruptcy, insolvency, moratorium, receivership, reorganization, fraudulent transfer and similar laws relating to and affecting the rights and remedies of creditors generally, (ii) principles of equity, including applicable law relating to fiduciary duties (regardless of whether considered and applied in a proceeding in equity or at law), and (iii) applicable public policy with respect to the enforceability of provisions relating to indemnification or contribution. D. We have assumed that all signatures on documents examined by us are genuine, that all documents submitted to us as originals are authentic, and that all documents submitted to us as copies conform with the originals, which facts we have not independently verified. E. We express no opinion as to the creation, attachment, perfection or priority of any mortgage or security interest or the nature or validity of title to any property. F. We have not participated in the preparation of any offering materials with respect to the Interests and assume no responsibility for their contents. This opinion may be relied upon by you in connection with the matters set forth herein. In addition, we consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to the Registration Statement. In giving the foregoing consent, we do not thereby admit that we come within the category of Persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the rules and regulations of the Securities and Exchange Commission thereunder. Other than as provided above, without our prior written consent, this opinion may not be relied upon by or furnished to any person or entity for any purpose. Very truly yours, /s/ Richards, Layton & Finger Richards, Layton & Finger EAM/TLM SCHEDULE A Kinetics Portfolio Trust EX-99.J(1) 9 CONSENT OF AUDITORS CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form N-1A of our report dated April 27, 2000, relating to the financial statements of Kinetics Portfolios Trust, which appear in such Registration Statement. We also consent to the references to us under the headings "Counsel and Independent Auditors" and "Independent Public Accountants" in such Registration Statement. Milwaukee, WI April 27, 2000 -----END PRIVACY-ENHANCED MESSAGE-----