<PAGE> 1
File No. 33-65137
File No. 811-7455
As Filed with the Securities and Exchange Commission on February 29, 1996
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. 2 /x/
----
Post-Effective Amendment No. / /
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 /x/
Amendment No. 2 /x/
----
(Check appropriate box or boxes)
SENECA FUNDS
(Exact Name of Registrant as Specified in Charter)
909 Montgomery Street
San Francisco, California 94133
(Address of Principal Executive Office) (Zip Code)
(415) 677-1500
(Registrant's Telephone Number, Including Area Code)
Delaware Corporation Organizers, Inc.
1201 North Market Street
Wilmington, Delaware 19801
(Name and Address of Agent for Service)
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Copy to:
Mark D. Whatley, Esq.
Paul B. Hudson, Esq.
Howard, Rice, Nemerovski, Canady, Falk & Rabkin
A Professional Corporation
Three Embarcadero Center
San Francisco, CA 94111
(415) 434-1600
Approximate Date of Proposed Public Offering: As soon as practicable
after the effectiveness of the registration under the Securities Act of
1933.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that
this Registration Statement shall thereafter become effective in
accordance with Section 8(a) of the Securities Act of 1933 or until the
Registration Statement shall become effective on such date as the
Securities and Exchange Commission, acting pursuant to Section 8(a), may
determine.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended, Registrant hereby elects to register an indefinite number of
shares of Registrant and any series thereof.
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SENECA FUNDS
ADMINISTRATIVE SHARES
Seneca Growth Fund
Seneca Mid-Cap Growth Fund
Seneca Bond Fund
Seneca Real Estate Securities Fund
Cross-Reference Sheet Showing Location in Prospectus
and Statement of Additional Information of
Information Required by Items of the Registration Form
<TABLE>
<CAPTION>
N-1A Item No. and Caption Location:
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<S> <C> <C>
Part A Prospectus
1. Cover Page............................ Cover Page
2. Synopsis.............................. Fund Expenses
3. Condensed Financial Information....... Not Applicable
4. General Description of Registrant..... The Seneca Funds At A Glance;
Management; Investment
Practices and Risk
Considerations; The Seneca
Funds in Detail; General
Information
5. Management of the Fund................ Fund Expenses; Management;
Investment Manager and
Administrator; General
Information
5A. Management's Discussion of Fund
Performance........................... Not Applicable
</TABLE>
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<TABLE>
<S> <C> <C>
6. Capital Stock and Other Securities.... Dividends and Capital Gains;
General Information
7. Purchase of Securities Being Offered.. Purchase of Shares
8. Redemption or Repurchase.............. Redemption of Shares
9. Pending Legal Proceedings............. Not Applicable
Statement of
Part B Additional Information
10. Cover Page............................ Cover Page
11. Table of Contents..................... Table of Contents
12. General Information and History....... Not Applicable
13. Investment Objectives and Policies.... General; Investment
Objectives and Policies;
Investment Restrictions;
Portfolio Turnover
14. Management of the Fund................ Trustees and Officers;
Organization
15. Control Persons and Principal
Holders of Securities................. Trustees and Officers
16. Investment Advisory and Other
Services.............................. Advisory and Administrative
Services
17. Brokerage Allocation and
Other Practices....................... Portfolio Brokerage;
Portfolio Turnover
</TABLE>
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<TABLE>
<S> <C> <C>
18. Capital Stock and Other Securities.... Organization
19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Net Asset Value
20. Tax Status............................ Dividends, Distributions and Tax Status
21. Underwriters.......................... Advisory and Administrative
Services
22. Calculation of Performance Data....... Calculation of the Funds'
Returns
23. Financial Statements.................. Not Applicable
</TABLE>
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SENECA FUNDS
INSTITUTIONAL SHARES
Seneca Growth Fund
Seneca Mid-Cap Growth Fund
Seneca Bond Fund
Seneca Real Estate Securities Fund
Cross-Reference Sheet Showing Location in Prospectus
and Statement of Additional Information of
Information Required by Items of the Registration Form
<TABLE>
<CAPTION>
N-1A Item No. and Caption Location:
<S> <C> <C>
Part A Prospectus
1. Cover Page............................ Cover Page
2. Synopsis.............................. Fund Expenses
3. Condensed Financial Information....... Not Applicable
4. General Description of Registrant..... The Seneca Funds At A Glance;
Management; Investment
Practices and Risk
Considerations; The Seneca
Funds in Detail; General
Information
5. Management of the Fund................ Fund Expenses; Management;
Investment Manager and
Administrator; General
Information
5A. Management's Discussion of Fund
Performance........................... Not Applicable
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C> <C>
6. Capital Stock and Other Securities.... Dividends and Capital Gains;
General Information
7. Purchase of Securities Being Offered.. Purchase of Shares
8. Redemption or Repurchase.............. Redemption of Shares
9. Pending Legal Proceedings............. Not Applicable
Part B Statement of
Additional Information
10. Cover Page............................ Cover Page
11. Table of Contents..................... Table of Contents
12. General Information and History....... Not Applicable
13. Investment Objectives and Policies.... General; Investment
Objectives and Policies;
Investment Restrictions;
Portfolio Turnover
14. Management of the Fund................ Trustees and Officers;
Organization
15. Control Persons and Principal
Holders of Securities................. Trustees and Officers
16. Investment Advisory and Other
Services.............................. Advisory and Administrative
Services
</TABLE>
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<PAGE> 8
<TABLE>
<S> <C> <C>
17. Brokerage Allocation and
Other Practices....................... Portfolio Brokerage;
Portfolio Turnover
18. Capital Stock and Other Securities.... Organization
19. Purchase, Redemption and Pricing of
Securities Being Offered.............. Net Asset Value
20. Tax Status............................ Dividends, Distributions and
Tax Status
21. Underwriters.......................... Advisory and Administrative
Services
22. Calculation of Performance Data....... Calculation of the Funds'
Returns
23. Financial Statements.................. Not Applicable
</TABLE>
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<PAGE> 9
Subject to Completion, Dated February ____, 1996
SENECA FUNDS
ADMINISTRATIVE SHARES
Prospectus: February 29, 1996
SENECA GROWTH FUND seeks capital appreciation primarily through investments in
equity securities of companies that, in the Investment Manager's opinion, have
the potential for above average market appreciation. Production of income will
be incidental to this objective. The Fund seeks to out perform the Standard &
Poor's Index of 500 Stocks.
SENECA MID-CAP GROWTH FUND seeks capital appreciation primarily through
investments in equity securities of companies that, in the Investment Manager's
opinion, have the potential for above average market appreciation. Production
of income will be incidental to this objective. The Fund will invest primarily
in companies with market capitalizations between $500 million and $5 billion.
The Fund seeks to out perform the Standard & Poor's Mid-Cap 400 Index.
SENECA BOND FUND seeks both current income and capital appreciation primarily
by investing in a diversified portfolio of government and corporate bonds and
other debt securities. The Fund will seek a total return higher than that of
the Lehman Brothers Government/Corporate Index.
SENECA REAL ESTATE SECURITIES FUND seeks a high total return through both
long-term capital appreciation and current income from investments related to
United States real estate. The Fund will invest primarily in securities of
issuers that are engaged principally in or whose businesses relate to ownership
and operation of real estate in the United States.
There can be no assurance that any of the Funds will achieve its investment
objectives or succeed in outperforming the indices described above. For
information about some of the principal risks involved in investments in the
Funds, see "Investment Practices and Risk Considerations."
This Prospectus is intended to set forth concisely the information an investor
should know before investing in any of the Funds. Please read it carefully and
save it for future reference. A Statement of Additional Information dated
February 29, 1996 (the "SAI") has been filed with the Securities and Exchange
Commission. The SAI, as amended or supplemented from time to time, is
incorporated into this Prospectus by this reference and is a part of this
Prospectus. It is available free of charge by writing to the Distributor at
909 Montgomery Street, San Francisco, California, 94133 or by calling
1-800-990-9331. See "Purchase of Shares."
Each Fund has its own levels of expenses and charges. The minimum investment
is $10,000 per Fund, or less in some instances. See "Purchase of Shares."
Fund shares are not deposits or obligations of, or endorsed or guaranteed by,
any bank or other financial institution, and they are not insured by the
Federal Deposit Insurance Corporation or any other agency of the United States
Government or any other governmental subdivision.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
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<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE SENECA FUNDS AT A GLANCE 4
FUND EXPENSES 5
INVESTMENT MANAGER'S PERFORMANCE 7
MANAGEMENT 10
THE SENECA FUNDS IN DETAIL 11
SENECA GROWTH FUND AND SENECA MID-CAP GROWTH FUND 11
SENECA BOND FUND 12
SENECA REAL ESTATE SECURITIES FUND 14
INVESTMENT PRACTICES AND RISK CONSIDERATIONS 15
PURCHASE OF SHARES 21
REDEMPTION OF SHARES 24
PORTFOLIO TRANSACTIONS 26
NET ASSET VALUE 27
DIVIDENDS AND CAPITAL GAINS 28
INCOME TAX CONSIDERATIONS 28
INVESTMENT MANAGER AND ADMINISTRATOR 29
GENERAL INFORMATION 31
</TABLE>
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<PAGE> 12
THE SENECA FUNDS AT A GLANCE
SENECA FUNDS (the "Trust") is an open-end management investment company,
consisting of the four separate investment portfolios described below (the
"Funds"). Each Fund is managed separately and has its own investment
objective, strategies and policies designed to meet different goals. The
following summary is qualified in its entirety by the more detailed information
that appears elsewhere in this Prospectus. A more detailed description of each
Fund may be found under the heading "The Seneca Funds in Detail."
The SENECA GROWTH FUND seeks capital appreciation. Production of income will
be incidental to this objective. This Fund will invest primarily in common
stocks of companies that, in the Investment Manager's opinion, have the
potential for above average market appreciation. The Fund may invest in
companies at all levels of market capitalization. For a portion of its
portfolio, the Fund will favor large, well-known companies that have
established histories of continuous dividend payment and, for another portion
its portfolio, will generally invest in smaller firms that the Investment
Manager believes have the potential for faster growth. The Fund will seek to
out perform the Standard & Poor's Index of 500 Stocks (the "S&P 500").
The SENECA MID-CAP GROWTH FUND seeks capital appreciation. Production of
income will be incidental to this objective. This Fund will invest primarily
in common stocks of companies that, in the Investment Manager's opinion, have
the potential for above average market appreciation, focussing on companies
with market capitalizations between $500 million and $5 billion. The Fund will
seek to out perform the Standard & Poor's Mid-Cap 400 Index (the "S&P Mid-Cap
Index").
The SENECA BOND FUND seeks both current income and capital appreciation. This
Fund will invest in a diversified portfolio of government and corporate bonds
and other debt securities, seeking a total return higher than the Lehman
Brothers Government/Corporate Index. The Fund will normally maintain a
dollar-weighted average maturity of between two and ten years and a
dollar-weighted average duration of between two and eight years.
The SENECA REAL ESTATE SECURITIES FUND seeks a high total return through both
long-term capital appreciation and current income. This Fund will be
non-diversified and will invest primarily in securities of issuers operating
principally in the United States real estate industry or whose businesses
relate to ownership and operation of real estate in the U.S., including equity
real estate investment trusts ("REITs"), mortgage REITs, real estate brokers
and developers, companies that manage or own real estate, manufacturers and
distributors of building supplies, and financial institutions that originate or
service mortgage loans.
There can be no assurance that the Funds will achieve their investment
objectives or succeed in outperforming the indices described above. Investors
should read this Prospectus carefully, particularly "Investment Practices and
Risk Considerations," for information about certain risks relevant to an
investment in the Funds. In particular, investors should note that the value
of all securities and other investments a Fund may hold and, as a result, the
Fund's net asset value per share, will vary from time to time in response to a
variety of factors. The value of securities may fluctuate in response to the
activities of individual companies as well as general market and economic
conditions. The values of small-to-medium-capitalization equity securities may
be particularly susceptible to fluctuation as a result of factors unrelated to
the issuers' underlying businesses. The value of debt securities can generally
be expected to vary inversely with changes in prevailing interest rates. The
net asset value per share of any Fund may be less at the time of redemption
than it was at the time of purchase.
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<PAGE> 13
Each Fund is separately managed by GMG/Seneca Capital Management, L.P.
("GMG/Seneca, L.P."). GMG/Seneca, L.P. plans to reorganize into a limited
liability company in mid-1996. The terms "GMG/Seneca" and "Investment Manager"
refer to GMG/Seneca, L.P. until the effectiveness of that reorganization and to
its successor thereafter.
FUND EXPENSES
Each Fund will bear the costs of its operations. These costs may include fees
for investment management, distribution, independent directors, brokerage
services, security pricing services, custody, transfer agency and recordkeeping
services, insurance, federal and state registration, legal and accounting
services, amortized expenses, taxes, and any extraordinary expenses.
Each Fund offers two classes of shares: Administrative Shares and
Institutional Shares. Administrative Shares are offered primarily to
participant-directed employee benefit plans and to investors purchasing through
accounts maintained with broker-dealers and other financial service companies.
With certain exceptions, the minimum initial investment for Administrative
Shares is $10,000. Institutional Shares are offered directly by the
Distributor to institutional investors such as pension and profit sharing
plans, other employee benefit trusts, endowments, foundations, and
corporations. The minimum investment for Institutional Shares is $100,000.
See "Purchase of Shares." This Prospectus describes only Administrative
Shares. To receive a free prospectus describing the Institutional Shares, call
1-800-990-9331 or write to the Distributor.
Each class may have different distribution-related expenses and charges and
other expenses specific to that class. Those expenses will be charged
separately to that class and may affect the class's performance. Fund expenses
that are not related to the distribution of shares of a particular class or to
services provided specifically to a particular class will be allocated between
the classes based on the net assets of each class.
The following table describes shareholder transaction-related expenses and
anticipated annual expenses (excluding portfolio brokerage expenses) as to
Administrative Shares.
<TABLE>
<CAPTION>
======================================================================================================
SHAREHOLDER TRANSACTION EXPENSES
SENECA REAL
SENECA MID-CAP SENECA ESTATE
SENECA GROWTH GROWTH BOND SECURITIES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Load on Purchases None None None None
- ------------------------------------------------------------------------------------------------------
Sales Load on Reinvested Dividends None None None None
- ------------------------------------------------------------------------------------------------------
Deferred Sales Load None None None None
- ------------------------------------------------------------------------------------------------------
Early Withdrawal Fee(1) 1.00% 1.00% 1.00% 1.00%
- ------------------------------------------------------------------------------------------------------
Exchange Fee None None None None
- ------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------
(1) Applies only to redemptions (including by exchanges) of shares
held less than 90 days. The fee is paid to the Fund and is intended to protect
long-term investors from the cost of frequent investments and redemptions by
short-term investors. See "Redemption of Shares."
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<PAGE> 14
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
ANNUAL FUND EXPENSES PERCENTAGE OF AVERAGE NET ASSETS
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees 0.70% 0.80% 0.50% 0.85%
- ---------------------------------------------------------------------------------------------------
12b-1 Fees(2) 0.25% 0.25% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------
Other Expenses (after waivers and expense 0.55% 0.55% 0.55% 0.60%
reimbursements)(3)
- ---------------------------------------------------------------------------------------------------
Total Expenses 1.50% 1.60% 1.30% 1.70%
- ---------------------------------------------------------------------------------------------------
</TABLE>
The Annual Fund Expenses table summarizes estimates of operating expenses
relating to Administrative Shares. The purpose of both of these tables is to
assist investors in understanding the varying costs and expenses they will bear
directly or indirectly. Without any fee waivers or expense reimbursements by
GMG/Seneca, the Other Expenses for Administrative Shares during the first year
of the Funds' operations are estimated to be 1.60%, 1.65%, 1.65%, and 1.70%,
respectively, and the Total Expenses are estimated to be 2.55%, 2.70%, 2.40%,
and 2.80%, respectively.
EXAMPLE
Using the above tables of transaction expenses and operating expenses, an
investor would pay the following expenses based on a $1,000 investment and an
assumed 5% annual return. The expenses are the same whether or not the
investor redeems the shares at the end of each time period.
- -------------------------
(2) Consists of distribution fees payable to the Distributor to cover,
among other things, costs of advertising and marketing the Administrative
Shares. See "General Information--Distribution and Administrative Services
Plan." These fees may result in long-term shareholders paying more than the
economic equivalent of the maximum front-end sales charge permitted under the
rules of the National Association of Securities Dealers, Inc.
(3) Includes estimates of fees to be paid to GMG/Seneca pursuant to an
Administrative Services Agreement, fees the Funds may pay to employee benefit
plan administrators, broker-dealers, and other financial services companies for
sub- accounting, account maintenance and other, related services, as well as
other expenses not covered by the Management Fees and the 12b-1 Fees. Certain
expenses may differ between classes depending on the particular services
provided to the different classes. Examples include transfer agency fees,
state and federal securities registration fees, legal and accounting fees,
directors' fees and expenses incurred as a result of issues relating solely to
a class, and fees and payments for specific class services, including account
maintenance or subaccounting expenses.
GMG/Seneca will waive some or all of its Administrative Fee and assume
other operating expenses of each Fund (other than certain extraordinary or
nonrecurring expenses) until the earlier of September 30, 1996 or such time as
the Fund's assets exceed $50 million, to the extent necessary to prevent the
expenses of the Administrative Shares of each Fund from exceeding the levels
set forth in the table. The Investment Manager may, from time to time, assume
additional expenses. Fee waivers and expense reimbursement or assumption
arrangements will increase a Fund's return.
"Other Expenses" may be reduced to the extent certain broker-dealers
executing Funds' portfolio transactions pay all or a portion of the Funds'
transfer agency or custodian fees or expenses or credits arising out of
balances maintained by Funds with the Transfer Agent and Custodian offset such
fees or expenses.
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<PAGE> 15
<TABLE>
<CAPTION>
================================================================
1 Year 3 Years
----------------------------------------------------------------
<S> <C> <C>
Seneca Growth Fund $15 $48
----------------------------------------------------------------
Seneca Mid-Cap Growth Fund $16 $51
----------------------------------------------------------------
Seneca Bond Fund $13 $41
----------------------------------------------------------------
Seneca Real Estate Securities Fund $17 $53
----------------------------------------------------------------
</TABLE>
THE INFORMATION IN THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN A RETURN GREATER OR LESS THAN 5%.
INVESTMENT MANAGER'S PERFORMANCE
Because they did not begin operating before February 1996, no past performance
information is available for the Funds. However, the Investment Manager and
its affiliates have been managing investment accounts for a variety of
institutional and individual investment advisory clients for over six years.
The Seneca Growth, Seneca Mid-Cap Growth, and Seneca Bond Funds have
substantially the same investment objectives and policies and use the same
investment strategies and techniques as certain of those accounts. The
performance of those accounts is illustrated in the table and the graphs that
follow.
In addition, an affiliate of the Investment Manager, Genesis Realty Capital
Management, L.P. ("Genesis Realty"), has been managing an investment account
since May of 1995 with substantially the same investment objectives and
policies, and using substantially the same investment strategies and
techniques, as the Seneca Real Estate Securities Fund. The portfolio
management team responsible for the management of that account will have
principal responsibility for the Seneca Real Estate Securities Fund. The
performance of that account is illustrated in the table and in the graph
entitled "Real Estate Securities Account" that follows.
There can be no assurance that any Fund's performance will be the same as that
of the corresponding individual accounts. The Funds may have total assets that
will be more or less than the total assets in the individual accounts. The
Investment Manager believes that asset size is not a significant factor in the
Funds' ability to achieve their investment objectives.
For comparison purposes, the individually-managed accounts and composites match
up to the Funds as follows:
<TABLE>
<S> <C>
Seneca Growth Fund Core Growth Equity Account
Composite
</TABLE>
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<PAGE> 16
<TABLE>
<S> <C>
Seneca Mid-Cap Growth Fund Mid-Cap Growth Equity Account
Composite
Seneca Bond Fund Fixed-Income Account Composite
Seneca Real Estate Securities Fund Real Estate Securities Account
</TABLE>
The following table shows how the individually-managed account composites'
annualized performance compares to recognized industry indices over each of the
last five years or, where shorter, since the relevant composite's inception and
how the individually-managed Real Estate Securities Account's performance from
May through December 1995 compares to a recognized industry index over the same
period.
<TABLE>
<CAPTION>
Calendar Calendar Calendar Calendar Calendar Calendar
Year 1990 Year 1991 Year 1992 Year 1993 Year 1994 Year 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Core Growth Equity Account Composite 8.5% 39.0% 7.8% 10.9% 1.5% 29.8%
S&P 500 Index -3.1% 30.5% 7.6% 10.1% 1.3% 37.5%
Mid-Cap Growth Equity Account Composite --(1) -- -- -- 11.1% 34.7%
S&P Mid-Cap Index -- -- -- -- -3.6% 30.9%
Fixed-Income Account Composite 9.2% 18.2% 9.1% 15.7% -2.7% 20.2%
Lehman Brothers Government/Corporate 8.3% 16.1% 7.6% 11.0% -3.5% 19.2%
Index
Real Estate Securities Account(2) -- -- -- -- -- 17.1%
National Association of Real Estate -- -- -- -- -- _15.0%
Investment Trust ("NAREIT") Equity
Index
</TABLE>
Following are graphs showing the performance of the four individually-managed
account composites from their respective inception dates compared with the
performance of recognized industry indices for the same periods. Rates of
return are calculated using a time-weighted total rate of return with the
periods linked to create the long-term rates of return. For each of the
individually-managed accounts and composites, account valuations and cash flows
occurred quarterly.
CORE GROWTH EQUITY ACCOUNT COMPOSITE
The following graph shows that $10,000 invested in an individually-managed
account that achieved the performance of the Core Growth Equity account
composite when the Investment Manager first began managing those accounts on
January 1, 1990, would have grown to about
- -------------------------
(1) Periods with "--" are before the Investment Manager began managing
the accounts in this composite.
(2) Inception of management of accounts was May 1, 1995. The return
shown for the Index is for the period from May 1, through December 31, 1995.
The percentage returns are not annualized.
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<PAGE> 17
$23,753 as of December 31, 1995. This is equivalent to a 17.0% return per
year. By comparison, $10,000 invested at the same time in a portfolio of the
securities comprising the S&P 500 Index (weighted as in that index) would have
grown to about $20,866 for a rate of return of 16.6% per year. The S&P 500
Index is a selection of 500 common stocks, is unmanaged, and is regarded by
some as a benchmark for the equity market in general.
[CORE GROWTH EQUITY ACCOUNT COMPOSITE GRAPH APPEARS HERE]
IT IS POSSIBLE THAT BY USING DIFFERENT METHODS TO CALCULATE PERFORMANCE,
RESULTS COULD DIFFER FROM THOSE GIVEN ABOVE. INVESTORS SHOULD NOT RELY ON THIS
PERFORMANCE DATE WHEN DECIDING WHETHER TO INVEST IN A PARTICULAR SENECA FUND.
MID-CAP GROWTH EQUITY ACCOUNT COMPOSITE
The following graph shows that $10,000 invested in an individually-managed
account that achieved the performance of the Mid-Cap Growth Equity account
composite when the Investment Manager first began managing those accounts on
January 1, 1994 would have grown to about $14,965 as of December 31, 1995.
This is equivalent to a 22.3% return per year. By comparison, $10,000 invested
at the same time in a portfolio of the securities comprising the S&P Mid-Cap
Index (weighted as in that index) would have grown to about $12,627 for a rate
of return of 12.4% per year. The S&P Mid-Cap Index is a
capitalization-weighted, unmanaged index of common stocks, which has a market
capitalization of approximately $700 million.
[MID-CAP GROWTH EQUITY ACCOUNT COMPOSITE GRAPH APPEARS HERE]
IT IS POSSIBLE THAT BY USING DIFFERENT METHODS TO CALCULATE PERFORMANCE,
RESULTS COULD DIFFER FROM THOSE GIVEN ABOVE. INVESTORS SHOULD NOT RELY ON THIS
PERFORMANCE DATE WHEN DECIDING WHETHER TO INVEST IN A PARTICULAR SENECA FUND.
FIXED-INCOME ACCOUNT COMPOSITE
The following graph shows that $10,000 invested in an individually-managed
account that achieved the performance of the Fixed- Income Account Composite
when the Investment Manager first began managing those accounts on January 1,
1990 would have grown to about $19,037 as of December 31, 1995. This is
equivalent to a 11.8% return per year. By comparison, $10,000 invested at the
same time in a portfolio of the securities comprising the Lehman Brothers
Government/Corporate Index (weighted as in that index) would have grown to
about $17,272 for a rate of return of 9.8% per year. The Lehman Brothers
Government/Corporate Index is an unmanaged index consisting of a mixture of
both corporate and government bonds that are rated within the "investment
grade" categories by Moody's Investor Services, Standard & Poor's Corporation
or Fitch Investors Service.
[FIXED-INCOME ACCOUNT COMPOSITE GRAPH APPEARS HERE]
IT IS POSSIBLE THAT BY USING DIFFERENT METHODS TO CALCULATE PERFORMANCE,
RESULTS COULD DIFFER FROM THOSE GIVEN ABOVE. INVESTORS SHOULD NOT RELY ON THIS
PERFORMANCE DATE WHEN DECIDING WHETHER TO INVEST IN A PARTICULAR SENECA FUND.
REAL ESTATE SECURITIES ACCOUNT
The following graph shows that $10,000 invested in an individually-managed
account that achieved the performance of the Real Estate Securities Account
when Genesis Realty first began
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<PAGE> 18
managing that account on May 1, 1995 would have grown to about $11,708 as of
December 31, 1995. This is equivalent to a 17.1% return per year. By
comparison, $10,000 invested at the same time in a portfolio of the securities
comprising the NAREIT Equity Index (weighted as in that index) would have grown
to about $11,499 for a rate of return of 15.0 per year. The NAREIT Equity
Index is a capitalization-weighted, unmanaged index consisting of common stocks
of all tax-qualified REITs listed on the New York Stock Exchange, the American
Stock Exchange, or Nasdaq.
[REAL ESTATE SECURITIES ACCOUNT GRAPH APPEARS HERE]
IT IS POSSIBLE THAT BY USING DIFFERENT METHODS TO CALCULATE PERFORMANCE,
RESULTS COULD DIFFER FROM THOSE GIVEN ABOVE. INVESTORS SHOULD NOT RELY ON THIS
PERFORMANCE DATE WHEN DECIDING WHETHER TO INVEST IN A PARTICULAR SENECA FUND.
The composite performance of individually-managed accounts is shown after
reduction for investment management fees. For the Core Growth Equity Account
Composite and the Mid-Cap Growth Equity Account Composite, those fees were
assumed to be 1% per annum, for the Fixed-Income Account Composite, those fees
were assumed to be 0.50% per annum, and for the Real Estate Securities Account,
those fees were .85% per annum, in each case applied to the value of the
accounts at the end of each quarter. These fees represent the Investment
Manager's (or, as to the Real Estate Securities Account, Genesis Realty's)
standard fees for accounts of these types, although some of the accounts may
have paid lower fees. The industry indices are shown in the graphs for
comparison purposes only. They are unmanaged indices that pay no management
fees and incur no expenses. An individual cannot invest in an index.
Each Fund's performance may differ from the composite performance of
individually-managed accounts due to differences in, among other things,
availability of cash for new investments, timing of purchases and sales,
overall expenses, brokerage commissions, and diversification of securities.
Performance figures are based on historical earnings. Past performance of the
individually-managed accounts and indices is no guarantee of future results for
the Funds.
MANAGEMENT
Overall responsibility for the management and supervision of the Trust and the
Funds rests with the Trustees of Seneca Funds (the "Trustees"). GMG/Seneca's
services under its Investment Management Agreement and Administrative Services
Agreement with the Trust are subject to the direction of the Trustees.
The Funds' investment manager is GMG/Seneca, 909 Montgomery Street, San
Francisco, California 94133. Under an Investment Management Agreement with the
Trust, GMG/Seneca's duties to each Fund include: (1) supervising and managing
the investments of that Fund and directing the purchase and sale of its
investments; and (2) ensuring that investments follow the investment objective,
strategies, and policies of that Fund and comply with government regulations.
GMG/Seneca has also entered into an Administrative Services Agreement with the
Trust under which it performs, or arranges for the performance of, the
following services, among others: (1) providing the Funds with administrative
and clerical services; (2) overseeing the maintenance of the Funds' books and
records by the Funds' custodian; (3) preparing the Funds' income tax returns;
(4) registering the Funds' shares with those states and other jurisdictions
where shares are offered or sold and arranging periodic updating of the Funds'
prospectus; (5) initial
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preparation and filing of proxy materials and reports to Fund shareholders and
the Securities and Exchange Commission ("SEC"); and (6) providing the Funds
with adequate office space and all necessary office equipment to perform the
foregoing services. GMG/Seneca has entered into an agreement with State Street
Bank and Trust Company ("State Street"), 1776 Heritage Drive, North Quincy,
Massachusetts 01701, pursuant to which State Street will perform substantially
all of those services.
For more information about the Investment Manager, its functions, and its
affiliates, see "Investment Manager."
THE SENECA FUNDS IN DETAIL
FUND OBJECTIVES, STRATEGIES AND POLICIES. The investment objectives,
strategies, and policies of each Fund are described below. There can be no
assurance that these objectives will be met. The "Investment Practices and
Risk Considerations" section describes in greater detail some specific risks of
the types of securities in which the Funds invest and practices in which the
Funds may engage.
FUNDAMENTAL POLICIES. An investment policy that a Fund has adopted as
"fundamental" may be changed only with the approval of a majority of
shareholders. Most of the strategies and policies described below and
described in the SAI are not fundamental. This means those strategies and
policies can be changed by the Trustees without shareholder approval.
SENECA GROWTH FUND AND SENECA MID-CAP GROWTH FUND
INVESTMENT OBJECTIVE: Capital appreciation; production of income will be
incidental. The Seneca Growth Fund seeks appreciation greater than that of the
S&P 500 Index and the Seneca Mid-Cap Growth Fund seeks appreciation greater
than that of the S&P Mid-Cap Index.
INVESTMENT STRATEGIES AND POLICIES. Each of these Funds will invest primarily
in common stocks of growth companies that meet certain fundamental standards
and that the Investment Manager believes have the potential for above average
market appreciation. These Funds will generally invest at least 65% of their
assets in common stocks. The Seneca Growth Fund will have no limitations as to
the market capitalizations of companies in which it invests, but will generally
focus a portion of its portfolio on large, well-known companies, many with
market capitalizations in excess of $5 billion, that have an established
history of profitability and/or dividend payment. The Seneca Mid-Cap Growth
Fund will generally invest at least 65% of its assets in companies with market
capitalizations between $500 million and $5 billion, although it may at times
have significant investments in companies with higher or lower market
capitalizations. At times, both Funds may invest in some of the same
securities.
In evaluating companies' potential for market appreciation, the Investment
Manager seeks companies that, among other things, it believes will demonstrate
greater long-term earnings growth than the average company included in, for the
Seneca Growth Fund, the S&P 500 or, for the Seneca Mid-Cap Growth Fund, the S&P
Mid-Cap Index. This approach is based on the belief that growth in a company's
earnings will correlate with growth in the price of its stock. The Investment
Manager will identify strong market sectors and then identify companies within
those sectors that have the most attractive earnings prospects.
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These Funds may also invest in preferred stocks, warrants, and debt
instruments, including bonds convertible into common stocks. When the
Investment Manager determines that market conditions warrant, the Funds may
invest without limit in cash and cash equivalents for temporary defensive
purposes, although this is not expected to occur routinely. These Funds may
engage in hedging transactions using, among other things, options and futures
contracts. See "Investment Practices and Risk Considerations--Options,
Futures, and Other Derivatives."
These Funds may invest as much as 20% of their assets in foreign securities if
those securities meet the same criteria for the Funds' investments in general.
At times the Funds may have no foreign investments. Generally, the Funds'
foreign investments will be made through American depositary receipts ("ADRs")
or stocks of foreign issuers that are traded directly on U.S. securities
exchanges or in the Nasdaq Stock Market.
To enable the Seneca Mid-Cap Growth Fund to invest effectively in companies
with small- to medium-sized market capitalizations, the Trust currently does
not expect to offer shares of that Fund to the public at any time when the net
assets of the Fund exceed $500 million. This limit is subject to change.
As these Funds invest primarily in common stocks, their investments are subject
to stock market price volatility. The Funds are intended for investors who
have the perspective, patience, and financial ability to take on above-average
stock market volatility in pursuit of long-term capital growth. Prices of
securities issued by medium-capitalization companies are often more volatile
than those of large, well-established companies, in part because of the
relatively fewer shares available and the potential for developments in a
smaller company's business to have a relatively greater impact on its earnings
and revenues than developments in the business of larger companies. In
addition, the risk of insolvency (with attendant losses to shareholders) is
greater for smaller companies than for larger companies. As a result, because
of its investment focus on companies with medium-capitalizations, the Seneca
Mid-Cap Growth Fund's performance can be expected to be more volatile than that
of the Seneca Growth Fund.
SENECA BOND FUND
INVESTMENT OBJECTIVE: High total return--both current income and capital
appreciation. This Fund will seek to outperform the Lehman Brothers
Government/Corporate Index.
INVESTMENT STRATEGIES AND POLICIES. This Fund will invest in a diversified
portfolio of corporate bonds and other debt securities. It will normally
maintain a dollar-weighted average maturity of between two and ten years,
although maturities of individual securities may be significantly longer. The
Fund will also generally seek to maintain a dollar-weighted average duration of
between two and eight years. The Investment Manager will actively manage this
Fund's portfolio, adjusting the weighted average portfolio maturity in response
to expected changes in interest rates. During periods of rising interest
rates, the Investment Manager may shorten the portfolio's average maturity to
reduce the effect of bond price declines on the Fund's net asset value.
Conversely, when interest rates are falling and bond prices are rising, the
Fund may lengthen its average maturity. The Investment Manager will also
consider bond performance in particular industry sectors and individual issue
characteristics and may engage in opportunistic trading activities.
The Fund's investments may include securities issued or guaranteed by the U.S.
Government or its agencies and instrumentalities, publicly-traded and
privately-placed corporate securities, and
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municipal obligations. The Fund may also invest in mortgage-backed securities
issued by various federal agencies and government-sponsored enterprises and in
other mortgage-related or asset-backed securities. Investments in
mortgage-related securities can be subject to the risk of early repayment of
principal. For more information, see "Investment Practices and Risk
Considerations--Mortgage-Backed and Asset-Backed Securities" and the SAI.
"Duration" will be an important criterion in selecting securities for this
Fund. Duration is a measure of the expected life of a debt security that was
developed as a more precise alternative to the concept of "term to maturity."
Traditionally, a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (the
"interest rate risk" or "volatility" of the security). But "term to maturity"
measures only the time until a security provides its final payment, taking no
account of the pattern of payments before maturity. Duration is a measure of
the expected life of a debt security on a present-value basis, incorporating a
bond's yield, coupon interest payments, final maturity, and call features into
one measure. It takes the length of the time intervals between the present
time and the time that interest and principal payments are scheduled or, in the
case of a callable bond, expected to be received, and weights them by the
present values of the cash to be received at each future time. For any debt
security with interest payments occurring before the payment of principal,
duration is always less than maturity. In general, all other things being
equal, the lower the stated or coupon rate of interest on a security, the
longer the security's duration. Conversely, the higher the stated or coupon
rate of interest, the shorter the duration.
There are situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating- and variable-rate securities often have final maturities of ten or
more years. However, their interest rate exposure corresponds to the frequency
of the coupon reset. And with mortgage pass-through securities, the stated
final maturity is generally 30 years, but currently expected prepayment rates
are more critical in determining the securities' interest rate exposure.
The Fund will invest at least 65% of its assets in investment-grade bonds
(i.e., rated Baa or higher by Moody's Investors Service ("Moody's") or BBB or
higher by Standard & Poor's Corporation ("S&P")), although it may invest to a
lesser extent in securities rated as low as B by Moody's or S&P. The Fund may
also invest in unrated securities of similar qualities, as determined by the
Investment Manager.
In general, lower-rated bonds, which will be a lesser component of this Fund,
offer higher returns than investment-grade bonds, but they also carry higher
risks. These can include: a) a higher risk of insolvency, especially during
economic downturns; b) a lower degree of liquidity; and c) greater price
volatility. The Fund will not purchase below-investment-grade securities when
the purchase would increase the Fund's holdings of such securities to 35% or
more of the Portfolio's value. If the Fund owns a security that was
"investment-grade" when the Fund acquired it but the security is downgraded by
a ratings service, the Fund may or may not choose to sell the security. This
depends on the Investment Manager's assessment of the issuer's prospects. See
"General Information--Summary of Bond Ratings" for a description of bond
ratings and "Investment Practices and Risk
Considerations--Below-Investment-Grade Securities" for a discussion of some of
the risks involved in investments in low- rated bonds.
The Fund may invest as much as 20% of its assets in securities of issuers
organized in jurisdictions outside the United States if they meet the same
criteria described above for the Fund's investments in general. At times the
Fund may have no foreign investments. See "Investment Practices and Risk
Considerations--Foreign Securities."
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This Fund ordinarily will invest in common stock only as a result of conversion
of bonds, exercise of warrants, or extraordinary business events.
SENECA REAL ESTATE SECURITIES FUND
INVESTMENT OBJECTIVE: High total return, both current income and long-term
capital appreciation, through investments in real estate-related securities.
INVESTMENT STRATEGIES AND POLICIES. This Fund will generally invest at least
65% of its assets in equity or debt securities of issuers that are principally
engaged in businesses in the United States real estate industry or in related
businesses. An issuer will be considered "principally" engaged in such a
business if at least 50% of the issuer's assets, gross income, or net income
are attributable to ownership, construction, management, or sale of real estate
located in the United States, or to products or services related to the real
estate industry. Examples of issuers participating directly in the real estate
industry include equity REITs (which own real estate directly), mortgage REITs
(which make short-term construction or real estate development loans or invest
in long-term mortgages or mortgage pools), other companies whose assets consist
substantially of real property and interests in real property, real estate
brokers and developers and companies that manage real estate. Issuers will not
be considered to be participating in the real estate industry simply because
they own significant amounts of real estate if such ownership is incidental to
another business unrelated to real estate. Examples of issuers whose products
or services are related to the real estate industry include manufacturers and
distributors of building supplies and financial institutions that originate or
service mortgage loans.
This Fund will generally focus on investments in common stocks but also may
invest in debt securities of REITs and other real estate-related issuers,
preferred stocks, convertible securities, warrants, and publicly-traded limited
partnerships that invest in real estate. In addition, the Fund may invest up
to 35% of its assets in equity and debt securities outside the real estate
industry or related businesses. Investments in debt securities will be
primarily limited to investment-grade securities; the Fund may not invest 35%
or more of its assets in securities rated lower than BBB by S&P or Baa by
Moody's and unrated debt securities that the Adviser considers to be of
comparable quality. In general, lower-rated debt securities offer higher
returns than investment-grade bonds but also carry higher risks. See "General
Information--Summary of Bond Ratings" for a description of bond ratings and
"Investment Practices and Risk Considerations--Below-Investment Grade
Securities" for a discussion of some of the risks involved in investments in
low-rated debt securities.
This Fund will be classified as a non-diversified investment company under the
Investment Company Act of 1940 (the "1940 Act"), which means that it is not
limited by that Act in the proportion of its assets it may invest in the
securities of any single issuer. The Fund will, however, comply with
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. As
a non-diversified investment company, the Fund may invest a greater proportion
of its assets in the securities of a small number of issuers and, as a result,
may be subject to a greater risk as to portfolio securities. If the Fund takes
concentrated positions in a small number of issuers, its return may fluctuate
more than that of a diversified company as a result of changes in the price of
any of those securities.
This Fund will not make direct investments in real estate. However, because it
may invest in debt securities of issuers primarily engaged in real estate
ownership, it is possible that the Fund could become the direct owner of real
estate as a result of a default on those securities. Rental income
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or income from the disposition of such assets could adversely affect the Fund's
status as a regulated investment company for Federal income tax purposes. See
"Income Tax Considerations."
INVESTMENT PRACTICES AND RISK CONSIDERATIONS
PORTFOLIO TURNOVER. The rate of portfolio turnover generally will not be
important in investment decisionmaking for any of the Funds. Decisions to buy
and sell securities will be based on the anticipated contribution of a security
to achievement of a Fund's investment objectives. Sales can result from, for
example, securities reaching a price objective, anticipated changes in interest
rates, changes in the creditworthiness of issuers, or general financial or
market developments. The Funds may sell one security and simultaneously buy
another of comparable quality and may simultaneously buy and sell the same
security to take advantage of short-term differences in bond yields. Funds may
buy individual securities in anticipation of relatively short- term price
gains. A Fund's liquidity needs may also necessitate sales. Because these
factors generally are not tied to the length of time a security has been held,
a significant number of short-term transactions may result.
The Funds cannot predict their turnover rates precisely, but, based on
experience with the individually-managed accounts described above under the
caption "Investment Manager's Performance," it is estimated that annual
turnover rates will generally be within the following ranges: 80%-150% for the
Seneca Growth Fund; 100%-200% for the Seneca Mid-Cap Growth Fund; 40%-100% for
the Seneca Bond Fund; and 40%-100% for the Seneca Real Estate Securities Fund.
A 100% annual turnover rate would occur if all of a Fund's securities were
replaced one time during a one year period.
While portfolio transactions will be necessary to achieve a Fund's investment
objectives, a high level of turnover entails certain costs. The higher the
turnover, the higher the overall brokerage commissions, dealer mark-ups and
mark-downs, and other direct transaction costs. High turnover can also result
in acceleration of the realization of gains, which may be short- term in nature
and thus taxable to shareholders at ordinary rates.
Certain tax considerations can restrict a Fund's ability to sell securities in
some circumstances when those securities have been held for less than three
months. See "Income Tax Considerations" and the SAI.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements. In a
repurchase agreement, a Fund buys a security and the seller simultaneously
agrees to repurchase the security on a specified future date at an agreed-upon
price. The repurchase price reflects an agreed-upon interest rate during the
time the Fund's money is invested in the security. Because the security
constitutes collateral for the repurchase obligation, a repurchase agreement
can be considered a collateralized loan. The Fund's risk is the ability of the
seller to pay the agreed-upon price on the delivery date. If the seller is
unable to make a timely repurchase, the Fund could experience delays in the
receipt of expected proceeds, suffer a loss in principal or current interest,
or incur costs in liquidating the collateral. The Trustees have established
criteria to evaluate the creditworthiness of parties with whom the Funds may
enter into repurchase agreements.
The securities underlying repurchase agreements are not subject to the average
weighted maturity or duration restrictions otherwise applicable to the Seneca
Bond Fund's investments. The Funds
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will limit repurchase agreements to securities issued by the United States
Government, its agencies, and its instrumentalities.
REVERSE REPURCHASE AGREEMENTS; BORROWING. Funds may enter into reverse
repurchase agreements with selected banks, U.S. securities dealers and other
financial institutions. In a reverse repurchase agreement, a Fund sells
securities and simultaneously agrees to repurchase them at a price that
reflects an agreed-upon rate of interest. Funds will use the proceeds of
reverse repurchase agreements to make other investments that either mature or
are subject to an agreement to resell at or before the date the reverse
repurchase agreement expires. When a Fund enters into a reverse repurchase
agreement, it will maintain a segregated account consisting of cash or
high-quality liquid debt securities in an amount at least equal to its
repurchase obligation under the agreement. Reverse repurchase agreements are a
form of leverage that increases the opportunity for gain and the risk of loss
for a given change in market value. There may also be a risk of delay in the
recovery of the underlying securities if the counterparty experiences financial
difficulties.
Each Fund may borrow money from banks and, to secure borrowings, may mortgage
or pledge securities. A Fund's obligations under all borrowings, including
reverse repurchase agreements, will not exceed one-third of the Fund's net
assets. If a Fund borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off.
BELOW-INVESTMENT-GRADE SECURITIES. No Fund may invest 35% or more of its net
assets in debt securities that are rated below "investment grade" by S&P or
Moody's. A Fund will not invest in securities rated lower than B by S&P or
Moody's or unrated securities whose quality the Investment Manager determines
to be lower than those ratings. "Investment grade" refers to securities rated
BBB or better by S&P or Baa or better by Moody's. Below-investment-grade
securities (so-called "junk bonds") generally pay higher current income but may
be considered speculative because they present a greater risk that the issuer
will not be able to make interest or principal payments on time. If this
happens, a Fund would lose income and could expect a decline in the market
value of the securities affected. Prices of such securities tend to react more
to prevailing economic and industry conditions, issuers' unique financial
situations, and the bonds' coupon rates than to small changes in prevailing
interest rates. However, during an economic downturn or a period of rising
interest rates, issuers of these securities, generally highly-leveraged
companies, can have trouble making principal and interest payments, meeting
projected business goals, and obtaining additional financing.
Each Fund may also invest in unrated debt securities. Unrated debt securities,
while not necessarily of lower quality than rated securities, may not have as
broad a market. Because of the size and perceived demand for an issue, among
other factors, certain issuers may decide not to pay the cost of getting a
rating for their bonds. The Investment Manager will analyze the
creditworthiness of the issuer of an unrated security, as well as any financial
institution or other party responsible for payments on the security. Unrated
debt securities will be included in Seneca Bond Fund's 35% limit on
below-investment-grade debt unless the Investment Manager determines those
securities to be the equivalent of investment-grade securities. See "General
Information--Summary of Bond Ratings" and the SAI for a description of bond
rating categories.
REITS AND OTHER REAL ESTATE-RELATED INVESTMENTS. The value of investments in
issuers that hold real estate, particularly equity REITs, may be affected by
changes in the values of real properties owned by the issuers, and the value of
investments in mortgage REITs may also be affected by the quality of the credit
they have extended. Investments in businesses related to the real estate
industry may also be affected by changes in the value of real estate generally
or in particular geographical areas in which the businesses operate primarily.
Interest rates can be a significant
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factor both in real estate values and in related businesses. Increases in
interest rates can cause or contribute to declines in real estate prices and
can cause slowdowns in such related businesses as real estate sales and
construction.
Investing in REITs, particularly equity REITS, may also involve risks similar
to those associated with small-capitalization companies, in that their
securities may trade less frequently and in a lower volume than those of
larger-capitalization companies and may be subject to abrupt and large price
movements. At times, the market price of a REIT's securities may be less than
the value of its investments in real estate. REITs often are not diversified
and are therefore subject to the risk of financing a limited number of projects
or properties. REITs depend on the skills of their management and are often
heavily dependent on cash flow from properties. Mortgage REITs are subject to
risks of default by borrowers. Some REITs are "self- liquidating" -- i.e.,
their existence is limited to a specific term--and present the risk of
liquidating at a time that is not economically opportune for their investors.
REITs also run the risks of failing to qualify for special tax treatment under
the Code and of maintaining exemptions under the 1940 Act.
DELAYED DELIVERY TRANSACTIONS. Funds may sometimes purchase or sell securities
on a when-issued or forward commitment basis. In such "delayed delivery"
transactions, the price of securities is established at the time the commitment
to purchase or sell is made. Delivery of and payment for these securities
typically occur up to 90 days after the commitment is made. The market price
of a security at the time of delivery may be higher or lower than the price
contracted for, and there is some risk the transaction may not be consummated.
When a Fund makes a commitment to buy securities on a forward commitment or
when-issued basis, it will maintain a segregated account consisting of cash or
high-quality liquid debt securities in an amount at least equal to the
commitments.
SHORT SALES. A Fund may sell securities that it owns or has the right to
acquire at no additional cost but does not intend to deliver to the buyer, a
practice known as selling short "against the box." These transactions allow a
Fund to hedge against price fluctuations by locking in a sale price for
securities the Fund does not wish to sell immediately, for example, to postpone
recognition of a gain or loss for federal income tax purposes or satisfy
certain tests applicable to regulated investment companies under the Code.
Subject to restrictions imposed by state law, a Fund may also sell securities
that it does not own or have the right to acquire. When a Fund does so, it
will maintain with its custodian in a segregated account cash or high-quality
liquid debt securities in an amount at least equal to the difference between
the current market value of the securities sold short and any amounts required
to be deposited as collateral with the selling broker in connection with the
short sale (not including the proceeds of the short sale). It is currently
expected that a Fund will not sell securities short if, as a result, the total
amount of all "open" short positions would exceed one-third of the value of the
Fund. This limitation may be changed at any time.
ILLIQUID SECURITIES. A Fund may invest up to 15% of its net assets in illiquid
securities -- securities that may not be sold within seven days at
approximately the price used in determining the Fund's net asset value.
Securities may be illiquid when they are held subject to legal or contractual
restrictions on resale, usually because they have not been registered for sale
to the general public ("restricted securities"), or when there is a limited
market for them. Repurchase agreements that mature in more than seven days are
considered illiquid securities.
Certain restricted securities that may be resold to institutional investors
pursuant to Rule 144A under the Federal Securities Act of 1933 may not be
considered illiquid if a sufficient dealer or institutional trading market
exists for them. The Investment Manager will determine whether such a market
exists as to Rule 144A securities, and whether such securities must be
considered
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illiquid, under guidelines approved by the Trustees. Institutional trading
markets for Rule 144A securities are relatively new. Liquidity of the Funds'
investments could be impaired if trading markets for these securities do not
develop further or decline.
FOREIGN SECURITIES. Each Fund may invest in securities, including U.S. dollar-
or foreign currency-denominated debt securities, of foreign issuers. Foreign
equity investments are generally limited to securities traded on U.S. exchanges
or in the Nasdaq Stock Market and ADRs evidencing ownership of foreign
securities. ADR's are dollar-denominated and are issued by domestic banks or
securities firms and traded in the U.S.
Securities of foreign issuers involve different, and sometimes greater, risks
than securities of U.S. issuers. These include an increased risk of adverse
political and economic developments, and, as to certain countries, the
possibility of expropriation, nationalization or confiscatory taxation or
limitations on the removal of the funds or other assets of a Fund.
Currency exchange rates may fluctuate significantly over short periods and can
be subject to unpredictable change based on such factors as political
developments and currency controls by foreign governments. Because the Funds,
particularly the Seneca Bond Fund, may invest in securities denominated in
foreign currencies, they may seek to hedge foreign currency risks by engaging
in foreign currency exchange transactions. These may include buying or selling
foreign currencies on a spot basis, entering into foreign currency forward
contracts, and buying and selling foreign currency options, foreign currency
futures, and options on foreign currency futures. Many of these activities
constitute "derivatives" transactions. See "Options, Futures, and Other
Derivatives."
LENDING SECURITIES. As a way to earn additional income, each of the Funds may
lend its portfolio securities to creditworthy persons not affiliated with the
Funds. Such loans must be secured by cash collateral or by irrevocable letters
of credit maintained on a current basis in an amount at least equal to the
market value of the securities lent. Under the terms of these loans, a Fund
must continue to receive the equivalent of the interest and dividends paid by
the issuer on the securities lent and interest on the investment of the
collateral and must have the right to call the loan and obtain the securities
lent at any time on five trading days' notice. This includes the right to call
the loan to enable the Fund to exercise its voting rights. Such loans may not
exceed one-third of the lending Fund's net assets at market value. This
percentage limitation constitutes a "fundamental" policy that can be changed
only by a vote of a majority of shareholders. Lending securities to
broker-dealers and institutions could result in a loss or a delay in recovering
the Fund's securities.
OPTIONS, FUTURES, SWAPS AND OTHER DERIVATIVES. The Funds may buy and write
call and put options on securities, securities indices, and foreign currencies,
and may enter into futures contracts and use options on futures contracts. The
Funds may also enter into swap agreements relating to interest rates, foreign
currencies, and securities indices and forward foreign currency contracts. All
of these may be referred to as "derivatives" transactions. The Funds may use
these techniques to hedge against changes in interest rates, foreign currency
exchange rates, changes in securities prices or other factors affecting the
value of their investments, or as part of their overall investment strategies.
Each Fund will maintain segregated accounts consisting of liquid assets, such
as cash, U.S. Government securities, or other high-grade debt securities (or,
as permitted by applicable regulations, enter into certain offsetting positions
to cover its obligations under derivatives transactions) to avoid "leveraging"
the Fund.
Gains and losses on "derivatives" transactions depend on the Investment
Manager's ability to predict correctly the direction of interests rates,
securities prices, currency exchange rates, or other
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factors. Risks in the use of these derivatives include: a) the risk that
interest rates, securities prices, or currency exchange rates or other factors
affecting the value of the Fund's investments do not move in the directions
being hedged against, in which case the Fund will have incurred the cost of the
derivative (either its purchase price or, by writing an option, losing the
opportunity to profit from increases in the value of the securities covered)
with no tangible benefit; b) imperfect correlation between the price of
derivatives and the movements of the securities prices, interest rates or
currency exchange rates being hedged; c) the possible absence of a liquid
secondary market for any particular derivative at any time; d) the potential
loss if the counterparty to the transaction does not perform as promised; and
e) the possible need to defer closing out certain positions to avoid adverse
tax consequences. In particular, the risk of loss from certain types of
futures transactions is potentially unlimited. More information on derivatives
is contained in the SAI.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Each Fund may invest in
mortgage-backed and asset-backed securities. The Seneca Bond Fund and the
Seneca Real Estate Securities Fund are more likely to invest in such securities
than the other Funds. Mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, mortgage loans secured
by real property. They include pass-through instruments, representing an
undivided interest in a pool of mortgages, in which the holder receives a share
of all interest and principal payments from the mortgages in the pool. For
many of these securities, the U.S. government, the issuing agency, or a private
entity guarantees payment of interest and principal or provides other forms of
credit enhancement. Some mortgage pass-through securities entitle the holders
to all or a substantial portion of the interest payments on a pool of mortgage
assets ("Interest Only" securities, or "IOs") while others entitle the holders
to all or a substantial portion of the principal payments ("Principal Only"
securities or "Pos"). Mortgage-backed securities also include collateralized
mortgage obligations ("CMOs"), a term that generally includes debt instruments
collateralized by mortgage loans or mortgage pass-through securities and
multi-class pass-through securities. CMO's are generally issued in classes,
each representing an obligation with a stated maturity or final distribution
date and a specific fixed or floating coupon rate. Payments of principal and
interest on the underlying mortgage assets may be allocated among the classes
in various ways, resulting in differing predictability of cash flows among the
classes. Other asset-backed securities apply techniques similar to those used
in mortgage-backed securities to base obligations on financial assets other
than mortgages, including automobile receivables, credit card receivables,
loans to finance boats, recreational vehicles, and mobile homes, computer,
copier, railcar, and medical equipment leases, and trade, healthcare, and
franchise receivables.
Part of the cash flow of mortgage-backed or other asset-backed securities may
be from the early payoff of some of the underlying loans. The specific amount
and timing of such prepayments are difficult to predict, creating "prepayment
risk." For mortgage-related securities, prepayments are likely to increase
during periods of declining long-term interest rates because borrowers tend to
refinance when interest rates drop. In the event of very high prepayments, a
Fund may be required to invest these proceeds at a lower interest rate, causing
the Fund to earn less than if the prepayments had not occurred. Prepayments
are likely to decrease during periods of rising interest rates, causing the
expected average life of mortgage- related securities to become longer. This
variability of prepayments will tend to limit price gains when interest rates
drop and to exaggerate price declines when interest rates rise. In general,
the obligations supporting other asset-backed securities are of shorter
maturities than mortgage loans and are less likely to experience substantial
prepayments. However, the risks relating to default may be greater.
The Investment Manager expects additional assets will be "securitized" in the
future. A Fund may invest in any such instruments or variations on them to the
extent consistent with the Fund's investment objectives and policies.
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STRUCTURED SECURITIES. The Funds may invest in debt securities, preferred
stock, or convertible securities, the principal amount, redemption terms, or
conversion terms of which are related to a specified securities or other index,
the market prices of specified securities, commodities, or other assets, or
specified foreign currency exchange rates. These securities are sometimes
referred to as "structured notes," "structured securities," or "asset-based"
securities. A Fund's investments in these securities will be subject to the
limits as to quality that are applicable to debt securities generally. If a
structured security is backed by a bank letter of credit or other credit
enhancement, a Fund may take the enhancement into account in assessing the
quality of the security. The prices of structured securities have historically
been subject to high volatility and their interest or dividend rates may at
times be substantially below prevailing market rates.
ZERO COUPON BONDS. Each Fund may invest in zero coupon bonds and strips. The
Seneca Bond Fund is more likely to invest in such securities than the other
Funds. Zero coupon bonds do not make regular interest payments. Instead, they
are sold at a discount from face value. A single lump sum that represents both
principal and interest is paid at maturity. Strips are debt securities whose
interest coupons are taken out and traded separately after the securities are
issued, but otherwise are comparable to zero coupon bonds. The market value of
zero coupon bonds and strips generally is more sensitive to interest rate
fluctuations than interest-paying securities of comparable term and quality.
VARIABLE RATE, FLOATING RATE, OR VARIABLE AMOUNT SECURITIES. Each Fund may
invest in variable rate, floating rate, or variable amount securities. These
are generally short-term unsecured obligations of private issuers. They are
generally interest-bearing notes on which the interest rate fluctuates on a
scheduled basis.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. Each Fund may invest up to 10% of
its total assets in the shares of other investment companies, but only up to 5%
of its assets in any one other investment company. In addition, a Fund may not
purchase more than 3% of the securities of any one investment company.
Investments in other investment companies involve investment management,
distribution, and other fees and expenses paid by such investment companies.
These will be in addition to the fees and expenses the Funds incur directly in
connection with their operations. The Funds may invest cash balances in money
market mutual funds.
Notwithstanding these limitations, the Funds reserve the right to convert to a
"master/feeder" structure at a future date. Under such a structure, one or
more "feeder" funds, such as the Funds, invest all of their assets in a
"master" fund, which, in turn, invests directly in a portfolio of securities.
If required by applicable law, the Funds will seek shareholder approval before
converting to a master/feeder structure. If the requisite regulatory
authorities determine that such approval is not required, shareholders will be
deemed, by purchasing shares, to have consented to such a conversion and no
further shareholder approval will be sought. Such a conversion is expressly
permitted under the investment objective and fundamental policies of each Fund.
DIVERSIFICATION. Diversifying a Fund's investment portfolio can reduce the
risks of investing. With the exception of the Seneca Real Estate Securities
Fund, as to 75% of its assets no Fund will make an investment that would result
in more than 5% of its total assets being invested in any one issuer or in the
Fund owning more than 10% of the outstanding voting securities of any issuer,
in each case excluding certain government securities, cash and certain other
assets. In addition, with the exception of Seneca Real Estate Securities Fund,
no Fund will invest more than 25% of its assets in any one industry. The
Seneca Real Estate Securities Fund will generally invest at least 65% of its
assets in securities of issuers that are principally engaged in businesses in
the U.S. real estate industry or related businesses. See "The Seneca Funds in
Detail-- Seneca Real Estate Securities Fund."
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PURCHASE OF SHARES
Each Fund offers two classes of shares: "Administrative Shares" and
"Institutional Shares." Administrative Shares are offered primarily to
participant-directed employee benefit plans and to investors purchasing through
accounts maintained with broker- dealers and other financial service companies.
Institutional Shares are offered directly by the Distributor to institutional
investors such as pensions and profit sharing plans, other employee benefit
trusts, endowments, foundations, and corporations.
No sales charges are assessed upon the sale of either class of shares, although
shares may be purchased through certain financial intermediaries, such as
broker-dealers, that charge their customers transaction or other fees relating
to customers' investments in the Funds. Sales are all at the respective net
asset value of the shares for the particular class.
Genesis Merchant Group Securities, L.P. ("GMG Securities") is the principal
underwriter for the Funds' Shares. Seneca Distributors, LLC ("Seneca
Distributors") has entered into a Distribution Agreement with the Trust
pursuant to which, upon becoming fully registered as a broker-dealer under
applicable laws, it will also serve as a principal underwriter. It is expected
that GMG Securities will terminate its agreement with the Trust shortly
thereafter and Seneca Distributors will become the sole principal underwriter.
In this prospectus, the term "Distributor" refers to the current principal
underwriter(s) for the Funds. GMG Securities and Seneca Distributors are both
located at 909 Montgomery Street, San Francisco, CA 94133.
MINIMUM INVESTMENT IN THE FUNDS
Except for purchases of Administrative Shares through certain pension or
retirement plans or accounts, the minimum initial investment for
Administrative Shares and Institutional Shares is currently $10,000 and
$100,000, respectively. The minimum initial investment for Administrative
Shares through pension or retirement plans or accounts, including 401(k) plans,
403(b) plans, 457 plans, governmental plans, tax-sheltered annuity plans and
individual retirement accounts ("Retirement Accounts"), is currently $1,000.
Certain other exceptions to these minimum requirements may apply.
OPENING AN ACCOUNT
To open an account, an investor should (i) complete the attached Client
Registration Application and send it, together with payment for the amount to
be invested, to Seneca Funds, c/o Investors Fiduciary Trust Company at P.O. Box
419565, Kansas City, Missouri 64141-6565 or (ii) contact his or her employee
benefit plan administrator or broker or other financial services provider.
Payments may be made by check or money order or by electronic transfer or
wiring of funds to Seneca Funds, c/o Investors Fiduciary Trust Company (the
"Transfer Agent"). See "How to Purchase Shares." Investors may call the
Transfer Agent at 1-800-990-9331 with questions concerning opening an account.
See "How to Purchase Shares."
HOW TO PURCHASE SHARES
Investors who are not buying shares through an account with a broker-dealer or
other financial service company may purchase shares in the following ways:
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BY MAIL. Fill out a Client Registration Application (for a new
account) or fill out the investment coupon from a previous confirmation
statement (for an existing account), and mail it, together with a check or
money order payable to Seneca Funds, to Seneca Funds, c/o Investors Fiduciary
Trust Company at P.O. Box 419565, Kansas City, Missouri 64141-6565. Checks
should be bank or certified checks. The Trust, at its option, may accept a
check that is not a bank or certified check, however, third party checks will
not be accepted. There are restrictions on the redemption of shares purchased
by check for which the funds are being collected. See "Redemption of Shares."
BY ELECTRONIC OR WIRE TRANSFER. Investors may also make initial or
subsequent investments by electronic transfer of funds or wire transfer of
Federal funds to Seneca Funds, c/o Investors Fiduciary Trust Company. Before
transferring or wiring funds, an investor must first telephone the Trust at
(800) 990-9331 for instructions. On the telephone, the following information
will be requested: name of authorized person; shareholder account number (if
you have one); name of Fund and share class; amount being transferred or wired;
and transferring or wiring bank name.
BY TELEPHONE. If an investor elects the telephone purchasing service
on the Client Registration Application (or subsequently in writing), the
investor may authorize electronic withdrawals from his or her bank account over
the telephone. The Transfer Agent may employ additional reasonable procedures
to confirm that such instructions are genuine, possibly including recording
telephone calls requesting purchases and/or verifying authorization and
requiring some form of personal identification. A Fund and the Transfer Agent
may be liable for losses due to unauthorized or fraudulent instructions only if
reasonable procedures are not followed. Otherwise, neither the Trust nor its
Transfer Agent will be liable for any loss, cost or expense for acting on
instructions (whether in writing or by telephone) believed by the party
receiving such instructions to be genuine and in accordance with the procedures
described in this Prospectus. Shareholders should realize that by electing the
telephone purchasing service, they may be giving up a measure of security that
they might have if they were to purchase their shares by means of written
instructions. Furthermore, interruptions in telephone service may mean that a
shareholder will be unable to effect a purchase by telephone when desired.
AUTOMATIC INVESTMENT PLAN. Additional investments may be made
automatically by electing this service on the Client Registration Application
and providing bank account and certain other information. This will authorize
the Fund and the Transfer Agent to make regular, automatic withdrawals from the
shareholder's bank account. Periodic investments must be at least $100 for
each Fund in which the shareholder is automatically investing. A shareholder
may change the date or amount of the monthly investment, or terminate the
Automatic Investment Plan, at any time by notifying the Transfer Agent in
writing or by telephone. The Transfer Agent must receive the request at least
10 business days before the change is to become effective. A shareholder may
also be able to have investments automatically deducted from his or her: (1)
paycheck at work; (2) savings account; or (3) choice of other sources. Call
the Transfer Agent at 1-800-990-9331 for more information.
All purchase orders are effected at the net asset value for the relevant class
next determined after receipt of the purchase order. A purchase order received
prior to the close of business (4:00 p.m., Eastern Time) on a day the Trust is
open for business will be effected at that business day's net asset value. An
order received after the close of business will be effected at the net asset
value determined on the next business day. The Trust is "open for business" on
each day the New York Stock Exchange is open for trading, which excludes the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Purchase
orders will be accepted only on days on which the Trust is open for business.
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<PAGE> 31
ADDITIONAL INVESTMENTS
Additional investments may be made at any time at the net asset value for the
relevant class by following the procedures described above. See "How to
Purchase Shares." The minimum additional investment for Administrative Shares
generally is $1,000; for participants in Retirement Accounts, the minimum
additional investment is $250. Additional investments for as little as $100
per month for each Fund may also be made through the Automatic Investment Plan.
See "Automatic Investment Plan."
OTHER PURCHASE INFORMATION
Purchases of a Fund's shares will be made in full and fractional shares. In
the interest of economy and convenience, certificates for shares will generally
not be issued.
The Trust reserves the right, in its sole discretion, to suspend the offering
of shares of either class of any Fund or to reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interests
of the Trust; to waive the minimum initial investment for certain investors;
and to redeem shares if information provided in the Client Registration
Application proves to be incorrect in any material manner (e.g., in a manner
such as to render the shareholder ineligible to purchase shares).
Shares of the Trust may not be qualified or registered for sale in all states.
Prospective investors should inquire as to whether shares of a particular Fund
are available for offer and sale in their state of residence. Shares may not
be offered or sold in any state unless registered or qualified in that
jurisdiction or unless an exemption from registration or qualification is
available.
Investors may, subject to the approval of the Trust, purchase shares of a Fund
with liquid securities that are eligible for purchase by the Fund (consistent
with such Fund's investment policies and restrictions) and that have a value
that is readily ascertainable. The transactions will be effected only if the
Investment Manager intends to retain the securities in the Fund as an
investment. Assets so purchased by a Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The
Trust reserves the right to amend or terminate this practice at any time.
RETIREMENT ACCOUNTS
Investors may establish an Individual Retirement Account (IRA), Simplified
Employee Plan (SEP), or certain other types of retirement plan with the
Distributor. Contributions to an IRA, SEP or other type of retirement plan may
be deductible from an investor's taxable income, depending on his or her
personal tax situation. An investor receiving a distribution from his or her
pension plan or wishing to transfer his or her IRA or other tax-deferred
retirement account from another financial institution, will continue to get
tax-deferred growth by transferring these accounts to the Distributor. Please
call 1-800-990-9331 for additional information.
REDEMPTION OF SHARES
Each Fund will redeem its shares at the net asset value for the relevant class
next determined following receipt of a redemption request. Redemptions may be
made by mail or, if elected on the Trust's Client Registration Application (or
subsequently in writing), by telephone. Although
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no charge is generally made for redemptions, when shares have been held for
fewer than 90 days, a fee of 1% of the amount redeemed will be assessed on an
average price basis. This amount will be retained by the appropriate Fund and
is intended to protect long-term shareholders from the expenses involved in
frequent purchases and redemptions by short-term investors. Shares may be
worth more or less upon redemption than their purchase price, generally,
depending on the market value of the investment securities held by the
particular Fund at the time of redemption.
REDEMPTIONS BY MAIL
Shares may be redeemed by submitting a written request to Seneca Funds, c/o
Investors Fiduciary Trust Company, P.O. Box 419565, Kansas City, Missouri
64141-6565, stating the Fund from which the shares are to be redeemed, the
class of shares, the number or dollar amount of the shares to be redeemed and
the account number. The request must be signed exactly as the names of the
registered owners appear on the Trust's account records, and the request must
be signed by all registered shareholders designated on the Client Registration
Application.
REDEMPTIONS BY TELEPHONE OR OTHER WIRE COMMUNICATIONS
A shareholder may authorize the Trust to effect redemptions or exchanges
between Funds (see "Other Redemption Information" and "Exchange Privilege") on
telephonic or other electronic instructions. This may be done either through
the Client Registration Application or with a subsequent written authorization,
a form of which may be obtained from the Transfer Agent. Once the shareholder
has given such authorization, he or she may redeem shares by calling the Trust
at (800) 990-9331, by sending a facsimile to Seneca Funds, c/o Investors
Fiduciary Trust Company, at (816) 435-6xxx or by other means of wire
communication. Investors must state the Fund and class from which the shares
are to be redeemed, the number or dollar amount of the shares to be redeemed
and the account number.
In electing telephone or other electronic redemption privileges, the investor
authorizes the Transfer Agent to act on instructions from any person
representing himself to be the investor and reasonably believed by the Transfer
Agent to be genuine. The Transfer Agent provides written confirmation of
transactions initiated electronically as a procedure designed to confirm that
such instructions are genuine. The Transfer Agent may employ additional
reasonable procedures to confirm that such instructions are genuine, possibly
including recording telephone calls requesting redemptions and/or verifying
authorization and requiring some form of personal identification. A Fund and
the Transfer Agent may be liable for losses due to unauthorized or fraudulent
instructions only if reasonable procedures are not followed. Otherwise,
neither the Trust nor its Transfer Agent will be liable for any loss, cost or
expense for acting on instructions (whether in writing or by telephone)
believed by the party receiving such instructions to be genuine and in
accordance with the procedures described in this Prospectus. Shareholders
should realize that by electing the telephone or wire redemption option, they
may be giving up a measure of security that they might have if they were to
redeem their shares in writing. Furthermore, interruptions in telephone
service may mean that a shareholder will be unable to effect a redemption by
telephone when desired. All redemptions, whether initiated by letter, by
telephone, or by other electronic means, will be processed in a timely manner
and proceeds will be forwarded by wire in accordance with the redemption
policies of the Trust detailed under the heading "Other Redemption
Information."
OTHER REDEMPTION INFORMATION
Payment of the redemption price will ordinarily be wired to the investor's bank
three business days after the tender request, but may take up to seven business
days. Redemption proceeds will
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be sent by wire only to the bank name designated on the Client Registration
Application. Because the cost of such wire transfers will be borne by the
shareholder, Administrative class shareholders may elect to receive redemption
proceeds by check. The Trust may suspend the right of redemption as to any
Fund or postpone the payment date at time when the New York Stock Exchange is
closed, or during certain other periods as permitted under the federal
securities laws. If the shares being redeemed were purchased by check, payment
may be delayed pending verification that the check used to purchase such shares
has been honored. Any such delay may be avoided if shares are purchased by
means of certified or bank check or electronic transfer or wire transfer of
Federal funds.
For shareholder protection, a request to change information contained in a
shareholder's account registration (for example, a request to change the bank
designated to receive wire redemption proceeds or to send redemption proceeds
made payable to someone other than the registered shareholder(s) or to an
address or bank account other than that previously designated in the Client
Registration Application) must be received in writing, signed by all registered
shareholders designated on the Client Registration Application, and accompanied
by a signature guarantee from any eligible guarantor institution, as determined
in accordance with the Trust's procedures. Shareholders should inquire as to
whether a particular institution is an eligible guarantor institution. A
signature guarantee cannot be provided by a notary public. In addition,
corporations, trust and other institutional organizations are required to
furnish evidence of the authority of the persons designated on the Client
Registration Application to effect transactions for the organizations.
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right unilaterally to redeem shares in any account (other than in
Retirement Accounts) for their then-current value (which will be promptly paid
to the investor) if at any time, due to other redemptions by the investor, the
shares in the account do not have a value of at least $10,000. A shareholder
will receive advance notice of such an involuntary redemption and will be given
at least 30 days to bring the value of his or her account up to at least
$10,000.
The Trust agrees to redeem shares of each Fund solely in cash up to the lesser
of $250,000 or 1% of its net assets during any 90-day period for any one
shareholder. In consideration of the best interests of the remaining
shareholders, the Trust reserves the right to pay any redemption price
exceeding this amount in whole or in part by a distribution in kind of
securities held by a Fund in lieu of cash. Although it is highly unlikely that
shares would ever be redeemed in kind, if they are, the redeeming shareholder
should expect to incur transaction costs upon the disposition of the securities
received.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged for shares of the same class of any other
Fund based on the respective net asset values of the shares involved.
Exchanges may be made only as to Funds registered in the state of residence of
the investor or where an exemption from registration is available. An exchange
order is treated the same as a redemption followed by a purchase and may result
in a capital gain or loss for tax purposes, and special rules may apply in
computing tax basis when determining gain or loss. See "Income Tax
Considerations" and "Dividends, Distributions and Tax Status" in the SAI. An
exchange may be made by following the redemption procedure described above
under "Redemptions by Mail" or, if the telephone redemption option has been
elected, by calling the Trust at (800) 990-9331.
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<PAGE> 34
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Management Agreement, the Investment Manager places
orders for the purchase and sale of portfolio investments for the Funds'
accounts with brokers or dealers selected by it in its discretion. In
effecting such purchases and sales, the Investment Manager will seek the best
price and execution of the Funds' orders. Commission rates are a component of
the Investment Manager's analysis of price. Factors the Investment Manager
will consider in evaluating execution quality include the ability of a broker
or dealer to effect the transaction, the broker's or dealer's clearance and
settlement facilities and capabilities, its reliability and financial
stability, a dealer's willingness to commit capital, the size of the
transaction, and the market for the security involved.
Many securities, both debt and equity, are traded primarily in the
over-the-counter market. For transactions traded in that market, dealers
generally act as principal rather than as agent and receive a markup or
markdown on the transaction price rather than a commission. The Funds intend
to deal with primary market makers for securities traded in the
over-the-counter markets except where more favorable execution and price can be
obtained elsewhere. Funds may also purchase securities directly from issuers
or from underwriters or dealers as part of an offering of securities.
Purchases from dealers and underwriters in such offerings will include a
discount or concession granted by the issuer to the underwriter.
In selecting brokers and dealers, the Investment Manager will consider not only
the factors described above relating to price and execution quality, but also
the value of research services and products provided to the Investment Manager.
As a result, a Fund may pay higher commission rates to such brokers than the
lowest available when the Investment Manager believes it is reasonable to do so
in light of the value of the brokerage and research services provided by the
broker effecting the transaction. The Investment Manager also may consider
sales of shares of the Trust as a factor in selection of broker-dealers to
execute portfolio transactions of the Trust. In addition, the Trust may direct
the Investment Manager, subject to obtaining best execution, to execute a
portion of one or more Fund's portfolio transactions through certain
broker-dealers in exchange for the broker-dealers' agreement to satisfy or pay
obligations that the Fund has incurred for, among other things, custodial,
accounting, or transfer agency services. These practices could result in a
Fund paying higher aggregate transaction costs than would otherwise be the
case.
Subject to the foregoing considerations of price and execution, the Funds may
use GMG Securities in connection with portfolio transactions in exchange-traded
securities. GMG Securities is a member of the American Stock Exchange and the
National Association of Securities Dealers, Inc. The ownership of GMG
Securities overlaps significantly with the ownership of the Investment Manager
and GMG Securities should be considered an affiliated person of the Investment
Manager.
GMG Securities will receive brokerage commissions from the Funds, limited to
"usual and customary broker's commissions," as contemplated by the 1940 Act,
and subject to GMG Securities being able to provide execution at least as
favorable as that provided by other qualified brokers. The Trustees have
developed procedures to ensure that the commissions paid to GMG Securities are
limited to "usual and customary broker's commissions" as contemplated in the
1940 Act. On a quarterly basis, the Trustees will review the securities
transactions of each Fund effected by GMG Securities to assure their compliance
with those procedures.
Some securities considered for investment by the Funds may also be appropriate
for other clients served by the Investment Manager, including accounts in which
the Investment Manager or
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<PAGE> 35
persons associated with the Investment Manager are investors, such as
investment partnerships of which the Investment Manager or such associated
persons is the general partner. If a purchase or sale of securities consistent
with the investment policies of a Fund and one or more of these clients served
by the Investment Manager is considered at or about the same time, transactions
in such securities will be allocated among the Fund and clients in a manner
deemed fair and reasonable by the Investment Manager.
NET ASSET VALUE
The net asset value per share of each class of each Fund will be determined as
of the regular close of trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time) by dividing the total market value of a Fund's portfolio
investments and other assets attributable to that class, less that class'
proportionate share of the Fund's liabilities that are not attributable to a
particular class and any liabilities attributable to that class, by the number
of total outstanding shares of that class. Net asset value will not be
determined on days on which the New York Stock Exchange is closed.
Portfolio securities and other assets for which market quotations are readily
available will be stated at market value. Market value will be determined on
the basis of last reported sales prices, or if no sales are reported, at the
mean between representative bid and asked quotations obtained from a quotation
reporting system or from established market makers. Fixed income securities,
including those to be purchased under firm commitment agreements (other than
obligations having a maturity of 60 days of less), will normally be valued on
the basis of quotes obtained from brokers and dealers or 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. Quotations of foreign
securities in foreign currency will be converted to U.S. dollar equivalents
using foreign exchange quotations received from independent dealers.
Short-term investments having a maturity of 60 days or less will be valued at
amortized cost, when the Trustees determine that amortized cost is their fair
market value. Certain debt securities for which daily market quotations are
not available may be valued, pursuant to guidelines established by the
Trustees, with reference to fixed income securities whose prices are more
readily obtainable and whose durations are comparable to the securities being
valued. Subject to the foregoing, other securities for which market quotations
are not readily available will be valued at fair value as determined in good
faith by, or at the direction of, the Trustees.
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DIVIDENDS AND CAPITAL GAINS
The Funds will distribute substantially all of their net investment income in
the form of dividends to shareholders. The following table shows how often
each Fund expects to pay dividends.
<TABLE>
<CAPTION>
FUND DIVIDEND PAID
- --------------------------------------------------------------------------------
<S> <C>
Seneca Growth Fund Annually
- --------------------------------------------------------------------------------
Seneca Mid-Cap Growth Fund Annually
- --------------------------------------------------------------------------------
Seneca Bond Fund Monthly
- --------------------------------------------------------------------------------
Seneca Real Estate Securities Fund Quarterly
================================================================================
</TABLE>
Each of the Funds will distribute net capital gains, if any, annually.
Shareholders may select from among the following distribution options:
REINVESTED Have all dividends and capital gains distributions
reinvested in additional shares of the same or any
other Fund. If a shareholder does not choose one
of the other options, this option will be selected
automatically.
CASH AND REINVESTED Have either dividends or capital gains paid in
cash and the other reinvested in additional shares
in the same or any other Fund; or
ALL CASH Have dividends and capital gains distributions
paid in cash.
Each Fund will make distributions on a per share basis to the shareholders of
record as of the distribution date of that Fund, regardless of how long the
shares have been held. That means if an investor buys shares just before or on
a record date, he or she will pay the full price for the shares and then may
receive a portion of the price back as a taxable distribution.
INCOME TAX CONSIDERATIONS
FEDERAL TAXES. For each taxable year, each Fund intends to qualify as a
regulated investment company under Subchapter M of the Code. Qualifying
regulated investment companies distributing substantially all of their ordinary
income and capital gains are not subject to federal income or excise tax on any
net investment income and net realized capital gains distributed to
shareholders. However, the shareholders are subject to tax on these
distributions.
Dividends paid by a Fund from net investment income, the excess of net
short-term capital gain over net long-term capital loss, and original issue
discount or certain market discount income will be taxable to shareholders as
ordinary income. Distributions paid by a Fund from the excess of net long-term
capital gain over net short-term capital loss will be taxable as long-term
capital gains
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<PAGE> 37
regardless of how long the shareholders have held their shares. These tax
consequences will apply regardless of whether distributions are received in
cash or reinvested in shares. A portion of the dividends paid to corporate
shareholders may qualify for the corporate dividends-received deduction to the
extent the Fund earns qualifying dividends. Each Fund will notify shareholders
after each calendar year of the amount and character of distributions they
received from that Fund for federal tax purposes.
For IRAs and pension plans, dividends and capital gains will be reinvested and
not taxed until the beneficiary receives a qualified distribution from the IRA
or pension plan.
Shareholders should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the
record date for a distribution will pay a per share price that includes the
value of the anticipated distribution. They will be taxed when they receive
the distribution even though the distribution represents a return of a portion
of the purchase price.
Redemptions and exchanges of shares are taxable events that may represent a
gain or a loss for the shareholder.
Individuals and certain other types of shareholders may be subject to backup
withholding of federal income tax on distributions, redemptions and exchanges
if they fail to furnish their correct taxpayer identification number.
Individuals, corporations and other shareholders that are not U.S. persons
under the Code are subject to different tax rules. They may be subject to
nonresident alien withholding on amounts considered ordinary dividends from the
Fund.
New investors must certify that their social security or taxpayer
identification numbers are correct. They must also certify that they are not
subject to backup withholding for failure to report income to the Internal
Revenue Service.
OTHER TAXES. In addition to federal taxes, investors may be subject to state
and local taxes on payments received from a Fund. Depending on the state tax
rules pertaining to a shareholder, a portion of the dividends paid by a Fund
that come from direct obligations of the U.S. Treasury and certain agencies may
be exempt from state and local taxes. Investors should consult their tax
advisers regarding specific questions as to federal, state and local taxes.
INVESTMENT MANAGER AND ADMINISTRATOR
As Investment Manager, GMG/Seneca is responsible for making investment
decisions for the Funds and for selecting brokers and dealers to execute
transactions for each Fund. GMG/Seneca has been an investment adviser since
1989, managing equity and fixed-income securities portfolios primarily for
institutions and individuals. Gail P. Seneca and Genesis Merchant Group, L.P.
are the managing general partners of GMG/Seneca. Gail P. Seneca, William K.
Weinstein and Philip C. Stapleton are the general partners of Genesis Merchant
Group, L.P. GMG/Seneca plans to reorganize from a limited partnership to a
limited liability company, effective in mid-1996, and the Funds will enter into
a new Investment Management Agreement with the resulting limited liability
company at that time. The material terms of the Investment Management
Agreement will remain unchanged. The limited liability company will be owned
by Ms. Seneca, the existing limited partners of GMG/Seneca, the existing
partners of Genesis Merchant Group, L.P., and certain employees of GMG/Seneca.
Under the limited liability company's "operating agreement," Ms. Seneca will be
the sole "manager" of GMG/Seneca after the reorganization.
-29-
<PAGE> 38
Investment and trading decisions for each Fund will be made by a team of
managers and analysts headed by two team leaders. The team leaders for each
Fund will be primarily responsible for the day-to-day decisions related to that
Fund. The team leader of any one Fund may be on another Fund team.
GAIL P. SENECA is a team leader for each of the Funds. From October 1987 until
October 1989, she was Senior Vice President of the Asset Management Division of
Wells Fargo Bank and from October 1983 to September 1987, she was chief
investment strategist for Chase Lincoln Bank.
RICHARD D. LITTLE is the other team leader for the Seneca Growth Fund and the
Seneca Mid-Cap Growth Fund. Mr. Little has been with GMG/Seneca since December
1989. He is a general partner and director of Equities. Before he joined
GMG/Seneca, Mr. Little held positions as an analyst, board member, and regional
manager with Smith Barney, NatWest Securities, and Montgomery Securities.
CHARLES B. DICKE is the other team leader for the Seneca Bond Fund. He has
been a Fixed-Income Portfolio Manager with GMG/Seneca since October 1991.
Before joining GMG/Seneca, he was a Vice President with Lehman Brothers,
serving as a Product Manager for Government agency securities and a strategist
on fixed-income portfolios.
DAVID SHAPIRO is the other leader for the Seneca Real Estate Securities Fund.
He has been a Portfolio Manager with GMG/Seneca since February 1996. Before
joining GMG/Seneca, he was a Portfolio Manager with Genesis Realty since May
1995. Prior to that, he was a managing director of The ADCO Group from 1992 to
1995.
MANAGEMENT FEE. For its services to the Funds, the Investment Manager will
receive a Management Fee based on an annual percentage of the average daily net
assets of each Fund. It is accrued daily, and paid monthly. The annual fee
percentages are 0.70% for the Seneca Growth Fund, 0.80% for the Seneca Mid-Cap
Growth Fund, 0.50% for the Seneca Bond Fund, and 0.85% for the Seneca Real
Estate Securities Fund. The Investment Manager's approach to locating
attractive investments in medium- capitalization companies, evaluating and
monitoring them, and effecting transactions in such securities requires more
effort and resources than traditional management of large-capitalization equity
portfolios and bond portfolios, as does the specialized nature of investing in
real estate and real estate-related securities. Accordingly, the management
fees for the Seneca Mid-Cap Growth Fund and the Seneca Real Estate Securities
Fund are higher than the management fees paid by most other mutual funds that
do not pursue these types of investment programs. The Investment Manager will
reduce the Management Fee each Fund must pay if the fee exceeds any
state-imposed expense limitations, excluding permissible items, such as
brokerage commissions, Rule 12b-1 payments, interest, taxes and litigation
expenses. The Investment Manager may waive some or all of these fees from time
to time at its discretion, and may reimburse a Fund for a portion of the Fund's
expenses. These practices will increase a Fund's return and will be intended
to make the Fund more competitive. The Investment Manager expects to effect
such waivers and reimbursements to the extent necessary to prevent the Funds'
overall expenses from exceeding the levels in the expense table set forth
elsewhere in this Prospectus through September 30, 1996. Thereafter, any such
waivers or reimbursements the Investment Manager may provide may be terminated
at any time.
ADMINISTRATIVE SERVICES. Pursuant to an Administrative Services Agreement,
GMG/Seneca is responsible for the day-to-day administrative functions of the
Trust. GMG/Seneca has entered into an agreement with State Street pursuant to
which State Street performs most of those functions. Among other things, State
Street provides the Trust and each Fund with clerical, data processing, and
other, similar services and support; handles the registration of the Funds'
shares
-30-
<PAGE> 39
under the securities laws of those states and other jurisdictions where the
shares are offered; assists in the preparation of SEC registration materials,
periodic reports, and proxy materials; and provides bookkeeping and accounting
services, including maintaining the accounts, books and records that are
required under applicable laws. For these services, the Administrative class
of each Fund pays GMG/Seneca a fee based on the average net assets of the Fund.
The Investment Manager may waive some or all of these fees from time to time at
its discretion, and may reimburse a Fund for a portion of a Fund's expenses.
The Institutional class of each Fund pays a lower fee in recognition of the
fact that fewer services are required.
GMG/Seneca may from time to time waive some or all of its fee and/or reimburse
a Fund for a portion of the Fund's operating expenses. Such reimbursements
will increase a Fund's return. This is intended to make the Funds more
competitive. Any such waivers or reimbursements may be terminated at any time.
GENERAL INFORMATION
SENECA FUNDS. Seneca Funds was organized as a Delaware business trust on
December 18, 1995. The Trust is registered with the Securities and Exchange
Commission under the 1940 Act as an open-end management investment company of
the series type. Each Fund constitutes a separate series. The fiscal year-end
of each of the Funds is September 30.
The Trust is authorized to issue and sell multiple classes of shares for each
series of shares of the Funds. Each of the Trust's existing series currently
has two classes of shares, Administrative Shares and Institutional Shares. The
Trust may issue additional series and additional classes of existing series of
shares in the future with such rights, preferences, and privileges as the
Trustees may determine (subject to compliance with applicable law), without the
consent of shareholders.
Except for the differences noted below and elsewhere in this Prospectus, each
share of a Fund has equal dividend, redemption and liquidation rights with
other shares of that Fund and when issued, will be fully paid and
nonassessable. Each share of each class represents an identical legal interest
in the same investments of a Fund, except that each class has certain expenses
related solely to that class. In particular, Administrative Shares have higher
fees and expenses relating to the way in which they are distributed and the
services provided to their class. Each class will have exclusive voting rights
under the 12b-1 Distribution and Administrative Services Plan. In the event
that a meeting of shareholders is called, separate votes are taken by each
class only if a matter affects, or requires the vote of, just that class.
Although the legal rights of holders of each class of shares are identical, it
is likely that the difference in expenses will result in different net asset
values and dividends. The classes may also have different exchange privileges.
As a Delaware business trust, the Trust is not required to hold regular annual
meetings of shareholders. Ordinarily there will be no shareholder meetings,
unless called by the Trustees, requested by shareholders holding 10% or more of
the outstanding shares under circumstances in which the 1940 Act or Delaware
law require that a meeting be held upon such request, or required by the 1940
Act or Delaware law. Shareholders are entitled to cast one vote for each
dollar of net asset value of their shares on the record date. At a
shareholders meeting, if one is called, issues that affect all the Funds and
classes in substantially the same way will be voted on by all shareholders of
all Funds. Issues that do not affect a Fund or a class will not be voted on by
shareholders of that Fund or class. Issues that affect all Funds, but in which
their interests are not substantially the same, will be voted on separately by
each Fund.
CUSTODIAN AND TRANSFER AGENT. Investors Fiduciary Trust Company ("IFTC" or the
"Transfer Agent"), P.O. Box 419565, Kansas City, Missouri 64141-6565, serves
as both Custodian and Transfer Agent for the Funds. Under a Custodian
Agreement, IFTC holds all securities and cash assets of the Funds as custodian
and provides certain accounting and recordkeeping services. In its capacity as
the custodian, IFTC is authorized to deposit securities in securities
depositories or to use services of sub-custodians.
Under a Transfer Agency Agreement, IFTC is responsible for, among other things:
a) opening and maintaining shareholder accounts; b) reporting account
information to shareholders; c) paying dividends and capital gains, and d)
handling requests for exchanges, transfers and redemptions.
-31-
<PAGE> 40
DISTRIBUTOR. GMG Securities is currently the principal underwriter and
distributor of the shares of each of the Funds and will distribute
Administrative as well as Institutional Shares. Seneca Distributors has also
entered into a Distribution Agreement with the Trust pursuant to which, upon
its registration as a broker-dealer under the Securities Exchange Act of 1934
and all applicable state securities laws, and becoming a member of the National
Association of Securities Dealers, Inc., Seneca Distributors will become a
principal underwriter and distributor of the Funds' shares. It is expected
that GMG Securities will then terminate its agreement with the Trust and Seneca
Distributors will become the sole Distributor. The ownership of GMG Securities
overlaps significantly with that of GMG/Seneca and GMG Securities should be
considered an affiliated person of GMG/Seneca. Seneca Distributors is 99%
owned by GMG/Seneca.
DISTRIBUTION AND RELATED SERVICES. Pursuant to a Distribution Plan, the Trust
has entered into a Distribution Agreement with the Distributor under which the
Trust will pay the Distributors a fee at an annual rate 0.25% of the average
daily net assets attributable to the Administrative Shares of each Fund. No
Distribution Fee will be paid as to the Institutional Shares of any Fund.
Amounts paid under the Distribution Plan may be used by the Distributor to
cover expenses that are primarily intended to result in, or are primarily
attributable to (i) the sale of Administrative Shares, (ii) ongoing servicing
and/or maintenance of accounts of holders of Administrative Shares, and (iii)
subaccounting, recordkeeping, and administrative services related to the sale
of Administrative Shares, all as set forth in the Distribution Plan. Payments
under the Distribution Plan are not tied directly to the expenses actually
incurred by the Distributor in connection with the foregoing activities and may
exceed those expenses. The Trustees will evaluate the appropriateness of the
Distribution Plan annually. For a more complete disclosure of the Plan and its
terms, see the SAI.
Shares may also be offered through certain brokers and financial intermediaries
("service agents"). Service agents may impose additional or different
conditions on the purchase or redemption of a Fund's shares by their customers
and may charge their customers transactions or other account fees on the
purchase and redemption of a Fund's shares. Each service agent is responsible
for transmitting to its customers a schedule of any such fees and information
regarding any additional or different conditions regarding purchases and
redemptions. Shareholders who are customers of service agents should consult
their service agent for information regarding these fees and conditions and
should be aware that, if they satisfy the minimum purchase requirements, they
could avoid those fees by investing directly through the Distributors.
OTHER EXPENSES
The Trust bears all costs of its operations. Trust expenses directly
attributable to a Fund or a class of shares are charged to that Fund or class;
other expenses are allocated among all the Funds. Administrative Shares may be
purchased in employee benefit plan accounts and in accounts maintained with
financial institutions and financial services companies such as broker-
dealers. Employee benefit plan administrators and financial institutions and
financial services companies through which Administrative Shares are purchased
may be paid fees by the Funds for transfer agency, accounting, recordkeeping,
and administrative and other services provided with respect to such shares.
Those services may include maintaining account records, aggregating and
processing orders to purchase, redeem, and exchange Administrative Shares,
processing dividend payments, forwarding shareholder communications, and
providing subaccounting services for shares held beneficially.
-32-
<PAGE> 41
PERFORMANCE INFORMATION.
The Trust may publish performance information about the Funds. Fund
performance usually will be shown either as cumulative total return or average
periodic total return compared with other mutual funds as published by public
ranking services, such as Lipper Analytical Services, Inc. Cumulative total
return is the actual performance over a stated period of time. Average annual
total return is the hypothetical return, compounded annually, that would have
produced the same cumulative return if the Fund's performance had been over the
entire period. Each Fund's total return shows its overall dollar or percentage
change in value. This includes changes in the share price and reinvestment of
dividends and capital gains.
The performance of a Fund may also be measured in terms of yield. Each Fund's
yield shows the rate of income the Fund earns on its investments as a
percentage of the Fund's share price.
A Fund may also separate its cumulative and average annual total returns into
income results and capital gains or losses. Each Fund may quote its total
returns on a before-tax or after-tax basis.
The performance information that may be published for the Funds is historical.
It is not intended to represent or guarantee future results. The value of Fund
shares may be more or less than their original cost when they are redeemed.
For more information, see the SAI.
MATERIAL LEGAL PROCEEDINGS. There are no material legal proceedings to which
the Trust is subject, or to which the Investment Manager or the Distributor are
subject, that are likely to have a material adverse effect on their ability to
perform their obligations to the Trust or on the Trust itself.
SUMMARY OF BOND RATINGS. Following is a summary of the grade indicators used
by two of the most prominent, independent rating agencies (Moody's Investors
Service, Inc. and Standard & Poor's Corporation) to rate the quality of bonds.
The first four categories are generally considered investment quality bonds.
Those below that level are of lower quality and are sometimes referred to as
"junk bonds."
-33-
<PAGE> 42
<TABLE>
<CAPTION>
INVESTMENT GRADE MOODY'S STANDARD &
POOR'S
- --------------------------------------------------------------------------------
<S> <C> <C>
Highest quality Aaa AAA
- --------------------------------------------------------------------------------
High quality Aa AA
- --------------------------------------------------------------------------------
Upper medium A A
- --------------------------------------------------------------------------------
Medium, speculative features Baa BBB
- --------------------------------------------------------------------------------
LOWER QUALITY
- --------------------------------------------------------------------------------
Moderately speculative Ba BB
- --------------------------------------------------------------------------------
Speculative B B
- --------------------------------------------------------------------------------
Very Speculative Caa CCC
- --------------------------------------------------------------------------------
Very high risk Ca CC
- --------------------------------------------------------------------------------
Highest risk, may not be paying interest C C
- --------------------------------------------------------------------------------
In arrears or default C D
- --------------------------------------------------------------------------------
</TABLE>
For more detailed information on bond ratings, including gradations within each
category of quality, see the SAI.
-34-
<PAGE> 43
Subject to Completion, Dated February ____, 1996
SENECA FUNDS
INSTITUTIONAL SHARES
Prospectus: February 29, 1996
- --------------------------------------------------------------------------------
SENECA GROWTH FUND seeks capital appreciation primarily through investments in
equity securities of companies that, in the Investment Manager's opinion, have
the potential for above average market appreciation. Production of income will
be incidental to this objective. The Fund seeks to out perform the Standard &
Poor's Index of 500 Stocks.
SENECA MID-CAP GROWTH FUND primarily seeks capital appreciation through
investments in equity securities of companies that, in the Investment Manager's
opinion, have the potential for above average market appreciation. The Fund will
invest primarily in companies with market capitalizations between $500 million
and $5 billion. Production of income will be incidental to this objective. The
Fund seeks to out perform the Standard & Poor's Mid-Cap 400 Index.
SENECA BOND FUND seeks both current income and capital appreciation primarily by
investing in a diversified portfolio of government and corporate bonds and other
debt securities. The Fund will seek a total return higher than that of the
Lehman Brothers Government/Corporate Index.
SENECA REAL ESTATE SECURITIES FUND seeks a high total return through both
long-term capital appreciation and current income from investments related to
United States real estate. The Fund will invest primarily in securities of
issuers that are engaged principally in or whose businesses relate to ownership
and operation of real estate in the United States.
There can be no assurance that any of the Funds will achieve its investment
objectives or succeed in outperforming the indices described above. For
information about some of the principal risks involved in investments in the
Funds, see "Investment Practices and Risk Considerations."
This Prospectus is intended to set forth concisely the information an investor
should know before investing in any of the Funds. Please read it carefully and
save it for future reference. A Statement of Additional Information dated
February 29, 1996 (the "SAI") has been filed with the Securities and Exchange
Commission. The SAI, as amended or supplemented from time to time, is
incorporated into this Prospectus by this reference and is a part of this
Prospectus. It is available free of charge by writing to the Distributor at 909
Montgomery Street, San Francisco, California, 94133 or by calling 1-800-
990-9331. See "Purchase of Shares."
Each Fund has its own levels of expenses and charges. The minimum investment is
$100,000 per Fund, or less in some instances. See "Purchase of Shares."
Fund shares are not deposits or obligations of, or endorsed or guaranteed by,
any bank or other financial institution, and they are not insured by the Federal
Deposit Insurance Corporation or any other agency of the United States
Government or any other governmental subdivision.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
-1-
<PAGE> 44
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
-2-
<PAGE> 45
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE SENECA FUNDS AT A GLANCE 4
FUND EXPENSES 5
INVESTMENT MANAGER'S PERFORMANCE 7
MANAGEMENT 10
THE SENECA FUNDS IN DETAIL 11
SENECA GROWTH FUND AND SENECA MID-CAP GROWTH FUND 11
SENECA BOND FUND 12
SENECA REAL ESTATE SECURITIES FUND 14
INVESTMENT PRACTICES AND RISK CONSIDERATIONS 15
PURCHASE OF SHARES 21
REDEMPTION OF SHARES 24
PORTFOLIO TRANSACTIONS 26
NET ASSET VALUE 27
DIVIDENDS AND CAPITAL GAINS 27
INCOME TAX CONSIDERATIONS 28
INVESTMENT MANAGER AND ADMINISTRATOR 29
GENERAL INFORMATION 31
</TABLE>
-3-
<PAGE> 46
THE SENECA FUNDS AT A GLANCE
SENECA FUNDS (the "Trust") is an open-end management investment company,
consisting of the four separate investment portfolios described below (the
"Funds"). Each Fund is managed separately and has its own investment objective,
strategies and policies designed to meet different goals. The following summary
is qualified in its entirety by the more detailed information that appears
elsewhere in this Prospectus. A more detailed description of each Fund may be
found under the heading "The Seneca Funds in Detail."
The SENECA GROWTH FUND seeks capital appreciation. Production of income will be
incidental to this objective. This Fund will invest primarily in common stocks
of companies that, in the Investment Manager's opinion, have the potential for
above average market appreciation. The Fund may invest in companies at all
levels of market capitalization. For a portion of its portfolio, the Fund will
favor large, well-known companies that have established histories of continuous
dividend payment and, for another portion its portfolio, will generally invest
in smaller firms that the Investment Manager believes have the potential for
faster growth. The Fund will seek to out perform the Standard &
Poor's Index of 500 Stocks (the "S&P 500").
The SENECA MID-CAP GROWTH FUND seeks capital appreciation. Production of income
will be incidental to this objective. This Fund will invest primarily in common
stocks of companies that, in the Investment Manager's opinion, have the
potential for above average market appreciation, focussing on companies with
market capitalizations between $500 million and $5 billion. The Fund to out
perform the Standard & Poor's Mid-Cap 400 Index (the "S&P Mid-Cap Index").
The SENECA BOND FUND seeks both current income and capital appreciation. This
Fund will invest in a diversified portfolio of government and corporate bonds
and other debt securities, seeking a total higher return than the Lehman
Brothers Government/Corporate Index. The Fund will normally maintain a
dollar-weighted average maturity of between two and ten years and a
dollar-weighted average duration of between two and eight years.
The SENECA REAL ESTATE SECURITIES FUND seeks a high total return through both
long-term capital appreciation and current income. This Fund will be
non-diversified and will invest primarily in securities of issuers operating
principally in the United States real estate industry or whose businesses relate
to ownership and operation of real estate in the U.S., including equity real
estate investment trusts ("REITs"), mortgage REITs, real estate brokers and
developers, companies that manage or own real estate, manufacturers and
distributors of building supplies, and financial institutions that originate or
service mortgage loans.
There can be no assurance that the Funds will achieve their investment
objectives or succeed in outperforming the indices described above. Investors
should read this Prospectus carefully, particularly "Investment Practices and
Risk Considerations," for information about certain risks relevant to an
investment in the Funds. In particular, investors should note that the value of
all securities and other investments a Fund may hold and, as a result, the
Fund's net asset value per share, will vary from time to time in response to a
variety of factors. The value of securities may fluctuate in response to the
activities of individual companies as well as general market and economic
conditions. The values of small-to-medium-capitalization equity securities may
be particularly susceptible to fluctuation as a result of factors unrelated to
the issuers' underlying businesses. The value of debt securities can generally
be expected to vary inversely with changes in prevailing interest rates. The net
asset value per share of any Fund may be less at the time of redemption than it
was at the time of purchase.
-4-
<PAGE> 47
Each Fund is separately managed by GMG/Seneca Capital Management, L.P.
("GMG/Seneca, L.P."). GMG/Seneca, L.P. plans to reorganize into a limited
liability company in mid-1996. The terms "GMG/Seneca" and "Investment Manager"
refer to GMG/Seneca, L.P. until the effectiveness of that reorganization and to
its successor thereafter.
FUND EXPENSES
Each Fund will bear the costs of its operations. These costs may include fees
for investment management, distribution, independent directors, brokerage
services, security pricing services, custody, transfer agency, and recordkeeping
services, insurance, federal and state registration, legal and accounting
services, amortized expenses, taxes, and any extraordinary expenses.
Each Fund offers two classes of shares: Institutional Shares and Administrative
Shares. Institutional Shares are offered directly by the Distributor to
institutional investors such as pension and profit sharing plans, other employee
benefit trusts, endowments, foundations, and corporations. The minimum
investment for Institutional Shares is $100,000. Administrative Shares are
offered primarily to participant-directed employee benefit plans and to
investors purchasing through accounts maintained with broker-dealers and other
financial service companies. With certain exceptions, the minimum initial
investment for Administrative Shares is $10,000. See "Purchase of Shares." This
Prospectus describes only Institutional Shares. To receive a free prospectus
describing the Administrative Shares, call 1-800- 990-9331 or write to the
Distributor.
Each class may have different distribution-related expenses and charges and
other expenses specific to that class. Those expenses will be charged separately
to that class and may affect the class's performance. Fund expenses that are not
related to the distribution of shares of a particular class or to services
provided specifically to a particular class will be allocated between the
classes based on the net assets of each class.
The following table describes shareholder transaction-related expenses and
anticipated annual expenses (excluding portfolio brokerage expenses) as to
Institutional Shares.
================================================================================
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
SENECA REAL
SENECA MID-CAP SENECA ESTATE
SENECA GROWTH GROWTH BOND SECURITIES
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Load on Purchases None None None None
- --------------------------------------------------------------------------------------
Sales Load on Reinvested Dividends None None None None
- --------------------------------------------------------------------------------------
Deferred Sales Load None None None None
- --------------------------------------------------------------------------------------
Early Withdrawal Fee(1) 1.00% 1.00% 1.00% 1.00%
- --------------------------------------------------------------------------------------
Exchange Fee None None None None
- --------------------------------------------------------------------------------------
</TABLE>
- --------------
(1)Applies only to redemptions (including by exchanges) of shares held less
than 90 days. The fee is paid to the Fund and is intended to protect long-term
investors from the cost of frequent investments and redemptions by short-term
investors. See "Redemption of Shares."
-5-
<PAGE> 48
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
ANNUAL FUND EXPENSES PERCENTAGE OF AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management Fees 0.70% 0.80% 0.50% 0.85%
- -----------------------------------------------------------------------------------------------
12b-1 Fees None None None None
- -----------------------------------------------------------------------------------------------
Other Expenses (after waivers and 0.15% 0.15% 0.15% 0.20%
expense reimbursements)(2)
- -----------------------------------------------------------------------------------------------
Total Expenses 0.85% 0.95% 0.65% 1.05%
- -----------------------------------------------------------------------------------------------
</TABLE>
The Annual Fund Expenses table summarizes estimates of operating expenses
relating to Institutional Shares. The purpose of both of these tables is to
assist investors in understanding the varying costs and expenses they will bear
directly or indirectly. Without any fee waivers or expense reimbursements by
GMG/Seneca, the Other Expenses for Institutional Shares during the first year of
the Funds' operation are estimated to be 1.25%, 1.30%, 1.30%, and 1.35%,
respectively, and the Total Expenses are estimated to be 1.95%, 2.10%, 1.80%,
and 2.20%, respectively.
EXAMPLE
Using the above tables of transaction expenses and operating expenses, an
investor would pay the following expenses based on a $1,000 investment and an
assumed 5% annual return. The expenses are the same whether or not the investor
redeems the shares at the end of each time period.
- --------------
(2)Includes estimates of fees to be paid to GMG/Seneca pursuant to an
Administrative Services Agreement, fees the Funds may pay to employee benefit
plan administrators, broker-dealers, and other financial services companies for
sub-accounting, account maintenance and other, related services, as well as
other expenses not covered by the Management Fees. Certain expenses may differ
between classes depending on the particular services provided to the different
classes. Examples include transfer agency fees, state and federal securities
registration fees, legal and accounting fees, directors' fees and expenses
incurred as a result of issues relating solely to a class, and fees and payments
for specific class services including account maintenance or subaccounting
expenses.
GMG/Seneca will waive some or all of its Administrative Fee and assume
other operating expenses of each Fund (other than certain extraordinary or
nonrecurring expenses) until the earlier of September 30, 1996 or such time as
the Fund's assets exceed $50 million, to the extent necessary to prevent the
expenses of the Institutional Shares of each Fund from exceeding the levels set
forth in the table. The Investment Manager may, from time to time, assume
additional expenses. Fee waivers and expense reimbursement or assumption
arrangements will increase a Fund's return.
"Other Expenses" may be reduced to the extent certain broker-dealers
executing Funds' portfolio transactions pay all or a portion of the Funds'
transfer agency or custodian fees or expenses or credits arising out of balances
maintained by Funds with the Transfer Agent and Custodian offset such fees or
expenses.
-6-
<PAGE> 49
<TABLE>
<CAPTION>
============================================================
1 Year 3 Years
------------------------------------------------------------
<S> <C> <C>
Seneca Growth Fund $9 $27
------------------------------------------------------------
Seneca Mid-Cap Growth Fund $10 $30
------------------------------------------------------------
Seneca Bond Fund $7 $21
------------------------------------------------------------
Seneca Real Estate Securities Fund $11 $34
------------------------------------------------------------
</TABLE>
THE INFORMATION IN THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
MOREOVER, WHILE THE EXAMPLE ASSUMES A 5% ANNUAL RETURN, EACH FUND'S ACTUAL
PERFORMANCE WILL VARY AND MAY RESULT IN A RETURN GREATER OR LESS THAN 5%.
INVESTMENT MANAGER'S PERFORMANCE
Because they did not begin operating before February 1996, no past performance
information is available for the Funds. However, the Investment Manager and its
affiliates have been managing investment accounts for a variety of institutional
and individual investment advisory clients for over six years. The Seneca
Growth, Seneca Mid-Cap Growth, and Seneca Bond Funds have substantially the same
investment objectives and policies and use the same investment strategies and
techniques as certain of those accounts. The performance of those accounts is
illustrated in the table and the graphs that follow.
In addition, an affiliate of the Investment Manager, Genesis Realty Capital
Management, L.P. ("Genesis Realty"), has been managing an investment account
since May of 1995 with substantially the same investment objectives and
policies, and using substantially the same investment strategies and techniques,
as the Seneca Real Estate Securities Fund. The portfolio management team
responsible for the management of that account will have principal
responsibility for the Seneca Real Estate Securities Fund. The performance of
that account is illustrated in the table and in the graph entitled "Real Estate
Securities Account" that follows.
There can be no assurance that any Fund's performance will be the same as that
of the corresponding individual accounts. The Funds may have total assets that
will be more or less than the total assets in the individual accounts. The
Investment Manager believes that asset size is not a significant factor in the
Funds' ability to achieve their investment objectives.
For comparison purposes, the individually-managed accounts and composites match
up to the Funds as follows:
Seneca Growth Fund Core Growth Equity Account
Composite
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Seneca Mid-Cap Growth Fund Mid-Cap Growth Equity Account
Composite
Seneca Bond Fund Fixed-Income Account Composite
Seneca Real Estate Securities Fund Real Estate Securities Account
The following table shows how the individually-managed account composites'
annualized performance compares to recognized industry indices over each of the
last five years or, where shorter, since the relevant composite's inception and
how the individually-managed Real Estate Securities Account's performance from
May through December 1995 compares to a recognized industry index over the same
period.
<TABLE>
<CAPTION>
Calendar Calendar Calendar Calendar Calendar Calendar
Year 1990 Year 1991 Year 1992 Year 1993 Year 1994 Year 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Core Growth Equity Account Composite 8.5% 39.0% 7.8% 10.9% 1.5% 29.8%
S&P 500 Index (3.1)% 30.5% 7.6% 10.1% 1.3% 37.5%
- ----------------------------------------------------------------------------------------------------------
Mid-Cap Growth Equity Account Composite --(1) -- -- -- 11.1% 34.7%
S&P Mid-Cap Index -- -- -- -- (3.6)% 30.9%
- ----------------------------------------------------------------------------------------------------------
Fixed-Income Account Composite 9.2% 18.2% 9.1% 15.7% (2.7)% 20.2%
Lehman Brothers Government/Corporate 8.3% 16.1% 7.6% 11.0% (3.5)% 19.2%
Index
- ----------------------------------------------------------------------------------------------------------
Real Estate Securities Account(2) -- -- -- -- -- 17.1%
National Association of Real Estate -- -- -- -- -- 15.0%
Investment Trust ("NAREIT") Equity Index
==========================================================================================================
</TABLE>
Following are graphs showing the performance of the four individually-managed
account composites from their respective inception dates compared with the
performance of recognized industry indices for the same periods. Rates of return
are calculated using a time-weighted total rate of return with the periods
linked to create the long-term rates of return. For each of the
individually-managed accounts and composites, account valuations and cash flows
occurred quarterly.
CORE GROWTH EQUITY ACCOUNT COMPOSITE
The following graph shows that $10,000 invested in an individually-managed
account that achieved the performance of the Core Growth Equity account
composite when the Investment Manager first began managing those accounts on
January 1, 1990, would have grown to about $23,753 as of December 31, 1995. This
is equivalent to a 17.0% return per year. By comparison, $10,000 invested at the
same time in a portfolio of the securities comprising the S&P 500 Index
(weighted as in that index) would have grown to about $20,686 for a rate of
return of 16.6% per
- --------------
(1)Periods with "--" are before the Investment Manager began managing
the accounts in this composite.
(2)Inception of management of accounts was May 1, 1995. The return
shown for the Index is for the period from May 1, through December 31, 1995. The
percentage returns are not annualized.
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<PAGE> 51
year. The S&P 500 Index is a selection of 500 common stocks, is unmanaged, and
is regarded by some as a benchmark for the equity market in general.
[CORE GROWTH EQUITY ACCOUNT COMPOSITE GRAPH APPEARS HERE]
IT IS POSSIBLE THAT BY USING DIFFERENT METHODS TO CALCULATE PERFORMANCE, RESULTS
COULD DIFFER FROM THOSE GIVEN ABOVE. INVESTORS SHOULD NOT RELY ON THIS
PERFORMANCE DATE WHEN DECIDING WHETHER TO INVEST IN A PARTICULAR SENECA FUND.
MID-CAP GROWTH EQUITY ACCOUNT COMPOSITE
The following graph shows that $10,000 invested in an individually-managed
account that achieved the performance of the Mid-Cap Growth Equity account
composite when the Investment Manager first began managing those accounts on
January 1, 1994 would have grown to about $14,965 as of December 31, 1995. This
is equivalent to a 22.3% return per year. By comparison, $10,000 invested at the
same time in a portfolio of the securities comprising the S&P Mid-Cap Index
(weighted as in that index) would have grown to about $12,627 for a rate of
return of 12.4% per year. The S&P Mid-Cap Index is a capitalization-weighted,
unmanaged index of common stocks, which has a market capitalization of
approximately $700 million.
[MID-CAP GROWTH EQUITY ACCOUNT COMPOSITE GRAPH APPEARS HERE]
IT IS POSSIBLE THAT BY USING DIFFERENT METHODS TO CALCULATE PERFORMANCE, RESULTS
COULD DIFFER FROM THOSE GIVEN ABOVE. INVESTORS SHOULD NOT RELY ON THIS
PERFORMANCE DATE WHEN DECIDING WHETHER TO INVEST IN A PARTICULAR SENECA FUND.
FIXED-INCOME ACCOUNT COMPOSITE
The following graph shows that $10,000 invested in an individually-managed
account that achieved the performance of the Fixed-Income Account Composite when
the Investment Manager first began managing those accounts on January 1, 1990
would have grown to about $19,037 as of December 31, 1995. This is equivalent to
a 11.8% return per year. By comparison, $10,000 invested at the same time in a
portfolio of the securities comprising the Lehman Brothers Government/Corporate
Index (weighted as in that index) would have grown to about 17,272 for a rate of
return of 9.8% per year. The Lehman Brothers Government/Corporate Index is an
unmanaged index consisting of a mixture of both corporate and government bonds
that are rated within the "investment grade" categories by Moody's Investor
Services, Standard & Poor's Corporation or Fitch Investors Service.
[FIXED-INCOME ACCOUNT COMPOSITE GRAPH APPEARS HERE]
IT IS POSSIBLE THAT BY USING DIFFERENT METHODS TO CALCULATE PERFORMANCE, RESULTS
COULD DIFFER FROM THOSE GIVEN ABOVE. INVESTORS SHOULD NOT RELY ON THIS
PERFORMANCE DATE WHEN DECIDING WHETHER TO INVEST IN A PARTICULAR SENECA FUND.
REAL ESTATE SECURITIES ACCOUNT
The following graph shows that $10,000 invested in an individually-managed
account that achieved the performance of the Real Estate Securities Account when
Genesis Realty first began managing that account on May 1, 1995 would have grown
to about $11,708 as of December 31, 1995. This is equivalent to a 17.1% return
per year. By comparison, $10,000 invested at the same time in a portfolio of the
securities comprising the NAREIT Equity Index (weighted as in that
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<PAGE> 52
index) would have grown to about $[11,499] for a rate of return of 15.0% per
year. The NAREIT Equity Index is a capitalization-weighted, unmanaged index
consisting of common stocks of all tax-qualified REITs listed on the New York
Stock Exchange, the American Stock Exchange, or Nasdaq.
[REAL ESTATE SECURITIES ACCOUNT GRAPH APPEARS HERE]
IT IS POSSIBLE THAT BY USING DIFFERENT METHODS TO CALCULATE PERFORMANCE, RESULTS
COULD DIFFER FROM THOSE GIVEN ABOVE. INVESTORS SHOULD NOT RELY ON THIS
PERFORMANCE DATE WHEN DECIDING WHETHER TO INVEST IN A PARTICULAR SENECA FUND.
The composite performance of individually-managed accounts is shown after
reduction for investment management fees. For the Core Growth Equity Account
Composite and the Mid-Cap Growth Equity Account Composite, those fees were
assumed to be 1% per annum, for the Fixed- Income Account Composite, those fees
were assumed to be 0.50% per annum, and for the Real Estate Securities Account,
those fees were .85% per annum, in each case applied to the value of the
accounts at the end of each quarter. These fees represent the Investment
Manager's (or, as to the Real Estate Securities Account, Genesis Realty's)
standard fees for accounts of these types, although some of the accounts may
have paid lower fees. The industry indices are shown in the graphs for
comparison purposes only. They are unmanaged indices that pay no management fees
and incur no expenses. An individual cannot invest in an index.
Each Fund's performance may differ from the composite performance of
individually-managed accounts due to differences in, among other things,
availability of cash for new investments, timing of purchases and sales, overall
expenses, brokerage commissions, and diversification of securities. Performance
figures are based on historical earnings. Past performance of the
individually-managed accounts and indices is no guarantee of future results for
the Funds.
MANAGEMENT
Overall responsibility for the management and supervision of the Trust and the
Funds rests with the Trustees of Seneca Funds (the "Trustees"). GMG/Seneca's
services under its Investment Management Agreement and Administrative Services
Agreement with the Trust are subject to the direction of the Trustees.
The Funds' investment manager is GMG/Seneca, 909 Montgomery Street, San
Francisco, California 94133. Under an Investment Management Agreement with the
Trust, GMG/Seneca's duties to each Fund include: (1) supervising and managing
the investments of that Fund and directing the purchase and sale of its
investments; and (2) ensuring that investments follow the investment objective,
strategies, and policies of that Fund and comply with government regulations.
GMG/Seneca has also entered into an Administrative Services Agreement with the
Trust under which it performs, or arranges for the performance of, the following
services, among others: (1) providing the Funds with administrative and clerical
services; (2) overseeing the maintenance of the Funds' books and records by the
Funds' custodian; (3) preparing the Funds' income tax returns; (4) registering
the Funds' shares with those states and other jurisdictions where shares
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<PAGE> 53
are offered or sold and arranging periodic updating of the Funds' prospectus;
(5) initial preparation and filing of proxy materials and reports to Fund
shareholders and the Securities and Exchange Commission ("SEC"); and (6)
providing the Funds with adequate office space and all necessary office
equipment to perform the foregoing services. GMG/Seneca has entered into an
agreement with State Street Bank and Trust Company ("State Street"), 1776
Heritage Drive, North Quincy, Massachusetts 01701, pursuant to which State
Street will perform substantially all of those services.
For more information about the Investment Manager, its functions, and its
affiliates, see "Investment Manager."
THE SENECA FUNDS IN DETAIL
FUND OBJECTIVES, STRATEGIES AND POLICIES. The investment objectives, strategies,
and policies of each Fund are described below. There can be no assurance that
these objectives will be met. The "Investment Practices and Risk Considerations"
section describes in greater detail some specific risks of the types of
securities in which the Funds invest and practices in which the Funds may
engage.
FUNDAMENTAL POLICIES. An investment policy that a Fund has adopted as
"fundamental" may be changed only with the approval of a majority of
shareholders. Most of the strategies and policies described below and described
in the SAI are not fundamental. This means those strategies and policies can be
changed by the Trustees without shareholder approval.
SENECA GROWTH FUND AND SENECA MID-CAP GROWTH FUND
INVESTMENT OBJECTIVE: Capital appreciation; production of income will be
incidental. The Seneca Growth Fund seeks appreciation greater than that of the
S&P 500 Index and the Seneca Mid-Cap Growth Fund seeks appreciation greater than
that of the S&P Mid-Cap Index.
INVESTMENT STRATEGIES AND POLICIES. Each of these Funds will invest primarily in
common stocks of growth companies that meet certain fundamental standards and
that the Investment Manager believes have the potential for above average market
appreciation. These Funds will generally invest at least 65% of their assets in
common stocks. The Seneca Growth Fund will have no limitations as to the market
capitalizations of companies in which it invests, but will generally focus a
portion of its portfolio on large, well-known companies, many with market
capitalizations in excess of $5 billion, that have an established history of
profitability and/or dividend payment. The Seneca Mid-Cap Growth Fund will
generally invest at least 65% of its assets in companies with market
capitalizations between $500 million and $5 billion, although it may at times
have significant investments in companies with higher or lower market
capitalizations. At times, both Funds may invest in some of the same securities.
In evaluating companies' potential for market appreciation, the Investment
Manager seeks companies that, among other things, it believes will demonstrate
greater long-term earnings growth than the average company included in, for the
Seneca Growth Fund, the S&P 500 or, for the Seneca Mid-Cap Growth Fund, the S&P
Mid-Cap Index. This approach is based on the belief that growth in a company's
earnings will correlate with growth in the price of its stock. The Investment
Manager will identify strong market sectors and then identify companies within
those sectors that have the most attractive earnings prospects.
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<PAGE> 54
These Funds may also invest in preferred stocks, warrants, and debt instruments,
including bonds convertible into common stocks. When the Investment Manager
determines that market conditions warrant, the Funds may invest without limit in
cash and cash equivalents for temporary defensive purposes, although this is not
expected to occur routinely. These Funds may engage in hedging transactions
using, among other things, options and futures contracts. See "Investment
Practices and Risk Considerations--Options, Futures, and Other Derivatives."
These Funds may invest as much as 20% of their assets in foreign securities if
those securities meet the same criteria for the Funds' investments in general.
At times the Funds may have no foreign investments. Generally, the Funds'
foreign investments will be made through American depositary receipts ("ADRs")
or stocks of foreign issuers that are traded directly on U.S. securities
exchanges or in the Nasdaq Stock Market.
To enable the Seneca Mid-Cap Growth Fund to invest effectively in companies with
small- to medium-sized market capitalizations, the Trust currently does not
expect to offer shares of that Fund to the public at any time when the net
assets of the Fund exceed $500 million. This limit is subject to change.
As these Funds invest primarily in common stocks, their investments are subject
to stock market price volatility. The Funds are intended for investors who have
the perspective, patience, and financial ability to take on above-average stock
market volatility in pursuit of long-term capital growth. Prices of securities
issued by medium-capitalization companies are often more volatile than those of
large, well-established companies, in part because of the relatively fewer
shares available and the potential for developments in a smaller company's
business to have a relatively greater impact on its earnings and revenues than
developments in the business of larger companies. In addition, the risk of
insolvency (with attendant losses to shareholders) is greater for smaller
companies than for larger companies. As a result, because of its investment
focus on companies with medium-capitalizations, the Seneca Mid-Cap Growth Fund's
performance can be expected to be more volatile than that of the Seneca Growth
Fund.
SENECA BOND FUND
INVESTMENT OBJECTIVE: High total return--both current income and capital
appreciation. This Fund will seek to outperform the Lehman Brothers
Government/Corporate Index.
INVESTMENT STRATEGIES AND POLICIES. This Fund will invest in a diversified
portfolio of corporate bonds and other debt securities. It will normally
maintain a dollar-weighted average maturity of between two and ten years,
although maturities of individual securities may be significantly longer. The
Fund will also generally seek to maintain a dollar-weighted average duration of
between two and eight years. The Investment Manager will actively manage this
Fund's portfolio, adjusting the weighted average portfolio maturity in response
to expected changes in interest rates. During periods of rising interest rates,
the Investment Manager may shorten the portfolio's average maturity to reduce
the effect of bond price declines on the Fund's net asset value. Conversely,
when interest rates are falling and bond prices are rising, the Fund may
lengthen its average maturity. The Investment Manager will also consider bond
performance in particular industry sectors and individual issue characteristics
and may engage in opportunistic trading activities.
The Fund's investments may include securities issued or guaranteed by the U.S.
Government or its agencies and instrumentalities, publicly-traded and
privately-placed corporate securities, and
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<PAGE> 55
municipal obligations. The Fund may also invest in mortgage-backed securities
issued by various federal agencies and government-sponsored enterprises and in
other mortgage-related or asset- backed securities. Investments in
mortgage-related securities can be subject to the risk of early repayment of
principal. For more information, see "Investment Practices and Risk
Considerations-- Mortgage-Backed and Asset-Backed Securities" and the SAI.
"Duration" will be an important criterion in selecting securities for this Fund.
Duration is a measure of the expected life of a debt security that was developed
as a more precise alternative to the concept of "term to maturity."
Traditionally, a debt security's "term to maturity" has been used as a proxy for
the sensitivity of the security's price to changes in interest rates (the
"interest rate risk" or "volatility" of the security). But "term to maturity"
measures only the time until a security provides its final payment, taking no
account of the pattern of payments before maturity. Duration is a measure of the
expected life of a debt security on a present-value basis, incorporating a
bond's yield, coupon interest payments, final maturity, and call features into
one measure. It takes the length of the time intervals between the present time
and the time that interest and principal payments are scheduled or, in the case
of a callable bond, expected to be received, and weights them by the present
values of the cash to be received at each future time. For any debt security
with interest payments occurring before the payment of principal, duration is
always less than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest on a security, the longer the security's
duration. Conversely, the higher the stated or coupon rate of interest, the
shorter the duration.
There are situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating- and variable-rate securities often have final maturities of ten or
more years. However, their interest rate exposure corresponds to the frequency
of the coupon reset. And with mortgage pass-through securities, the stated final
maturity is generally 30 years, but currently expected prepayment rates are more
critical in determining the securities' interest rate exposure.
The Fund will invest at least 65% of its assets in investment-grade bonds (i.e.,
rated Baa or higher by Moody's Investors Service ("Moody's") or BBB or higher by
Standard & Poor's Corporation ("S&P")), although it may invest to a lesser
extent in securities rated as low as B by Moody's or S&P. The Fund may also
invest in unrated securities of similar qualities, as determined by the
Investment Manager.
In general, lower-rated bonds, which will be a lesser component of this Fund,
offer higher returns than investment-grade bonds, but they also carry higher
risks. These can include: a) a higher risk of insolvency, especially during
economic downturns; b) a lower degree of liquidity; and c) greater price
volatility. The Fund will not purchase below-investment-grade securities when
the purchase would increase the Fund's holdings of such securities to 35% or
more of the Portfolio's value. If the Fund owns a security that was
"investment-grade" when the Fund acquired it but the security is downgraded by a
ratings service, the Fund may or may not choose to sell the security. This
depends on the Investment Manager's assessment of the issuer's prospects. See
"General Information--Summary of Bond Ratings" for a description of bond ratings
and "Investment Practices and Risk Considerations--Below-Investment-Grade
Securities" for a discussion of some of the risks involved in investments in
low-rated bonds.
The Fund may invest as much as 20% of its assets in securities of issuers
organized in jurisdictions outside the United States if they meet the same
criteria described above for the Fund's investments in general. At times the
Fund may have no foreign investments. See "Investment Practices and Risk
Considerations--Foreign Securities."
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<PAGE> 56
This Fund ordinarily will invest in common stock only as a result of conversion
of bonds, exercise of warrants, or extraordinary business events.
SENECA REAL ESTATE SECURITIES FUND
INVESTMENT OBJECTIVE: High total return, both current income and long-term
capital appreciation, through investments in real estate-related securities.
INVESTMENT STRATEGIES AND POLICIES. This Fund will generally invest at least 65%
of its assets in equity or debt securities of issuers that are principally
engaged in businesses in the United States real estate industry or in related
businesses. An issuer will be considered "principally" engaged in such a
business if at least 50% of the issuer's assets, gross income, or net income are
attributable to ownership, construction, management, or sale of real estate
located in the United States, or to products or services related to the real
estate industry. Examples of issuers participating directly in the real estate
industry include equity REITs (which own real estate directly), mortgage REITs
(which make short-term construction or real estate development loans or invest
in long-term mortgages or mortgage pools), other companies whose assets consist
substantially of real property and interests in real property, real estate
brokers and developers and companies that manage real estate. Issuers will not
be considered to be participating in the real estate industry simply because
they own significant amounts of real estate if such ownership is incidental to
another business unrelated to real estate. Examples of issuers whose products or
services are related to the real estate industry include manufacturers and
distributors of building supplies and financial institutions that originate or
service mortgage loans.
This Fund will generally focus on investments in common stocks but also may
invest in debt securities of REITs and other real estate-related issuers,
preferred stocks, convertible securities, warrants, and publicly-traded limited
partnerships that invest in real estate. In addition, the Fund may invest up to
35% of its assets in equity and debt securities outside the real estate industry
or related businesses. Investments in debt securities will be primarily limited
to investment-grade securities; the Fund may not invest 35% or more of its
assets in securities rated lower than BBB by S&P or Baa by Moody's and unrated
debt securities that the Adviser considers to be of comparable quality. In
general, lower-rated debt securities offer higher returns than investment-grade
bonds but also carry higher risks. See "General Information--Summary of Bond
Ratings" for a description of bond ratings and "Investment Practices and Risk
Considerations-- Below-Investment Grade Securities" for a discussion of some of
the risks involved in investments in low-rated debt securities.
This Fund will be classified as a non-diversified investment company under the
Investment Company Act of 1940 (the "1940 Act"), which means that it is not
limited by that Act in the proportion of its assets it may invest in the
securities of any single issuer. The Fund will, however, comply with
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. As a
non-diversified investment company, the Fund may invest a greater proportion of
its assets in the securities of a small number of issuers and, as a result, may
be subject to a greater risk as to portfolio securities. If the Fund takes
concentrated positions in a small number of issuers, its return may fluctuate
more than that of a diversified company as a result of changes in the price of
any of those securities.
This Fund will not make direct investments in real estate. However, because it
may invest in debt securities of issuers primarily engaged in real estate
ownership, it is possible that the Fund could become the direct owner of real
estate as a result of a default on those securities. Rental income
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<PAGE> 57
or income from the disposition of such assets could adversely affect the Fund's
status as a regulated investment company for Federal income tax purposes. See
"Income Tax Considerations."
INVESTMENT PRACTICES AND RISK CONSIDERATIONS
PORTFOLIO TURNOVER. The rate of portfolio turnover generally will not be
important in investment decisionmaking for any of the Funds. Decisions to buy
and sell securities will be based on the anticipated contribution of a security
to achievement of a Fund's investment objectives. Sales can result from, for
example, securities reaching a price objective, anticipated changes in interest
rates, changes in the creditworthiness of issuers, or general financial or
market developments. The Funds may sell one security and simultaneously buy
another of comparable quality and may simultaneously buy and sell the same
security to take advantage of short-term differences in bond yields. Funds may
buy individual securities in anticipation of relatively short-term price gains.
A Fund's liquidity needs may also necessitate sales. Because these factors
generally are not tied to the length of time a security has been held, a
significant number of short-term transactions may result.
The Funds cannot predict their turnover rates precisely, but, based on
experience with the individually-managed accounts described above under the
caption "Investment Manager's Performance," it is estimated that annual turnover
rates will generally be within the following ranges: 80%-150% for the Seneca
Growth Fund; 100%-200% for the Seneca Mid-Cap Growth Fund; 40%-100% for the
Seneca Bond Fund; and 40%-100% for the Seneca Real Estate Securities Fund. A
100% annual turnover rate would occur if all of a Fund's securities were
replaced one time during a one year period.
While portfolio transactions will be necessary to achieve a Fund's investment
objectives, a high level of turnover entails certain costs. The higher the
turnover, the higher the overall brokerage commissions, dealer mark-ups and
mark-downs, and other direct transaction costs. High turnover can also result in
acceleration of the realization of gains, which may be short-term in nature and
thus taxable to shareholders at ordinary rates.
Certain tax considerations can restrict a Fund's ability to sell securities in
some circumstances when those securities have been held for less than three
months. See "Income Tax Considerations" and the SAI.
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements. In a
repurchase agreement, a Fund buys a security and the seller simultaneously
agrees to repurchase the security on a specified future date at an agreed-upon
price. The repurchase price reflects an agreed-upon interest rate during the
time the Fund's money is invested in the security. Because the security
constitutes collateral for the repurchase obligation, a repurchase agreement can
be considered a collateralized loan. The Fund's risk is the ability of the
seller to pay the agreed-upon price on the delivery date. If the seller is
unable to make a timely repurchase, the Fund could experience delays in the
receipt of expected proceeds, suffer a loss in principal or current interest, or
incur costs in liquidating the collateral. The Trustees have established
criteria to evaluate the creditworthiness of parties with whom the Funds may
enter into repurchase agreements.
The securities underlying repurchase agreements are not subject to the average
weighted maturity or duration restrictions otherwise applicable to the Seneca
Bond Fund's investments. The Funds
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<PAGE> 58
will limit repurchase agreements to securities issued by the United States
Government, its agencies, and its instrumentalities.
REVERSE REPURCHASE AGREEMENTS; BORROWING. Funds may enter into reverse
repurchase agreements with selected banks, U.S. securities dealers and other
financial institutions. In a reverse repurchase agreement, a Fund sells
securities and simultaneously agrees to repurchase them at a price that reflects
an agreed-upon rate of interest. Funds will use the proceeds of reverse
repurchase agreements to make other investments that either mature or are
subject to an agreement to resell at or before the date the reverse repurchase
agreement expires. When a Fund enters into a reverse repurchase agreement, it
will maintain a segregated account consisting of cash or high-quality liquid
debt securities in an amount at least equal to its repurchase obligation under
the agreement. Reverse repurchase agreements are a form of leverage that
increases the opportunity for gain and the risk of loss for a given change in
market value. There may also be a risk of delay in the recovery of the
underlying securities if the counterparty experiences financial difficulties.
Each Fund may borrow money from banks and, to secure borrowings, may mortgage or
pledge securities. A Fund's obligations under all borrowings, including reverse
repurchase agreements, will not exceed one-third of the Fund's net assets. If a
Fund borrows money, its share price may be subject to greater fluctuation until
the borrowing is paid off.
BELOW-INVESTMENT-GRADE SECURITIES. No Fund may invest 35% or more of its net
assets in debt securities that are rated below "investment grade" by S&P or
Moody's . A Fund will not invest in securities rated lower than B by S&P or
Moody's or unrated securities whose quality the Investment Manager determines to
be lower than those ratings. "Investment grade" refers to securities rated BBB
or better by S&P or Baa or better by Moody's. Below-investment-grade securities
(so-called "junk bonds") generally pay higher current income but may be
considered speculative because they present a greater risk that the issuer will
not be able to make interest or principal payments on time. If this happens, a
Fund would lose income and could expect a decline in the market value of the
securities affected. Prices of such securities tend to react more to prevailing
economic and industry conditions, issuers' unique financial situations, and the
bonds' coupon rates than to small changes in prevailing interest rates. However,
during an economic downturn or a period of rising interest rates, issuers of
these securities, generally highly-leveraged companies, can have trouble making
principal and interest payments, meeting projected business goals, and obtaining
additional financing.
Each Fund may also invest in unrated debt securities. Unrated debt securities,
while not necessarily of lower quality than rated securities, may not have as
broad a market. Because of the size and perceived demand for an issue, among
other factors, certain issuers may decide not to pay the cost of getting a
rating for their bonds. The Investment Manager will analyze the creditworthiness
of the issuer of an unrated security, as well as any financial institution or
other party responsible for payments on the security. Unrated debt securities
will be included in Seneca Bond Fund's 35% limit on below-investment-grade debt
unless the Investment Manager determines those securities to be the equivalent
of investment-grade securities. See "General Information--Summary of Bond
Ratings" and the SAI for a description of bond rating categories.
REITS AND OTHER REAL ESTATE-RELATED INVESTMENTS. The value of investments in
issuers that hold real estate, particularly equity REITs, may be affected by
changes in the values of real properties owned by the issuers, and the value of
investments in mortgage REITs may also be affected by the quality of the credit
they have extended. Investments in businesses related to the real estate
industry may also be affected by changes in the value of real estate generally
or in particular geographical areas in which the businesses operate primarily.
Interest rates can be a significant
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factor both in real estate values and in related businesses. Increases in
interest rates can cause or contribute to declines in real estate prices and can
cause slowdowns in such related businesses as real estate sales and
construction.
Investing in REITs, particularly equity REITS, may also involve risks similar to
those associated with small-capitalization companies, in that their securities
may trade less frequently and in a lower volume than those of
larger-capitalization companies and may be subject to abrupt and large price
movements. At times, the market price of a REIT's securities may be less than
the value of its investments in real estate. REITs often are not diversified and
are therefore subject to the risk of financing a limited number of projects or
properties. REITs depend on the skills of their management and are often heavily
dependent on cash flow from properties. Mortgage REITs are subject to risks of
default by borrowers. Some REITs are "self-liquidating" -- i.e., their existence
is limited to a specific term--and present the risk of liquidating at a time
that is not economically opportune for their investors. REITs also run the risks
of failing to qualify for special tax treatment under the Code and of
maintaining exemptions under the 1940 Act.
DELAYED DELIVERY TRANSACTIONS. Funds may sometimes purchase or sell securities
on a when-issued or forward commitment basis. In such "delayed delivery"
transactions, the price of securities is established at the time the commitment
to purchase or sell is made. Delivery of and payment for these securities
typically occur up to 90 days after the commitment is made. The market price of
a security at the time of delivery may be higher or lower than the price
contracted for, and there is some risk the transaction may not be consummated.
When a Fund makes a commitment to buy securities on a forward commitment or
when-issued basis, it will maintain a segregated account consisting of cash or
high-quality liquid debt securities in an amount at least equal to the
commitments.
SHORT SALES. A Fund may sell securities that it owns or has the right to acquire
at no additional cost but does not intend to deliver to the buyer, a practice
known as selling short "against the box." These transactions allow a Fund to
hedge against price fluctuations by locking in a sale price for securities the
Fund does not wish to sell immediately, for example, to postpone recognition of
a gain or loss for federal income tax purposes or satisfy certain tests
applicable to regulated investment companies under the Code. Subject to
restrictions imposed by state law, a Fund may also sell securities that it does
not own or have the right to acquire. When a Fund does so, it will maintain with
its custodian in a segregated account cash or high-quality liquid debt
securities in an amount at least equal to the difference between the current
market value of the securities sold short and any amounts required to be
deposited as collateral with the selling broker in connection with the short
sale (not including the proceeds of the short sale). It is currently expected
that a Fund will not sell securities short if, as a result, the total amount of
all "open" short positions would exceed one-third of the value of the Fund. This
limitation may be changed at any time.
ILLIQUID SECURITIES. A Fund may invest up to 15% of its net assets in illiquid
securities -- securities that may not be sold within seven days at approximately
the price used in determining the Fund's net asset value. Securities may be
illiquid when they are held subject to legal or contractual restrictions on
resale, usually because they have not been registered for sale to the general
public ("restricted securities"), or when there is a limited market for them.
Repurchase agreements that mature in more than seven days are considered
illiquid securities.
Certain restricted securities that may be resold to institutional investors
pursuant to Rule 144A under the Federal Securities Act of 1933 may not be
considered illiquid if a sufficient dealer or institutional trading market
exists for them. The Investment Manager will determine whether such a market
exists as to Rule 144A securities, and whether such securities must be
considered
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illiquid, under guidelines approved by the Trustees. Institutional trading
markets for Rule 144A securities are relatively new. Liquidity of the Funds'
investments could be impaired if trading markets for these securities do not
develop further or decline.
FOREIGN SECURITIES. Each Fund may invest in securities, including U.S. dollar-
or foreign currency- denominated debt securities, of foreign issuers. Foreign
equity investments are generally limited to securities traded on U.S. exchanges
or in the Nasdaq Stock Market and ADRs evidencing ownership of foreign
securities. ADR's are dollar-denominated and are issued by domestic banks or
securities firms and traded in the U.S.
Securities of foreign issuers involve different, and sometimes greater, risks
than securities of U.S. issuers. These include an increased risk of adverse
political and economic developments, and, as to certain countries, the
possibility of expropriation, nationalization or confiscatory taxation or
limitations on the removal of the funds or other assets of a Fund.
Currency exchange rates may fluctuate significantly over short periods and can
be subject to unpredictable change based on such factors as political
developments and currency controls by foreign governments. Because the Funds,
particularly the Seneca Bond Fund, may invest in securities denominated in
foreign currencies, they may seek to hedge foreign currency risks by engaging in
foreign currency exchange transactions. These may include buying or selling
foreign currencies on a spot basis, entering into foreign currency forward
contracts, and buying and selling foreign currency options, foreign currency
futures, and options on foreign currency futures. Many of these activities
constitute "derivatives" transactions. See "Options, Futures, and Other
Derivatives."
LENDING SECURITIES. As a way to earn additional income, each of the Funds may
lend its portfolio securities to creditworthy persons not affiliated with the
Funds. Such loans must be secured by cash collateral or by irrevocable letters
of credit maintained on a current basis in an amount at least equal to the
market value of the securities lent. Under the terms of these loans, a Fund must
continue to receive the equivalent of the interest and dividends paid by the
issuer on the securities lent and interest on the investment of the collateral
and must have the right to call the loan and obtain the securities lent at any
time on five trading days' notice. This includes the right to call the loan to
enable the Fund to exercise its voting rights. Such loans may not exceed
one-third of the lending Fund's net assets at market value. This percentage
limitation constitutes a "fundamental" policy that can be changed only by a vote
of a majority of shareholders. Lending securities to broker-dealers and
institutions could result in a loss or a delay in recovering the Fund's
securities.
OPTIONS, FUTURES, SWAPS AND OTHER DERIVATIVES. The Funds may buy and write call
and put options on securities, securities indices, and foreign currencies, and
may enter into futures contracts and use options on futures contracts. The Funds
may also enter into swap agreements relating to interest rates, foreign
currencies, and securities indices and forward foreign currency contracts. All
of these may be referred to as "derivatives" transactions. The Funds may use
these techniques to hedge against changes in interest rates, foreign currency
exchange rates, changes in securities prices or other factors affecting the
value of their investments, or as part of their overall investment strategies.
Each Fund will maintain segregated accounts consisting of liquid assets, such as
cash, U.S. Government securities, or other high-grade debt securities (or, as
permitted by applicable regulations, enter into certain offsetting positions to
cover its obligations under derivatives transactions) to avoid "leveraging" the
Fund.
Gains and losses on "derivatives" transactions depend on the Investment
Manager's ability to predict correctly the direction of interests rates,
securities prices, currency exchange rates, or other
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factors. Risks in the use of these derivatives include: a) the risk that
interest rates, securities prices, or currency exchange rates or other factors
affecting the value of the Fund's investments do not move in the directions
being hedged against, in which case the Fund will have incurred the cost of the
derivative (either its purchase price or, by writing an option, losing the
opportunity to profit from increases in the value of the securities covered)
with no tangible benefit; b) imperfect correlation between the price of
derivatives and the movements of the securities prices, interest rates or
currency exchange rates being hedged; c) the possible absence of a liquid
secondary market for any particular derivative at any time; d) the potential
loss if the counterparty to the transaction does not perform as promised; and e)
the possible need to defer closing out certain positions to avoid adverse tax
consequences. In particular, the risk of loss from certain types of futures
transactions is potentially unlimited. More information on derivatives is
contained in the SAI.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. Each Fund may invest in
mortgage-backed and asset-backed securities. The Seneca Bond Fund and the Seneca
Real Estate Securities Fund are more likely to invest in such securities than
the other Funds. Mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, mortgage loans secured by
real property. They include pass-through instruments, representing an undivided
interest in a pool of mortgages, in which the holder receives a share of all
interest and principal payments from the mortgages in the pool. For many of
these securities, the U.S. government, the issuing agency, or a private entity
guarantees payment of interest and principal or provides other forms of credit
enhancement. Some mortgage pass-through securities entitle the holders to all or
a substantial portion of the interest payments on a pool of mortgage assets
("Interest Only" securities, or "Ios") while others entitle the holders to all
or a substantial portion of the principal payments ("Principal Only" securities
or "Pos"). Mortgage-backed securities also include collateralized mortgage
obligations ("CMOs"), a term that generally includes debt instruments
collateralized by mortgage loans or mortgage pass-through securities and
multi-class pass-through securities. CMO's are generally issued in classes, each
representing an obligation with a stated maturity or final distribution date and
a specific fixed or floating coupon rate. Payments of principal and interest on
the underlying mortgage assets may be allocated among the classes in various
ways, resulting in differing predictability of cash flows among the classes.
Other asset-backed securities apply techniques similar to those used in
mortgage-backed securities to base obligations on financial assets other than
mortgages, including automobile receivables, credit card receivables, loans to
finance boats, recreational vehicles, and mobile homes, computer, copier,
railcar, and medical equipment leases, and trade, healthcare, and franchise
receivables.
Part of the cash flow of mortgage-backed or other asset-backed securities may be
from the early payoff of some of the underlying loans. The specific amount and
timing of such prepayments are difficult to predict, creating "prepayment risk."
For mortgage-related securities, prepayments are likely to increase during
periods of declining long-term interest rates because borrowers tend to
refinance when interest rates drop. In the event of very high prepayments, a
Fund may be required to invest these proceeds at a lower interest rate, causing
the Fund to earn less than if the prepayments had not occurred. Prepayments are
likely to decrease during periods of rising interest rates, causing the expected
average life of mortgage-related securities to become longer. This variability
of prepayments will tend to limit price gains when interest rates drop and to
exaggerate price declines when interest rates rise. In general, the obligations
supporting other asset-backed securities are of shorter maturities than mortgage
loans and are less likely to experience substantial prepayments. However, the
risks relating to default may be greater.
The Investment Manager expects additional assets will be "securitized" in the
future. A Fund may invest in any such instruments or variations on them to the
extent consistent with the Fund's investment objectives and policies.
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STRUCTURED SECURITIES. The Funds may invest in debt securities, preferred stock,
or convertible securities, the principal amount, redemption terms, or conversion
terms of which are related to a specified securities or other index, the market
prices of specified securities, commodities, or other assets, or specified
foreign currency exchange rates. These securities are sometimes referred to as
"structured notes," "structured securities," or "asset-based" securities. A
Fund's investments in these securities will be subject to the limits as to
quality that are applicable to debt securities generally. If a structured
security is backed by a bank letter of credit or other credit enhancement, a
Fund may take the enhancement into account in assessing the quality of the
security. The prices of structured securities have historically been subject to
high volatility and their interest or dividend rates may at times be
substantially below prevailing market rates.
ZERO COUPON BONDS. Each Fund may invest in zero coupon bonds and strips. The
Seneca Bond Fund is more likely to invest in such securities than the other
Funds. Zero coupon bonds do not make regular interest payments. Instead, they
are sold at a discount from face value. A single lump sum that represents both
principal and interest is paid at maturity. Strips are debt securities whose
interest coupons are taken out and traded separately after the securities are
issued, but otherwise are comparable to zero coupon bonds. The market value of
zero coupon bonds and strips generally is more sensitive to interest rate
fluctuations than interest-paying securities of comparable term and quality.
VARIABLE RATE, FLOATING RATE, OR VARIABLE AMOUNT SECURITIES. Each Fund may
invest in variable rate, floating rate, or variable amount securities. These are
generally short-term unsecured obligations of private issuers. They are
generally interest-bearing notes on which the interest rate fluctuates on a
scheduled basis.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. Each Fund may invest up to 10% of its
total assets in the shares of other investment companies, but only up to 5% of
its assets in any one other investment company. In addition, a Fund may not
purchase more than 3% of the securities of any one investment company.
Investments in other investment companies involve investment management,
distribution, and other fees and expenses paid by such investment companies.
These will be in addition to the fees and expenses the Funds incur directly in
connection with their operations. The Funds may invest cash balances in money
market mutual funds.
Notwithstanding these limitations, the Funds reserve the right to convert to a
"master/feeder" structure at a future date. Under such a structure, one or more
"feeder" funds, such as the Funds, invest all of their assets in a "master"
fund, which, in turn, invests directly in a portfolio of securities. If required
by applicable law, the Funds will seek shareholder approval before converting to
a master/feeder structure. If the requisite regulatory authorities determine
that such approval is not required, shareholders will be deemed, by purchasing
shares, to have consented to such a conversion and no further shareholder
approval will be sought. Such a conversion is expressly permitted under the
investment objective and fundamental policies of each Fund.
DIVERSIFICATION. Diversifying a Fund's investment portfolio can reduce the risks
of investing. With the exception of the Seneca Real Estate Securities Fund, as
to 75% of its assets no Fund will make an investment that would result in more
than 5% of its total assets being invested in any one issuer or in the Fund
owning more than 10% of the outstanding voting securities of any issuer, in each
case excluding certain government securities, cash and certain other assets. In
addition, with the exception of Seneca Real Estate Securities Fund, no Fund will
invest more than 25% of its assets in any one industry. The Seneca Real Estate
Securities Fund will generally invest at least 65% of its assets in securities
of issuers that are principally engaged in businesses in the U.S. real estate
industry or related businesses. See "The Seneca Funds in Detail--Seneca Real
Estate Securities Fund."
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PURCHASE OF SHARES
Each Fund offers two classes of shares: "Institutional Shares" and
"Administrative Shares." Institutional Shares are offered directly by the
Distributor to institutional investors such as pensions and profit sharing
plans, other employee benefit trusts, endowments, foundations, and corporations.
Administrative Shares are offered primarily to participant-directed employee
benefit plans and to investors purchasing through accounts maintained with
broker-dealers and other financial service companies.
No sales charges are assessed upon the sale of either class of shares, although
shares may be purchased through certain financial intermediaries, such as
broker-dealers, that charge their customers transaction or other fees relating
to customers' investments in the Funds. Sales are all at the respective net
asset value of the shares for the particular class.
Genesis Merchant Group Securities, L.P. ("GMG Securities") is the principal
underwriter for the Funds' Shares. Seneca Distributors, LLC ("Seneca
Distributors") has entered into a Distribution Agreement with the Trust pursuant
to which, upon becoming fully registered as a broker-dealer under applicable
laws, it will also serve as a principal underwriter. It is expected that GMG
Securities will terminate its agreement with the Trust shortly thereafter and
Seneca Distributors will become the sole principal underwriter. In this
prospectus, the term "Distributor" refers to the current principal
underwriter(s) for the Funds. GMG Securities and Seneca Distributors are both
located at 909 Montgomery Street, San Francisco, CA 94133.
MINIMUM INVESTMENT IN THE FUNDS
Except for purchases of Administrative Shares through certain pension or
retirement plans or accounts, the minimum initial investment for Administrative
Shares and Institutional Shares is currently $10,000 and $100,000, respectively.
The minimum initial investment for Administrative Shares through pension or
retirement plans or accounts, including 401(k) plans, 403(b) plans, 457 plans,
governmental plans, tax-sheltered annuity plans and individual retirement
accounts ("Retirement Accounts"), is currently $1,000. Certain other exceptions
to these minimum requirements may apply.
OPENING AN ACCOUNT
To open an account, an investor should (i) complete the attached Client
Registration Application and send it, together with payment for the amount to be
invested, to Seneca Funds, c/o Investors Fiduciary Trust Company at P.O. Box
419565, Kansas City, Missouri 64141-6565, or (ii) contact his or her employee
benefit plan administrator or broker or other financial services provider.
Payments may be made by check or money order or by electronic transfer or wiring
of funds to Seneca Funds, c/o Investors Fiduciary Trust Company (the "Transfer
Agent"). See "How to Purchase Shares." Investors may call the Transfer Agent at
1-800- 990-9331 with questions concerning opening an account. See "How to
Purchase Shares."
HOW TO PURCHASE SHARES
Investors who are not buying shares through an account with a broker-dealer or
other financial service company may purchase shares in the following ways:
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BY MAIL. Fill out a Client Registration Application (for a new account)
or fill out the investment coupon from a previous confirmation statement (for an
existing account), and mail it, together with a check or money order payable to
Seneca Funds, to Seneca Funds, c/o Investors Fiduciary Trust Company at P.O. Box
419565, Kansas City, Missouri 64141-6565. Checks should be bank or certified
checks. The Trust, at its option, may accept a check that is not a bank or
certified check, however, third party checks will not be accepted. There are
restrictions on the redemption of shares purchased by check for which the funds
are being collected. See "Redemption of Shares."
BY ELECTRONIC OR WIRE TRANSFER. Investors may also make initial or
subsequent investments by electronic transfer of funds or wire transfer of
Federal funds to Seneca Funds, c/o Investors Fiduciary Trust Company. Before
transferring or wiring funds, an investor must first telephone the Trust at
(800) 990-9331 for instructions. On the telephone, the following information
will be requested: name of authorized person; shareholder account number (if you
have one); name of Fund and share class; amount being transferred or wired; and
transferring or wiring bank name.
BY TELEPHONE. If an investor elects the telephone purchasing service
on the Client Registration Application (or subsequently in writing), the
investor may authorize electronic withdrawals from his or her bank account over
the telephone. The Transfer Agent may employ additional reasonable procedures
to confirm that such instructions are genuine, possibly including recording
telephone calls requesting purchases and/or verifying authorization and
requiring some form of personal identification. A Fund and the Transfer Agent
may be liable for losses due to unauthorized or fraudulent instructions only if
reasonable procedures are not followed. Otherwise, neither the Trust nor its
Transfer Agent will be liable for any loss, cost or expense for acting on
instructions (whether in writing or by telephone) believed by the party
receiving such instructions to be genuine and in accordance with the procedures
described in this Prospectus. Shareholders should realize that by electing the
telephone purchasing service, they may be giving up a measure of security that
they might have if they were to purchase their shares by means of written
instructions. Furthermore, interruptions in telephone service may mean that a
shareholder will be unable to effect a purchase by telephone when desired.
AUTOMATIC INVESTMENT PLAN. Additional purchases of Administrative
Shares may be made automatically by electing this service on the Client
Registration Application and providing bank account and certain other
information. This will authorize the Fund and the Transfer Agent to make
regular, automatic withdrawals from the shareholder's bank account. Periodic
investments must be at least $100 for each Fund in which the shareholder is
automatically investing. A shareholder may change the date or amount of the
monthly investment, or terminate the Automatic Investment Plan, at any time by
notifying the Transfer Agent in writing or by telephone. The Transfer Agent must
receive the request at least 10 business days before the change is to become
effective. A shareholder may also be able to have investments automatically
deducted from his or her: (1) paycheck at work; (2) savings account; or (3)
choice of other sources. Call the Transfer Agent at 1-800-990-9331 for more
information.
All purchase orders are effected at the net asset value for the relevant class
next determined after receipt of the purchase order. A purchase order received
prior to the close of business (4:00 p.m., Eastern Time) on a day the Trust is
open for business will be effected at that business day's net asset value. An
order received after the close of business will be effected at the net asset
value determined on the next business day. The Trust is "open for business" on
each day the New York Stock Exchange is open for trading, which excludes the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Purchase orders
will be accepted only on days on which the Trust is open for business.
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ADDITIONAL INVESTMENTS
Additional investments may be made at any time at the net asset value for the
relevant class by following the procedures described above. See "How to Purchase
Shares." The minimum additional investment for Institutional Shares generally is
$10,000. The minimum additional investment for Administrative Shares generally
is $1,000; for participants in Retirement Accounts, the minimum additional
investment is $250. See "Minimum Investment In The Funds."
OTHER PURCHASE INFORMATION
Purchases of a Fund's shares will be made in full and fractional shares. In the
interest of economy and convenience, certificates for shares will generally not
be issued.
The Trust reserves the right, in its sole discretion, to suspend the offering of
shares of either class of any Fund or to reject purchase orders when, in the
judgment of management, such suspension or rejection is in the best interests of
the Trust; to waive the minimum initial investment for certain investors; and to
redeem shares if information provided in the Client Registration Application
proves to be incorrect in any material manner (e.g., in a manner such as to
render the shareholder ineligible to purchase shares).
Shares of the Trust may not be qualified or registered for sale in all states.
Prospective investors should inquire as to whether shares of a particular Fund
are available for offer and sale in their state of residence. Shares may not be
offered or sold in any state unless registered or qualified in that jurisdiction
or unless an exemption from registration or qualification is available.
Investors may, subject to the approval of the Trust, purchase shares of a Fund
with liquid securities that are eligible for purchase by the Fund (consistent
with such Fund's investment policies and restrictions) and that have a value
that is readily ascertainable. The transactions will be effected only if the
Investment Manager intends to retain the securities in the Fund as an
investment. Assets so purchased by a Fund will be valued in generally the same
manner as they would be valued for purposes of pricing the Fund's shares, if
such assets were included in the Fund's assets at the time of purchase. The
Trust reserves the right to amend or terminate this practice at any time.
RETIREMENT ACCOUNTS
Investors may establish an Individual Retirement Account (IRA), Simplified
Employee Plan (SEP), or certain other types of retirement plan with the
Distributor. Contributions to an IRA, SEP or other type of retirement plan may
be deductible from an investor's taxable income, depending on his or her
personal tax situation. An investor receiving a distribution from his or her
pension plan or wishing to transfer his or her IRA or other tax-deferred
retirement account from another financial institution, will continue to get
tax-deferred growth by transferring these accounts to the Distributor. Please
call 1-800-990-9331 for additional information.
REDEMPTION OF SHARES
Each Fund will redeem its shares at the net asset value for the relevant class
next determined following receipt of a redemption request. Redemptions may be
made by mail or, if elected on the Trust's Client Registration Application (or
subsequently in writing), by telephone. Although no charge is generally made for
redemptions, when shares have been held for fewer than 90 days,
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a fee of 1% of the amount redeemed will be assessed on an average price basis.
This amount will be retained by the appropriate Fund and is intended to protect
long-term shareholders from the expenses involved in frequent purchases and
redemptions by short-term investors. Shares may be worth more or less upon
redemption than their purchase price, generally, depending on the market value
of the investment securities held by the particular Fund at the time of
redemption.
REDEMPTIONS BY MAIL
Shares may be redeemed by submitting a written request to Seneca Funds, c/o
Investors Fiduciary Trust Company, P.O. Box 419565, Kansas City, Missouri
64141-6565, stating the Fund from which the shares are to be redeemed, the class
of shares, the number or dollar amount of the shares to be redeemed and the
account number. The request must be signed exactly as the names of the
registered owners appear on the Trust's account records, and the request must be
signed by all registered shareholders designated on the Client Registration
Application .
REDEMPTIONS BY TELEPHONE OR OTHER WIRE COMMUNICATIONS
A shareholder may authorize the Trust to effect redemptions or exchanges between
Funds (see "Other Redemption Information" and "Exchange Privilege") on
telephonic or other electronic instructions. This may be done either through the
Client Registration Application or with a subsequent written authorization, a
form of which may be obtained from the Transfer Agent. Once the shareholder has
given such authorization, he or she may redeem shares by calling the Trust at
(800) 990-9331, by sending a facsimile to Seneca Funds, c/o Investors Fiduciary
Trust Company, at (816) 435-6XXX or by other means of wire communication.
Investors must state the Fund and class from which the shares are to be
redeemed, the number or dollar amount of the shares to be redeemed and the
account number.
In electing telephone or other electronic redemption privileges, the investor
authorizes the Transfer Agent to act on instructions from any person
representing himself to be the investor and reasonably believed by the Transfer
Agent to be genuine. The Transfer Agent provides written confirmation of
transactions initiated electronically as a procedure designed to confirm that
such instructions are genuine. The Transfer Agent may employ additional
reasonable procedures to confirm that such instructions are genuine, possibly
including recording telephone calls requesting redemptions and/or verifying
authorization and requiring some form of personal identification. A Fund and the
Transfer Agent may be liable for losses due to unauthorized or fraudulent
instructions only if reasonable procedures are not followed. Otherwise, neither
the Trust nor its Transfer Agent will be liable for any loss, cost or expense
for acting on instructions (whether in writing or by telephone) believed by the
party receiving such instructions to be genuine and in accordance with the
procedures described in this Prospectus. Shareholders should realize that by
electing the telephone or wire redemption option, they may be giving up a
measure of security that they might have if they were to redeem their shares in
writing. Furthermore, interruptions in telephone service may mean that a
shareholder will be unable to effect a redemption by telephone when desired. All
redemptions, whether initiated by letter, by telephone, or by other electronic
means, will be processed in a timely manner and proceeds will be forwarded by
wire in accordance with the redemption policies of the Trust detailed under the
heading "Other Redemption Information."
OTHER REDEMPTION INFORMATION
Payment of the redemption price will ordinarily be wired to the investor's bank
three business days after the tender request, but may take up to seven business
days. Redemption proceeds will be sent by wire only to the bank name designated
on the Client Registration Application. Because
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the cost of such wire transfers will be borne by the shareholder, Administrative
class shareholders may elect to receive redemption proceeds by check. The Trust
may suspend the right of redemption as to any Fund or postpone the payment date
at time when the New York Stock Exchange is closed, or during certain other
periods as permitted under the federal securities laws. If the shares being
redeemed were purchased by check, payment may be delayed pending verification
that the check used to purchase such shares has been honored. Any such delay may
be avoided if shares are purchased by means of certified or bank check or
electronic transfer or wire transfer of Federal funds.
For shareholder protection, a request to change information contained in a
shareholder's account registration (for example, a request to change the bank
designated to receive wire redemption proceeds or to send redemption proceeds
made payable to someone other than the registered shareholder(s) or to an
address or bank account other than that previously designated in the Client
Registration Application) must be received in writing, signed by all registered
shareholders designated on the Client Registration Application, and accompanied
by a signature guarantee from any eligible guarantor institution, as determined
in accordance with the Trust's procedures. Shareholders should inquire as to
whether a particular institution is an eligible guarantor institution. A
signature guarantee cannot be provided by a notary public. In addition,
corporations, trust and other institutional organizations are required to
furnish evidence of the authority of the persons designated on the Client
Registration Application to effect transactions for the organizations.
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right unilaterally to redeem shares in any account (other than in
Retirement Accounts) for their then-current value (which will be promptly paid
to the investor) if at any time, due to other redemptions by the investor, the
shares in the account do not have a value of at least $10,000. A shareholder
will receive advance notice of such an involuntary redemption and will be given
at least 30 days to bring the value of his or her account up to at least
$10,000.
The Trust agrees to redeem shares of each Fund solely in cash up to the lesser
of $250,000 or 1% of its net assets during any 90-day period for any one
shareholder. In consideration of the best interests of the remaining
shareholders, the Trust reserves the right to pay any redemption price exceeding
this amount in whole or in part by a distribution in kind of securities held by
a Fund in lieu of cash. Although it is highly unlikely that shares would ever be
redeemed in kind, if they are, the redeeming shareholder should expect to incur
transaction costs upon the disposition of the securities received.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged for shares of the same class of any other Fund
based on the respective net asset values of the shares involved. Exchanges may
be made only as to Funds registered in the state of residence of the investor or
where an exemption from registration is available. An exchange order is treated
the same as a redemption followed by a purchase and may result in a capital gain
or loss for tax purposes, and special rules may apply in computing tax basis
when determining gain or loss. See "Income Tax Considerations" and "Dividends,
Distributions and Tax Status" in the SAI. An exchange may be made by following
the redemption procedure described above under "Redemptions by Mail" or, if the
telephone redemption option has been elected, by calling the Trust at (800)
990-9331.
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<PAGE> 68
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Management Agreement, the Investment Manager places
orders for the purchase and sale of portfolio investments for the Funds'
accounts with brokers or dealers selected by it in its discretion. In effecting
such purchases and sales, the Investment Manager will seek the best price and
execution of the Funds' orders. Commission rates are a component of the
Investment Manager's analysis of price. Factors the Investment Manager will
consider in evaluating execution quality include the ability of a broker or
dealer to effect the transaction, the broker's or dealer's clearance and
settlement facilities and capabilities, its reliability and financial stability,
a dealer's willingness to commit capital, the size of the transaction, and the
market for the security involved.
Many securities, both debt and equity, are traded primarily in the
over-the-counter market. For transactions traded in that market, dealers
generally act as principal rather than as agent and receive a markup or markdown
on the transaction price rather than a commission. The Funds intend to deal with
primary market makers for securities traded in the over-the-counter markets
except where more favorable execution and price can be obtained elsewhere. Funds
may also purchase securities directly from issuers or from underwriters or
dealers as part of an offering of securities. Purchases from dealers and
underwriters in such offerings will include a discount or concession granted by
the issuer to the underwriter.
In selecting brokers and dealers, the Investment Manager will consider not only
the factors described above relating to price and execution quality, but also
the value of research services and products provided to the Investment Manager.
As a result, a Fund may pay higher commission rates to such brokers than the
lowest available when the Investment Manager believes it is reasonable to do so
in light of the value of the brokerage and research services provided by the
broker effecting the transaction. The Investment Manager also may consider sales
of shares of the Trust as a factor in selection of broker-dealers to execute
portfolio transactions of the Trust. In addition, the Trust may direct the
Investment Manager, subject to obtaining best execution, to execute a portion of
one or more Fund's portfolio transactions through certain broker-dealers in
exchange for the broker-dealers' agreement to satisfy or pay obligations that
the Fund has incurred for, among other things, custodial, accounting, or
transfer agency services. These practices could result in a Fund paying higher
aggregate transaction costs than would otherwise be the case.
Subject to the foregoing considerations of price and execution, the Funds may
use GMG Securities in connection with portfolio transactions in exchange-traded
securities. GMG Securities is a member of the American Stock Exchange and the
National Association of Securities Dealers, Inc. The ownership of GMG Securities
overlaps significantly with the ownership of the Investment Manager and GMG
Securities should be considered an affiliated person of the Investment Manager.
GMG Securities will receive brokerage commissions from the Funds, limited to
"usual and customary broker's commissions," as contemplated by the 1940 Act, and
subject to GMG Securities being able to provide execution at least as favorable
as that provided by other qualified brokers. The Trustees have developed
procedures to ensure that the commissions paid to GMG Securities are limited to
"usual and customary broker's commissions" as contemplated in the 1940 Act. On a
quarterly basis, the Trustees will review the securities transactions of each
Fund effected by GMG Securities to assure their compliance with those
procedures.
Some securities considered for investment by the Funds may also be appropriate
for other clients served by the Investment Manager, including accounts in which
the Investment Manager or
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<PAGE> 69
persons associated with the Investment Manager are investors, such as investment
partnerships of which the Investment Manager or such associated persons is the
general partner. If a purchase or sale of securities consistent with the
investment policies of a Fund and one or more of these clients served by the
Investment Manager is considered at or about the same time, transactions in such
securities will be allocated among the Fund and clients in a manner deemed fair
and reasonable by the Investment Manager.
NET ASSET VALUE
The net asset value per share of each class of each Fund will be determined as
of the regular close of trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time) by dividing the total market value of a Fund's portfolio
investments and other assets attributable to that class, less that class'
proportionate share of the Fund's liabilities that are not attributable to a
particular class and any liabilities attributable to that class, by the number
of total outstanding shares of that class. Net asset value will not be
determined on days on which the New York Stock Exchange is closed.
Portfolio securities and other assets for which market quotations are readily
available will be stated at market value. Market value will be determined on the
basis of last reported sales prices, or if no sales are reported, at the mean
between representative bid and asked quotations obtained from a quotation
reporting system or from established market makers. Fixed income securities,
including those to be purchased under firm commitment agreements (other than
obligations having a maturity of 60 days of less), will normally be valued on
the basis of quotes obtained from brokers and dealers or 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. Quotations of foreign
securities in foreign currency will be converted to U.S. dollar equivalents
using foreign exchange quotations received from independent dealers. Short-term
investments having a maturity of 60 days or less will be valued at amortized
cost, when the Trustees determine that amortized cost is their fair market
value. Certain debt securities for which daily market quotations are not
available may be valued, pursuant to guidelines established by the Trustees,
with reference to fixed income securities whose prices are more readily
obtainable and whose durations are comparable to the securities being valued.
Subject to the foregoing, other securities for which market quotations are not
readily available will be valued at fair value as determined in good faith by,
or at the direction of, the Trustees.
DIVIDENDS AND CAPITAL GAINS
The Funds will distribute substantially all of their net investment income in
the form of dividends to shareholders. The following table shows how often each
Fund expects to pay dividends.
<TABLE>
<CAPTION>
FUND DIVIDEND PAID
- --------------------------------------------------------------------------------
<S> <C>
Seneca Growth Fund Annually
- --------------------------------------------------------------------------------
Seneca Mid-Cap Growth Fund Annually
- --------------------------------------------------------------------------------
Seneca Bond Fund Monthly
- --------------------------------------------------------------------------------
</TABLE>
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<PAGE> 70
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
Seneca Real Estate Securities Fund Quarterly
================================================================================
</TABLE>
Each of the Funds will distribute net capital gains, if any, annually.
Shareholders may select from among the following distribution options:
REINVESTED Have all dividends and capital gains distributions
reinvested in additional shares of the same or any
other Fund. If a shareholder does not choose one of the
other options, this option will be selected
automatically.
CASH AND REINVESTED Have either dividends or capital gains paid in cash
and the other reinvested in additional shares in the
same or any other Fund; or
ALL CASH Have dividends and capital gains distributions paid
in cash.
Each Fund will make distributions on a per share basis to the shareholders of
record as of the distribution date of that Fund, regardless of how long the
shares have been held. That means if an investor buys shares just before or on a
record date, he or she will pay the full price for the shares and then may
receive a portion of the price back as a taxable distribution.
INCOME TAX CONSIDERATIONS
FEDERAL TAXES. For each taxable year, each Fund intends to qualify as a
regulated investment company under Subchapter M of the Code. Qualifying
regulated investment companies distributing substantially all of their ordinary
income and capital gains are not subject to federal income or excise tax on any
net investment income and net realized capital gains distributed to
shareholders. However, the shareholders are subject to tax on these
distributions.
Dividends paid by a Fund from net investment income, the excess of net
short-term capital gain over net long-term capital loss, and original issue
discount or certain market discount income will be taxable to shareholders as
ordinary income. Distributions paid by a Fund from the excess of net long-term
capital gain over net short-term capital loss will be taxable as long-term
capital gains regardless of how long the shareholders have held their shares.
These tax consequences will apply regardless of whether distributions are
received in cash or reinvested in shares. A portion of the dividends paid to
corporate shareholders may qualify for the corporate dividends-received
deduction to the extent the Fund earns qualifying dividends. Each Fund will
notify shareholders after each calendar year of the amount and character of
distributions they received from that Fund for federal tax purposes.
For IRAs and pension plans, dividends and capital gains will be reinvested and
not taxed until the beneficiary receives a qualified distribution from the IRA
or pension plan.
Shareholders should consider the tax implications of buying shares immediately
prior to a distribution. Investors who purchase shares shortly before the record
date for a distribution will pay a per share price that includes the value of
the anticipated distribution. They will be taxed
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<PAGE> 71
when they receive the distribution even though the distribution represents a
return of a portion of the purchase price.
Redemptions and exchanges of shares are taxable events that may represent a gain
or a loss for the shareholder.
Individuals and certain other types of shareholders may be subject to backup
withholding of federal income tax on distributions, redemptions and exchanges if
they fail to furnish their correct taxpayer identification number. Individuals,
corporations and other shareholders that are not U.S. persons under the Code are
subject to different tax rules. They may be subject to nonresident alien
withholding on amounts considered ordinary dividends from the Fund.
New investors must certify that their social security or taxpayer identification
numbers are correct. They must also certify that they are not subject to backup
withholding for failure to report income to the Internal Revenue Service.
OTHER TAXES. In addition to federal taxes, investors may be subject to state and
local taxes on payments received from a Fund. Depending on the state tax rules
pertaining to a shareholder, a portion of the dividends paid by a Fund that come
from direct obligations of the U.S. Treasury and certain agencies may be exempt
from state and local taxes. Investors should consult their tax advisers
regarding specific questions as to federal, state and local taxes.
INVESTMENT MANAGER AND ADMINISTRATOR
As Investment Manager, GMG/Seneca is responsible for making investment decisions
for the Funds and for selecting brokers and dealers to execute transactions for
each Fund. GMG/Seneca has been an investment adviser since 1989, managing equity
and fixed-income securities portfolios primarily for institutions and
individuals. Gail P. Seneca and Genesis Merchant Group, L.P. are the managing
general partners of GMG/Seneca. Gail P. Seneca, William K. Weinstein and Philip
C. Stapleton are the general partners of Genesis Merchant Group, L.P. GMG/Seneca
plans to reorganize from a limited partnership to a limited liability company,
effective in mid-1996, and the Funds will enter into a new Investment Management
Agreement with the resulting limited liability company at that time. The
material terms of the Investment Management Agreement will remain unchanged. The
limited liability company will be owned by Ms. Seneca, the existing limited
partners of GMG/Seneca, the existing partners of Genesis Merchant Group, L.P.,
and certain employees of GMG/Seneca. Under the limited liability company's
"operating agreement," Ms. Seneca will be the sole "manager" of GMG/Seneca after
the reorganization.
Investment and trading decisions for each Fund will be made by a team of
managers and analysts headed by two team leaders. The team leaders for each Fund
will be primarily responsible for the day-to-day decisions related to that Fund.
The team leader of any one Fund may be on another Fund team.
GAIL P. SENECA is a team leader for each of the Funds. From October 1987 until
October 1989, she was Senior Vice President of the Asset Management Division of
Wells Fargo Bank and from October 1983 to September 1987, she was chief
investment strategist for Chase Lincoln Bank.
RICHARD D. LITTLE is the other team leader for the Seneca Growth Fund and the
Seneca Mid-Cap Growth Fund. Mr. Little has been with GMG/Seneca since December
1989. He is a general partner and director of Equities. Before he joined
GMG/Seneca, Mr. Little held positions as an
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<PAGE> 72
analyst, board member, and regional manager with Smith Barney, NatWest
Securities, and Montgomery Securities.
CHARLES B. DICKE is the other team leader for the Seneca Bond Fund. He has been
a Fixed-Income Portfolio Manager with GMG/Seneca since October 1991. Before
joining GMG/Seneca, he was a Vice President with Lehman Brothers, serving as a
Product Manager for Government agency securities and a strategist on
fixed-income portfolios.
DAVID SHAPIRO is the other leader for the Seneca Real Estate Securities Fund. He
has been a Portfolio Manager with GMG/Seneca since February 1996. Before joining
GMG/Seneca, he was a Portfolio Manager with Genesis Realty since May 1995. Prior
to that, he was a managing director of The ADCO Group from 1992 to 1995.
MANAGEMENT FEE. For its services to the Funds, the Investment Manager will
receive a Management Fee based on an annual percentage of the average daily net
assets of each Fund. It is accrued daily, and paid monthly. The annual fee
percentages are 0.70% for the Seneca Growth Fund, 0.80% for the Seneca Mid-Cap
Growth Fund, 0.50% for the Seneca Bond Fund, and 0.85% for the Seneca Real
Estate Securities Fund. The Investment Manager's approach to locating attractive
investments in medium-capitalization companies, evaluating and monitoring them,
and effecting transactions in such securities requires more effort and resources
than traditional management of large-capitalization equity portfolios and bond
portfolios, as does the specialized nature of investing in real estate and real
estate-related securities. Accordingly, the management fees for the Seneca
Mid-Cap Growth Fund and the Seneca Real Estate Securities Fund are higher than
the management fees paid by most other mutual funds that do not pursue these
types of investment programs. The Investment Manager will reduce the Management
Fee each Fund must pay if the fee exceeds any state-imposed expense limitations,
excluding permissible items, such as brokerage commissions, Rule 12b-1 payments,
interest, taxes and litigation expenses. The Investment Manager may waive some
or all of these fees from time to time at its discretion, and may reimburse a
Fund for a portion of the Fund's expenses. These practices will increase a
Fund's return and will be intended to make the Fund more competitive. The
Investment Manager expects to effect such waivers and reimbursements to the
extent necessary to prevent the Funds' overall expenses from exceeding the
levels in the expense table set forth elsewhere in this Prospectus through
September 30, 1996. Thereafter, any such waivers or reimbursements the
Investment Manager may provide may be terminated at any time.
ADMINISTRATIVE SERVICES. Pursuant to an Administrative Services Agreement,
GMG/Seneca is responsible for the day-to-day administrative functions of the
Trust. GMG/Seneca has entered into an agreement with State Street pursuant to
which State Street performs most of those functions. Among other things, State
Street provides the Trust and each Fund with clerical, data processing, and
other, similar services and support; handles the registration of the Funds'
shares under the securities laws of those states and other jurisdictions where
the shares are offered; assists in the preparation of SEC registration
materials, periodic reports, and proxy materials; and provides bookkeeping and
accounting services, including maintaining the accounts, books and records that
are required under applicable laws. For these services, the Administrative class
of each Fund pays GMG/Seneca a fee based on the average net assets of the Fund.
The Investment Manager may waive some or all of these fees from time to time at
its discretion, and may reimburse a Fund for a portion of a Fund's expenses. The
Institutional class of each Fund pays a lower fee in recognition of the fact
that fewer services are required.
GMG/Seneca may from time to time waive some or all of its fee and/or reimburse a
Fund for a portion of the Fund's operating expenses. Such reimbursements will
increase a Fund's return.
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<PAGE> 73
This is intended to make the Funds more competitive. Any such waivers or
reimbursements may be terminated at any time.
GENERAL INFORMATION
SENECA FUNDS. Seneca Funds was organized as a Delaware business trust on
December 18, 1995. The Trust is registered with the Securities and Exchange
Commission under the 1940 Act as an open-end management investment company of
the series type. Each Fund constitutes a separate series. The fiscal year-end of
each of the Funds is September 30.
The Trust is authorized to issue and sell multiple classes of shares for each
series of shares of the Funds. Each of the Trust's existing series currently has
two classes of shares, Institutional Shares and Administrative. The Trust may
issue additional series and additional classes of existing series of shares in
the future with such rights, preferences, and privileges as the Trustees may
determine (subject to compliance with applicable law), without the consent of
shareholders.
Except for the differences noted below and elsewhere in this Prospectus, each
share of a Fund has equal dividend, redemption and liquidation rights with other
shares of that Fund and when issued, will be fully paid and nonassessable. Each
share of each class represents an identical legal interest in the same
investments of a Fund, except that each class has certain expenses related
solely to that class. In particular, Administrative Shares have higher fees and
expenses relating to the way in which they are distributed and the services
provided to their class. Each class will have exclusive voting rights under the
12b-1 Distribution and Administrative Services Plan. In the event that a meeting
of shareholders is called, separate votes are taken by each class only if a
matter affects, or requires the vote of, just that class. Although the legal
rights of holders of each class of shares are identical, it is likely that the
difference in expenses will result in different net asset values and dividends.
The classes may also have different exchange privileges.
As a Delaware business trust, the Trust is not required to hold regular annual
meetings of shareholders. Ordinarily there will be no shareholder meetings,
unless called by the Trustees, requested by shareholders holding 10% or more of
the outstanding shares under circumstances in which the 1940 Act or Delaware law
require that a meeting be held upon such request, or required by the 1940 Act or
Delaware law. Shareholders are entitled to cast one vote for each dollar of net
asset value of their shares on the record date. At a shareholders meeting, if
one is called, issues that affect all the Funds and classes in substantially the
same way will be voted on by all shareholders of all Funds. Issues that do not
affect a Fund or a class will not be voted on by shareholders of that Fund or
class. Issues that affect all Funds, but in which their interests are not
substantially the same, will be voted on separately by each Fund.
CUSTODIAN AND TRANSFER AGENT. Investors Fiduciary Trust Company ("IFTC" or the
"Transfer Agent"), P.O. Box 419565, Kansas City, Missouri 64141-6565, serves as
both Custodian and Transfer Agent for the Funds. Under a Custodian Agreement,
IFTC holds all securities and cash assets of the Funds as custodian and provides
certain accounting and recordkeeping services. In its capacity as the custodian,
IFTC is authorized to deposit securities in securities depositories or to use
services of sub-custodians.
Under a Transfer Agency Agreement, IFTC is responsible for, among other things:
a) opening and maintaining shareholder accounts; b) reporting account
information to shareholders; c) paying dividends and capital gains, and d)
handling requests for exchanges, transfers and redemptions.
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<PAGE> 74
DISTRIBUTOR. GMG Securities is currently the principal underwriter and
distributor of the shares of each of the Funds and will distribute
Administrative as well as Institutional Shares. Seneca Distributors has also
entered into a Distribution Agreement with the Trust pursuant to which, upon its
registration as a broker-dealer under the Securities Exchange Act of 1934 and
all applicable state securities laws, and becoming a member of the National
Association of Securities Dealers, Inc., Seneca Distributors will become a
principal underwriter and distributor of the Funds' shares. It is expected that
GMG Securities will then terminate its agreement with the Trust and Seneca
Distributors will become the sole Distributor. The ownership of GMG Securities
overlaps significantly with that of GMG/Seneca and GMG Securities should be
considered an affiliated person of GMG/Seneca. Seneca Distributors is 99% owned
by GMG/Seneca.
DISTRIBUTION AND RELATED SERVICES. Pursuant to a Distribution Plan, the Trust
has entered into a Distribution Agreement with the Distributor under which the
Trust will pay the Distributors a fee at an annual rate 0.25% of the average
daily net assets attributable to the Administrative Shares of each Fund. No
Distribution Fee will be paid as to the Institutional Shares of any Fund.
Amounts paid under the Distribution Plan may be used by the Distributor to cover
expenses that are primarily intended to result in, or are primarily attributable
to (i) the sale of Administrative Shares, (ii) ongoing servicing and/or
maintenance of accounts of holders of Administrative Shares, and (iii)
subaccounting, recordkeeping, and administrative services related to the sale of
Administrative Shares, all as set forth in the Distribution Plan. Payments under
the Distribution Plan are not tied directly to the expenses actually incurred by
the Distributor in connection with the foregoing activities and may exceed those
expenses. The Trustees will evaluate the appropriateness of the Distribution
Plan annually. For a more complete disclosure of the Plan and its terms, see the
SAI.
Shares may also be offered through certain brokers and financial intermediaries
("service agents"). Service agents may impose additional or different conditions
on the purchase or redemption of a Fund's shares by their customers and may
charge their customers transactions or other account fees on the purchase and
redemption of a Fund's shares. Each service agent is responsible for
transmitting to its customers a schedule of any such fees and information
regarding any additional or different conditions regarding purchases and
redemptions. Shareholders who are customers of service agents should consult
their service agent for information regarding these fees and conditions and
should be aware that, if they satisfy the minimum purchase requirements, they
could avoid those fees by investing directly through the Distributors.
OTHER EXPENSES
The Trust bears all costs of its operations. Trust expenses directly
attributable to a Fund or a class of shares are charged to that Fund or class;
other expenses are allocated among all the Funds. Administrative Shares may be
purchased in employee benefit plan accounts and in accounts maintained with
financial institutions and financial services companies such as broker-dealers.
Employee benefit plan administrators and financial institutions and financial
services companies through which Administrative Shares are purchased may be paid
fees by the Funds for transfer agency, accounting, recordkeeping, and
administrative and other services provided with respect to such shares. Those
services may include maintaining account records, aggregating and processing
orders to purchase, redeem, and exchange Administrative Shares, processing
dividend payments, forwarding shareholder communications, and providing
subaccounting services for shares held beneficially.
PERFORMANCE INFORMATION.
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<PAGE> 75
The Trust may publish performance information about the Funds. Fund performance
usually will be shown either as cumulative total return or average periodic
total return compared with other mutual funds as published by public ranking
services, such as Lipper Analytical Services, Inc. Cumulative total return is
the actual performance over a stated period of time. Average annual total return
is the hypothetical return, compounded annually, that would have produced the
same cumulative return if the Fund's performance had been over the entire
period. Each Fund's total return shows its overall dollar or percentage change
in value. This includes changes in the share price and reinvestment of dividends
and capital gains.
The performance of a Fund may also be measured in terms of yield. Each Fund's
yield shows the rate of income the Fund earns on its investments as a percentage
of the Fund's share price.
A Fund may also separate its cumulative and average annual total returns into
income results and capital gains or losses. Each Fund may quote its total
returns on a before-tax or after-tax basis.
The performance information that may be published for the Funds is historical.
It is not intended to represent or guarantee future results. The value of Fund
shares may be more or less than their original cost when they are redeemed. For
more information, see the SAI.
MATERIAL LEGAL PROCEEDINGS. There are no material legal proceedings to which the
Trust is subject, or to which the Investment Manager or the Distributor are
subject, that are likely to have a material adverse effect on their ability to
perform their obligations to the Trust or on the Trust itself.
SUMMARY OF BOND RATINGS. Following is a summary of the grade indicators used by
two of the most prominent, independent rating agencies (Moody's Investors
Service, Inc. and Standard & Poor's Corporation) to rate the quality of bonds.
The first four categories are generally considered investment quality bonds.
Those below that level are of lower quality and are sometimes referred to as
"junk bonds."
<TABLE>
<CAPTION>
INVESTMENT GRADE MOODY'S STANDARD &
POOR'S
- --------------------------------------------------------------------------------
<S> <C> <C>
Highest quality Aaa AAA
- --------------------------------------------------------------------------------
High quality Aa AA
- --------------------------------------------------------------------------------
Upper medium A A
- --------------------------------------------------------------------------------
Medium, speculative features Baa BBB
- --------------------------------------------------------------------------------
LOWER QUALITY
- --------------------------------------------------------------------------------
Moderately speculative Ba BB
- --------------------------------------------------------------------------------
</TABLE>
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<PAGE> 76
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C>
Speculative B B
- --------------------------------------------------------------------------------
Very Speculative Caa CCC
- --------------------------------------------------------------------------------
Very high risk Ca CC
- --------------------------------------------------------------------------------
Highest risk, may not be paying interest C C
- --------------------------------------------------------------------------------
In arrears or default C D
- --------------------------------------------------------------------------------
</TABLE>
For more detailed information on bond ratings, including gradations within each
category of quality, see the SAI.
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<PAGE> 77
PART B
SENECA FUNDS
SENECA GROWTH FUND
SENECA MID-CAP GROWTH FUND
SENECA BOND FUND
SENECA REAL ESTATE SECURITIES FUND
(each a "Fund" and collectively, the "Funds")
ADMINISTRATIVE SHARES and
INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
February 29, 1996
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Institutional Shares or Administrative Shares
prospectus of the Funds, dated February 29, 1996, as amended and/or
supplemented from time to time (the "Prospectuses"), copies of which may be
obtained without charge by writing to Seneca Funds (the "Trust"), care of its
transfer agent, Investors Fiduciary Trust Company, P.O. Box 419565, Kansas
City, Missouri 64141-6565, or by calling 1-800-990-9331.
THE STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
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<PAGE> 78
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL 1
INVESTMENT OBJECTIVES AND POLICIES 1
INVESTMENT RESTRICTIONS 18
CALCULATION OF THE FUNDS' RETURNS 22
ADVISORY AND ADMINISTRATIVE SERVICES 25
TRUSTEES AND OFFICERS 30
NET ASSET VALUE 32
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS 33
PORTFOLIO BROKERAGE 36
PORTFOLIO TURNOVER 39
ORGANIZATION 40
CUSTODIAN 41
TRANSFER AGENT 42
INDEPENDENT AUDITORS 42
FINANCIAL STATEMENTS 43
APPENDIX 45
GLOSSARY 46
</TABLE>
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<PAGE> 79
GENERAL
The Trust consists of four separate Funds: The Seneca Growth Fund; the Seneca
Mid-Cap Growth Fund; the Seneca Bond Fund; and the Seneca Real Estate
Securities Fund. Each Fund offers two classes of shares: Institutional Shares
and Administrative Shares. Institutional Shares are offered directly by the
Funds' "Distributor" (see "Advisory and Administrative Services--Distribution
and Service Plan") to institutional investors such as pension and profit
sharing plans, employee benefit trusts, endowments, foundations, and
corporations. Administrative Shares are offered primarily to investors through
accounts with broker-dealers, employee benefit plan administrators and other
financial intermediaries. The Administrative class pays fees to those entities
for subaccounting, recordkeeping, and similar services they provide that class.
All capitalized terms not defined herein have the meanings set forth in the
Prospectuses.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and general investment policies of each Fund are
described in the Prospectuses. This Statement of Additional Information should
be read in conjunction with the Prospectus. See, in particular, "The Seneca
Funds in Detail" and "Investment Practices and Risk Considerations" in the
Prospectus. Additional information concerning the characteristics of certain
securities in which the Funds may invest and certain practices in which they
may engage is set forth below. The Appendix to this Statement of Additional
Information contains a description of the quality categories of corporate bonds
in which the Funds may invest, and a Glossary describing some of the Funds'
investments.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with banks, broker-dealers or
other financial institutions in order to generate additional current income.
Under a repurchase agreement, a Fund acquires a security from a seller subject
to resale to the seller at an agreed upon price and date. The resale price
reflects an agreed upon interest rate effective for the time period the
security is held by the Fund. The repurchase price may be higher than the
purchase price, the difference being income to the Fund, or the purchase and
repurchase price may be the same, with interest payable to the Fund at a stated
rate together with the repurchase price on repurchase. In either case, the
income to the Fund is unrelated to the interest rate on the security.
Typically, repurchase agreements are in effect for one week or less, but may be
in effect for longer periods of time. Repurchase agreements of more than one
week's duration are subject to each Fund's limitation on investments in
illiquid securities.
Repurchase agreements are considered by the Securities and Exchange Commission
(the "SEC") to be loans by the purchaser collateralized by the underlying
securities. In an attempt to reduce the risk of incurring a loss on a
repurchase agreement, the Funds will generally enter into repurchase agreements
only with domestic banks with total assets in excess of one billion dollars,
primary dealers in U.S. Government securities reporting to the Federal Reserve
Bank of New York or broker-dealers approved by the Trustees of the Trust. The
Investment Manager will monitor the value of the underlying securities
throughout the term of the agreement to attempt to ensure that their market
value always equals or exceeds the agreed-upon repurchase price to be paid to a
Fund. Each Fund will maintain a segregated account with its custodian,
Investors Fiduciary Trust Company (the "Custodian"), or a subcustodian for the
securities and other collateral, if any, acquired under a repurchase agreement
for the term of the agreement.
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<PAGE> 80
In addition to the risk of the seller's default or a decline in value of the
underlying security (see "Investment Practices and Risk Considerations --
Repurchase Agreements" in the Prospectus), a Fund also might incur disposition
costs in connection with liquidating the underlying securities. If the seller
becomes insolvent and subject to liquidation or reorganization under the
Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by a Fund not within the control of that Fund
and therefore subject to sale by the seller's trustee in bankruptcy. Finally,
it is possible that a Fund may not be able to perfect its interest in the
underlying security and may be deemed an unsecured creditor of the seller.
CORPORATE DEBT SECURITIES
A Fund's investments in debt securities of domestic or foreign corporate
issuers are limited to bonds, debentures, notes and other similar corporate
debt instruments, including convertible securities that meet the Fund's minimum
ratings criteria or if unrated are, in the Investment Manager's opinion,
comparable in quality to corporate debt securities that meet those criteria.
The rate of return or return of principal on some debt obligations may be
linked or indexed to the level of exchange rates between the U.S. dollar and a
foreign currency or currencies or to the value of commodities, such as gold.
Convertible Securities. A convertible security is a bond, debenture, note, or
other security that entitles the holder to acquire common stock or other equity
securities of the same or a different issuer. It generally entitles the holder
to receive interest paid or accrued until the security matures or is redeemed,
converted, or exchanged. Before conversion, convertible securities have
characteristics similar to nonconvertible debt securities. Convertible
securities rank senior to common stock in a corporation's capital structure
and, therefore, generally entail less risk than the corporation's common stock,
although the extent to which this is true depends in large measure on the
degree to which the convertible security sells above its value as a
fixed-income security.
A convertible security may be subject to redemption or conversion at the option
of the issuer at a predetermined price. If a convertible security held by a
Fund is called for redemption, the Fund could be required to permit the issuer
to redeem the security and convert it to the underlying common stock. The
Seneca Bond Fund generally would invest in convertible securities for their
favorable price characteristics and total return potential and would normally
not exercise an option to convert. The Seneca Growth Fund and Seneca Mid-Cap
Growth Fund might be more willing to convert such securities to common stock.
Below-Investment Grade Securities. Investments in below-investment grade
securities (see Appendix for an explanation of the various ratings) generally
provide greater income (leading to the name "high-yield" securities) and
opportunity for capital appreciation than investments in higher quality
securities, but they also typically entail greater price volatility and
principal and income risk. These securities are regarded as predominantly
speculative as to the issuer's continuing ability to meet principal and
interest payment obligations. The markets for these securities are relatively
new and many of the outstanding high-yield securities have not endured a major
business recession. A long-term track record on default rates, such as that
for investment-grade corporate bonds, does not exist for these securities.
Analysis of the creditworthiness of issuers of lower-quality debt securities
may be more complex than for issuers of higher-quality debt securities.
High-yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment-grade securities.
The prices of high-yield securities have been found to be less sensitive to
interest-rate changes than higher-quality investments, but more sensitive to
adverse economic developments or individual corporate
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developments. A projection of an economic downturn or of a period of rising
interests rates, for example, could cause a decline in high-yield securities
prices because the advent of a recession could lessen the ability of a
highly-leveraged company to make principal and interest payments. If an issuer
of high-yield securities defaults, in addition to risking payment of all or a
portion of interest and principal, the Funds may incur additional expenses to
seek recovery. Market prices of high-yield securities structured as
zero-coupon or pay-in-kind securities are affected to a greater extent by
interest rate changes, and therefore tend to be more volatile than securities
that pay interest periodically and in cash.
The secondary market on which high-yield securities are traded may be less
liquid than the market for higher-grade securities. Less liquidity could
adversely affect the price at which a Fund could sell a high-yield security and
could adversely affect the daily net asset value of the Fund's shares. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of high-yield securities,
especially in a thinly-traded market. When secondary markets for these
securities are less liquid than the market for higher-grade securities, it may
be more difficult to value the high-yield securities because the valuation may
require more research and judgment may play a greater role in valuation because
of the lack of reliable, objective data.
DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase securities on a when-issued or forward commitment basis.
These transactions are also know as delayed delivery transactions. (The phrase
"delayed delivery" is not intended to include purchases where a delay in
delivery involves only a brief period required by the selling party solely to
locate appropriate certificates and prepare them for submission for clearance
and settlement in the customary way.) Delayed delivery transactions involve a
commitment by a Fund to purchase or sell securities at a future date
(ordinarily up to 90 days later). The price of the underlying securities
(usually expressed in terms of yield) and the date when the securities will be
delivered and paid for (the settlement date) are fixed at the time the
transaction is negotiated. When-issued purchases and forward commitments are
negotiated directly with the selling party.
When-issued purchases and forward commitments enable a Fund to lock in what is
believed to be an attractive price or yield on a particular security for a
period of time, regardless of future changes in interest rates. For example,
in periods of rising interest rates and falling bond prices, a Fund might sell
debt securities it owns on a forward commitment basis to limit its exposure to
falling prices. In periods of falling interest rates and rising prices, a Fund
might sell securities it owns and purchase the same or similar securities on a
when-issued or forward commitment basis, thereby obtaining the benefit of
currently higher yields. A Fund will not enter into such transactions for the
purpose of leverage.
The value of securities purchased on a when-issued or forward commitment basis
and any subsequent fluctuations in their value will be reflected in the Fund's
net asset value starting on the date of the agreement to purchase the
securities, and the Fund will be subject to the rights and risks of ownership
of the securities on that date. A Fund will not earn interest on securities it
has committed to purchase until they are paid for and received.
When a Fund makes a forward commitment to sell securities it owns, the proceeds
to be received upon settlement will be included in the Fund's assets.
Fluctuations in the market value of the underlying securities will not be
reflected in the Fund's net asset value as long as the commitment to sell
remains in effect. Settlement of when-issued purchases and forward commitment
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transactions generally takes place up to 90 days after the date of the
transaction, but a Fund may agree to a longer settlement period.
A Fund will make commitments to purchase securities on a when-issued basis or
to purchase or sell securities on a forward commitment basis only with the
intention of completing the transaction and actually purchasing or selling the
securities. If deemed advisable as a matter of investment strategy, however, a
Fund may dispose of or renegotiate a commitment after it is entered into. A
Fund also may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. The Fund may
realize a capital gain or loss in connection with these transactions.
When a Fund purchases securities on a when-issued or forward-commitment basis,
the Custodian will maintain in a segregated account securities having a value
(determined daily) at least equal to the amount of the Fund's purchase
commitments. These procedures are designed to ensure that each Fund will
maintain sufficient assets at all times to cover its obligations under
when-issued purchases and forward commitments.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage Pass-Through Securities. These are interests in pools of mortgage
loans, assembled and issued by various governmental, government-related, and
private organizations. Unlike other forms of debt securities, which normally
provide for periodic payment of interest in fixed amounts with principal
payments at maturity or specified call dates, these securities provide a
monthly payment consisting of both interest and principal payments. In effect,
these payments are a "pass-through" of the monthly payments made by the
individual borrowers on their residential or commercial mortgage loans, net of
any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from the sale of the
underlying property, refinancing or foreclosure, net of fees or costs.
"Modified pass-through" securities (such as securities issued by the Government
National Mortgage Association ("GNMA") entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
at the scheduled payment dates regardless of whether or not the mortgagor
actually makes the payment.
The principal governmental guarantor of mortgage-related securities is GNMA.
GNMA is a wholly owned United States Government corporation within the
Department of Housing and Urban Development. GNMA is authorized to guarantee,
with the full faith and credit of the United States Government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as savings and loan institutions, commercial banks and mortgage
bankers) and backed by pools of Federal Housing Administration insured or
Veterans Administration guaranteed mortgages.
Government-related guarantors whose obligations are not backed by the full
faith and credit of the United States Government include the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation
("FHLMC"). FNMA is a government-sponsored corporation owned entirely by
private stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development. FNMA purchases conventional (i.e., not insured
or guaranteed by any government agency) residential mortgages from a list of
approved seller/servicers which include state and federally chartered savings
and loan associations, mutual savings banks, commercial banks and credit unions
and mortgage bankers. FHLMC is a government-sponsored corporation formerly
owned by the twelve Federal Home Loan Banks and now owned entirely by private
stockholders. FHLMC issues Participation Certificates ("Pcs") that represent
interests in conventional mortgages from FHLMC's national portfolio. FNMA and
FHLMC
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guarantee the timely payment of interest and ultimate collection of principal
on securities they issue, but their guarantees are not backed by the full faith
and credit of the United States Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential mortgage loans. Such issuers
may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments for such
securities. However, timely payment of interest and principal of these pools
may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets a Fund's investment quality
standards. There can be no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. Funds may buy mortgage-related securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the originator/servicers and poolers, the Investment Manager determines that
the securities meet the Funds' quality standards. Securities issued by certain
private organizations may not be readily marketable.
Mortgage-backed securities that are issued or guaranteed by the U.S.
Government, its agencies or instrumentalities, are not subject to the Funds'
industry concentration restrictions, set forth below under "Investment
Restrictions," by virtue of the exclusion from the test available to all U.S.
Government securities. The Funds will take the position that privately-issued
mortgage-related securities do not represent interests in any particular
"industry" or group of industries. The assets underlying such securities may
be represented by a portfolio of first lien residential mortgages (including
both whole mortgage loans and mortgage participation interests) or portfolios
of mortgage pass-through securities issued or guaranteed by GNMA, FNMA or
FHLMC. Mortgage loans underlying a mortgage-related security may in turn be
insured or guaranteed by the Federal Housing Administration or the Department
of Veterans Affairs. In the case of private issue mortgage-related securities
whose underlying assets are neither U.S. Government securities nor U.S.
Government-insured mortgages, to the extent that real properties securing such
assets may be located in the same geographical region, the security may be
subject to a greater risk of default than other comparable securities in the
event of adverse economic, political or business developments that may affect
such region and, ultimately, the ability of residential homeowners to make
payments of principal and interest on the underlying mortgages.
Collateralized Mortgage Obligations (CMOs). A CMO is similar to a bond in that
interest and prepaid principal is paid, in most cases, semiannually. CMOs may
be collateralized by whole mortgage loans or by portfolios of mortgage
pass-through securities guaranteed by entities such as GNMA, FHLMC, or FNMA,
and their income streams.
CMOs are typically structured in multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of
mortgages according to how quickly the loans are repaid. Monthly payment of
principal received from the pool of underlying mortgages, including
prepayments, is first returned to investors holding the shortest maturity
class. Investors holding the longer maturity classes
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typically receive principal only after the first class has been retired. An
investor may be partially guarded against a sooner than desired return of
principal because of the sequential payments.
FHLMC CMOs are debt obligations of FHLMC issued in multiple classes having
different maturity dates and are secured by the pledge of a pool of
conventional mortgage loans purchased by FHLMC. Unlike FHLMC Pcs, payments of
principal and interest on the CMOs are made semiannually rather than monthly.
The amount of principal payable on each semiannual payment date is determined
in accordance with FHLMC's mandatory sinking fund schedule. Sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payments of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's
minimum sinking fund obligation for any payment date are paid to the holders of
the CMOs as additional sinking-fund payments. Because of the "pass-through"
nature of all principal payments received on the collateral pool in excess of
FHLMC's minimum sinking fund requirement, the rate at which principal of the
CMOs is actually repaid is likely to be such that each class of bonds will be
retired in advance of its scheduled maturity date. If collection of principal
(including prepayments) on the mortgage loans during any semiannual payment
period is not sufficient to meet FHLMC's minimum sinking fund obligation on the
next sinking fund payment date, FHLMC agrees to make up the deficiency from its
general funds.
CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans. As described above, the cash flow
generated by the mortgage assets underlying a series of CMOs is applied first
to make required payments of principal and interest on the CMOs and second to
pay the related administrative expenses of the issuer. The "residual" in a CMO
structure generally represents the interest in any excess cash flow remaining
after making the foregoing payments. Each payment of such excess cash flow to
a holder of the related CMO residual represents income and/or a return of
capital. The amount of residual cash flow resulting from a CMO will depend on,
among other things, the characteristics of the mortgage assets, the coupon rate
of each class of CMO, prevailing interest rates, the amount of administrative
expenses and, in particular, the prepayment experience on the mortgage assets.
In addition, if a series of a CMO includes a class that bears interest at an
adjustable rate, the yield to maturity on the related CMO residual will also be
extremely sensitive to changes in the level of the index upon which interest
rate adjustments are based. As described below with respect to stripped
mortgage-backed securities, in certain circumstances a Fund may fail to recoup
fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently
may not have the liquidity of other more established securities trading in
other markets. CMO residuals may be subject to certain restrictions on
transferability, may be deemed "illiquid," and may be subject to a Fund's
limitations on investment in illiquid securities.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. They may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans. SMBS are usually structured with two
classes that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of SMBS will have
one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and
the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the interest-only or "IO" class), while the other
class will
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receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class security is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may fail to recoup fully its initial investment in these securities even
if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through several
investment banking firms acting as brokers or dealers, these securities were
only recently developed. As a result, established trading markets have not yet
developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
A Fund may invest in other mortgage-related securities with features similar to
those described above, to the extent consistent with the Fund's investment
objectives and policies.
Other Asset-Backed Securities. Through trusts and other special purpose
entities, various types of securities based on financial assets other than
mortgage loans are increasingly available, in both pass-through structures
similar to mortgage pass-through securities described above and in other
structures more like CMOs. As with mortgage-related securities, these
asset-backed securities are often backed by a pool of financial assets
representing the obligations of a number of different parties. They often
include credit-enhancement features similar to mortgage-related securities.
Financial assets on which these securities are based include automobile
receivables; credit card receivables; loans to finance boats, recreational
vehicles, and mobile homes; computer, copier, railcar, and medical equipment
leases; and trade, healthcare, and franchise receivables. In general, the
obligations supporting these asset-backed securities are of shorter maturities
than mortgage loans and are less likely to experience substantial prepayments.
However, obligations such as credit card receivables are generally unsecured
and the obligors are often entitled to protection under a number of state and
federal consumer credit laws granting, among other things, rights to set off
certain amounts owed on the credit cards, thus reducing the balance due. Other
obligations that are secured, such as automobile receivables, may present
issuers with difficulties in perfecting and executing on the security
interests, particularly where the issuer allows the servicers of the
receivables to retain possession of the underlying obligations, thus increasing
the risk that recoveries on defaulted obligations may not be adequate to
support payments on the securities.
The Investment Manager expects additional assets will be "securitized" in the
future. A Fund may invest in any such instruments or variations on them to the
extent consistent with the Fund's investment objectives and policies.
FOREIGN SECURITIES
Each of Funds may invest in U.S. dollar- or foreign currency-denominated
corporate debt securities of foreign issuers (including preferred or preference
stock), certain foreign bank obligations and U.S. dollar- or foreign
currency-denominated obligations of foreign governments or their subdivisions,
agencies and instrumentalities, international agencies and supranational
entities. Seneca Growth Fund and Seneca Mid-Cap Growth Fund may each invest up
to 20% of its total assets directly in common stocks issued by foreign
companies or in securities represented by ADRs. Each Fund will limit its
investment in securities denominated in foreign currencies to no more than 20%
of the Fund's total assets.
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Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies.
These include differences in accounting, auditing and financial reporting
standards, generally higher commission rates on foreign portfolio transactions,
the possibility of expropriation or confiscatory taxation, adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country), political instability which can
affect U.S. investments in foreign countries and potential restrictions on the
flow of international capital. In addition, foreign securities and dividends
and interest payable on those securities may be subject to foreign taxes,
including taxes withheld from payments on those securities. Foreign securities
often trade with less frequency and volume than domestic securities and
therefore may exhibit greater price volatility. Changes in foreign exchange
rates will affect the value of those securities which are denominated or quoted
in currencies other than the U.S. dollar.
ADRs are dollar-denominated receipts issued generally by domestic banks and
representing the deposit with the bank of a security of a foreign issuer, and
are publicly traded on exchanges or over-the-counter in the United States.
ADRS may be issued as sponsored or unsponsored programs. In sponsored
programs, an issuer has made arrangements to have its securities trade in the
form of ADRs. In unsponsored programs, the issuer may not be directly involved
in the creation of the program. Although regulatory requirements with respect
to sponsored and unsponsored programs are generally similar, in some cases it
may be easier to obtain financial information from an issuer that has
participated in the creation of a sponsored program.
Each of Funds also may purchase and sell foreign currency options and foreign
currency futures contracts and related options and enter into forward foreign
currency exchange contracts in order to protect against uncertainty in the
level of future foreign exchange rates in the purchase and sale of securities.
The Funds may also use foreign currency options and foreign currency forward
contracts to increase exposure to a foreign currency or to shift exposure to
foreign currency fluctuations from one country to another.
A forward foreign currency contract involves an obligation to purchase or sell
a specific currency at a future date, which may be any fixed number of days
from the date of the contract agreed upon by the parties, at a price set at the
time of the contract. These contracts may be bought or sold to protect a Fund
against a possible loss resulting from an adverse change in the relationship
between foreign currencies and the U.S. dollar or to increase exposure to a
particular foreign currency. Open positions in forward contracts are covered
by the segregation with the Trust's custodian of high quality short-term
investments and are marked to market daily. Although such contracts are
intended to minimize the risk of loss due to a decline in the value of the
currencies being hedged against, at the same time, they tend to limit any
potential gain which might result should the value of such currencies increase.
OPTIONS
The Funds may, as described in the Prospectuses, purchase and sell (write) both
put options and call options on securities, securities indexes, and foreign
currencies, and enter into interest rate, foreign currency and index futures
contracts and purchase and sell options on such futures contracts ("futures
options"). The Funds also may enter into swap agreements with respect to
foreign currencies, interest rates and securities indices. If other types of
options or futures options are traded in the future, a Fund may also use those
instruments, provided that the Trustees determine that their use is consistent
with the Fund's investment objective, and provided that their use is consistent
with restrictions applicable to options and futures contracts currently
eligible for use by the Trust (i.e., that written call or put options will be
"covered" or "secured" and that futures and futures options will be used only
for hedging purposes).
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The purpose of writing covered put and call options is to hedge against
fluctuations in the market value of a Fund's portfolio securities. Each Fund
may purchase or sell call and put options on securities indices for a similar
purpose. Such a hedge is limited to the degree that the extent of the price
change of the underlying security is less than the difference between the
option premium received by the Fund and the option strike price. To the extent
the underlying security's price change exceeds this amount, written put and
call options will not provide an effective hedge.
Writing Call Options. Each Fund may write (sell) covered call options on
securities ("calls") when the Investment Manager considers such sales
appropriate. When a Fund writes a call, it receives a premium and grants the
purchaser the right to buy the underlying security at any time during the call
period (usually between three and nine months) at a fixed exercise price
regardless of market price changes during the call period. If the call is
exercised, the Fund forgoes any gain but is not subject to any loss on any
change in the market price of the underlying security relative to the exercise
price. A Fund will write such options subject to any applicable limitations or
restrictions imposed by law.
A written call option is covered if the Fund owns the security underlying the
option. A written call option may also be covered by purchasing an offsetting
option or any other option which, by virtue of its exercise price or otherwise,
reduces the Fund's net exposure on its written option position. In addition,
the Fund may cover such options by maintaining cash, U.S. Government securities
or high-grade debt securities rated within one of the top three ratings
categories by Moody's or S&P or, if unrated, deemed by the Investment Manager
to be of comparable quality ("High-Grade Debt Securities") in a segregated
account in amounts sufficient to ensure that it is able to meet its obligations
under the written call should it be exercised. This method does not reduce the
potential loss to the Fund should the value of the underlying security increase
and the option be exercised.
Purchasing Call Options. Each Fund may purchase a call option when the
Investment Manager believes the value of the underlying security will rise or
to effect a "closing purchase transaction" as to a call option the Fund has
written (sold). A Fund will realize a profit (or loss) from a closing purchase
transaction if the amount paid to purchase a call is less (or more) than the
amount received from the sale thereof.
Writing Put Options. A put option written by a Fund obligates the Fund to
purchase the specified security at a specified price if the option is exercised
at any time before the expiration date. A written put option may be covered by
maintaining in a segregated account cash or U.S. Government securities or
High-Grade Debt Securities. While this may help ensure that a Fund will have
sufficient assets to meet its obligations under the option contract should it
be exercised, it will not reduce the potential loss to the Fund should the
value of the underlying security decrease and the option be exercised.
Purchasing Put Options. A Fund may purchase a put option when the Investment
Manager believes the value of the underlying security will decline. A Fund may
purchase put options on securities in its portfolio in order to hedge against a
decline in the value of such securities ("protective puts") or to effect
closing purchase transactions as to puts it has written. A Fund will realize a
profit (or loss) from a closing purchase transaction if the amount paid to
purchase a put is less (or more) than the amount received from the sale
thereof.
Options on Securities Indices. Unlike a stock option, which gives the holder
the right to purchase or sell a specified stock at a specified price, an option
on a securities index gives the holder the right to receive a cash "exercise
settlement amount" equal to (i) the difference between the exercise price of
the option and the value of the underlying securities index on the exercise
date multiplied
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by (ii) a fixed "index multiplier." Like an option on a specific security,
when a Fund purchases a put or a call option on an index, it places the entire
amount of the premium paid at risk, for if, at the expiration date, the value
of the index has decreased below the exercise price (in the case of a call) or
increased above the exercise price (in the case of a put), the option will
expire worthless.
A securities index fluctuates with changes in the market values of the stocks
included in the index. For example, some securities index options are based on
a broad market index such as the S&P 500. Others are based on a narrower
market index such as the Standard & Poor's 100 Stock Index. Indices may also
be based on an industry or market segment such as the AMEX Oil and Gas Index or
the Computer and Business Equipment Index. Options on securities indices are
currently traded on the Chicago Board Options Exchange, the New York Stock
Exchange ("NYSE") and the American Stock Exchange.
Funds may purchase put options on securities indices to hedge against an
anticipated decline in stock market prices that might adversely affect the
value of a Fund's portfolio securities. If a Fund purchases such a put option,
the amount of the payment it would receive upon exercising the option would
depend on the extent of any decline in the level of the securities index below
the exercise price. Such payments would tend to offset a decline in the value
of the Fund's portfolio securities. However, if the level of the securities
index increases and remains above the exercise price while the put option is
outstanding, a Fund will not be able to profitably exercise the option and will
lose the amount of the premium and any transaction costs. Such loss may be
partially or wholly offset by an increase in the value of a Fund's portfolio
securities.
A Fund may purchase call options on securities indices in order to participate
in an anticipated increase in stock market prices or to offset anticipated
price increases on securities that it intends to buy in the future. If a Fund
purchases a call option on a securities index, the amount of the payment it
would receive upon exercising the option would depend on the extent of any
increase in the level of the securities index above the exercise price. Such
payments would in effect allow the Fund to benefit from stock market
appreciation even though it may not have had sufficient cash to purchase the
underlying stocks. Such payments may also offset increases in the prices of
stocks that the Fund intends to purchase. If, however, the level of the
securities index declines and remains below the exercise price while the call
option is outstanding, a Fund will not be able to exercise the option
profitably and will lose the amount of the premium and transaction costs. Such
loss may be partially or wholly offset by a reduction in the price a Fund pays
to buy additional securities for its portfolio.
Each of the Funds may write (sell) covered call or put options on a securities
index. Such options may be covered by purchasing an offsetting option which,
by virtue of its exercise price or otherwise, reduces the Fund's net exposure
on its written option position or by owning securities whose price changes are
expected to be similar to those of the underlying index or by having an
absolute and immediate right to acquire such securities without additional cash
consideration or for additional cash consideration (held in a segregated
account by its custodian) upon conversion or exchange of other securities in
their respective portfolios. In addition, the Fund may cover such options by
maintaining cash, U.S. Government Securities or High-Grade Debt Securities with
a value equal to the exercise price in a segregated account with the Custodian
or by using the other methods described above.
The extent to which options on securities indices will provide a Fund with an
effective hedge against interest rate or stock market risk will depend on the
extent to which the stocks comprising the indices correlate with the
composition of the Fund's portfolio. Moreover, the ability to hedge
effectively depends upon the ability to predict movements in interest rates or
the stock market.
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Some options on securities indices may not have a broad and liquid secondary
market, in which case options purchased by the Fund may not be closed out and
the Fund could lose more than its option premium when the option expires.
The purchase and sale of option contracts is a highly specialized activity that
involves investment techniques and risks different from those ordinarily
associated with investment companies. Transaction costs relating to options
transactions may tend to be higher than the costs of transactions in
securities. In addition, if a Fund were to write a substantial number of
option contracts that are exercised, the portfolio turnover rate of that Fund
could increase.
Foreign Currency Options. A Fund may buy or sell put and call options on
foreign currencies either on exchanges or in the over-the- counter market. A
call option on a foreign currency gives the purchaser of the option the right
to buy a foreign currency at the exercise price until the option expires. A
put option gives the option-holder a similar right to sell the underlying
currency. Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Fund to reduce foreign
currency risk using such options. Over-the-counter options differ from
exchange-traded options in that they are two-party contracts with price and
other terms negotiated between buyer and seller, and generally do not have as
much market liquidity as exchange-traded options.
FUTURES TRANSACTIONS
Each Fund may purchase and sell futures contracts for hedging purposes and in
an attempt to increase total return. A futures contract is an agreement
between two parties to buy and sell a security for a set price at a future
time. Each Fund may also enter into index-based futures contracts and interest
rate futures contracts. Futures contracts on indices provide for a final cash
settlement on the expiration date based on changes in the relevant index. All
futures contracts are traded on designated "contract markets" licensed and
regulated by the Commodity Futures Trading Commission (the "CFTC") which,
through their clearing corporations, guarantee performance of the contracts.
Generally, while market interest rates increase, the value of outstanding debt
securities declines (and vice versa). If a Fund holds long-term debt
securities and the Investment Manager anticipates a rise in long-term interest
rates, it could, in lieu of disposing of its portfolio securities, enter into
futures contracts for the sale of similar long-term securities. If rates
increased and the value of a Fund's portfolio securities declined, the value of
that Fund's futures contract would increase, thereby preventing net asset value
from declining as much as it otherwise would have. If the Investment Manager
expects long-term interest rates to decline, a Fund might enter into futures
contracts for the purchase of long-term securities, so that it could offset
anticipated increases in the cost of such securities it intends to purchase
while continuing to hold higher-yielding short-term securities or waiting or
the long-term market to stabilize. Similar techniques may be used by the Funds
to hedge stock market risk.
Each Fund also may purchase and sell listed put and call options on futures
contracts. An option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put),
at a specified exercise price at any time during the option period. When an
option on a futures contract is exercised, settlement is effected by the
payment of cash representing the difference between the current market price of
the futures contract and the exercise price of the option. The risk of loss to
a Fund purchasing an option on a futures contract is limited to the premium
paid for the option.
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A Fund may purchase put options on futures contracts in lieu of, and for the
same purpose as, its sale of a futures contract: to hedge a long position in
the underlying futures contract. The purchase of call options on futures
contracts is intended to serve the same purpose as the actual purchase of the
futures contract.
A Fund would write a call option on a futures contract in order to hedge
against a decline in the prices of the securities underlying the futures
contracts. If the price of the futures contract at expiration is below the
exercise price, the applicable Fund would retain the option premium, which
would offset, in part, any decline in the value of its portfolio securities.
The writing of a put option on a futures contract is similar to the purchase of
the futures contract, except that, if market price declines, a Fund would pay
more than the market price for the underlying securities. The net cost to a
Fund will be reduced, however, by the premium received on the sale of the put,
less any transaction costs.
Each Fund may engage in "straddle" transactions, which involve the purchase or
sale of combinations of call and put options on the same underlying securities
or futures contracts.
In purchasing and selling futures contracts and related options, each Fund
intends to comply with rules and interpretations of the CFTC and of the SEC.
LIMITATIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS ON FUTURES
Each Fund will engage in futures and related options transactions only for bona
fide hedging purposes in accordance with CFTC regulations or in an attempt to
increase total return to the extent permitted by such regulations. In hedging
transactions, a Fund will seek to invest in futures contracts and options on
futures contracts the prices of which are substantially related to price
fluctuations in securities held by the Fund or which it expects to purchase.
Except as stated below, a Fund's futures transactions will be entered into for
traditional hedging purposes--that is, futures contracts will be sold to
protect against a decline in the price of securities that the Fund owns, or
futures contracts will be purchased to protect the Fund against an increase in
the price of securities it intends to purchase. As evidence of this hedging
intent, the Fund expects that on 75% or more of the occasions on which it takes
a long futures (or option) position (involving the purchase of futures
contracts), a Fund will have purchased, or will be in the process of
purchasing, equivalent amounts of related securities in the cash market at the
time when the futures (or option) position is closed out. However, in
particular cases, when it is economically advantageous for a Fund to do so, a
long futures position may be terminated (or an option may expire) without the
corresponding purchase of securities. As an alternative to compliance with the
bona fide hedging definition, a CFTC regulation permits a Fund to elect to
comply with a different test, under which the sum of the amounts of initial
margin deposits and premiums on its futures positions entered into for the
purpose of seeking to increase total return (net of the amount the positions
were "in the money" at the time of purchase) would not exceed 5% of that Fund's
net assets, after taking into account unrealized gains and losses on such
positions. A Fund will engage in transactions in futures contracts and related
options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
maintaining its qualification as a regulated investment company for Federal
income tax purposes (see "Dividends, Distributions, and Tax Status").
A Fund will be required, in connection with transactions in futures contracts
and the writing of options on futures contracts, to make margin deposits, which
will be held by a Fund's custodian for the benefit of the merchant through whom
a Fund engages in such futures and options transactions. In the case of
futures contracts or options thereon requiring the Fund to purchase
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securities, the Fund must segregate cash, U.S. Government Securities or
High-Grade Debt Securities in an account maintained by the Custodian to cover
such contracts and options. Cash, U.S. Government securities or High-Grade
Debt Securities required to be in a segregated account will be marked to market
daily.
SPECIAL CONSIDERATIONS AND RISKS RELATED TO OPTIONS AND FUTURES TRANSACTIONS
Exchange markets in options on certain securities are a relatively new and
untested concept. It is impossible to predict the amount of trading interest
that may exist in such options, and there can be no assurance that viable
exchange markets will develop or continue.
The exchanges will not continue indefinitely to introduce new expirations to
replace expiring options on particular issues because trading interest in many
issues of longer duration tends to center on the most recently auctioned
issues. The expirations introduced at the commencement of options trading on a
particular issue will be allowed to run out, with the possible addition of a
limited number of new expirations as the original expirations expire. Options
trading on each issue of securities with longer durations will thus be phased
out as new options are listed on more recent issues, and a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
In the event of a shortage of the underlying securities deliverable on exercise
of an option, the Options Clearing Corporation ("OCC") has the authority to
permit other, generally comparable, securities to be delivered in fulfillment
of option exercise obligations. It may also adjust the exercise prices of the
affected options by setting different prices at which otherwise ineligible
securities may be delivered. As an alternative to permitting such substitute
deliveries, the OCC may impose special exercise settlement procedures.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent the markets
for underlying securities close before the options markets, significant price
and rate movements can take place in the options markets that cannot be
reflected in the underlying markets. In addition, to the extent that the
options markets close before the markets for the underlying securities, price
and rate movements can take place in the underlying markets that cannot be
reflected in the options markets.
Prior to exercise or expiration, an option position can be terminated only by
entering into a closing purchase or sale transaction. This requires a
secondary market on an exchange for call or put options of the same series.
Similarly, positions in futures may be closed out only on an exchange which
provides a secondary market for such futures. There can be no assurance that a
liquid secondary market will exist for any particular call or put option or
futures contract at any specific time. Thus, it may not be possible to close
an option or futures position. In the event of adverse price movements, a Fund
would continue to be required to make daily payments of maintenance margin for
futures contracts or options on futures contracts position written by that
Fund. A Fund may have to sell portfolio securities at a time when it may be
disadvantageous to do so if it has insufficient cash to meet the daily
maintenance margin requirements. In addition, a Fund may be required to take
or make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on a Fund's ability to effectively hedge its portfolios.
Each of the exchanges has established limitations governing the maximum number
of call or put options on the same underlying security (whether or not covered)
that may be written by a single investor, whether acting alone or in concert
with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or
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through one or more brokers). An exchange may order the liquidation of
positions found to be in violation of applicable trading limits and it may
impose other sanctions or restrictions. The Trust and other clients advised by
the Investment Manager and its affiliates may be deemed to constitute a group
for these purposes. In light of these limits, the Trustees may determine at
any time to restrict or terminate the Funds' transactions in options. The
Investment Manager does not believe that these trading and position limits will
have any adverse investment techniques for hedging the Trust's portfolios.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties ("Counterparties") through
direct agreement with the ct. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guarantees and security, are set by negotiation of the parties.
Unless the parties provide for it, there is no central clearing or guaranty
function in the OTC option market. As a result, if the ct fails to make
delivery of the security or other instrument underlying an OTC option it has
entered into with a Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction.
Accordingly, the Investment Manager must assess the creditworthiness of each
such ct or any guarantor or credit enhancement of the ct's credit to determine
the likelihood that the terms of the OTC option will be satisfied. The staff
of the SEC currently takes the position that OTC options purchased by a Fund,
and portfolio securities "covering" the amount of a Fund's obligation pursuant
to an OTC option sold by it (the cost of the sell-back plus the in-the-money
amount, if any) are illiquid, and are subject to each Fund's limitation on
investing no more than 15% of its assets in illiquid securities. However, for
options written with "primary dealers" in U.S. Government securities pursuant
to an agreement requiring a closing transaction at a formula price, the amount
considered to be illiquid may be calculated by reference to a formula price.
The loss from investing in futures transactions is potentially unlimited. In
addition, utilization of futures in hedging transactions may fail where there
is an imperfect correlation in movements in the price of futures contracts and
movements in the price of the securities which are the subject of the hedge.
If the price of the futures contract moves more or less than the price of the
security, a Fund will experience a gain or loss that will not be completely
offset by movements in the price of the securities which are the subject of the
hedge. There is also a risk of imperfect correlation where the securities
underlying futures contracts have different maturities than the portfolio
securities being hedged. Transactions in options on futures contracts involve
similar risks.
SWAP AGREEMENTS. The Funds may enter into interest rate, index and currency
exchange rate swap agreements in attempts to obtain a particular desired return
at a lower cost to the Fund than if the Fund had invested directly in an
instrument that yielded that desired return. Swap agreements are two-party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or "swapped" between the parties are calculated
with respect to a "notional amount," i.e., the return on or increase in value
of a particular dollar amount invested at a particular interest rate, in a
particular foreign currency, or in a "basket" of securities representing a
particular index. The "notional amount" of the swap agreement is only a
fictive basis on which to calculate the obligations the parties to a swap
agreement have agreed to exchange. A Fund's obligations (or rights) under a
swap agreement will generally be equal only to the amount to be paid or
received under the agreement based on the relative values of the positions held
by each party to the agreement (the
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"net amount"). A Fund's obligations under a swap agreement will be accrued
daily (offset against any amounts owing to the Fund) and any accrued but unpaid
net amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of cash, U.S. Government securities, or High
Grade Debt Securities, to avoid leveraging of the Fund's portfolio. A Fund
will not enter into a swap agreement with any single party if the net amount
owed or to be received under existing contracts with that party would exceed 5%
of the Fund's assets.
Whether a Fund's use of swap agreements enhance the Fund's total return will
depend on the Investment Manager's ability correctly to predict whether certain
types of investments are likely to produce greater returns than other
investments. Because they are two-party contracts and may have terms of
greater than seven days, swap agreements may be considered to be illiquid.
Moreover, a Fund bears the risk of loss of the amount expected to be received
under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. The Investment Manager will cause a Fund to enter into
swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Funds'
repurchase agreement guidelines. Certain restrictions imposed on the Funds by
the Internal Revenue Code may limit the Funds' ability to use swap agreements.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations of the CFTC. To
qualify for this exemption, a swap agreement must be entered into by "eligible
participants," which include the following, provided the participants' total
assets exceed established levels: a bank or trust company, savings association
or credit union, insurance company, investment company subject to regulation
under the Investment Company Act of 1940, commodity pool, corporation,
partnership, proprietorship, organization, trust or other entity, employee
benefit plan, governmental entity, broker-dealer, futures commission merchant,
natural person, or regulated foreign person. To be eligible, natural persons
and most other entities must have total assets exceeding $10 million; commodity
pools and employees benefit plans must have assets exceeding $5 million. In
addition, an eligible swap transaction must meet three conditions. First, the
swap agreement may not be part of a fungible class of agreements that are
standardized as to their material economic terms. Second, the creditworthiness
of parties with actual or potential obligations under the swap agreement must
be a material consideration in entering into or determining the terms of the
swap agreement, including pricing, cost or credit enhancement terms. Third,
swap agreements may not be entered into and traded on or through a multilateral
transaction execution facility.
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES
Foreign currency warrants. Foreign currency warrants such as Currency Exchange
Warrants(SM) ("CEWs(SM)") are warrants that entitle the holder to receive from
the issuer an amount of cash (generally, for warrants issued in the United
States, in U.S. dollars) that is calculated pursuant to a predetermined formula
and based on the exchange rate between a specified foreign currency and the
U.S. dollar as of the exercise date of the warrant. Foreign currency warrants
generally are exercisable upon their issuance and expire as of a specified date
and time. Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk that, from the point of view of
prospective purchasers of the securities, is inherent in the international
fixed-income marketplace. Foreign currency warrants may be used to reduce the
foreign exchange risk assumed
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by purchasers of a security by, for example, providing for a supplemental
payment in the event the U.S. Dollar depreciates against the value of a major
foreign currency such as the Japanese Yen or German Deutschemark. The formula
used to determine the amount payable upon exercise of a foreign currency
warrant may make the warrant worthless unless the applicable foreign currency
exchange rate moves in a particular direction (e.g., unless the U.S. dollar
appreciates or depreciates against the particular foreign currency to which the
warrant is linked or indexed). Foreign currency warrants are severable from
the debt obligations with which they may be offered, and may be listed on
exchanges. Foreign currency warrants may be exercisable only in certain
minimum amounts, and an investor wishing to exercise warrants who possesses
less than the minimum number required for exercise may be required either to
sell the warrants or to purchase additional warrants, thereby incurring
additional transaction costs. Upon exercise of warrants, there may be a delay
between the time the holder gives instructions to exercise and the time the
exchange rate relating to exercise is determined, thereby affecting both the
market and cash settlement values of the warrants being exercised. The
expiration date of the warrants may be accelerated if the warrants should be
delisted from an exchange or if their trading should be suspended permanently,
which would result in the loss of any remaining "time value" of the warrants
(i.e., the difference between the current market value and the exercise value
of the warrants), and, if the warrants were "out-of-the-money," in a total loss
of the purchase price of the warrants. Warrants are generally unsecured
obligations of their issuers and are not standardized foreign currency options
issued by the OCC. Unlike foreign currency options issued by OCC, the terms of
foreign exchange warrants generally will not be amended in the event of
governmental or regulatory actions affecting exchange rates or in the event of
the imposition of other regulatory controls affecting the international
currency markets. The initial public offering price of foreign currency
warrants is generally considerably in excess of the price that a commercial
user of foreign currencies might pay in the interbank market for a comparable
option involving significantly larger amounts of foreign currencies. Foreign
currency warrants are subject to significant foreign exchange risk, including
risks arising from complex political or economic factors.
Principal exchange rate linked securities. Principal exchange rate linked
securities (or "PERLS(SM)") are debt obligations the principal on which is
payable at maturity in an amount that may vary based on the exchange rate
between the U.S. dollar and a particular foreign currency at or about that
time. The return on "standard" principal exchange rate linked securities is
enhanced if the foreign currency to which the security is linked appreciates
against the U.S. dollar, and is adversely affected by increases in the foreign
exchange value of the U.S. dollar; "reverse" PERLS are like the "standard"
securities, except that their return is enhanced by increases in the value of
the U.S. dollar and adversely impacted by increases in the value of foreign
currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). PERLS may in
limited cases be subject to acceleration of maturity (generally, not without
the consent of the holders of the securities), which may have an adverse impact
on the value of the principal payment to be made at maturity.
Performance indexed paper. Performance indexed paper (or "PIPs(SM)") is U.S.
dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields
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on U.S. dollar-denominated commercial paper, with both the minimum and maximum
rates of return on the investment corresponding to the minimum and maximum
values of the spot exchange rate two business days prior to maturity.
WARRANTS TO PURCHASE SECURITIES
The Funds may invest in or acquire warrants to purchase equity or fixed income
securities. Bonds with warrants attached to purchase equity securities have
many characteristics of convertible bonds and their prices may, to some degree,
reflect the performance of the underlying stock. Bonds also may be issued with
warrants attached to purchase additional fixed income securities at the same
coupon rate. A decline in interest rates would permit a Fund to buy additional
bonds at the favorable rate or to sell the warrants at a profit. If interest
rates rise, the warrants would generally expire with no value.
A Fund will not invest more than 5% of its net assets, valued at the lower of
cost or market, in warrants to purchase securities. Included within that
amount, but not to exceed 2% of the Fund's net assets, may be warrants that are
not listed on the New York Stock Exchange ("NYSE") or American Stock Exchange.
Warrants acquired in units or attached to securities will be deemed to be
without value for purposes of this restriction.
PARTICIPATION INTERESTS
The Seneca Bond Fund may purchase from banks participation interests in all or
part of specific holdings of debt obligations. Each participation interest is
backed by an irrevocable letter of credit or guarantee of the selling bank that
the Investment Manager has determined meets the prescribed quality standards of
each Fund. Thus, even if the credit of the issuer of the debt obligation does
not meet the quality standards of the Fund, the credit of the selling bank
will.
RESTRICTED AND ILLIQUID SECURITIES
Each Fund may invest up to 15% of its total assets in "illiquid investments,"
including "restricted securities" (i.e., securities that would be required to
be registered prior to distribution to the public), securities that are not
readily marketable, repurchase agreements maturing in more than seven days and
privately issued stripped mortgage-backed securities.
Certain "restricted" securities may be resold to qualified institutional buyers
without restriction pursuant to Rule 144A under the Securities Act of 1933. If
a sufficient dealer or institutional trading market exists for such a security,
it may not be considered "illiquid." The Trustees have adopted guidelines and
delegated to the Investment Manager the daily function of determining and
monitoring the liquidity of restricted securities and determining whether a
Rule 144A security restricted security should be considered "illiquid." The
Trustees, however, retain oversight and are ultimately responsible for the
determinations. Please see the non-fundamental investment restrictions for
further limitations regarding the Funds' investments in restricted and illiquid
securities.
SHORT SALES
The Funds may sell securities short as part of their overall portfolio
management strategies involving the use of derivative instruments and to offset
potential declines in long positions in similar securities. A short sale is a
transaction in which a Fund sells a security it does not own or have the right
to acquire (or that it owns but does not wish to deliver) in anticipation that
the market price of that security will decline.
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When a Fund makes a short sale, the broker-dealer through which the short sale
is made must borrow the security sold short and deliver it to the party
purchasing the security. The Fund is required to make a margin deposit in
connection with such short sales; the Fund may have to pay a fee to borrow
particular securities and will often be obligated to pay over any dividends and
accrued interest on borrowed securities.
If the price of the security sold short increases between the time of the short
sale and the time the Fund covers its short position, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a capital gain.
Any gain will be decreased, and any loss increased, by the transaction costs
described above. The successful use of short selling may be adversely affected
by imperfect correlation between movements in the price of the security sold
short and the securities being hedged.
To the extent a Fund sells securities short, it will provide collateral to the
broker-dealer and (except in the case of short sales "against the box") will
maintain additional asset coverage in the form of cash, U.S. Government
securities or High-Grade Debt Securities with its custodian in a segregated
account in an amount at least equal to the difference between the current
market value of the securities sold short and any amounts required to be
deposited as collateral with the selling broker (not including the proceeds of
the short sale). The Funds do not intend to enter into short sales (other than
short sales "against the box") if immediately after such sales the aggregate of
the value of all collateral plus the amount in such segregated account exceeds
one-third of the value of the Fund's net assets. This percentage may be varied
by action of the Trustees. A short sale is "against the box" to the extent the
Fund contemporaneously owns, or has the right to obtain at no added cost,
securities identical to those sold short.
LOANS OF PORTFOLIO SECURITIES
Each Fund may seek to increase its income by lending portfolio securities.
Under present regulatory policies, such loans may be made to financial
institutions, such as broker-dealers, and must be collateralized continuously
with cash, cash equivalents, irrevocable letters of credit, or U.S. Government
securities maintained on a current basis at an amount at least equal to the
market value of the securities lent. For the duration of a loan, the Fund
would receive the equivalent of the interest or dividends paid by the issuer on
the securities lent and would also receive compensation from the investment of
the collateral. The Fund would not have the right to vote any securities
having voting rights during the existence of the loan, but the Fund could call
the loan in anticipation of an important vote to be taken among holders of the
securities or of the giving or withholding of their consent on a material
matter affecting the investment. As with other extensions of credit, there are
risks of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. However, the loans would be made
only to firms considered by the Investment Manager to be allocated, and when,
in the judgment of the Investment Manager, the consideration that can be earned
currently from securities loans of this type justifies the attendant risk. The
value of the securities lent may not exceed one-third of the value of the total
assets of the Fund.
A Fund may pay reasonable negotiated fees to the Custodian in connection with
loaned securities as long as such fees are pursuant to a contract approved by
the Trustees.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following fundamental investment restrictions which
may not be changed without approval of a majority of the applicable Fund's
outstanding voting securities.
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Under the 1940 Act, and as used in the Prospectuses and this Statement of
Additional Information, a "majority of the outstanding voting securities"
requires the approval of the lesser of (1) the holders of 67% or more of the
shares of a Fund represented at a meeting of the holders if more than 50% of
the outstanding shares of the Fund are present in person or by proxy or (2) the
holders of more than 50% of the outstanding shares of the Fund.
A Fund may not:
1. Issue senior securities, except as permitted by paragraphs 3, 6, and 7
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale
of options, futures contracts, forward commitments and reverse
repurchase agreements entered into in accordance with the Fund's
investment policies or within the meaning of paragraph 3 below, are NOT
deemed to be senior securities.
2. Purchase securities on margin (but the Funds may obtain such short-term
credits as may be necessary for the clearance of transactions);
provided that the deposit or payment of initial or variation margin in
connection with options or futures contracts is not considered the
purchase of securities on margin.
3. Borrow money, except that a Fund may borrow from banks or enter into
reverse repurchase agreements or dollar rolls up to one-third of the
value of its total assets (calculated when the loan is made) to take
advantage of investment opportunities and may pledge up to one-third of
the value of its total assets to secure such borrowings. Each Fund is
also authorized to borrow an additional 5% of its total assets without
regard to the foregoing limitations for temporary purposes such as the
clearance of transactions and share redemptions. For purposes of this
investment restriction, short sales, the purchase or sale of securities
on a "when-issued," delayed delivery or forward commitment basis, the
purchase or sale of options, futures contracts, and options on futures
contracts, securities or indices and collateral arrangements with
respect thereto shall not constitute borrowing.
4. Act as an underwriter with respect to the securities of other issuers,
except to the extent that in connection with the disposition of
portfolio securities, the Fund may be deemed to be an underwriter for
purposes of the 1933 Act; provided, however, that the Fund may invest
all or part of its investable assets in an open-end investment company
with substantially the same investment objectives, policies and
restrictions as the Fund.
5. Purchase or sell real estate except that the Fund may (i) acquire or
lease office space for its own use, (ii) invest in securities of
issuers that invest in real estate or interests therein, (iii) invest
in securities that are secured by real estate or interests therein,
(iv) purchase and sell mortgage-related securities and (v) hold and
sell real estate acquired by the Fund as a result of the ownership of
securities.
6. Invest in commodities, except that the Fund may purchase and sell
options on securities, securities indices and currency, futures
contracts on securities, securities indices and currency and options on
such futures, forward foreign currency exchange contracts (including,
foreign currency warrants, principal exchange rated linked securities,
and performance indexed paper), forward commitments, securities index
put or call warrants and repurchase agreements entered into in
accordance with the Fund's investment policies, subject to restrictions
as may be set forth elsewhere in the Prospectuses or this Statement of
Additional Information.
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7. Make loans, except that the Fund may (1) lend portfolio securities in
accordance with the Fund's investment policies up to one-third of the
Fund's total assets taken at market value, (2) enter into repurchase
agreements, and (3) purchase all or a portion of an issue of debt
securities, bank loan participation interests, bank certificates of
deposit, bankers' acceptances, debentures or other securities, whether
or not the purchase is made upon the original issuance of the
securities.
7. For each Fund other than the Seneca Real Estate Securities Fund,
purchase the securities of issuers conducting their principal activity
in a single industry if, immediately after such purchase, the value of
its investments in such industry would exceed 25% of its total assets
taken at market value at the time of such investment (except
investments in obligations of the U.S. Government or any of its
agencies, instrumentalities or authorities; provided, however, that the
Fund may invest all or part of its investable assets in an open-end
investment company with substantially the same investment objectives,
policies and restrictions as the Fund.
8. For each Fund other than the Seneca Real Estate Securities Fund, as to
75% of its total assets, purchase securities of an issuer (other than
the U.S. Government, its agencies, instrumentalities or authorities or
repurchase agreements collateralized by U.S. Government securities and
other investment companies), if:
(a) such purchase would cause more than 5% of the Fund's total
assets taken at market value to be invested in the securities
of such issuer; or
(b) such purchase would at the time result in more than 10% of the
outstanding voting securities of such issuer being held by the
Fund;
provided, however, that a Fund may, subject to restrictions imposed by
the 1940 Act and applicable state laws, invest all or part of its
investable assets in an open-end investment company with substantially
the same investment objectives, policies and restrictions as the Fund.
Because it is a "non-diversified" fund within the meaning of the 1940
Act, Seneca Real Estate Securities Fund will not be limited in the
proportion of its assets it may invest in the securities of any single
issuer.
For purposes of the above fundamental investment restrictions, the Investment
Manager generally classifies issuers by industry in accordance with
classifications set forth in the Standard & Poor's Bond Guide. In the absence
of such classification or if the Investment Manager determines in good faith
based on its own information that the economic characteristics affecting a
particular issuer make it more appropriate considered to be engaged in a
different industry, the Investment Manager may classify an issuer according to
its own sources.
The Trust has undertaken with a state securities commission that it will
interpret the provisions of investment restriction number 5. to prohibit
investment by the Funds in real estate limited partnerships.
The following restrictions are designated as non-fundamental and may be changed
by the Trustees without the approval of shareholders.
A Fund may not:
a. Pledge, mortgage or hypothecate its assets, except to secure permitted
borrowings and then only if such pledging, mortgaging or hypothecating
does not exceed one-third of the
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Fund's total assets taken at market value. Collateral arrangements
with respect to margin, option and other risk management and
when-issued and forward commitment transactions are not deemed to be
pledges or other encumbrances for purposes of this restriction.
b. Participate on a joint or joint-and-several basis in any securities
trading account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Investment Manager or any subadviser to save
commissions or to average prices among them is NOT deemed to result in
a joint securities trading account.
c. Purchase or retain securities of an issuer if one or more of the
Trustees or officers of the Trust or principals or officers of the
Investment Manager, any subadviser or any investment management
subsidiary of the Investment Manager individually owns beneficially
more than 0.5% and together own beneficially more than 5% of the
securities of such issuer.
d. Purchase a security of other investment companies, except when the
purchase is part of a plan of merger, consolidation, reorganization or
acquisition or except where such purchase would not result in (i) more
than 10% of the Fund's assets being invested in securities of other
investment companies, (ii) more than 3% of the total outstanding
voting securities of any one such investment company being held by the
Fund or (iii) more than 5% of the Fund's assets being invested in any
one such investment company; provided, however, that the Fund may
invest all of its investable assets in an open-end investment company
with substantially the same investment objectives, policies and
restrictions as the Fund.
e. Invest in securities that are illiquid if, as a result, more than 15%
of its net assets would consist of such securities, including
repurchase agreements maturing in more than seven days, securities
that are not readily marketable, and restricted securities not
eligible for resale pursuant to Rule 144A under the 1933 Act;
provided, however, that the Fund may invest all or part of its
investable assets in an open-end investment company with substantially
the same investment objectives, policies and restrictions as the Fund.
f. Purchase warrants of any issuer, if, as a result of such purchase,
more than 2% of the value of the Fund's total assets would be invested
in warrants that are not listed on the NYSE or American Stock Exchange
or more than 5% of the total assets of the Fund, valued at the lower
of cost or current market value, would be invested in warrants
generally, whether or not so listed. Warrants acquired by the Fund in
units with or attached to debt securities shall be deemed to be
without value.
g. Purchase interest in oil, gas, or other mineral exploration programs
or mineral leases; however, this policy will not prohibit the
acquisition of securities of companies engaged in the production or
transmission of oil, gas or other minerals.
h. Invest for the purpose of exercising control over or management of any
company; provided that the Fund may do so where it is deemed advisable
to protect or enhance the value of an existing investment; and
provided further, that the Fund may invest all or part of its
investable assets in an open-end investment company with substantially
the same investment objectives, policies and restrictions as the Fund.
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<PAGE> 100
i. Write (sell) options that are not "covered" as described elsewhere in
this Statement of Additional Information or write puts on securities
if the aggregate value of the obligations underlying the puts exceeds
50% of the Fund's net assets.
j. Buy and sell puts and calls on securities, stock index futures or
options on stock index futures or financial futures or options on
financial futures if (i) the aggregate premiums paid on all such
options which are held at any time exceed 20% of the Fund's aggregate
net assets and (ii) the aggregate margin deposits required on all such
futures or options thereon held at any time exceed 5% of the Fund's
total assets.
k. Purchase puts, calls, straddles, spreads, or any combination thereof
if by reason thereof, the value of its aggregate investment in such
classes of securities (other than protective puts) will exceed 5% of
its net assets.
l. Make short sales of securities or maintain a short position, unless at
all times when a short position is open, the Fund owns an equal amount
of the securities or securities convertible into or exchangeable for,
without payment of any further consideration, securities of the same
issue as, and equal in amount to, the securities sold short.
Each Fund may, notwithstanding any other fundamental or non-fundamental
investment restriction or policy, invest all of its assets in the securities of
a single open-end investment company with substantially the same fundamental
investment objectives, restrictions and policies as the Fund.
Except as to the 300% asset coverage required by fundamental restriction number
2, if a percentage restriction on investment or utilization of assets as set
forth above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the values of a Fund's assets will not be
considered a violation of the restriction. Notwithstanding the foregoing, if a
Fund's investment in illiquid securities exceeds 15% of its net assets, whether
through a change in values, net assets, or otherwise, the Fund will take
appropriate steps to protect liquidity, including the orderly liquidation of
illiquid securities in a manner consistent with the realization of the maximum
value of those assets.
Pursuant to a restriction imposed by a state securities commission, the
Investment Manager waives its fee on all assets of any Fund invested in shares
of other open-end investment management companies pursuant to investment
restriction d., above.
In order to permit the sale of shares of the Funds in certain states, the
Trustees may, in their sole discretion, adopt restrictions on investment policy
more restrictive than those described above. Should the Trustees determine
that any such more restrictive policy is no longer in the best interest of a
Fund and its shareholders, the Fund may cease offering shares in the state
involved and the Trustees may revoke such restrictive policy. Moreover, if the
states involved shall no longer require any such restrictive policy, the
Trustees may, in their sole discretion, revoke such policy.
CALCULATION OF THE FUNDS' RETURNS
TOTAL RETURN
The average annual total return on Shares of each class of each Fund is
determined for a particular period by calculating the actual dollar amount of
the investment return on a $1,000 investment
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in Shares of that class of the Fund made at the net asset value of such shares
at the beginning of the period, and then calculating the annual compounded rate
of return that would produce that amount. Total return for a period of one year
is equal to the actual return of shares of that class of the Fund during that
period. The following formula describes the calculation:
n
ERV = P(1+T)
Where:
P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
investment made at the beginning of the indicated
period.
This calculation assumes that (i) all dividends and distributions are
reinvested at net asset value on the reinvestment dates during the period and
(ii) all recurring fees are included for applicable periods.
Each Fund may illustrate in advertisements and sales literature the average
annual total return and cumulative total return for several time periods
throughout the Fund's life based on an assumed initial investment of $1,000.
Any such cumulative total return for a Fund will assume the reinvestment of all
income dividends and capital gains distributions for the indicated periods and
will include all recurring fees.
Yield
The 30-day yield quotation as to a class of shares of the Seneca Bond Fund may
be computed by dividing the net investment income for the period as to shares
of that class by the net asset value of each share of that class on the last
day of the period, according to the following formula:
6
[(a-b + 1) -1]
YIELD = 2 ---
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued for the period.
c = the average daily number of shares of the class
outstanding during the period that were entitled to
receive dividends.
d = the maximum offering price per share of the class
(net asset value per share) on the last day of the
period.
Return for a Fund is not fixed or guaranteed and will fluctuate from time to
time, unlike bank deposits or other investments which pay a fixed yield or
return for a stated period of time, and do not provide a basis for determining
future returns. Return is a function of portfolio quality, composition,
maturity and market conditions as well as the expenses allocated to each class
of each Fund. The return of a class may not be comparable to other investment
alternatives because of differences in the foregoing variables and differences
in the methods used to value portfolio securities, compute expenses and
calculate return.
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Other Quotations, Comparisons, and General Information
From time to time, in advertisements, in sales literature, or in reports to
shareholders, the past performance of a Fund may be illustrated and/or compared
with that of other mutual funds with similar investment objectives, and to
stock or other relevant indices. For example, total return of a Fund's classes
may be compared to averages or rankings prepared by Lipper Analytical Services,
Inc., a widely recognized independent service that monitors mutual fund
performance; the Lehman Brothers Government/Corporate Index, an unmanaged index
of consisting of a mixture of government and corporate bonds rated within
"investment grade" categories by S&P or Moody's; the Morgan Stanley Europe,
Australia, Far East Index ("EAFE"), an unmanaged index of international stock
markets, the S&P Mid-Cap Index, an unmanaged index of common stocks; the S&P
500 Index, an unmanaged index of common stocks; the Russell 2000 Index (the
"Russell 2000"), an unmanaged index of common stocks; the Russell 3000 Index
(the "Russell 3000"), an unmanaged index of common stocks; or the Dow Jones
Industrial Average, an unmanaged index of common stocks of 30 industrial
companies listed on the NYSE.
The S&P 500 Index is an unmanaged index of 500 common stocks traded on the
NYSE, American Stock Exchange and the Nasdaq National Market. The S&P 500
represents approximately 70% of the total domestic U.S. equity market
capitalization. The S&P Mid-Cap Index is an unmanaged index of common stocks
of 400 companies with mid-size market capitalizations--$300 million to $5
billion. The S&P 500 and the S&P Mid-Cap Indices are market value-weighted
indices (shares outstanding times stock price) in which each company's
influence on the respective index is directly proportional to its market value.
The companies in the S&P 500 Index and the S&P Mid-Cap Index are selected from
four major industry sectors: industrials, utilities, financials and
transportation. The 500 companies chosen for the S&P 500 Index are not the 500
largest companies in terms of market value. Rather, the companies chosen by
S&P for inclusion in the S&P 500 tend to be leaders in important industries
within the U.S. economy. The Russell 2000 is an unmanaged index of 2000 common
stocks of small capitalization companies. The Russell 2000 is composed of the
2000 smallest companies with respect to capitalization in the Russell 3000 and
represents approximately 70% of the Russell 3000 total market capitalization.
The Russell 3000 is an unmanaged index of 3000 common stocks of large United
States companies with market capitalizations ranging from approximately $60
million to $80 billion. The Russell 3000 represents approximately 98% of the
United States equity market.
In addition, the performance of the classes of a Fund may be compared to
alternative investment or savings vehicles and/or to indexes or indicators of
economic activity, e.g., inflation or interest rates. Performance rankings and
listings reported in newspapers or national business and financial
publications, such as Barron's, Business Week, Consumer's Digest, Consumer
Reports, Financial World, Forbes, Fortune, Investors Business Daily,
Kiplinger's Personal Finance Magazine, Money Magazine, the New York Times,
Smart Money, USA Today, U.S. News and World Report, The Wall Street Journal and
Worth may also be cited (if a Fund is listed in such a publication) or used for
comparison, as well as performance listings and rankings from various other
sources, including Bloomberg Financial Systems, CDA/Wiesenberger Investment
Companies Service, Donoghue's Mutual Fund Almanac, Investment Company Data,
Inc., Johnson's Charts, Kanon Bloch Carre & Co., Micropal, Inc., Morningstar,
Inc., Schabacker Investment Management and Towers Data Systems.
In addition, from time to time, quotations from articles from financial
publications, such as those listed above, may be used in advertisements, in
sales literature or in reports to shareholders of the Funds.
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<PAGE> 103
The Trust may also present, from time to time, historical information depicting
the value of a hypothetical account in one or more classes of a Fund since the
Fund's inception.
In presenting investment results, the Trust may also include references to
certain financial planning concepts, including (a) an investor's need to
evaluate his financial assets and obligations to determine how much to invest;
(b) his need to analyze the objectives of various investments to determine
where and when to invest; and (c) his need to analyze his time frame for future
capital needs to determine how to invest. The investor controls these three
factors, all of which affect the use of investments in building assets. The
Investment Manager's agreement to limit each Fund's operating expenses will
increase investment performance.
ADVISORY AND ADMINISTRATIVE SERVICES
INVESTMENT MANAGER
The Funds' investment management agreement with GMG/Seneca Capital Management,
L.P. and a substantially identical agreement to be entered into with GMG/Seneca
Capital Management, LLC when that entity succeeds to the business of GMG/Seneca
Capital Management, L.P. pursuant to a reorganization in mid-1996 (each, a
"Management Agreement") have been approved by the Trustees of the Trust,
including a majority of the Trustees who are not "interested persons" (as such
term is defined in the 1940 Act) of any party thereto (the "Independent
Trustees"), and by the sole initial shareholder immediately prior to any Fund's
commencement of operations. Until the effective time of the reorganization of
GMG/Seneca Capital Management, L.P. as GMG/Seneca Capital Management, LLC, the
term "Investment Manager" refers to GMG/Seneca Capital Management, L.P.
Thereafter, as used herein, that term refers to GMG/Seneca Capital Management,
LLC.
Pursuant to the Management Agreement, the Investment Manager supervises and
assists in the management of the assets of each Fund and furnishes each Fund
with research, statistical and advisory services. In managing the assets of
the Funds, the Investment Manager furnishes continuously an investment program
for each Fund consistent with the investment objectives and policies of that
Fund. More specifically, the Investment Manager determines from time to time
what securities shall be purchased for the Fund, what securities shall be held
or sold by the Fund and what portion of the Fund's assets shall be held
uninvested as cash, subject always to the provisions of the Trust's Agreement
and Declaration of Trust, By-Laws and its registration statement under the 1940
Act and under the 1933 Act covering the Trust's shares, as filed with the SEC,
and to the investment objectives, policies and restrictions of the Fund, as
each of the same shall be from time to time in effect, and subject, further, to
such policies and instructions as the Trustees of the Trust may from time to
time establish. To carry out such determinations, the Investment Manager
places orders for the investment and reinvestment of each Fund's assets (see
"Portfolio Brokerage").
For its investment advisory services under the Management Agreement, the
Investment Manager receives a fee, payable monthly, from Seneca Growth Fund
equal to 0.70% per annum of the Fund's average daily net assets, from Seneca
Mid-Cap Growth Fund equal to 0.80% per annum of the Fund's average daily net
assets, from Seneca Bond Fund equal to 0.50% per annum of such Fund's average
daily net assets, and from Seneca Real Estate Securities Fund equal to 0.85%
per annum of such Fund's average daily net assets.
The management fees are accrued daily and will be prorated with respect to
any Fund if the Investment Manager shall not have acted as that Fund's
investment adviser during any entire
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<PAGE> 104
monthly period. The Investment Management Agreement provides that if the
operating expenses of a Fund in any year, excluding taxes, brokerage
commissions, interest, dividends paid on securities sold short and
extraordinary legal fees and expenses, exceed the expense limits set by state
securities law administrators in states in which that Fund's shares are sold,
the amount payable to the Investment Manager will be reduced (but not below
zero) by the amount of such excess. The most restrictive state securities law
expense limit presently in effect requires such reduction if expenses exceed
2.5% of the first $30 million, 2.0% of the next $70 million and 1.5% of the
remainder of the average daily net assets of a Fund during such year. Each
Fund will reimburse the Investment Manager for fees foregone or other expenses
paid by the Investment Manager in order to comply with any expense limitation
imposed by state laws in later years in which operating expenses for the Fund
are less than such expense limitations for such year. No interest, carrying or
finance charge will be paid by a Fund as to the amounts representing fees
foregone or other expenses paid. In addition, no Fund will pay any
unreimbursed amounts to the Investment Manager upon termination of its
Investment Management Agreement.
The Investment Manager expects voluntarily to reimburse the Funds' operating
expenses (excluding class-specific expenses, litigation, indemnification and
other extraordinary expenses), to waive some or all of its management fee and
to assume other operating expenses temporarily during the Funds' start-up
periods in such amounts as may be necessary to prevent the overall expenses of
each class of shares of each Fund from exceeding the amounts set forth in the
"Annual Fund Expenses" table in the Prospectuses for such class. The
Investment Manager expects to continue such waivers and assumption of expenses
until the earlier of September 30, 1996 or, as to each Fund, the time at which
such Fund's net assets first exceed $50 million. The Investment Manager may
discontinue or modify any such waivers or reimbursements it may provide in the
future at its discretion.
Under the Investment Management Agreement, the Trust, on behalf of each Fund,
agrees (i) not to hold the Investment Manager or any of its officers or
employees liable for, and (ii) to indemnify or insure the Manager and its
officers and employees ("Indemnified Parties") against, any costs and
liabilities the Indemnified Parties may incur as a result of any claim against
the Indemnified Parties in the good faith exercise of their powers under the
Investment Management Agreement or arising out of an act or omission of the
Trust's custodian of assets, or of any broker or agent selected by the
Investment Manager in a commercially reasonable manner, excepting matters as to
which the Indemnified Parties shall be finally adjudged to have been guilty of
willful misfeasance, bad faith, gross negligence, reckless disregard of duty or
breach of fiduciary duty (all as used in the 1940 Act).
The Investment Management Agreement may be modified or amended only with the
approval of the holders of a majority of the applicable Fund's outstanding
shares and by a vote of the majority of the Independent Trustees. Unless
terminated as provided below, the Investment Management Agreement continues in
full force and effect for two years after its date of execution, and for
successive periods of one year thereafter, but only as long as each such
continuance after the end of the initial two year period is approved annually
by a majority vote of the Trustees or by a vote of the holders of a majority of
the out standing shares of the applicable Fund, but in either event it also
must be approved by a vote of a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on such approval. The
Investment Management Agreement may be terminated without penalty by either
party upon 60 days' written notice and automatically terminates in the event of
its assignment.
Officers and Trustees of the Trust who are also principals in and employees of
GMG/Seneca may receive indirect compensation by reason of investment advisory
fees paid by the Trust to GMG/Seneca in its capacity as the Investment Manager.
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<PAGE> 105
GMG/Seneca Capital Management, L.P. consists of two managing general partners,
Gail P. Seneca and Genesis Merchant Group, L.P. ("GMGLP"), one other,
nonmanaging general partner (Richard D. Little), and certain limited partners.
After succeeding to the business of GMG/Seneca Capital Management, L.P.,
GMG/Seneca Capital Management, LLC will be owned by the existing partners of
GMG/Seneca Capital Management, L.P., the existing partners of Genesis Merchant
Group, L.P., and certain employees of the Investment Manager. Gail P. Seneca
will be the largest single holder of "membership" interests and will be the
sole "manager." GMG/Seneca has approximately 35 full-time employees and,
together with GMGLP, acts as investment adviser or manager for approximately $3
billion of institutional and private investment accounts. GMGLP consists of
three general partners, Gail P. Seneca, Philip C. Stapleton, and William K.
Weinstein, and certain limited partners. The three general partners are the
only persons who control GMGLP and GMG/Seneca. After the reorganization
described above, Ms. Seneca will be the only person who controls the Investment
Manager.
Gail P. Seneca, President and Trustee of the Trust, Sandra J. Westhoff,
Treasurer and Trustee of the Trust, and Ronald K. Jacks, Secretary and Trustee
of the Trust, are each an "affiliated person" of the Trust (as defined in the
1940 Act). Gail P. Seneca, as managing general partner, Chief Investment
Officer, and an owner of more than 5% of the equity of GMG/Seneca is an
"affiliated person" of GMG/Seneca. Sandra J. Westhoff, as Chief Administrative
Officer of GMG/Seneca, and Ronald K. Jacks, as a Portfolio Manager of
GMG/Seneca, are each an "affiliated person" of GMG/Seneca.
In the management of the Trust and their other accounts, GMG/Seneca and its
affiliates allocate investment opportunities to all accounts for which they are
appropriate subject to the availability of cash in any particular account and
the final decision of the individual or individuals in charge of such accounts.
Where market supply is inadequate for a distribution to all such accounts,
securities are allocated in proportion to net assets. In some cases this
procedure may have an adverse effect on the price or volume of the security as
far as the Funds are concerned. However, it is the judgment of the Trustees
that the desirability of continuing the Trust's advisory arrangements with the
Investment Manager outweighs any disadvantages that may result from
contemporaneous transactions. See "Portfolio Brokerage."
In an attempt to avoid any potential conflict with portfolio transactions for
the Funds, the Investment Manager and the Trust, on behalf of each Fund, have
adopted restrictions on personal securities trading by personnel of the
Investment Manager and its affiliates. These restrictions include:
pre-clearance of all personal securities transactions and a prohibition of
purchasing initial public offerings of securities.
In the event neither the Investment Manager nor any of its affiliates acts as
investment adviser to the Trust, the name of the Trust will be changed to one
that does not contain the name "Seneca" or otherwise suggest an affiliation
with the Investment Manager.
ADMINISTRATOR
GMG/Seneca, in its capacity as Administrator of each Fund, is responsible for
providing administrative services for each Fund under an administration
agreement (the "Administration Agreement"). GMG/Seneca and the Trust have also
entered into an agreement (the "Sub-Administration Agreement") with State
Street Bank and Trust Company under which State Street provides most of these
services. In the Sub-Administration Agreement, the Trust has agreed to
guarantee the obligation of GMG/Seneca to compensate State Street. The
services to be rendered under the Administration Agreement include for each
Fund, (a) overseeing the determination and publication of the Fund's net asset
value, (b) overseeing the maintenance by the Custodian of
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certain books and records of the Fund as required by Rule 31a-1(b) under the
1940 Act, (c) preparing the Fund's tax returns, (d) preparing financial
information for the Fund's semiannual and annual reports, proxy statements, and
other communications to shareholders, (e) preparing the Fund's periodic
financial reports on Form N-SAR and financial information required for the
Fund's filings with the SEC, (f) providing periodic testing of the Fund's
portfolio to assist in compliance with the requirements of the Code for
qualification as a registered investment company and with the 1940 Act and
prospectus limitations on investments, (g) filing annual and semiannual reports
with appropriate regulatory agencies, (h) preparing and filing with the SEC
Rule 24f-2 notices, and (i) preparing and filing state registrations of the
Fund's securities.
For its services under the Administration Agreement, GMG/Seneca is entitled to
receive a fee (the "Administrative Services Fee") from each Fund based on the
average net assets of the Fund. The Administrative Services Fee will be
payable monthly and will equal, on an annualized basis, the sum of (i) .08% of
the first $125 million average net assets, plus (ii) .06% of the next $125
million average net assets, plus (iii) .04% of the average net assets above
$250 million. During each year, each Fund will be obligated to pay a minimum
Administrative Services Fee of $55,000. However, GMG/Seneca has agreed to waive
the minimum Administrative Services Fee for the first six months during which
the Trust is in operation. However, if the Trust terminates the Administration
Agreement prior to the third anniversary of the date that the Trust first
accepts money for investment, the Trust will pay to GMG/Seneca a termination
fee equal to the aggregate Administrative Services Fees waived.
In addition to the Administrative Services Fee, for performing Blue Sky and
other administrative services GMG/Seneca is entitled to receive from each Fund
an annual fee equal to $2,500 for each class of shares in such Fund.
The above fees may be changed by the Trustees without shareholder approval.
[/R]
Each Fund bears all expenses of its own operation (subject to the expense
limitations described above), which expenses include: (i) fees and expenses of
any investment adviser or administrator of the Fund; (ii) organization expenses
of the Trust; (iii) fees and expenses incurred by the Fund in connection with
membership in investment company organizations; (iv) brokers' commissions; (v)
payment for portfolio pricing services to a pricing agent, if any; (vi) legal,
accounting or auditing expenses; (vii) interest, insurance premiums, taxes or
governmental fees; (viii) fees and expenses of the transfer agent of the Funds;
(ix) the cost of preparing stock certificates or any other expenses, including,
without limitation, clerical expenses of issue, redemption or repurchase of
shares of the Fund; (x) the expenses of and fees for registering or qualifying
shares of the Funds for sale and of maintaining the registration of the Funds;
(xi) a portion of the fees and expenses of Trustees who are not affiliated with
the Investment Manager; (xii) the cost of preparing and distributing reports
and notices to existing shareholders, the SEC and other regulatory authorities;
(xiii) fees or disbursements of custodians of the Funds' assets, including
expenses incurred in the performance of any obligations enumerated by the
Agreement and Declaration of Trust or By-Laws of the Trust insofar as they
govern agreements with any such custodian; (xiv) costs in connection with
annual or special meetings of shareholders, including proxy material
preparation, printing and mailing; (xv) litigation and indemnification expenses
and other extraordinary expenses not incurred in the ordinary course of the
Funds' business; and
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<PAGE> 107
(xvi) distribution fees and service fees applicable to Administrative Class
shares and service fees applicable to Institutional Shares.
The Funds' Management and Administration Agreements each provide that
GMG/Seneca may render similar services to others so long as the services
provided thereunder are not impaired thereby.
PRINCIPAL UNDERWRITER
Genesis Merchant Group Securities, L.P. ("GMG Securities") will serve as the
principal underwriter in connection with the continuous offering of the shares
of the Trust pursuant to a Distribution and Services Agreement, dated as of the
effective date of the Trust's registration statement. The Trustees, including
the Independent Trustees, will approve the Distribution and Services Agreement
before the Funds begin selling shares to the public. The Distribution and
Services Agreement will continue in effect from year to year, if annually
approved by the Trustees, including the Independent Trustees. It provides that
GMG Securities will bear certain distribution expenses not borne by the Funds.
Seneca Distributors, LLC has also entered into the Distribution and Services
Agreement with the Trust and, pursuant to that agreement, upon its registration
as a broker-dealer under the Securities Exchange Act of 1934 and all applicable
state securities laws, and becoming a member of the National Association of
Securities Dealers, Inc., Seneca Distributors will become the principal
underwriter and distributor of the Funds' shares. It is expected that
thereafter GMG Securities will terminate its agreement with the Trust and
Seneca Distributors will become the sole Distributor.
The Distributors will bear all expenses they incur in providing services under
the Distribution and Services Agreement. Such expenses include compensation to
their employees and representatives and to any financial intermediaries
("service agents") for distribution related services. The Distributors also
pay certain expenses in connection with the distribution of the Funds' shares,
including the cost of preparing, printing and distributing advertising or
promotional materials, and the cost of printing and distributing prospectuses
and supplements to prospective shareholders. The Distributors will receive
compensation under a Distribution and Services Plan for providing such services
with respect to Administrative Shares. Each Fund bears the cost of registering
its shares under federal, state and foreign securities law.
Seneca Distributors is 99% owned by GMG/Seneca. GMG Securities is a limited
partnership of which three corporations are general partners and GMGLP is the
sole limited partner. The managing general partner of GMG Securities is owned
by the general partners of GMGLP.
DISTRIBUTION AND SERVICES PLAN
The Trust has adopted a Distribution and Services Plan (the "Plan") pursuant to
Rule 12b-1 with respect to the Administrative Shares of each Fund under which
each Fund will pay the Distributors an aggregate fee calculated at an annual
rate of 0.25% of the average daily net assets of the Administrative Shares of
such Fund. Services to be performed by the Distributors include (i) the
marketing, promotion, and sale of Administrative Shares, as set forth in the
Plan, (ii) ongoing servicing and/or maintenance of the accounts of holders of
Administrative Shares of such Fund, and (iii) subtransfer agency, subaccounting
and other recordkeeping, and administrative services related to the sale of
Administrative Shares of such Fund. Payments under the Plan are intended, in
part, to reimburse the Distributors for (a) their direct expenses in providing
the services described above, including reimbursement of third parties with
whom the Distributors may contract to assist with the provision of those
services, (b) payments made to consultants and others for providing any
services connected with the Distributors' services,
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(c) costs of developing, producing, and implementing marketing and promotional
materials and activities relating to the sale of Administrative Shares,
including direct mail promotions, mass media advertising, and related travel
and entertainment expenses, (d) costs of printing and distributing
prospectuses, statements of additional information, and reports to prospective
purchasers of Administrative Shares, and (e) costs involved in obtaining
information, analyses, and reports as to marketing and promotional activities
that the Fund may, from time to time deem appropriate.
Under the terms of the Plan, the Distributor will provide to the Trust for
review by the Trustees a quarterly written report of the amounts expended under
the Plan as to each Fund and the purpose for which such expenditures were made.
In the Trustees' quarterly review of the Plan, they will consider the continued
appropriateness and the level of compensation that the Plan provide for each
Trust.
TRUSTEES AND OFFICERS
The Trustees have responsibility for management of the business of the Trust.
The executive officers of the Trust are responsible for its day to day
operation. Set forth below is certain information concerning the Trustees and
officers.
<TABLE>
<CAPTION>
Name and Title Address Age Principal Occupations During Past Five
-------------- ------- --- ------------------------------------------
Years
-----
<S> <C> <C> <C>
Gail P. Seneca,* 909 Montgomery Street 42 Ms. Seneca has been President and Trustee
President, and San Francisco, CA 94133 of the Trust since February 1996. Since
Trustee November 1989, she has been Chief Investment
Officer and a managing general partner of
GMG/Seneca.
Sandra J. Westhoff,* 909 Montgomery Street 36 Ms. Westhoff has been Treasurer and a
Treasurer and San Francisco, CA 94133 Trustee of the Trust since February 1996.
Trustee From September 1994 to present, she has
been Chief Administrative Officer of
GMG/Seneca. From 1989 to 1994, she was
Director of Finance for the San Francisco
Newspaper Agency.
Ronald K. Jacks,* 909 Montgomery Street 30 Mr. Jacks has been Secretary and a
Secretary and San Francisco, CA 94133 Trustee of the Trust since February 1996.
Trustee From July 1990 to present, he has been a
Portfolio Manager of GMG/Seneca.
</TABLE>
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<PAGE> 109
<TABLE>
<S> <C> <C> <C>
Melinda Ellis c/o Ellis Partners, 351 35 Ms. Evers has been a Trustee of the Trust
Evers,** Trustee California Street, Suite since February 1996. She is a founding
1150, San Francisco, CA partner of Ellis Partners, Inc., a real
94104 estate investment firm, established in
1993. From 1991 to 1993 she attended
Stanford University's Graduate School of
Business. From 1984 to 1991, she was a
Portfolio Manager with Grubb & Ellis
Realty Advisers.
Paul E. Erdman,** 1817 Lytton Springs 63 Mr. Erdman has been a Trustee of the
Trustee Road, Healdsburg, CA Trust since February 1996. He is an
95448 economist and novelist, and, since 1979,
has served on the Board of Advisors of
The University of Georgetown School of
Foreign Service.
Mary Ann Cusenza,** 2109 Santa Cruz Avenue, 39 Ms. Cusenza has been a Trustee of the
Trustee Menlo Park, CA 94025 Trust since February 1996. She joined
Apple Computer, Inc. in 1985 and was a
Vice President and Treasurer of Apple
Computer, Inc. from 1992 until February
1996.
Victor Guinasso,** 333 Twin Dolphin Drive, 40 Mr. Guinasso has been a Trustee of the
Trustee Redwood City, CA 94065 Trust since February 1996. He joined DHL
Worldwide Express in 1982, and has served
as Chief Operating Officer of DHL
Worldwide Express since 1991.
</TABLE>
____________________
* "Interested Persons" within the meaning of the 1940 Act.
** Each of the Independent Trustees is a trustee of each of the other
Seneca Funds and a member of the Trust's Audit Committee.
COMPENSATION OF TRUSTEES AND OFFICERS
The Funds pay no compensation to Trustees affiliated with the Investment
Manager or its officers. Each Trustee of the Trust who is not an "interested
person" of the Trust receives a fee of $2,500 for each regular, quarterly
meeting of the Board of Trustees attended and is reimbursed for expenses
incurred in connection with such attendance.
The following table estimates the amount of compensation to be paid to the
Trust's Trustees for the fiscal year ending September 30, 1996.
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<PAGE> 110
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement
Aggregate Compensation Benefits Total
Aggregate Compensation Aggregate from Seneca Accrued as Compensation
Compensation from Seneca Compensation Real Estate Part of from Trust and
from Seneca Mid-Cap Growth from Seneca Securities Trust's other Funds in
Growth Fund* Fund* Bond Fund* Fund* Expenses Complex**
<S> <C> <C> <C> <C> <C>
$7,500 $7,500 $7,500 $7,500 -- $30,000
</TABLE>
* Estimated. The Trust is newly organized and has not paid any Trustee's
fees.
CERTAIN SHAREHOLDERS
Immediately before the commencement of a Fund's operations, GMG/Seneca owned
100% of the outstanding shares of that Fund. As of the date of this Statement
of Additional Information, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting or investing power with respect to) less
than 1% of the outstanding shares of each Fund.
NET ASSET VALUE
(See "Net Asset Value" in the Prospectuses.)
Under the 1940 Act, the Trustees are responsible for determining in good faith
the fair value of securities of the Funds. The net asset value per share of
each class of each Fund is determined once daily, Monday through Friday as of
the close of regular trading on the NYSE (normally 4:00 P.M. New York City
time) on each day the Trust is "open for business" (as defined in the
Prospectus) in which there is a sufficient degree of trading in that Fund's
portfolio securities that the current net asset value of that Fund's shares
might be materially affected. A Fund need not determine its net asset value on
any day during which its shares were not tendered for redemption and the Trust
did not receive any order to purchase or sell shares of that Fund. In
accordance with procedures approved by the Trustees, the net asset value per
share of each class of each Fund is calculated by determining the value of the
net assets attributable to each class of that Fund and dividing by the number
of outstanding shares of that class. The NYSE is not open for trading on
weekends or on New Year's Day (January 1), Presidents' Day (the third Monday in
February), Good Friday, Memorial Day (the last Monday in May), Independence Day
(July 4), Labor Day (the first Monday in September), Thanksgiving Day (the
fourth Thursday in November) and Christmas Day (December 25).
The public offering price per share of a class of a Fund is the net asset value
per share of that class of that Fund next determined after receipt of an order.
Orders for shares that have been received by the Trust or the Transfer Agent
before the close of regular trading of the NYSE are confirmed at the offering
price effective at the close of regular trading of the NYSE on that day, while
orders received subsequent to the close of regular trading of the NYSE will be
confirmed at the offering price effective at the close of regular trading of
the NYSE on the next day on which the net asset value is calculated.
Bonds and other fixed-income securities (other than short-term obligations but
including listed issues) in a Fund's portfolio are valued on the basis of
valuations furnished by a pricing service
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<PAGE> 111
that uses both dealer-supplied valuations and electronic data processing
techniques that take into account appropriate factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data, without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, when such
valuations are believed to reflect the fair value of such securities.
In determining the net asset value, unlisted securities for which market
quotations are available are valued at the last reported sales price or, if no
sales reported or such pricing is not provided, the mean between the most recent
bid and asked prices. Securities, options on securities, futures contracts and
options thereon that are listed or admitted to trading on a national exchange,
are valued at their last sale on such exchange prior to the time of determining
net asset value; or if no sales are reported on such exchange on that day, at
the mean between the most recent bid and asked price. Securities listed on more
than one exchange shall be valued on the exchange the security is most
extensively traded. Quotations of foreign securities in foreign currency will
be converted to U.S. dollar equivalents using foreign exchange quotations
received from independent dealers. Short-term investments having a maturity of
60 days or less will be valued at amortized cost, when the Trustees determines
that amortized cost is their fair market value. Certain debt securities for
which daily market quotations are not available may be valued, pursuant to
guidelines established by the Trustees, with reference to fixed income
securities whose prices are more readily obtainable and whose durations are
comparable to the securities being valued. Subject to the foregoing, other
securities for which market quotations are not readily available will be valued
at fair value as determined in good faith by the Trustees.
For purposes of determining the net asset value of the Funds' shares, options
transactions will be treated as follows: When a Fund sells an option, an
amount equal to the premium received by that Fund will be included in that
Fund's accounts as an asset and a deferred liability will be created in the
amount of the option. The amount of the liability will be marked to the market
to reflect the current market value of the option. If the option expires or if
that Fund enters into a closing purchase transaction, that Fund will realize a
gain (or a loss if the cost of the closing purchase exceeds the premium
received), and the related liability will be extinguished. If a call option
contract sold by a Fund is exercised, that Fund will realize the gain or loss
from the sale of the underlying security and the sale proceeds will be
increased by the premium originally received.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
Each Fund within the Trust is separate for investment and accounting purposes
and is treated as a separate entity for federal income tax purposes.
A regulated investment company qualifying under Subchapter M of the Code is not
subject to federal income tax on distributed amounts to the extent that it
distributes annually its taxable and, if any, tax-exempt net investment income
and net realized capital gains in accordance with the timing requirements of
the Code. Each Fund intends to elect and to qualify to be treated as a
regulated investment company and intends to continue to so qualify for each
taxable year.
Qualification of a Fund for treatment as a regulated investment company under
the Code requires, among other things, that (a) at least 90% of a Fund's annual
gross income, without offset for losses from the sale or other disposition of
stock or securities or other transactions, be derived from interest, payments
with respect to securities loans, dividends and gains from the sale or other
disposition of stock or securities or foreign currencies, or other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business
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<PAGE> 112
of investing in such stock, securities or currencies; (b) the Fund derive less
than 30% of its annual gross income from gains (without deduction for losses)
from the sale or other disposition of any of the following held (for tax
purposes) for less than three months: (i) stock or securities; (ii) options,
futures or forward contracts (not on foreign currencies) or (iii) foreign
currencies (or options, futures or forward contracts on foreign currencies) not
directly related to the Fund's principal business of investing in stock or
securities and related options or futures; (c) the Fund distribute at least
annually to its shareholders as dividends at least 90% of its taxable and
tax-exempt net investment income, the excess of net short-term capital gain
over net long-term capital loss earned in each year and any other net income
(except for the excess, if any, of net long-term capital gain over net
short-term capital loss, which need not be distributed in order for the Fund to
be treated as a regulated investment company but such amount is taxed to the
Fund if it is not distributed); and (d) the Fund diversify its assets so that,
at the close of each quarter of its taxable year, (i) at least 50% of the fair
market value of its total (gross) assets is comprised of cash, cash items, U.S.
Government securities, securities of other regulated investment companies and
other securities limited in respect of any one issuer to no more than 5% of the
fair market value of the Fund's total assets and 10% of the outstanding voting
securities of such issuer and (ii) no more than 25% of the fair market value of
its total assets is invested in the securities of any one issuer (other than
U.S. Government securities and securities of other regulated investment
companies) or of two or more issuers controlled by the Fund and engaged in the
same, similar, or related trades or businesses.
Each Fund is subject to a 4% nondeductible federal excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
requires that a Fund distribute (or be deemed to have distributed) to
shareholders during a calendar year at least 98% of the Fund's ordinary income
(not including tax-exempt interest) for the calendar year, at least 98% of the
excess of its capital gains over the capital losses realized during the
one-year period ending October 31 during such year, as well as any income or
gain (as so computed) from the prior calendar year that was not distributed for
such year and on which the Fund paid no federal income tax. Each Fund has
distribution policies that should generally enable it to avoid liability for
this tax.
Net investment income for each Fund is the Fund's investment income less its
expenses. Dividends from taxable net investment income and the excess, if any,
of net short-term capital gain over net long-term capital loss of a Fund will
be treated under the Code as ordinary income, and dividends from net long-term
capital gain in excess of net short-term capital loss ("capital gain
dividends") will be treated under the Code as long-term capital gain, for
federal income tax purposes. These dividends are paid after taking into
account, and reducing the distribution to the extent of, any available capital
loss carryforwards. Distributions from a Fund's current or accumulated
earnings and profits, as computed for Federal income tax purposes, will be
treated as described above whether taken in shares or in cash. Certain
distributions received in January may be treated as if paid by a Fund and
received by a shareholder on December 31 of the prior year.
Dividends, including capital gain dividends, paid by a Fund shortly after a
shareholder's purchase of shares have the effect of reducing the net asset
value per share of his shares by the amount per share of the dividend
distribution. Although such dividends are, in effect, a partial return of the
shareholder's purchase price to the shareholder, they may be characterized as
ordinary income or capital gain as described above.
Equity options (including options on stock and options on narrow-based stock
indices) and over-the-counter options on debt securities written or purchased
by a Fund will be subject to tax under Section 1234 of the Code. In general,
no loss is recognized by a Fund upon payment of a
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<PAGE> 113
premium in connection with the purchase of a put or call option. The character
of any gain or loss recognized (i.e long-term or short-term) will generally
depend, in the case of a lapse or sale of the option, on the Fund's holding
period for the option, and in the case of an exercise of put option, on the
Fund's holding period for the underlying security. The purchase of a put
option may constitute a short sale for federal income tax purposes, causing an
adjustment in the holding period of the underlying stock or security or a
substantially identical stock or security in the Fund's portfolio. The
exercise of a call option purchased by a Fund is not a taxable transaction for
the Fund. If a Fund writes a put or call option, no gain is recognized upon
its receipt of a premium. If the option lapses or is closed out, any gain or
loss is treated as a short-term capital gain or loss. If a call option is
exercised, whether the gain or loss is long-term or short-term depends on the
holding period of the underlying stock or security. The exercise of a put
option written by a Fund is not a taxable transaction for the Fund.
All futures contracts and foreign currency contracts entered into by a Fund and
all listed nonequity options written or purchased by a Fund (including options
on debt securities, options on futures contracts, options on securities indices
and options on broad-based stock indices) will be governed by Section 1256 of
the Code. Absent a tax election to the contrary, gain or loss attributable to
the lapse, exercise or closing out of any such position will be treated as 60%
long-term and 40% short-term capital gain or loss, and on the last trading day
of a Fund's taxable year, all outstanding Section 1256 positions will be marked
to market (i.e., treated as if such positions were closed out at their closing
price on such day), and any resulting gain or loss will be recognized as 60%
long-term and 40% short-term capital gain or loss. Under certain
circumstances, entry into a futures contract to sell a security may constitute
a short sale for federal income tax purposes, causing an adjustment in the
holding period of the underlying security or a substantially identical security
in a Fund's portfolio.
Because options, futures and currency activities of a Fund may increase the
amount of gains from the sale of securities or investments held or treated as
held for less than three months, the Funds may limit these transactions in
order to comply with the 30% limitation described above.
Positions of a Fund which consist of at least one stock and at least one stock
option or other position with respect to a related security which substantially
diminishes the Fund's risk of loss with respect to such stock could be treated
as a "straddle" which is governed by Section 1092 of the Code, the operation of
which may cause deferral of losses, adjustments in the holding periods of stock
or securities and conversion of short-term capital losses into long-term
capital losses. An exception to these straddle rules exists for any "qualified
covered call options" on stock written by a Fund.
Positions of a Fund which consist of at least one debt security not governed by
Section 1256 and at least one futures or currency contract or listed nonequity
option governed by Section 1256 which substantially diminishes the Fund's risk
of loss with respect to such debt security will be treated as a "mixed
straddle." Although mixed straddles are subject to the straddle rules of
Section 1092 of the Code, certain tax elections exist for them which reduce or
eliminate the operation of these rules. Each Fund will monitor these
transactions and may make certain tax elections in order to mitigate the
operation of these rules and prevent disqualification of the Fund as a
regulated investment company for federal income tax purposes.
These special tax rules applicable to options, futures and currency
transactions could affect the amount, timing and character of a Fund's income
or loss and hence of its distributions to shareholders by causing holding
period adjustments, converting short-term capital losses into long-term capital
losses, and accelerating a Fund's income or deferring its losses.
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A Fund's investment in zero coupon securities or other securities having
original issue discount (or market discount, if the Fund elects to include
market discount in income currently) will generally cause it to realize income
prior to the receipt of cash payments with respect to these securities. The
mark to market rules described above may also require a Fund to recognize gains
without a concurrent receipt of cash. In such case, a Fund will not be able to
purchase additional income producing securities with the cash generated by the
sale of such securities but will be required to use such cash to make such
required distributions, and its current portfolio income may ultimately be
reduced accordingly. In order to distribute this income or gains, maintain its
qualification as a regulated investment company, and avoid federal income or
excise taxes, the Fund may be required to liquidate portfolio securities that
it might otherwise have continued to hold.
The Funds may be subject to foreign withholding or other foreign taxes with
respect to income (possibly including, in some cases, capital gains) derived
from foreign securities. These taxes may be reduced or eliminated under the
terms of applicable tax treaties. However, the Funds will not be eligible to
pass through to shareholders any foreign tax credits or deductions for foreign
taxes paid by the Funds that are not thus reduced or eliminated. Certain
foreign exchange gains and losses realized by the Funds with respect to such
securities or related currency transactions will generally be treated as
ordinary income and losses. Certain uses of foreign currency and investments
by the Funds in certain "passive foreign investment companies" may be limited
in order to avoid adverse tax consequences for the Funds (or an election, if
available, may be made with respect to such investments).
Different tax treatment, including a penalty on certain distributions, excess
contributions or other transactions is accorded to accounts maintained as IRAs
or other retirement plans. Investors should consult their tax advisers for
more information.
Redemptions, including exchanges, of shares may give rise to recognized gains
or losses, except as to those investors subject to tax provisions that do not
require them to recognize such gains or losses. All or a portion of a loss
realized upon the redemption of shares may be disallowed under "wash sale"
rules to the extent shares are purchased (including shares acquired by means of
reinvested dividends) within a 61-day period beginning 30 days before and
ending 30 days after such redemption. Any loss realized upon a shareholder's
sale, redemption or other disposition of shares with a tax holding period of
six months or less will be treated as a long-term capital loss to the extent of
any distribution of long-term capital gains with respect to such shares.
The Trust is organized as a Delaware business trust, and neither the Trust nor
the Funds will be subject to any corporate excise or franchise tax in the State
of Delaware, nor will they be liable for Delaware income taxes provided that
each Fund qualifies as a regulated investment company for federal income tax
purposes and satisfies certain income source requirements of Delaware law. If
each Fund so qualifies and distributes all of its income and capital gains, it
will also be exempt from the New York State franchise tax and the New York City
general corporation tax, except for small minimum taxes.
The foregoing discussion of U.S. federal income tax law does not address the
special tax rules applicable to certain classes of investors, such as insurance
companies. Each shareholder who is not a U.S. person should consider the U.S.
and foreign tax consequences of ownership of shares of the Funds, including the
possibility that such a shareholder may be subject to a U.S. withholding tax
at a rate of 30% (or at a lower rate under an applicable income tax treaty) on
Fund distributions treated as ordinary dividends.
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<PAGE> 115
This discussion of the federal income tax treatment of the Funds and their
distributions is based on the federal income tax law in effect as of the date
of this Statement of Additional Information. Shareholders should consult their
tax advisers about the application of the provisions of tax law described in
this statement of additional information and about the possible application of
state, local and foreign taxes in light of their particular tax situations.
PORTFOLIO BROKERAGE
(See "Portfolio Transactions" in the Prospectuses.)
It is the general policy of the Trust not to employ any broker in the purchase
or sale of securities for a Fund's portfolio unless the Trust believes that the
broker will obtain the best results for the Fund, taking into consideration
such relevant factors as price, the ability of the broker to effect the
transaction and the broker's facilities, reliability and financial
responsibility. Commission rates, being a component of price, are considered
together with such factors. Subject to the foregoing, where transactions are
effected on securities exchanges, the Trust will employ GMG Securities as a
broker. The Trust is not obligated to deal with any broker or group of brokers
in the execution of transactions in portfolio securities.
In selecting brokers to effect transactions on securities exchanges, the Trust
considers the factors set forth in the first paragraph under this heading and
any investment products or services provided by such brokers, subject to the
criteria of Section 28(e) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Section 28(e) specifies that a person with investment
discretion shall not be "deemed to have acted unlawfully or to have breached a
fiduciary duty" solely because such person has caused the account to pay a
higher commission than the lowest rate available. To obtain the benefit of
Section 28(e), the person so exercising investment discretion must make a good
faith determination that the commissions paid are "reasonable in relation to
the value of the brokerage and research services provided viewed in terms of
either that particular transaction or his overall responsibilities with respect
to the accounts as to which he exercises investment discretion." Accordingly,
if the Trust determines in good faith that the amount of commissions charged by
a broker is reasonable in relation to the value of the brokerage and research
products and services provided by such broker, the Trust may pay commissions to
such broker in an amount greater than the amount another firm might charge.
Research products and services provided to the Trust include research reports
on particular industries and companies, economic surveys and analyses,
recommendations as to specific securities and other products or services (e.g.,
quotation equipment and computer related costs and expenses) providing lawful
and appropriate assistance to GMG/Seneca and its affiliates in the performance
their decision-making responsibilities.
Each year, the Investment Manager will consider the amount and nature of the
research products and services provided by other brokers as well as the extent
to which such products and services are relied upon, and attempt to allocate a
portion of the brokerage business of their clients, such as the Trust, on the
basis of such considerations. In addition, brokers sometimes suggest a level
of business they would like to receive in return for the various services the
provide. Actual brokerage business received by any broker may be less than the
suggested allocations, but can (and often does) exceed the suggestions, because
total brokerage is allocated on the basis of all the considerations described
above. In no instance is a broker excluded from receiving business because it
has not been identified as providing research services. As permitted by
Section 28(e), the investment information received from other brokers may be
used by GMG/Seneca (and its subsidiaries) in servicing all its accounts and not
all such information may be used by GMG/Seneca, in its capacity as the
Investment Manager, in connection with the Trust.
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<PAGE> 116
Nonetheless, the Trust believes that such investment information provides the
Trust with benefits by supplementing the research otherwise available to the
Trust.
GMG Securities will act as broker for the Funds on exchange transactions,
subject, however, to the general policy of the Trust set forth above and
certain procedures adopted by the Trustees. Commissions paid to GMG Securities
must be at least as favorable as those believed to be contemporaneously charged
by other brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange. A transaction
will not be placed with GMG Securities if a Fund would have to pay a commission
rate less favorable than GMG Securities contemporaneous charges for comparable
transactions for its other most favored, but unaffiliated, customers except for
any customers of GMG Securities determined by a majority of the Independent
Trustees not to be comparable to the Funds. With regard to comparable
customers, in isolated situations, subject to the approval of a majority of the
Independent Trustees, exceptions may be made. Since GMG/Seneca has, as
investment adviser to the Funds, the obligation to provide management, which
includes elements of research and related skills, such research and related
skills will not be used by GMG Securities as a basis for negotiating
commissions at a rate higher than that determined in accordance with the above
criteria.
The commission rate on all exchange orders is subject to negotiation. Section
17(e) of the 1940 Act limits to "the usual and customary broker's commission"
the amount that can be paid by the Trust to an affiliated person, such as GMG
Securities, acting as broker in connection with transactions effected on a
securities exchange. The Trustees, including a majority of the Independent
Trustees, have adopted procedures designed to comply with the requirements of
Section 17(e) of the 1940 Act and Rule 17e-1 thereunder to ensure a broker's
commission that is "reasonable and fair compared to the commission, fee or
other remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time . . . ." Rule 17e-1
also requires the Trustees, including a majority of the Independent Trustees,
to adopt procedures reasonably designed to provide that the commission paid is
consistent with the above standard, review those procedures at least annually
to determine that they continue to be appropriate and determine at least
quarterly that transactions have been effected in compliance with those
procedures. The Trustees of the Trust, including a majority of the Independent
Trustees, have adopted procedures designed to comply with the requirements of
Rule 17e-1.
Section 11(a) of the Exchange Act provides that a member firm of a national
securities exchange (such as GMG Securities) may not effect transactions on
such exchange for the account of an investment company (such as the Trust) of
which the member firm or its affiliate (such as the Investment Manager) is the
investment adviser unless certain conditions are met. These conditions require
that the investment company authorize the practice and that the investment
company receive from the member firm at least annually a statement of all
commissions paid in connection with such transactions. GMG Securities
transactions on behalf of the Funds will be effected in compliance with these
conditions.
GMG Securities will furnish to the Trust at least quarterly a statement setting
forth the total amount of all compensation retained by GMG Securities or any
associated person of GMG Securities in connection with effecting transactions
for the account of the Trust, and the Trustees of the Trust review and approve
all the Trust's portfolio transactions and the compensation received by GMG
Securities in connection therewith.
GMG Securities will not knowingly participate in commissions paid by the Trust
to other brokers or dealers and will not seek or knowingly receive any
reciprocal business as the result of the
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payment of such commissions. In the event GMG Securities at any time learns
that it has knowingly received reciprocal business, it will so inform the
Trustees.
To the extent that GMG Securities receives brokerage commissions on Trust
portfolio transactions, officers and Trustees of the Trust who are also
principals in GMG Securities may receive indirect compensation from the Trust
through their participation in such brokerage commissions.
The Trust has adopted certain procedures, pursuant to Rule 10f-3 under the 1940
Act, that must be followed any time a Fund purchases or otherwise acquires,
during the existence of an underwriting syndicate, a security of which GMG
Securities is an underwriter or member of the underwriting syndicate. The
Trustees will determine, on at least a quarterly basis, that any such purchases
made during the preceding quarter were effected in compliance with such
procedures.
In certain instances there may be securities that are suitable for a Fund's
portfolio as well as for that of another Fund or one or more of the other
clients of the Investment Manager. Investment decisions for a Fund and for the
Investment Manager's other clients are made with a view to achieving their
respective investment objectives. It may develop that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients. Likewise, a particular security may be bought for one
or more clients when one or more other clients are selling that same security.
Some simultaneous transactions are inevitable when several clients receive
investment advice from the same investment adviser, particularly when the same
security is suitable for the investment objectives of more than one client. When
two or more clients are simultaneously engaged in the purchase or sale of the
same security, the securities are allocated among clients in a manner believed
to be equitable to each. It is recognized that in some cases this system could
have a detrimental effect on the price or volume of the security in a particular
transaction as far as a Fund is concerned. The Trust believes that over time
its ability to participate in volume transactions will produce better executions
for the Funds. When appropriate, orders for the account of the Funds are
combined with orders for other investment companies or other clients advised by
the Investment Manager, including accounts (such as investment limited
partnerships) in which the Investment Manager or affiliated or associated
persons of the Investment Manager are investors or have a financial interest, in
order to obtain a more favorable commission rate. When the same security is
purchased for a Fund and one or more other funds or other clients on the same
day, each party pays the average price and commissions paid are allocated in
direct proportion to the number of shares purchased.
On occasion, situations may arise in which legal and regulatory considerations
will preclude trading for the Funds' accounts by reason of activities of GMG
Securities or its affiliates. The Trustees believe the Funds will not be
materially disadvantaged by any such preclusion and that the desirability of
continuing its advisory arrangements with the Investment Manager and the
Investment Manager's affiliation with GMG Securities and other affiliates of
GMG Securities outweigh any disadvantages that may result from such preclusion.
The U.S. Government and debt securities in which the Funds invest are traded
primarily in the over-the-counter market. Transactions in the over-the-counter
market are generally principal transactions with dealers and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Trust, where possible, deals
directly with the dealers who make a market in the securities involved except
in those circumstances where better prices and execution are available
elsewhere. Under the 1940 Act, persons affiliated with the Trust are
prohibited from dealing with the Trust as a principal in the purchase and sale
of securities. Since transactions in the over-the-counter market usually
involve transactions with dealers acting as principal for their own account,
affiliated persons of the Trust, including GMG Securities, may not serve as the
Trust's dealer in connection with such
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<PAGE> 118
transactions. However, affiliated persons of the Trust may serve as its broker
in transactions conducted on an exchange or over-the-counter transactions
conducted on an agency basis. On occasion, certain market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid.
PORTFOLIO TURNOVER
See "Investment Practices and Risk Considerations--Portfolio Turnover" in the
Prospectuses.
The annual portfolio turnover rate of a Fund will be calculated by dividing the
lesser of the purchase or sales of a Fund's portfolio securities for the year
by the monthly average of the value of the portfolio securities owned by that
Fund during the year. The monthly average will be calculated by totalling the
values of the portfolio securities as of the beginning and end of the first
month of the year and as of the end of the succeeding 11 months and dividing
the sum by 13. In determining portfolio turnover, securities (including
options) that have maturities at the time of acquisition of one year or less
("short-term securities"), will be excluded. A turnover rate of 100% would
occur if all of a Fund's portfolio securities (other than short-term
securities) were replaced once in a period of one year. It should be noted
that if a Fund were to write a substantial number of options which are
exercised, the portfolio turnover rate of that Fund would increase. Increased
portfolio turnover results in increased brokerage costs that the Trust must pay
and the possibility of more short-term gains that may increase the difficulty
of qualifying as a regulated investment company.
To the extent their portfolios are traded for short-term market considerations
and turnover exceeds 100%, the Funds' annual turnover rate could be higher than
most mutual funds. None of the Funds will engage in short-term trading to an
extent that would disqualify them as regulated investment companies under
Subchapter M of the Code.
ORGANIZATION
(See "Management" and "General Information" in the Prospectuses.)
As a Delaware business trust, the Trust's operations are governed by its
Agreement and Declaration of Trust dated December 18, 1995 (the "Declaration of
Trust"). A copy of the Trust's Certificate of Trust, also dated December 18,
1995, is on file with the Office of the Secretary of State of the State of
Delaware. Upon the initial purchase of shares, the shareholder agrees to be
bound by the Trust's Declaration of Trust, as amended from time to time.
Generally, Delaware business trust shareholders are not personally liable for
obligations of the Delaware business trust under Delaware law. The Delaware
Business Trust Act (the "Delaware Act") provides that a shareholder of a
Delaware business trust shall be entitled to the same limitation of liability
extended to shareholders of private for-profit corporations. The Trust's
Declaration of Trust expressly provides that the Trust has been organized under
the Delaware Act and that the Declaration of Trust is to be governed by
Delaware law. It is nevertheless possible that a Delaware business trust, such
as the Trust, might become a party to an action in another state whose courts
refused to apply Delaware law, in which case the Trust's shareholders could be
subject to personal liability.
To guard against this risk, the Declaration of Trust (i) contains an express
disclaimer of shareholder liability for acts or obligations of the Trust and
provides that notice of such disclaimer
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<PAGE> 119
may be given in each agreement, obligation and instrument entered into or
executed by the Trust or its Trustees, (ii) provides for the indemnification out
of Trust property of any shareholders held personally liable for any obligations
of the Trust or any series of the Trust and (iii) provides that the Trust shall,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Trust and satisfy any judgment thereon. Thus, the
risk of a Trust shareholder incurring financial loss beyond his or her
investment because of shareholder liability is limited to circumstances in which
all of the following factors are present: (1) a court refused to apply Delaware
law; (2) the liability arose under tort law or, if not, no contractual
limitation of liability was in effect; and (3) the Trust itself would be unable
to meet its obligations. In the light of Delaware law, the nature of the
Trust's business and the nature of its assets, the risk of personal liability to
a Fund shareholder is remote.
The Declaration of Trust further provides that the Trust shall indemnify each
of its Trustees and officers against liabilities and expenses reasonably
incurred by them, in connection with, or arising out of, any action, suit or
proceeding, threatened against or otherwise involving such Trustee or officer,
directly or indirectly, by reason of being or having been a Trustee or officer
of the Trust. The Declaration of Trust does not authorize the Trust to
indemnify any Trustee or officer against any liability to which he or she would
otherwise be subject by reason of or for willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties.
Under the Declaration of Trust, the Trust is not required to hold annual
meetings to elect Trustees or for other purposes. It is not anticipated that
the Trust will hold shareholders' meetings unless required by law or the
Declaration of Trust. The Trust will be required to hold a meeting to elect
Trustees to fill any existing vacancies on the Board if, at any time, fewer
than a majority of the Trustees have been elected by the shareholders of the
Trust. The Board is required to call a meeting for the purpose of considering
the removal of persons serving as Trustee if requested in writing to do so by
the holders of not less than 10% of the outstanding shares of the Trust.
Shares of the Trust do not entitle their holders to cumulative voting rights,
so that the holders of more than 50% of the outstanding shares of the Trust may
elect all of the Trustees, in which case the holders of the remaining shares
would not be able to elect any Trustees. As determined by the Trustees,
shareholders are entitled to one vote for each dollar of net asset value
(number of shares held times the net asset value of the applicable class of the
applicable Fund).
Pursuant to the Declaration of Trust, the Trustees may create additional funds
by establishing additional series of shares in the Trust. The establishment of
additional series would not affect the interests of current shareholders in the
existing four Funds. As of the date of this Statement of Additional
Information, the Trustees do not have any plan to establish another series of
shares in the Trust.
Pursuant to the Declaration of Trust, the Trustees may establish and issue
multiple classes of shares for each Fund. As of the date of this Statement of
Additional Information, the Trustees have authorized the issuance of two
classes of shares for each series, designated Institutional Shares and
Administrative Shares. See " General Information" in the Prospectuses for a
detailed description of the respective rights of the two classes of shares.
The Trustees do not have any plan to establish additional classes of shares for
any Fund.
Each share of each class of a Fund is entitled to such dividends and
distributions out of the income earned on the assets belonging to that Fund
which are attributable to such class as are declared in the discretion of the
Trustees. In the event of the liquidation or dissolution of the Trust, shares
of each class of each Fund are entitled to receive their proportionate share of
the assets which are attributable to such class of such Fund and which are
available for distribution
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<PAGE> 120
as the Trustees in their sole discretion may determine. Shareholders are not
entitled to any preemptive, conversion or subscription rights. All shares, when
issued, will be fully paid and non-assessable by the Trust.
Subject to shareholder approval (if then required), the Trustees may authorize
each Fund to invest all or part of its investable assets in a single open-end
investment company that has substantially the same investment objectives,
policies and restrictions as the Fund. As of the date of this Statement of
Additional Information, the Trustees do not have any plan to authorize any Fund
to so invest its assets.
"Seneca Funds" is the designation of the Trust for the time being under the
Declaration of Trust, and all persons dealing with a Fund must look solely to
the property of that Fund for the enforcement of any claims against that Fund
as neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of a Fund or the Trust. No
Fund is liable for the obligations of any other Fund. Since the Funds use
combined prospectuses, however, it is possible that one Fund might become
liable for a misstatement or omission in its prospectus regarding the other
Fund with which its disclosure is combined. The Trustees have considered this
factor in approving the use of the combined prospectuses.
CUSTODIAN
The Custodian for the Trust is Investors Fiduciary Trust Company at 127 West
10th Street, Kansas City, Missouri, 64105. In this capacity, the Custodian
performs all accounting services, holds the assets of the Trust and is
responsible for calculating the net asset value per share.
TRANSFER AGENT
Investors Fiduciary Trust Company acts as transfer agent for the Trust and, in
such capacity, processes purchases, transfers and redemptions of shares, acts as
dividend disbursing agent, and maintains records and handles correspondence with
respect to shareholder accounts.
INDEPENDENT AUDITORS
Deloitte & Touche LLP, 50 Fremont Street, Suite 3100, San Francisco,
California, 94105, are the independent auditors for the Trust. Professional
services performed by Deloitte & Touche LLP include audits of the financial
statements of the Trust, consultation on financial, accounting and reporting
matters, review and consultation regarding various filings with the SEC and
attendance at the meetings of the Audit Committee and Board of Trustees. The
independent auditors also perform other professional services for the Trust
including preparation of income tax returns of the Funds.
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<PAGE> 121
FINANCIAL STATEMENTS
SENECA FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 26, 1996
<TABLE>
<CAPTION>
Seneca Seneca Real
Seneca Mid-Cap Estate
Growth Growth Seneca Bond Securities
Fund Fund Fund Fund
------- ------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash $25,000 $25,000 $25,000 $25,000
Prepaid Expenses 2,500 2,500 2,500 2,500
Deferred 54,428 54,428 54,428 54,428
Organizational
Expenses
Total Assets 81,928 81,928 81,928 81,928
LIABILITIES
Accrued Expenses 2,500 2,500 2,500 2,500
Organizational 54,428 54,428 54,428 54,428
Expenses Payable
Total Liabilities 56,928 56,928 56,928 56,928
Net Assets $25,000 $25,000 $25,000 $25,000
SHARES ISSUED AND OUTSTANDING
Administrative 1,250 1,250 1,250 1,250
Shares
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
Administrative $ 10.00 $ 10.00 $ 10.00 $ 10.00
shares
Institutional Shares $ 10.00 $ 10.00 $ 10.00 $ 10.00
</TABLE>
The accompanying notes are an integral part of these financial statements.
43
<PAGE> 122
SENECA FUNDS
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 26, 1996
1. ORGANIZATION
Seneca Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Trust
consists of four series: Seneca Growth Fund, Seneca Mid-Cap Growth Fund, Seneca
Bond Fund and Seneca Real Estate Securities Fund (individually, the "Fund", and
collectively, the "Funds"). The Board of Trustees has authorized each Fund to
issue two classes of common shares: Administrative Shares and Institutional
Shares.
The Trust was organized as a Delaware business trust on December 18, 1995. Prior
to February 26, 1996, the Trust had no operations other than its organization.
On February 26, 1996, each Fund sold 1,250 shares each of Administrative and
Institutional Shares at net asset value (the "Initial Shares") to Seneca
Distributors, Inc.
The costs of organizing each Fund and registering its shares will be paid by
GMG/Seneca Capital Management, L.P. and reimbursed by each Fund at the time of
the initial offering. The organization costs will be deferred and amortized on a
straight-line basis over a period of sixty months from the commencement of
investment operations. The costs associated with the state registration of
shares will be amortized on a straight-line basis over a period of twelve
months. If any of the Initial Shares are redeemed before the end of the
amortization period, the proceeds of the redemption will be reduced by the pro
rata share of the unamortized organization and state registration costs.
2. 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 at the date of the
financial statements. Actual results could differ from those estimates.
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
The Trust has an Investment Management Agreement with GMG/Seneca Capital
Management, L.P. ("Seneca Management"), under which Seneca Management manages
the investments of each Fund. For its services, Seneca Management receives a fee
from each Fund at an annual percentage of the average daily net assets of each
Fund. Such investment management fees are 0.70%, 0.80%, 0.50% and 0.85% for the
Growth Fund, Mid-Cap Growth Fund, Bond Fund and Real Estate Securities Fund,
respectively.
The Trust has a Distribution and Services Agreement (the "Agreement") with
Seneca Distributors, Inc. ("Seneca Distributors"), a corporation wholly-owned by
Seneca Management, under which Seneca Distributors serves as the distributor and
principal underwriter of each Fund's shares. Pursuant to the Agreement, Seneca
Distributors receives a fee from each Fund at an annual rate of 0.25% of the
average daily net assets attributable to the Administrative Shares of each Fund.
44
<PAGE> 123
APPENDIX
DESCRIPTION OF BOND RATINGS MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by 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 that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group the 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 fluctuations of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that 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.
Moody's also provides credit ratings for preferred stocks.
Preferred stock occupies a junior position to bonds within a particular capital
structure and that these securities are rated within the universe of preferred
stocks.
aaa: An issue that is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa: An issue that is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance that earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue that is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.
baa: An issue that is rated "baa" is considered to be a medium grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
Moody's ratings for municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term and long-term credit risk.
Loans bearing the designation MIG 1 are of the best quality, enjoying strong
protection by establishing cash flows of funds for their servicing or by
established and broad-based access to the market for refinancing, or both.
Loans bearing the designation
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<PAGE> 124
MIG 2 are of high quality, with margins of protection ample although not so
large as in the preceding group. A short term issue having a demand feature
(i.e. payment relying on external liquidity and usually payable on demand rather
than fixed maturity dates) is differentiated by Moody's with the use of the
Symbol VMIG, instead of MIG.
Moody's also provides credit ratings for tax-exempt commercial
paper. These are promissory obligations (1) not having an original maturity in
excess of nine months, and (2) backed by commercial banks. Notes bearing the
designation P-1 have a superior capacity for repayment. Notes bearing the
designation P-2 have a strong capacity for repayment.
STANDARD & POOR'S CORPORATION
AAA: Bonds rated AAA have the higher rating assigned by Standard & Poor's
Corporation. Capacity to pay interest and repay principal is extremely strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the higher rated issues only in small degree.
A: Bonds rated A have a very strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay interest and repay
principal for bonds in this category than in higher rated categories.
S&P's top ratings for municipal notes issued after July 29,
1984 are SP-1 and SP-2. The designation SP-1 indicates a very strong capacity
to pay principal and interest. A "+" is added for those issues determined to
possess overwhelming safety characteristics. An "SP-2" designation indicates a
satisfactory capacity to pay principal and interest.
Commercial paper rated A-2 or better by S&P is described as
having a very strong degree of safety regarding timeliness and capacity to
repay. Additionally, as a precondition for receiving an S&P commercial paper
rating, a bank credit line and/or liquid assets must be present to cover the
amount of commercial paper outstanding at all times.
The Moody's Prime-2 rating and above indicates a strong
capacity for repayment of short-term promissory obligations.
GLOSSARY
Commercial Paper: Short-term promissory notes of large corporations with
excellent credit ratings issued to finance their current operations.
Certificates of Deposit: Negotiable certificates representing a commercial
bank's obligations to repay funds deposited with it, earning specified rates of
interest over given periods.
Bankers' Acceptances: Negotiable obligations of a bank to pay a draft which
has been drawn on it by a customer. These obligations are backed by large
banks and usually are backed by goods in international trade.
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<PAGE> 125
Time Deposits: Non-negotiable deposits in a banking institution earning a
specified interest rate over a given period of time.
Corporate Obligations: Bonds and notes issued by corporations and other
business organizations in order to finance their long-term credit needs.
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<PAGE> 126
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Part B - Seneca Funds Financial Statements:
Statements of Assets and Liabilities as of February
26, 1996.
(b) Exhibits:
1. (a) Agreement and Declaration of Trust.*
1. (b) Certificate of Trust.*
2. By-Laws.*
3. None.
4. None.
5. Form of Investment Management Agreement (the
"Investment Management Agreement") between the
Registrant, on behalf of Seneca Growth Fund,
Seneca Mid-Cap Growth Fund, Seneca Bond Fund,
and Seneca Real Estate Securities Fund, on the
one hand, and GMG/Seneca Capital Management,
L.P. ("GMG/Seneca") on the other.*
6. Form of Distribution Agreement (the
"Distribution Agreement") among the
Registrant, Genesis Merchant Group Securities,
L.P. ("GMG Securities"), and Seneca
Distributors, LLC ("Seneca Distributors").**
7. None.
8. Form of Custody and Investment Accounting
Agreement (the "Custody Agreement") between
the Registrant and Investors Fiduciary Trust
Company ("IFTC").**
9. (a) Form of Transfer Agency and Service
Agreement (the "Transfer Agency
Agreement") between the Registrant
and IFTC. **
- -------------------------
*Previously filed as an exhibit to Registrant's Registration Statement on
Form N-1A dated December 18, 1995.
**Previously filed as an exhibit to Pre-effective Amendment No. 1 to
Registrant's Registration Statement dated February 13, 1996.
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<PAGE> 127
(b) Form of Administration Agreement (the
"Administration Agreement") between
the Registrant, on behalf of Seneca
Growth Fund, Seneca Mid-Cap Growth
Fund, Seneca Bond Fund, and Seneca
Real Estate Securities Fund, on the
one hand, and GMG/Seneca on the
other.
(c) Form of Sub-Administration Agreement
(the "Sub-Administration Agreement")
between the Registrant, GMG/Seneca
and State Street Bank and Trust
Company.
10. Opinion and consent of Morris, Nichols, Arsht & Tunnell.
11. Report and consent of Deloitte & Touche LLP, Independent Public
Accountants.
12. None.
13. Form of Share Purchase Agreement between Registrant and
GMG/Seneca (the "Share Purchase Agreement").
14. None.
15. Form of Distribution Plan Pursuant to Rule 12b-1.**
16. None.
17. None.
18. Form of Rule 18f-3 Plan.**
Item 25. Persons Controlled By or Under Common Control With Registrant.
As of the date of the Prospectus, GMG/Seneca, a California
limited partnership, will be a control person of the Registrant because it will
own all of the shares of the Registrant.
Item 26. Number of Holders of Securities.
Immediately prior to the effective date of the Registration
Statement, it is expected that there will be one record holder of the
Registrant's shares of beneficial interest.
- ---------------------
*Previously filed as an exhibit to Registrant's Registration Statement on
Form N-1A dated December 18, 1995.
**Previously filed as an exhibit to Pre-effective Amendment No. 1 to
Registrant's Registration Statement dated February 13, 1996.
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<PAGE> 128
<TABLE>
<CAPTION>
Title of Class Number of
Record Holders as
of December 16, 1995
<S> <C>
Seneca Growth Fund
Institutional Class 0
Administrative Class 0
Seneca Mid-Cap Growth Fund
Institutional Class 0
Administrative Class 0
Seneca Bond Fund
Institutional Class 0
Administrative Class 0
Seneca Real Estate Securities Fund
Institutional Class 0
Administrative Class 0
</TABLE>
Item 27. Indemnification
The Agreement and Declaration of Trust dated December 18, 1995
and the By-Laws of the Registrant provide that no trustee or officer will be
indemnified against any liability to which the Registrant would otherwise be
subject by reason of or for willful misfeasance, bad faith, gross negligence or
reckless disregard of such person's duties. The Investment Management
Agreement (Section 12), Distribution Agreement (Section 6), Custody Agreement
(Section 5) and Transfer Agency Agreement (Section 6) each will provide that
the Trust will indemnify the other party (or parties, as the case may be) to
the agreement for losses arising from such party's good faith exercise of its
duties under the applicable agreement, provided, however, that the Trust will
not indemnify such other party (or parties) in the case of willful misfeasance,
bad faith, gross negligence or reckless disregard of such person's duties under
the applicable agreement.
Insofar as indemnification for liability arising under the
Securities Act of 1933, as amended (the "Act"), may be available to trustees,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, 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 28. Business and Other Connections of Investment Advisers.
All of the information required by this item is set forth in
the Form ADV, as currently amended, of GMG/Seneca (File No. 801-35374), which
is incorporated herein by reference.
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<PAGE> 129
Item 29. Principal Underwriter.
(a) Neither GMG Securities nor Seneca Distributors serves
as principal underwriter, depositor or investment adviser to any investment
company other than the Registrant.
(b) Directors, Officers and Partners
<TABLE>
<CAPTION>
Positions and Offices with Positions and Offices with
Name* Principal Underwriter Registrant
---- ------------------------- ------------------
<S> <C> <C>
SENECA DISTRIBUTORS
Philip C. Stapleton Member and Chief Executive President, Secretary,
Officer Treasurer, and Sole Trustee
GMG SECURITIES
Philip C. Stapleton Managing Partner and Chief President, Secretary,
Financial Officer Treasurer, and Sole Trustee
William K. Weinstein Chief Executive Officer and N/A
Chief Operating Officer
GMG Management Inc. General Partner N/A
T.E. James, Inc. General Partner N/A
BSR Corporation General Partner N/A
Genesis Merchant Group, L.P. Limited Partner N/A
</TABLE>
(c) Not applicable.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be
maintained by Section 31(a) of the 1940 Act and the rules thereunder will be
maintained at the offices of (1) the Registrant at 909 Montgomery Street, Suite
600, San Francisco, California 94133, (2) GMG/Seneca at 909 Montgomery Street,
San Francisco, California, 94133, (3) State Street Bank and Trust Company, 1776
Heritage Drive, North Quincy, Massachusetts, 02171-2197, and (4) Registrant's
Custodian and Transfer Agent, Investors Fiduciary Trust Company, at 127 West
10th Street, Kansas City, Missouri 64105.
Item 31. Management Services.
None.
- ---------------------
*The principal business address of each director, officer and partner of
GMG Securities and each member and officer of Seneca Distributors is 909
Montgomery Street, San Francisco, California 94133.
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<PAGE> 130
Item 32. Undertakings.
Registrant undertakes that it will:
(a) file an amendment to the registration
statement with certified financial statements showing the initial capital
received before accepting subscriptions from more than 25 persons if the
Registrant proposes to raise its initial capital pursuant to Section 14(a)(3)
of the 1940 Act;
(b) file a post-effective amendment, using
financial statements which need not be certified, within four to six months
from the effective date of the Registrant's registration statement under the
Securities Act of 1933, as amended;
(c) if requested to do so by the holders of at
least 10% of its outstanding shares, call a meeting of shareholders for the
purpose of voting upon the question of removal of a trustee or trustees; and
(d) assist in communications among shareholders as
required by Section 16(c) of the 1940 Act.
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<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and
the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of San Francisco, and the State of California on
the 28th day of February 1996.
SENECA FUNDS
By:/s/ GAIL P. SENECA
---------------------
Gail P. Seneca
President
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes
and constitutes Gail P. Seneca and Sandra J. Westhoff and each of them singly,
his or her true and lawful attorneys-in-fact will full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities (including his or her capacity as a trustee and/or
officer of Seneca Funds) to sign and file any and all amendments (including
post-effective amendments) to this Registration Statement with all exhibits
thereto, and other documents in connection therewith with the Securities and
Exchange Commission, and s/he hereby ratifies and confirms all that said
attorneys-in-fact or any of them, or his or her substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement on Form N-1A has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/GAIL P. SENECA Trustee and President February 28, 1996
---------------------- (Chief Executive Officer)
Gail P. Seneca
/s/SANDRA J. WESTHOFF Trustee and Treasurer (Chief February 28, 1996
--------------------- Financial Officer and Accounting
Sandra J. Westhoff Officer)
/s/RONALD K. JACKS Trustee and Secretary February 28, 1996
----------------------
Ronald K. Jacks
/s/MELINDA ELLIS EVERS Trustee February 28, 1996
----------------------
Melinda Ellis Evers
/s/PAUL E. ERDMAN Trustee February 28, 1996
----------------------
Paul E. Erdman
/s/MARY ANN CUSENZA Trustee February 28, 1996
----------------------
Mary Ann Cusenza
/s/VICTOR GUINASSO Trustee February 28, 1996
----------------------
Victor Guinasso
</TABLE>
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<PAGE> 132
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
9. (b) Administration Agreement.
(c) Sub-Administration Agreement.
10. Opinion and consent of Morris, Nichols, Arsht & Tunnell.
11. Report and consent of Deloitte & Touche LLP.
13. Share Purchase Agreement.
-7-
<PAGE> 1
Exhibit 9(b)
ADMINISTRATION AGREEMENT
Agreement dated as of __________, 1996 by and between
GMG/Seneca Capital Management, L.P., a California limited partnership ("The
Administrator"), and Seneca Funds, a Delaware business trust (the "Fund").
WHEREAS, the Fund is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund wishes to retain the Administrator to
furnish certain administrative services to the Fund, and the Administrator is
willing to furnish such services;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties hereto agree as follows:
1. APPOINTMENT OF ADMINISTRATOR
The Fund hereby appoints the Administrator to provide certain
administrative services to the Fund for the period and on the terms set forth
in this Agreement. The Administrator accepts such appointment and agrees to
render the services stated herein.
The Fund will initially consist of the portfolio(s) and/or
class(es) of shares (each an "Investment Fund") listed in Schedule A to this
Agreement. In the event that the Fund establishes one or more additional
Investment Funds with respect to which the Administrator is to act as
administrator, the Fund shall notify the Administrator in writing. Upon
written acceptance by the Administrator, such Investment Fund shall become
subject to the provisions of this Agreement to the same extent as the existing
Investment Funds, except to the extent that such provisions (including those
relating to the compensation and expenses payable by the Fund and its
Investment Funds) may be modified with respect to each additional Investment
Fund in writing by the Administrator at the time of the addition of the
Investment Fund.
2. DELIVERY OF DOCUMENTS
The Fund will promptly deliver to the Administrator copies of
each of the following documents and all future amendments and supplements, if
any:
a. The Fund's charter document and by-laws;
b. The Fund's currently effective registration statement under the
Securities Act of 1933, as amended (the "1933 Act"), and the
1440 Act and the Fund's Prospectus(es) and Statement(s) of
Additional Information relating to all Investment Funds and all
amendments and supplements thereto as in effect from time to
time;
c. Certified copies of the resolutions of the Board of Trustees
of the Fund (the "Board") authorizing (1) the Fund to enter
into this Agreement, and (2) certain individuals on behalf of
the Fund to (a) give instructions to the Administrator
pursuant to this Agreement and (b) sign checks and pay
expenses;
-1-
<PAGE> 2
d. A copy of the investment advisory agreement between the Fund
and its investment adviser; and
e. Such other certificates, documents or opinions which the
Administrator may, in its reasonable discretion, deem
necessary or appropriate in the proper performance of its
duties.
3. REPRESENTATION AND WARRANTIES OF THE ADMINISTRATOR
The Administrator represents and warrants to the Fund that:
a. It is a limited partnership, duly organized and existing under
the laws of the State of California;
b. It has the corporate power and authority to carry on its
business;
c. All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement;
d. No legal or administrative proceedings have been instituted or
threatened which would impair the Administrator's ability to
perform its duties and obligations under this Agreement; and
e. Its entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or
obligation of the Administrator or any law or regulation
applicable to it.
4. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Administrator that:
a. The Fund is a business trust, duly organized and existing and
in good standing under the laws of the State of Delaware;
b. The Fund has the corporate power and authority under
applicable laws and by its charter and by-laws to enter into
and perform this Agreement;
c. All requisite proceedings have been taken to authorize the Fund
to enter into and perform this Agreement;
d. The Fund is an investment company properly registered under the
1940 Act;
e. A registration statement under the 1933 Act and the 1940 Act
has been filed and will be effective and remain effective
during the term of this Agreement. The Fund also warrants to
the Administrator that as of the effective date of this
Agreement, all necessary filings under the securities laws of
the states in which the Fund offers or sells its shares have
been made;
f. No legal or administrative proceedings have been instituted or
threatened which would impair the Fund's ability to perform
its duties and obligations under this Agreement;
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<PAGE> 3
g. The Fund's entrance into this Agreement shall not cause a
material breach or be in material conflict with any other
agreement or obligation of the Fund or any law or regulation
applicable to it; and
h. As of the close of business on the date of this Agreement, the
Fund is authorized to issue shares of capital stock and it
will initially offer shares, in the authorized amounts as set
forth in Schedule A to this Agreement.
5. ADMINISTRATION SERVICES
The Administrator shall provide the following services, in
each case, subject to the control, supervision and direction of the Fund and
the review and comment by the Fund's auditors and legal counsel and in
accordance with procedures which may be established from time to time between
the Fund and the Administrator:
a. Oversee the determination and publication of the Fund's net
asset value in accordance with the Fund's policy as adopted
from time to time by the Board;
b. Oversee the maintenance by the Fund's custodian of certain
books and records of the Fund as required under Rule 31a-1(b)
of the 1940 Act;
c. Prepare the Fund's federal, state and local income tax returns
for review by the Fund's independent accountants and filing by
the Fund's treasurer;
d. Review calculation, submit for approval by officers of the Fund
and arrange for payment of the Fund's expenses;
e. Prepare for review and approval by officers of the Fund
financial information for the Fund's semi-annual and annual
reports, proxy statements and other communications required or
otherwise to be sent to Fund shareholders, and arrange for the
printing and dissemination of such reports and communications
to shareholders;
f. Prepare for review by an officer of and legal counsel for the
Fund the Fund's periodic financial reports required to be
filed with the Securities and Exchange Commission ("SEC") on
Form N-SAR and financial information required by Form N-1A and
such other reports, forms or filings as may be mutually agreed
upon;
g. Prepare reports relating to the business and affairs of the
Fund as may be mutually agreed upon and not otherwise prepared
by the Fund's investment adviser, custodian, legal counsel or
independent accountants;
h. Make such reports and recommendations to the Board concerning
the performance of the independent accountants as the Board
may reasonably request;
i. Make such reports and recommendations to the Board concerning
the performance and fees of the Fund's custodian and transfer
and dividend disbursing agent ("Transfer Agent") as the Board
may reasonably request or deems appropriate;
-3-
<PAGE> 4
j. Oversee and review calculations of fees paid to the Fund's
investment adviser, custodian and Transfer Agent;
k. Consult with the Fund's officers, independent accountants,
legal counsel, custodian and Transfer Agent in establishing
the accounting policies of the Fund;
l. Review implementation of any dividend reinvestment programs
authorized by the Board;
m. Respond to, or refer to the Fund's officers or Transfer Agent,
shareholder inquiries relating to the Fund;
n. Provide periodic testing of portfolios to assist the Fund's
investment adviser in complying with Internal Revenue Code
mandatory qualification requirements, the requirements of the
1940 Act and Fund prospectus limitations as may be mutually
agreed upon;
o. Review and provide assistance on shareholder communications;
p. Maintain general corporate calendar;
q. Maintain copies of the Fund's charter and by-laws;
r. File annual and semi-annual shareholder reports with the
appropriate regulatory agencies; review text of "President's
letters" to shareholders and "Management's Discussion of Fund
Performance" (which shall also be subject to review by the
Fund's legal counsel);
s. Organize, attend and prepare minutes of shareholder meetings;
t. Provide consultation on regulatory matters relating to
portfolio management, Fund operations and any potential
changes in the Fund's investment policies, operations or
structure; act as liaison to legal counsel to the Fund and,
where applicable, to legal counsel to the Fund's independent
Board members;
u. Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the
Fund, update the Board and the investment adviser on those
developments and provide related planning assistance where
requested or appropriate;
v. Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
w. Counsel and assist the Fund in the handling of routine
regulatory examinations and work closely with the Fund's legal
counsel in response to any non-routine regulatory matters;
Subject to review and comment by the Fund's legal counsel:
x. Prepare and file with the SEC amendments to the Fund's
registration statement, including updating the Prospectus and
Statement of Additional Information, where applicable;
-4-
<PAGE> 5
y. Prepare and file with the SEC proxy statements; provide
consultation on proxy solicitation matters;
z. Prepare agenda and background materials for Board meetings,
make presentations where appropriate, prepare minutes and
follow-up on matters raised at Board meetings; and
aa. Prepare and file with the SEC Rule 24f-2 notices.
bb. Prepare and file state registrations of the Fund's securities
pursuant to the specific instructions of the Fund and as
detailed in Schedule C to this Agreement.
The Administrator shall provide the office facilities and the personnel
required by it to perform the services contemplated herein.
6. FEES; EXPENSES; EXPENSE REIMBURSEMENT
The Administrator shall receive from the Fund such
compensation for the Administrator's services provided pursuant to this
Agreement as may be agreed to from time to time in a written fee schedule
approved by the parties and initially set forth in Schedule B to this
Agreement. The fees are accrued daily and billed monthly and shall be due and
payable upon receipt of the invoice. Upon the termination of this Agreement
before the end of any month, the fee for the part of the month before such
termination shall be prorated according to the proportion which such part bears
to the full monthly period and shall be payable upon the date of termination of
this Agreement. In addition, the Fund shall reimburse the Administrator for
its out-of-pocket costs incurred in connection with this Agreement.
The Fund agrees promptly to reimburse the Administrator for
any equipment and supplies specially ordered by or for the Fund through the
Administrator and for any other expenses not contemplated by this Agreement
that the Administrator may incur on the Fund's behalf at the request or with
the consent of the Fund.
The Administrator will not be responsible for any expenses
incurred in the operation of the Fund and not specifically assumed by the
Administrator. Such expenses include, but are not limited to: organizational
expenses; cost of services of independent accountants and outside legal and tax
counsel (including such counsel's review of the Fund's registration statement,
proxy materials, federal and state tax qualification as a regulated investment
company and other reports and materials prepared by the Administrator under
this Agreement); cost of any services contracted for by the Fund directly from
parties other than through the Administrator; cost of trading operations and
brokerage fees, commissions and transfer taxes in connection with the purchase
and sale of securities for the Fund; investment advisory fees; taxes, insurance
premiums and other fees and expenses applicable to its operation; costs
incidental to any meetings of shareholders including, but not limited to, legal
and accounting fees, proxy filing fees and the costs of preparation, printing
and mailing of any proxy materials; costs incidental to Board meetings,
including fees and expenses of Board members; the salary and expenses of any
officer, director/trustee or employee of the Fund; costs incidental to the
preparation, printing and distribution of the Fund's registration statements
and any amendments thereto and shareholder reports; cost of typesetting and
printing of prospectuses; cost of preparation and filing of the Fund's tax
returns, Form N-1A and Form N-SAR, and all notices, registrations and
amendments associated with applicable federal and state tax and securities
laws; all applicable registration fees and filing fees required under federal
and state securities laws; fidelity bond and directors' and
-5-
<PAGE> 6
officers' liability insurance; and cost of independent pricing services used in
computing the Fund's net asset value.
The Administrator may from time to time sub-contract with
one or more sub-administrators (each, a "Sub- Administrator") to provide some
or all services hereunder, and is authorized to and may employ or associate
with such person or persons as the Administrator may deem desirable to assist
it in performing its duties under this Agreement; provided, however, that the
compensation of such Sub- Administrators and persons shall be paid by the
Administrator and that the Administrator shall be as fully responsible to the
Fund for the acts and omissions of any such Sub-Administrators or persons as it
is for its own acts and omissions.
7. INSTRUCTIONS AND ADVICE
At any time, the Administrator may apply to any officer of the
Fund for instructions and may consult with its own legal counsel or outside
counsel for the Fund or the independent accountants for the Fund at the expense
of the Fund, with respect to any matter arising in connection with the services
to be performed by the Administrator under this Agreement. The Administrator
shall not be liable, and shall be indemnified by the Fund, for any action taken
or omitted by it in good faith in reliance upon any such instructions or advice
or upon any paper or document believed by it to be genuine and to have been
signed by the proper person or persons. The Administrator shall not be held to
have notice of any change of authority of any person until receipt of written
notice thereof from the Fund. Nothing in this paragraph shall be construed as
imposing upon the Administrator any obligation to seek such instructions or
advice, or to act in accordance with such advice when received.
8. LIMITATION OF LIABILITY AND INDEMNIFICATION
The Administrator shall be responsible for the performance of
only such duties as are set forth in this Agreement and, except as otherwise
provided under Section 6, shall have no responsibility for the actions or
activities of any other party, including other service providers. The
Administrator shall have no liability for any error of judgment or mistake of
law or for any loss or damage resulting from the performance or nonperformance
of its duties hereunder unless solely caused by or resulting from the gross
negligence or willful misconduct of the Administrator, its officers or
employees. The Administrator shall not be liable for any special, indirect,
incidental, or consequential damages of any kind whatsoever (including, without
limitation, attorneys' fees) under any provision of this Agreement or for any
such damages arising out of any act or failure to act hereunder. In any event,
the Administrator's liability under this Agreement shall be limited to its
total annual compensation earned and fees paid hereunder during the preceding
twelve months for any liability or loss suffered by the Fund including, but not
limited to, any liability relating to qualification of the Fund as a regulated
investment company or any liability relating to the Fund's compliance with any
federal or state tax or securities statute, regulation or ruling.
The Administrator shall not be responsible or liable for any
failure or delay in performance of its obligations under this Agreement arising
out of or caused, directly or indirectly, by circumstances beyond its control,
including without limitation, work stoppage, power or other mechanical failure,
computer virus, natural disaster, governmental action or communication
disruption, nor shall any such failure or delay give the Fund the right to
terminate this Agreement.
The Fund shall indemnify and hold the Administrator harmless
from all loss, cost, damage and expense, including reasonable fees and expenses
for counsel, incurred by the Administrator resulting from any claim, demand,
action or suit in connection with the
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<PAGE> 7
Administrator's acceptance of this Agreement, any action or omission by it or
its subcontractors in the performance of Administrator's duties hereunder, or
as a result of acting upon any instructions reasonably believed by it to have
been duly authorized by the Fund, provided that this indemnification shall not
apply to actions or omissions of the Administrator, its officers or employees
in cases of its or their own gross negligence or willful misconduct.
The Fund will 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 liability subject to the indemnification provided above. In the
event the Fund elects to assume the defense of any such suit and retain
counsel, the Administrator or any of its affiliated persons, named as defendant
or defendants in the suit, may retain additional counsel but shall bear the
fees and expenses of such counsel unless (i) the Fund shall have specifically
authorized the retaining of such counsel or (ii) the Fund shall have determined
in good faith that the retention of such counsel is required as a result of a
conflict of interest.
The indemnification contained herein shall survive the
termination of this Agreement.
9. CONFIDENTIALITY
The Administrator agrees that, except as otherwise required by
law or in connection with any required disclosure to a banking or other
regulatory authority, it will keep confidential all records and information in
its possession relating to the Fund or its shareholders or shareholder accounts
and will not disclose the same to any person except at the request or with the
written consent of the Fund.
10. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS; RECORDS
The Fund assumes full responsibility for complying with all
securities, tax, commodities and other laws, rules and regulations applicable
to it.
In compliance with the requirements of Rule 31a-3 under the
1940 Act, the Administrator agrees that all records which it maintains for the
Fund shall at all times remain the property of the Fund, shall be readily
accessible during normal business hours, and shall be promptly surrendered upon
the termination of the Agreement or otherwise on written request. The
Administrator further agrees that all records which it maintains for the Fund
pursuant to Rule 31a-1 under the 1940 Act will be preserved for the periods
prescribed by Rule 31a-2 under the 1940 Act unless any such records are earlier
surrendered as provided above. Records shall be surrendered in usable
machine-readable form.
11. SERVICES NOT EXCLUSIVE
The services of the Administrator to the Fund are not to be
deemed exclusive, and the Administrator shall be free to render similar
services to others. The Administrator shall be deemed to be an independent
contractor and shall, unless otherwise expressly provided herein or otherwise
authorized by the Fund from time to time, have no authority to act or represent
the Fund in any way or otherwise be deemed an agent of the Fund.
12. TERM, TERMINATION AND AMENDMENT
This initial term of this Agreement will commence on the date
on which the Fund first accepts money for investment and will end on September
30, 1996. The term will
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<PAGE> 8
automatically continue in effect thereafter for successive annual terms, until
terminated. Either party may terminate this Agreement as to some or all
Investment Funds by giving written notice at least 60 days prior to the
expiration of the then-current annual term. Such termination will be effective
at the end of such term. Termination of this Agreement with respect to any
given Investment Fund shall in no way affect the continued validity of this
Agreement with respect to any other Investment Fund. Upon termination of this
Agreement, the Fund shall pay to the Administrator such compensation and any
reimbursable expenses as may be due under the terms hereof as of the date of
such termination, including reasonable out-of- pocket expenses associated with
such termination. This Agreement may be modified or amended from time to time
by mutual written agreement of the parties hereto.
13. NOTICES
Any notice or other communication authorized or required by
this Agreement to be given to either party shall be in writing and deemed to
have been given when delivered in person or by confirmed facsimile, or posted
by certified mail, return receipt requested, to the following address (or such
other address as a party may specify by written notice to the other): if to
the Administrator: GMG/Seneca Capital Management, L.P., 909 Montgomery Street,
San Francisco, CA 94133 Attn: Gail P. Seneca, fax:_______________; if to the
Fund: Seneca Funds, 909 Montgomery Street, San Francisco, CA 94133 Attn: Eric
Munson.
14. ASSIGNMENT
This Agreement shall not be assigned by either party hereto
without the prior consent in writing of the other party, except that either
party may assign this Agreement to a successor of all or a substantial portion
of its business, or to a party controlling, controlled by or under common
control with the assigning party.
15. SUCCESSORS
This Agreement shall be binding on and shall inure to the
benefit of the Administrator and the Fund, and their respective successors and
permitted assigns.
16. ENTIRE AGREEMENT
This Agreement contains the entire understanding between the
parties hereto with respect to the subject matter hereof and supersedes all
previous representations, warranties or commitments regarding the services to
be performed hereunder whether oral or in writing.
17. WAIVER
The failure of a party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver nor
shall it deprive such party of the right thereafter to insist upon strict
adherence to that term or any term of this Agreement. Any waiver must be in
writing signed by the waiving party.
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<PAGE> 9
18. SEVERABILITY
If any provision of this Agreement is invalid or unenforceable,
the balance of the Agreement shall remain in effect, and if any provision is
inapplicable to any person or circumstance it shall nevertheless remain
applicable to all other persons and circumstances.
19. GOVERNING LAW
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the date first written
above.
GMG/SENECA CAPITAL MANAGEMENT, L.P.
By: ____________________________________________
Gail P. Seneca, its Managing General Partner
SENECA FUNDS
By: ____________________________________________
Name: ____________________________________________
Title: ____________________________________________
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<PAGE> 10
ADMINISTRATION AGREEMENT
SENECA FUNDS
SCHEDULE A
LISTING OF INVESTMENT FUNDS AND AUTHORIZED SHARES
Investment Fund Authorized Shares
<PAGE> 11
ADMINISTRATION AGREEMENT
SENECA FUNDS
<TABLE>
<CAPTION>
SCHEDULE B
FEES AND EXPENSES
I. FUND ADMINISTRATION SERVICES
<S> <C>
Net Asset Value Fee Annual Rate Expressed in Basis Points:
1/100 of 1%
First $125 Million per Portfolio 8
Next $125 Million per Portfolio 6
Thereafter 4
Minimum fee per Portfolio
(annualized) $55,000
</TABLE>
The above fees will be computed and accrued daily at one
three-hundred-sixty-fifth of the applicable rates expressed above.
The net asset value of each Portfolio will be determined in the manner
set forth in the Registration Statement pertaining to such Portfolio
after the close of the New York Stock Exchange on each day on which
said Exchange is open, and in the case of Saturdays, Sundays, and
other days on which said exchange shall not be open, in the manner
further set forth in said Registration Statement.
A fee of $2,500 for each class of shares, excluding the initial class
of shares, if more than one class of shares is operational in a fund.
The minimum fee will be waived for the first six months of Trust
operations.
II. BLUE SKY ADMINISTRATION SERVICES
A fee of $2,500 for each class of shares, excluding the initial class
of shares, if more than one class of shares is operational in a fund.
III. OUT-OF-POCKET EXPENSES -- INCLUDE, BUT MAY NOT BE LIMITED TO:
-- Printing for shareholder reports and SEC filings
-- Legal fees, audit fees, and other professional fees
-- Postage, telephone, fax, and photocopying
-- Supplies related to fund records
-- Travel and lodging for Board and Operations meetings
-- Preparation of financial statements other than Annual,
Semi-annual and quarterly board reporting $3,000 per financial
report
IV. SPECIAL ARRANGEMENTS
Fee for activities of non-recurring nature such as fund consolidations
or reorganizations, and/or preparation of special reports will be
subject to negotiation.
<PAGE> 12
V. TERM OF FEE SCHEDULE
The parties agree that the fee schedule shall remain in effect for
three full years from the commencement of Trust operations and from
year to year thereafter until it is revised as a result of
negotiations initiated by either party.
In the event that the Trust terminates the Agreement prior to its
initial termination date all amounts waived under the Fee Schedule
will become payable to GMG/Seneca Capital Management, L.P. by the
Trust.
GMG/SENECA CAPITAL MANAGEMENT, L.P.
By: ____________________________________________
Gail P. Seneca, its Managing General Partner
SENECA FUNDS
By: _________________________________________
Name: _________________________________________
Title: _________________________________________
<PAGE> 13
ADMINISTRATION AGREEMENT
SENECA FUNDS
SCHEDULE C
REGISTRATION OF FUND SHARES
WITH STATE SECURITIES ADMINISTRATORS
AT THE SPECIFIC DIRECTION OF THE ADMINISTRATOR AND THE FUND, THE ADMINISTRATOR
WILL PREPARE REQUIRED DOCUMENTATION AND REGISTER FUND SHARES IN ACCORDANCE WITH
THE SECURITIES LAWS OF EACH JURISDICTION IN WHICH FUND SHARES ARE TO BE OFFERED
OR SOLD PURSUANT TO INSTRUCTIONS GIVEN TO THE ADMINISTRATOR BY THE FUND.
THE FUND SHALL BE SOLELY RESPONSIBLE FOR THE DETERMINATION (i) OF THOSE
JURISDICTIONS IN WHICH FUND SHARES ARE TO BE REGISTERED AND (ii) THE NUMBER OF
FUND SHARES TO BE REGISTERED IN EACH SUCH JURISDICTION. IN THE EVENT THAT THE
ADMINISTRATOR BECOMES AWARE OF (a) THE SALE OF FUND SHARES IN A JURISDICTION IN
WHICH FUND SHARES ARE NOT REGISTERED FOR OFFER AND SALE OR (b) THE SALE OF FUND
SHARES IN EXCESS OF THE NUMBER OF FUND SHARES REGISTERED IN SUCH JURISDICTION,
THE ADMINISTRATOR SHALL REPORT SUCH INFORMATION TO THE FUND, AND IT SHALL BE
THE FUND'S RESPONSIBILITY TO DETERMINE APPROPRIATE CORRECTIVE ACTION AND
INSTRUCT THE ADMINISTRATOR WITH RESPECT THERETO.
The registration services shall consist of the following:
1. Filing of Fund's Application to Register Securities and
amendments, if directed by the Fund;
2. Filing of amendments to the Fund's registration statement;
3. Filing Fund sales reports and advertising literature where
required;
4. Payment at the expense of the Fund of all Fund state
registration and filing fees;
5. Filing the Prospectuses and Statements of Additional
Information and any supplements thereto;
6. Filing of annual reports and proxy statements where required;
and
7. The performance of such additional services as the
Administrator and the Fund may agree upon in writing.
Unless otherwise specified in writing by the Administrator, registration
services by the Administrator shall not include determining the availability of
exemptions under a jurisdiction's blue sky law. Any such determination shall be
made by the Fund or its legal counsel. In connection with the services
described herein, the Fund shall issue in favor of the Administrator a power of
attorney to register Fund shares on behalf of the Fund, which power of attorney
shall be substantially in the form of Exhibit I attached hereto.
<PAGE> 14
EXHIBIT I
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, as of _____________ , 1996 that the undersigned
SENECA FUNDS, with principal offices at 909 Montgomery Street, San Francisco,
CA 94133 (the "Fund") makes, constitutes, and appoints GMG/SENECA CAPITAL
MANAGEMENT, L.P. (the "Administrator") with principal offices at 909 Montgomery
Street, San Francisco, CA 94133 its lawful attorney-in-fact for it to do as if
it were itself acting, the following:
1. REGISTRATION OF FUND SHARES. The power to register shares of the Fund in
each jurisdiction in which Fund shares are offered or sold and in connection
therewith the power to prepare, execute, and deliver and file any and all Fund
applications, including without limitation, applications to register shares,
consents, including consents to service of process, reports, including without
limitation, all periodic reports, claims for exemption, or other documents and
instruments now or hereafter required or appropriate in the judgment of the
Administrator in connection with the registration of Fund shares.
2. AUTHORIZED SIGNERS. Pursuant to this Limited Power of Attorney,
individuals holding the titles of Officer, Blue Sky Manager, or Senior Blue Sky
Administrator at the Administrator shall have authority to act on behalf of the
Fund with respect to item 1 above.
The execution of this limited power of attorney shall be deemed coupled with an
interest and shall be revocable only upon receipt by the Administrator of such
termination of authority. Nothing herein shall be construed to constitute the
appointment of the Administrator as or otherwise authorize the Administrator to
act as an officer, director or employee of the Fund.
IN WITNESS WHEREOF, the Fund has caused this Agreement to be executed in its
name and on its behalf by and through its duly authorized officer, as of the
date first written above.
SENECA FUNDS
By: _____________________________
Name:___________________________
Title: ___________________________
<PAGE> 1
Exhibit 9(c)
SUB-ADMINISTRATION AGREEMENT
Agreement dated as of __________, 1996 by and among State
Street Bank and Trust Company, a Massachusetts trust company (the
"Sub-Administrator"), GMG/Seneca Capital Management, L.P., a California limited
partnership (the "Administrator"), and Seneca Funds, a Delaware business trust
(the "Fund").
WHEREAS, the Fund is registered as an open-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund has retained the Administrator to furnish
certain administrative services to the Fund pursuant to that certain
Administration Agreement (the "Administration Agreement") between the Fund and
the Administrator of even date herewith; and
WHEREAS, the Administrator wishes to delegate its duties to
perform services under the Administration Agreement to the Sub-Administrator
pursuant to the terms of this Sub-Administration Agreement (the
"Sub-Administration Agreement"), and the Sub- Administrator is willing to
furnish such services; and
WHEREAS, the Fund is willing to guarantee the performance by
the Administrator of certain of the Administrator's obligations under the
Sub-Administration Agreement;
NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties hereto agree as follows:
1. APPOINTMENT OF ADMINISTRATOR
The Administrator hereby appoints the Sub-Administrator to
provide certain administrative services to the Fund for the period and on the
terms set forth in this Agreement. The Sub-Administrator accepts such
appointment and agrees to render the services stated herein.
The Fund will initially consist of the portfolio(s) and/or
class(es) of shares (each an "Investment Fund") listed in Schedule A to this
Agreement. In the event that the Fund establishes one or more additional
Investment Funds with respect to which the Administrator is to act as
administrator, the Fund shall notify the Administrator and Sub-Administrator in
writing. Upon written acceptance by the Administrator and the
Sub-Administrator, such Investment Fund shall become subject to the provisions
of this Agreement to the same extent as the existing Investment Funds, except
to the extent that such provisions (including those relating to the
compensation and expenses payable by the Fund and its Investment Funds) may be
modified with respect to each additional Investment Fund in writing by the
Administrator and the Sub-Administrator at the time of the addition of the
Investment Fund.
2. DELIVERY OF DOCUMENTS
The Fund will promptly deliver to the Administrator and the
Sub-Administrator copies of each of the following documents and all future
amendments and supplements, if any:
a. The Fund's charter document and by-laws;
b. The Fund's currently effective registration statement under
the Securities Act of 1933, as amended (the "1933 Act"), and
the 1440 Act and the Fund's Prospectus(es) and Statement(s) of
Additional Information relating to all
<PAGE> 2
Investment Funds and all amendments and supplements thereto as
in effect from time to time;
c. Certified copies of the resolutions of the Board of Trustees
of the Fund (the "Board") authorizing (1) the Fund to enter
into the Administration Agreement and this Agreement, and (2)
certain individuals on behalf of the Fund to (a) give
instructions to the Administrator and the Sub-Administrator
pursuant to the Administration Agreement and this Agreement
and (b) sign checks and pay expenses;
d. A copy of the investment advisory agreement between the Fund
and its investment adviser; and
e. Such other certificates, documents or opinions which the
Sub-Administrator may, in its reasonable discretion, deem
necessary or appropriate in the proper performance of its
duties.
3. REPRESENTATION AND WARRANTIES OF THE ADMINISTRATOR
The Sub-Administrator represents and warrants to the Fund
that:
a. It is a Massachusetts trust company, duly organized, existing
and in good standing under the laws of The Commonwealth of
Massachusetts;
b. It has the corporate power and authority to carry on its
business in The Commonwealth of Massachusetts;
c. All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement;
d. No legal or administrative proceedings have been instituted or
threatened which would impair the Sub-Administrator's ability
to perform its duties and obligations under this Agreement;
and
e. Its entrance into this Agreement shall not cause a material
breach or be in material conflict with any other agreement or
obligation of the Administrator or any law or regulation
applicable to it.
4. REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Administrator that:
a. The Fund is a business trust, duly organized and existing and
in good standing under the laws of the State of Delaware;
b. The Fund has the corporate power and authority under
applicable laws and by its charter and by-laws to enter into
and perform the Administration Agreement and this Agreement;
c. All requisite proceedings have been taken to authorize the
Fund to enter into and perform the Administration Agreement
and this Agreement;
d. The Fund is an investment company properly registered under
the 1940 Act;
<PAGE> 3
e. A registration statement under the 1933 Act and the 1940 Act
has been filed and will be effective and remain effective
during the term of this Agreement. The Fund also warrants to
the Administrator that as of the effective date of this
Agreement, all necessary filings under the securities laws of
the states in which the Fund offers or sells its shares have
been made;
f. No legal or administrative proceedings have been instituted or
threatened which would impair the Fund's ability to perform
its duties and obligations under the Administration Agreement
and this Agreement;
g. The Fund's entrance into the Administration Agreement or this
Agreement shall not cause a material breach or be in material
conflict with any other agreement or obligation of the Fund or
any law or regulation applicable to it; and
h. As of the close of business on the date of this Agreement, the
Fund is authorized to issue shares of capital stock and it
will initially offer shares, in the authorized amounts as set
forth in Schedule A to this Agreement.
5. ADMINISTRATION SERVICES
The Sub-Administrator shall provide the following services, in
each case, subject to the control, supervision and direction of the
Administrator and the Fund and the review and comment by the Fund's auditors and
legal counsel and in accordance with procedures which may be established from
time to time between the Fund, the Administrator, and the SubAdministrator:
a. Oversee the determination and publication of the Fund's net
asset value in accordance with the Fund's policy as adopted
from time to time by the Board;
b. Oversee the maintenance by the Fund's custodian of certain
books and records of the Fund as required under Rule 31a-1(b)
of the 1940 Act;
c. Prepare the Fund's federal, state and local income tax returns
for review by the Fund's independent accountants and filing by
the Fund's treasurer;
d. Review calculation, submit for approval by officers of the
Fund and arrange for payment of the Fund's expenses;
e. Prepare for review and approval by officers of the Fund
financial information for the Fund's semi-annual and annual
reports, proxy statements and other communications required or
otherwise to be sent to Fund shareholders, and arrange for the
printing and dissemination of such reports and communications
to shareholders;
f. Prepare for review by an officer of and legal counsel for the
Fund the Fund's periodic financial reports required to be
filed with the Securities and Exchange Commission ("SEC") on
Form N-SAR and financial information required by Form N-1A and
such other reports, forms or filings as may be mutually agreed
upon;
g. Prepare reports relating to the business and affairs of the
Fund as may be mutually agreed upon and not otherwise prepared
by the Fund's investment adviser, custodian, legal counsel or
independent accountants;
<PAGE> 4
h. Make such reports and recommendations to the Board concerning
the performance of the independent accountants as the Board
may reasonably request;
i. Make such reports and recommendations to the Board concerning
the performance and fees of the Fund's custodian and transfer
and dividend disbursing agent ("Transfer Agent") as the Board
may reasonably request or deems appropriate;
j. Oversee and review calculations of fees paid to the Fund's
investment adviser, custodian and Transfer Agent;
k. Consult with the Fund's officers, independent accountants,
legal counsel, custodian and Transfer Agent in establishing
the accounting policies of the Fund;
l. Review implementation of any dividend reinvestment programs
authorized by the Board;
m. Respond to, or refer to the Fund's officers or Transfer Agent,
shareholder inquiries relating to the Fund;
n. Provide periodic testing of portfolios to assist the Fund's
investment adviser in complying with Internal Revenue Code
mandatory qualification requirements, the requirements of the
1940 Act and Fund prospectus limitations as may be mutually
agreed upon;
o. Review and provide assistance on shareholder communications;
p. Maintain general corporate calendar;
q. Maintain copies of the Fund's charter and by-laws;
r. File annual and semi-annual shareholder reports with the
appropriate regulatory agencies; review text of "President's
letters" to shareholders and "Management's Discussion of Fund
Performance" (which shall also be subject to review by the
Fund's legal counsel);
s. Organize, attend and prepare minutes of shareholder meetings;
t. Provide consultation on regulatory matters relating to
portfolio management, Fund operations and any potential
changes in the Fund's investment policies, operations or
structure; act as liaison to legal counsel to the Fund and,
where applicable, to legal counsel to the Fund's independent
Board members;
u. Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the
Fund, update the Board and the investment adviser on those
developments and provide related planning assistance where
requested or appropriate;
v. Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
w. Counsel and assist the Fund in the handling of routine
regulatory examinations and work closely with the Fund's legal
counsel in response to any non-routine regulatory matters;
<PAGE> 5
Subject to review and comment by the Fund's legal counsel:
x. Prepare and file with the SEC amendments to the Fund's
registration statement, including updating the Prospectus and
Statement of Additional Information, where applicable;
y. Prepare and file with the SEC proxy statements; provide
consultation on proxy solicitation matters;
z. Prepare agenda and background materials for Board meetings,
make presentations where appropriate, prepare minutes and
follow-up on matters raised at Board meetings; and
aa. Prepare and file with the SEC Rule 24f-2 notices.
bb. Prepare and file state registrations of the Fund's securities
pursuant to the specific instructions of the Fund and as
detailed in Schedule C to this Agreement.
The Sub-Administrator shall provide the office facilities and the personnel
required by it to perform the services contemplated herein.
6. FEES; EXPENSES; EXPENSE REIMBURSEMENT
The Sub-Administrator shall receive from the Administrator
such compensation for the Sub-Administrator's services provided pursuant to this
Agreement as may be agreed to from time to time in a written fee schedule
approved by the parties and initially set forth in Schedule B to this Agreement.
The fees are accrued daily and billed monthly and shall be due and payable upon
receipt of the invoice. Upon the termination of this Agreement before the end of
any month, the fee for the part of the month before such termination shall be
prorated according to the proportion which such part bears to the full monthly
period and shall be payable upon the date of termination of this Agreement. In
addition, the Administrator shall reimburse the SubAdministrator for its
out-of-pocket costs incurred in connection with this Agreement.
The Administrator agrees promptly to reimburse the
Sub-Administrator for any equipment and supplies specially ordered by or for the
Fund through the Sub-Administrator and for any other expenses not contemplated
by this Agreement that the Sub-Administrator may incur on the Fund's behalf at
the request or with the consent of the Fund or the Administrator.
The Sub-Administrator will not be responsible for any expenses
incurred in the operation of the Fund and not specifically assumed by the
Sub-Administrator. Such expenses include, but are not limited to: organizational
expenses; cost of services of independent accountants and outside legal and tax
counsel (including such counsel's review of the Fund's registration statement,
proxy materials, federal and state tax qualification as a regulated investment
company and other reports and materials prepared by the Sub-Administrator under
this Agreement); cost of any services contracted for by the Fund directly from
parties other than the Administrator or the Sub-Administrator; cost of trading
operations and brokerage fees, commissions and transfer taxes in connection with
the purchase and sale of securities for the Fund; investment advisory fees;
taxes, insurance premiums and other fees and expenses applicable to its
operation; costs incidental to any meetings of shareholders including, but not
limited to, legal and accounting fees, proxy filing fees and the costs of
preparation, printing and mailing of any proxy materials; costs incidental to
Board meetings, including fees and expenses of Board members; the salary and
expenses of any officer, director/trustee or employee of the Fund; costs
incidental to the preparation, printing and distribution of the Fund's
registration statements and any amendments thereto and shareholder reports; cost
of typesetting and printing of prospectuses; cost of preparation and filing of
the Fund's tax returns, Form N-1A and Form
<PAGE> 6
N-SAR, and all notices, registrations and amendments associated with applicable
federal and state tax and securities laws; all applicable registration fees and
filing fees required under federal and state securities laws; fidelity bond and
directors' and officers' liability insurance; and cost of independent pricing
services used in computing the Fund's net asset value.
The Sub-Administrator is authorized to and may employ or
associate with such person or persons as the Sub-Administrator may deem
desirable to assist it in performing its duties under this Agreement;
provided,however, that the compensation of such person or persons shall be paid
by the Sub-Administrator and that the Sub-Administrator shall be as fully
responsible to the Fund and the Administrator for the acts and omissions of any
such person or persons as it is for its own acts and omissions.
7. INSTRUCTIONS AND ADVICE
At any time, the Sub-Administrator may apply to any officer of
the Fund for instructions and may consult with its own legal counsel or outside
counsel for the Fund or the independent accountants for the Fund at the expense
of the Fund, with respect to any matter arising in connection with the services
to be performed by the Sub-Administrator under this Agreement. The
Sub-Administrator shall not be liable, and shall be indemnified by the Fund, for
any action taken or omitted by it in good faith in reliance upon any such
instructions or advice or upon any paper or document believed by it to be
genuine and to have been signed by the proper person or persons. The
Sub-Administrator shall not be held to have notice of any change of authority of
any person until receipt of written notice thereof from the Fund. Nothing in
this paragraph shall be construed as imposing upon the Sub-Administrator any
obligation to seek such instructions or advice, or to act in accordance with
such advice when received.
8. LIMITATION OF LIABILITY AND INDEMNIFICATION
The Sub-Administrator shall be responsible for the performance
of only such duties as are set forth in this Agreement and, except as otherwise
provided under Section 6, shall have no responsibility for the actions or
activities of any other party, including other service providers. The
Sub-Administrator shall have no liability for any error of judgment or mistake
of law or for any loss or damage resulting from the performance or
nonperformance of its duties hereunder unless solely caused by or resulting from
the gross negligence or willful misconduct of the Sub-Administrator, its
officers or employees. The Sub-Administrator shall not be liable for any
special, indirect, incidental, or consequential damages of any kind whatsoever
(including, without limitation, attorneys' fees) under any provision of this
Agreement or for any such damages arising out of any act or failure to act
hereunder. In any event, the Sub-Administrator's liability under this Agreement
shall be limited to its total annual compensation earned and fees paid hereunder
during the preceding twelve months for any liability or loss suffered by the
Fund including, but not limited to, any liability relating to qualification of
the Fund as a regulated investment company or any liability relating to the
Fund's compliance with any federal or state tax or securities statute,
regulation or ruling.
The Sub-Administrator shall not be responsible or liable for
any failure or delay in performance of its obligations under this Agreement
arising out of or caused, directly or indirectly, by circumstances beyond its
control, including without limitation, work stoppage, power or other mechanical
failure, computer virus, natural disaster, governmental action or communication
disruption, nor shall any such failure or delay give the Fund the right to
terminate this Agreement.
The Fund shall indemnify and hold the Sub-Administrator
harmless from all loss, cost, damage and expense, including reasonable fees and
expenses for counsel, incurred by the Sub-Administrator resulting from any
claim, demand, action or suit in connection with the SubAdministrator's
acceptance of this Agreement, any action or omission by it in the performance of
<PAGE> 7
its duties hereunder, or as a result of acting upon any instructions reasonably
believed by it to have been duly authorized by the Administrator or the Fund,
provided that this indemnification shall not apply to actions or omissions of
the Sub-Administrator, its officers or employees in cases of its or their own
gross negligence or willful misconduct.
The Fund will 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 liability subject to the indemnification provided above. In the
event the Administrator or the Fund elects to assume the defense of any such
suit and retain counsel, the Sub-Administrator or any of its affiliated persons,
named as defendant or defendants in the suit, may retain additional counsel but
shall bear the fees and expenses of such counsel unless (i) the Administrator or
the Fund shall have specifically authorized the retaining of such counsel or
(ii) the Administrator or the Fund shall have determined in good faith that the
retention of such counsel is required as a result of a conflict of interest.
The indemnification contained herein shall survive the
termination of this Agreement.
9. GUARANTEE OF ADMINISTRATIVE OBLIGATIONS
The Fund hereby guarantees performance by the Administrator of
its obligations under paragraphs 6 and 8 hereof.
10. CONFIDENTIALITY
The Sub-Administrator agrees that, except as otherwise
required by law or in connection with any required disclosure to a banking or
other regulatory authority, it will keep confidential all records and
information in its possession relating to the Fund or its shareholders or
shareholder accounts and will not disclose the same to any person except at the
request or with the written consent of the Fund.
11. COMPLIANCE WITH GOVERNMENTAL RULES AND REGULATIONS; RECORDS
The Fund assumes full responsibility for complying with all
securities, tax, commodities and other laws, rules and regulations applicable to
it.
In compliance with the requirements of Rule 31a-3 under the
1940 Act, the SubAdministrator agrees that all records which it maintains for
the Fund shall at all times remain the property of the Fund, shall be readily
accessible during normal business hours, and shall be promptly surrendered upon
the termination of the Agreement or otherwise on written request. The
Sub-Administrator further agrees that all records which it maintains for the
Fund pursuant to Rule 31a-1 under the 1940 Act will be preserved for the periods
prescribed by Rule 31a-2 under the 1940 Act unless any such records are earlier
surrendered as provided above. Records shall be surrendered in usable
machine-readable form.
12. SERVICES NOT EXCLUSIVE
The services of the Sub-Administrator to the Administrator and
the Fund are not to be deemed exclusive, and the Sub-Administrator shall be free
to render similar services to others. The Sub-Administrator shall be deemed to
be an independent contractor and shall, unless otherwise expressly provided
herein or authorized by the Fund from time to time, have no authority to act or
represent the Fund in any way or otherwise be deemed an agent of the Fund.
<PAGE> 8
13. TERM, TERMINATION AND AMENDMENT
This initial term of this Agreement will commence on the date
on which the Fund first accepts money for investment and will end on September
30, 1996. The term will automatically continue in effect thereafter for
successive annual terms, until terminated. Either the Administrator or the
Sub-Administrator may terminate this Agreement as to some or all Investment
Funds by giving written notice at least 60 days prior to the expiration of the
then-current annual term. Such termination will be effective at the end of such
term. Termination of this Agreement with respect to any given Investment Fund
shall in no way affect the continued validity of this Agreement with respect to
any other Investment Fund. Upon termination of this Agreement, the Administrator
shall pay to the Sub-Administrator such compensation and any reimbursable
expenses as may be due under the terms hereof as of the date of such
termination, including reasonable out-of-pocket expenses associated with such
termination. This Agreement may be modified or amended from time to time by
mutual written agreement of the parties hereto.
14. NOTICES
Any notice or other communication authorized or required by
this Agreement to be given to either party shall be in writing and deemed to
have been given when delivered in person or by confirmed facsimile, or posted by
certified mail, return receipt requested, to the following address (or such
other address as a party may specify by written notice to the other): if to the
Administrator: GMG/Seneca Capital Management, L.P., 909 Montgomery Street, San
Francisco, CA 94133 Attn: Gail P. Seneca, fax:_______________; if to the
Sub-Administrator: State Street Bank and Trust Company, 1776 Heritage Drive,
North Quincy, Massachusetts 02171, Attn: David M. Elwood, Vice President and
Senior Counsel, fax: (617)985-2497; if to the Fund: Seneca Funds, 909 Montgomery
Street, San Francisco, CA 94133 Attn: Eric Munson.
15. ASSIGNMENT
This Agreement shall not be assigned by either party hereto
without the prior consent in writing of the other party, except that either
party may assign this Agreement to a successor of all or a substantial portion
of its business, or to a party controlling, controlled by or under common
control with the assigning party.
16. SUCCESSORS
This Agreement shall be binding on and shall inure to the
benefit of the Administrator, the Sub-Administrator, and the Fund, and their
respective successors and permitted assigns.
17. ENTIRE AGREEMENT
This Agreement contains the entire understanding between the
parties hereto with respect to the subject matter hereof and supersedes all
previous representations, warranties or commitments regarding the services to be
performed hereunder whether oral or in writing.
18. WAIVER
The failure of a party to insist upon strict adherence to any
term of this Agreement on any occasion shall not be considered a waiver nor
shall it deprive such party of the right thereafter to insist upon strict
adherence to that term or any term of this Agreement. Any waiver must be in
writing signed by the waiving party.
<PAGE> 9
19. SEVERABILITY
If any provision of this Agreement is invalid or
unenforceable, the balance of the Agreement shall remain in effect, and if any
provision is inapplicable to any person or circumstance it shall nevertheless
remain applicable to all other persons and circumstances.
20. GOVERNING LAW
This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of The Commonwealth of
Massachusetts.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the date first written above.
GMG/SENECA CAPITAL MANAGEMENT, L.P.
By:
---------------------------------------------------
Gail P. Seneca, its Managing General Partner
STATE STREET BANK AND TRUST COMPANY
By:
--------------------------------------------------
Name:
-------------------------------------------------
Title:
-----------------------------------------------
SENECA FUNDS
By:
--------------------------------------------------
Name:
------------------------------------------------
Title:
-----------------------------------------------
<PAGE> 10
SUB-ADMINISTRATION AGREEMENT
SENECA FUNDS
SCHEDULE A
LISTING OF INVESTMENT FUNDS AND AUTHORIZED SHARES
Investment Fund Authorized Shares
<PAGE> 11
SUB-ADMINISTRATION AGREEMENT
SENECA FUNDS
SCHEDULE B
FEES AND EXPENSES
FUND SUB-ADMINISTRATION FEE SCHEDULE
I. FUND SUB-ADMINISTRATION SERVICES
<TABLE>
<CAPTION>
Fee Annual Rate Expressed in Basis Points:
Net Asset Value 1/100 of 1%
--------------- ------------------------------------------
<S> <C>
First $125 Million per Portfolio 8
Next $125 Million per Portfolio 6
Thereafter 4
Minimum fee per Portfolio $55,000
(annualized)
</TABLE>
The above fees will be computed and accrued daily at one
three-hundred-sixty-fifth of the applicable rates expressed above. The
net asset value of each Portfolio will be determined in the manner set
forth in the Registration Statement pertaining to such Portfolio after
the close of the New York Stock Exchange on each day on which said
Exchange is open, and in the case of Saturdays, Sundays, and other days
on which said exchange shall not be open, in the manner further set
forth in said Registration Statement.
A fee of $2,500 for each class of shares, excluding the initial class
of shares, if more than one class of shares is operational in a fund.
The minimum fee will be waived for the first six months of Trust
operations.
II. BLUE SKY ADMINISTRATION SERVICES
A fee of $2,500 for each class of shares, excluding the initial class
of shares, if more than one class of shares is operational in a fund.
III. OUT-OF-POCKET EXPENSES -- INCLUDE, BUT MAY NOT BE LIMITED TO:
-- Printing for shareholder reports and SEC filings
-- Legal fees, audit fees, and other professional fees
-- Postage, telephone, fax, and photocopying
-- Supplies related to fund records
-- Travel and lodging for Board and Operations meetings
-- Preparation of financial statements other than Annual,
Semi-annual and quarterly board reporting $3,000 per financial
report
<PAGE> 12
IV. SPECIAL ARRANGEMENTS
Fee for activities of non-recurring nature such as fund consolidations
or reorganizations, and/or preparation of special reports will be
subject to negotiation.
V. TERM OF CONTRACT
The parties agree that the fee schedule shall remain in effect for
three full years from the commencement of Trust operations and from
year to year thereafter until it is revised as a result of negotiations
initiated by either party.
In the event that the Trust terminates the Agreement prior to its
initial termination date all amounts waived under the Fee Schedule will
become payable to State Street Bank and Trust Company by GMG/Seneca
Capital Management, L.P.
GMG/SENECA CAPITAL MANAGEMENT, L.P. STATE STREET BANK AND TRUST COMPANY
By: ____________________________ By: ____________________________
Title: _________________________ Title: _________________________
Date: __________________________ Date: __________________________
<PAGE> 13
SUB-ADMINISTRATION AGREEMENT
SENECA FUNDS
SCHEDULE C
REGISTRATION OF FUND SHARES
WITH STATE SECURITIES ADMINISTRATORS
AT THE SPECIFIC DIRECTION OF THE ADMINISTRATOR AND THE FUND, THE SUB-
ADMINISTRATOR WILL PREPARE REQUIRED DOCUMENTATION AND REGISTER FUND SHARES IN
ACCORDANCE WITH THE SECURITIES LAWS OF EACH JURISDICTION IN WHICH FUND SHARES
ARE TO BE OFFERED OR SOLD PURSUANT TO INSTRUCTIONS GIVEN TO THE ADMINISTRATOR
AND THE SUB-ADMINISTRATOR BY THE FUND.
THE FUND SHALL BE SOLELY RESPONSIBLE FOR THE DETERMINATION (I) OF THOSE
JURISDICTIONS IN WHICH FUND SHARES ARE TO BE REGISTERED AND (II) THE NUMBER OF
FUND SHARES TO BE REGISTERED IN EACH SUCH JURISDICTION. IN THE EVENT THAT THE
SUB-ADMINISTRATOR BECOMES AWARE OF (A) THE SALE OF FUND SHARES IN A JURISDICTION
IN WHICH FUND SHARES ARE NOT REGISTERED FOR OFFER AND SALE OR (B) THE SALE OF
FUND SHARES IN EXCESS OF THE NUMBER OF FUND SHARES REGISTERED IN SUCH
JURISDICTION, THE ADMINISTRATOR SHALL REPORT SUCH INFORMATION TO THE FUND, AND
IT SHALL BE THE FUND'S RESPONSIBILITY TO DETERMINE APPROPRIATE CORRECTIVE ACTION
AND INSTRUCT THE SUB-ADMINISTRATOR WITH RESPECT THERETO.
The registration services shall consist of the following:
1. Filing of Fund's Application to Register Securities and
amendments, if directed by the Fund;
2. Filing of amendments to the Fund's registration statement;
3. Filing Fund sales reports and advertising literature where
required;
4. Payment at the expense of the Fund of all Fund state
registration and filing fees;
5. Filing the Prospectuses and Statements of Additional
Information and any supplements thereto;
6. Filing of annual reports and proxy statements where required;
and
7. The performance of such additional services as the
Administrator and the Fund may agree upon in writing.
Unless otherwise specified in writing by the Sub-Administrator, registration
services by the SubAdministrator shall not include determining the availability
of exemptions under a jurisdiction's blue sky law. Any such determination shall
be made by the Fund or its legal counsel. In connection with the services
described herein, the Fund shall issue in favor of the SubAdministrator a power
of attorney to register Fund shares on behalf of the Fund, which power of
attorney shall be substantially in the form of Exhibit I attached hereto.
<PAGE> 14
EXHIBIT I
LIMITED POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, as of _____________ , 1996 that the undersigned
SENECA FUNDS, with principal offices at 909 Montgomery Street, San Francisco, CA
94133 (the "Fund") makes, constitutes, and appoints STATE STREET BANK AND TRUST
COMPANY (the "Administrator") with principal offices at 225 Franklin Street,
Boston, Massachusetts its lawful attorney-in-fact for it to do as if it were
itself acting, the following:
1. REGISTRATION OF FUND SHARES. The power to register shares of the Fund in each
jurisdiction in which Fund shares are offered or sold and in connection
therewith the power to prepare, execute, and deliver and file any and all Fund
applications, including without limitation, applications to register shares,
consents, including consents to service of process, reports, including without
limitation, all periodic reports, claims for exemption, or other documents and
instruments now or hereafter required or appropriate in the judgment of the
Administrator in connection with the registration of Fund shares.
2. AUTHORIZED SIGNERS. Pursuant to this Limited Power of Attorney, individuals
holding the titles of Officer, Blue Sky Manager, or Senior Blue Sky
Administrator at the Administrator shall have authority to act on behalf of the
Fund with respect to item 1 above.
The execution of this limited power of attorney shall be deemed coupled with an
interest and shall be revocable only upon receipt by the Administrator of such
termination of authority. Nothing herein shall be construed to constitute the
appointment of the Administrator as or otherwise authorize the Administrator to
act as an officer, director or employee of the Fund.
IN WITNESS WHEREOF, the Fund has caused this Agreement to be executed in its
name and on its behalf by and through its duly authorized officer, as of the
date first written above.
SENECA FUNDS
By: ____________________________
Name:___________________________
Title: _________________________
<PAGE> 1
Exhibit 10
February 28, 1996
Seneca Funds
909 Montgomery Street
San Francisco, California 94133
Re: Seneca Funds
Ladies and Gentlemen:
We have acted as special Delaware counsel to Seneca Funds, a
Delaware business trust (the "Trust"), in connection with certain matters
relating to the organization of the Trust and the issuance of Shares of
beneficial interest in the Trust. Capitalized terms used herein and not
otherwise herein defined are used as defined in the Agreement and Declaration of
Trust of the Trust dated as of December 18, 1995 (the "Governing Instrument").
In rendering this opinion, we have examined copies of the
following documents, each in the form provided to us: the Certificate of Trust
of the Trust as filed in the Office of the Secretary of State of the State of
Delaware (the "Recording Office") on December 18, 1995 (the "Certificate"); the
Governing Instrument; the By-laws of the Trust; certain resolutions of the
Trustees of the Trust; the Trust's Notification of Registration Filed Pursuant
to Section 8(a) of the Investment Company Act of 1940 on Form N-8A as filed with
the Securities and Exchange Commission on December 18, 1995; the Trust's
Registration Statement on Form N-1A as filed with the Securities and Exchange
Commission on December 18, 1995, as amended by Pre-Effective Amendment Nos. 1
and 2 thereto (collectively and as so amended, the "Registration Statement");
and a certification of good standing of the Trust obtained as of a recent date
from the Recording Office. In such examinations, we have assumed the genuineness
of all signatures, the conformity to original documents of all documents
submitted to us as copies or drafts of documents to be executed, and the legal
capacity of natural persons to complete the execution of documents. We have
further assumed for the purpose of this opinion: (i) the due authorization,
execution and delivery by, or on behalf of, each of the parties thereto of the
above-referenced instruments, certificates and other documents, and of all
documents contemplated by the Governing Instrument, the By-laws and applicable
resolutions of the Trustees to be executed by investors desiring to become
Shareholders; (ii) the payment of consideration for Shares, and the application
of such consideration, as provided in the Governing Instrument, and compliance
with the other terms, conditions and restrictions set forth in the Governing
Instrument and all applicable resolutions of the Trustees of the Trust in
connection with the issuance of Shares (including, without limitation, the
taking of all appropriate action by the Trustees to designate Series of Shares
and the rights and preferences attributable thereto as contemplated by the
Governing Instrument); (iii) that appropriate notation of the names and
addresses of, the number of Shares held by, and the consideration paid by,
Shareholders will be maintained in the appropriate registers and other books and
records of the Trust in connection with the issuance, redemption or transfer of
Shares; (iv) that no event has occurred subsequent to the filing of the
Certificate that would cause a termination or reorganization of the Trust under
Section 2 or Section 3 of Article VIII of the Governing Instrument; (v) that the
activities of the Trust have been and will be conducted in accordance with the
terms of the Governing Instrument and the Delaware Business Trust Act, 12 Del.
C. ss.ss. 3801 et seq. (the "Delaware Act"); and (vi) that each of the documents
examined by us is in full force and effect and has not been modified,
supplemented or otherwise
<PAGE> 2
amended. No opinion is expressed herein with respect to the requirements of, or
compliance with, federal or state securities or blue sky laws. Further, we
express no opinion on the sufficiency or accuracy of any registration or
offering documentation relating to the Trust or the Shares. As to any facts
material to our opinion, other than those assumed, we have relied without
independent investigation on the above-referenced documents and on the accuracy,
as of the date hereof, of the matters therein contained.
Based on and subject to the foregoing, and limited in all
respects to matters of Delaware law, it is our opinion that:
1. The Trust is a duly organized and validly existing
business trust in good standing under the laws of the State of Delaware.
2. The Shares, when issued to Shareholders in accordance
with the terms, conditions, requirements and procedures set forth in the
Governing Instrument, will constitute legally issued, fully paid and
non-assessable Shares of beneficial interest in the Trust.
3. Under the Delaware Act and the terms of the Governing
Instrument, each Shareholder of the Trust, in such capacity, will be entitled to
the same limitation of personal liability as that extended to stockholders of
private corporations for profit organized under the general corporation law of
the State of Delaware; provided, however, that we express no opinion with
respect to the liability of any Shareholder who is, was or may become a named
Trustee of the Trust. Notwithstanding the foregoing or the opinion expressed in
paragraph 2 above, we note that, pursuant to Section 5 of Article IV of the
Governing Instrument, the Trustees have the power to cause Shareholders, or
Shareholders of a particular Series, to pay certain custodian, transfer,
servicing or similar agent charges by setting off the same against declared but
unpaid dividends or by reducing Share ownership (or by both means).
We understand that the Trust is currently in the process of
registering or qualifying Shares in various states, and we hereby consent to the
filing of a copy of this opinion with the securities administrators of such
states and with the Securities and Exchange Commission as part of a
pre-effective amendment to the Trust's Registration Statement. In giving this
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. Except as provided in this paragraph, the opinion set forth above is
expressed solely for the benefit of the addressee hereof in connection with the
subject matter hereof and may not be relied upon by, or filed with, any other
person or entity or for any other purpose without our prior written consent.
Sincerely,
MORRIS, NICHOLS, ARSHT & TUNNELL
<PAGE> 1
Exhibit 11
SENECA FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
AS OF FEBRUARY 26, 1996 AND
INDEPENDENT AUDITOR'S REPORT
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of Seneca Funds:
We have audited the accompanying statements of assets and
liabilities of the Funds comprising Seneca Funds (Seneca Growth Fund, Seneca
MidCap Growth Fund, Seneca Bond Fund, and Seneca Real Estate Securities Fund)
(the "Funds") as of February 26, 1996. These financial statements are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such statements of assets and liabilities
present fairly, in all material respects, the financial position of each of the
respective Funds comprising Seneca Funds as of February 26, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
February 27, 1996
<PAGE> 2
SENECA FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 26, 1996
<TABLE>
<CAPTION>
Seneca Seneca Real
Seneca Mid-Cap Estate
Growth Growth Seneca Bond Securities
Fund Fund Fund Fund
------- ------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Cash $25,000 $25,000 $25,000 $25,000
Prepaid Expenses 2,500 2,500 2,500 2,500
Deferred 54,428 54,428 54,428 54,428
Organizational
Expenses
Total Assets 81,928 81,928 81,928 81,928
LIABILITIES
Accrued Expenses 2,500 2,500 2,500 2,500
Organizational 54,428 54,428 54,428 54,428
Expenses Payable
Total Liabilities 56,928 56,928 56,928 56,928
Net Assets $25,000 $25,000 $25,000 $25,000
SHARES ISSUED AND OUTSTANDING
Administrative 1,250 1,250 1,250 1,250
Shares
NET ASSET VALUE, OFFERING PRICE
AND REDEMPTION PRICE PER SHARE
Administrative $ 10.00 $ 10.00 $ 10.00 $ 10.00
shares
Institutional Shares $ 10.00 $ 10.00 $ 10.00 $ 10.00
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
SENECA FUNDS
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
FEBRUARY 26, 1996
1. ORGANIZATION
Seneca Funds (the "Trust") is registered under the Investment Company Act of
1940, as amended, as an open-end management investment company. The Trust
consists of four series: Seneca Growth Fund, Seneca Mid-Cap Growth Fund, Seneca
Bond Fund and Seneca Real Estate Securities Fund (individually, the "Fund", and
collectively, the "Funds"). The Board of Trustees has authorized each Fund to
issue two classes of common shares: Administrative Shares and Institutional
Shares.
The Trust was organized as a Delaware business trust on December 18, 1995. Prior
to February 26, 1996, the Trust had no operations other than its organization.
On February 26, 1996, each Fund sold 1,250 shares each of Administrative and
Institutional Shares at net asset value (the "Initial Shares") to Seneca
Distributors, Inc.
The costs of organizing each Fund and registering its shares will be paid by
GMG/Seneca Capital Management, L.P. and reimbursed by each Fund at the time of
the initial offering. The organization costs will be deferred and amortized on a
straight-line basis over a period of sixty months from the commencement of
investment operations. The costs associated with the state registration of
shares will be amortized on a straight-line basis over a period of twelve
months. If any of the Initial Shares are redeemed before the end of the
amortization period, the proceeds of the redemption will be reduced by the pro
rata share of the unamortized organization and state registration costs.
2. 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 at the date of the
financial statements. Actual results could differ from those estimates.
3. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
The Trust has an Investment Management Agreement with GMG/Seneca Capital
Management, L.P. ("Seneca Management"), under which Seneca Management manages
the investments of each Fund. For its services, Seneca Management receives a fee
from each Fund at an annual percentage of the average daily net assets of each
Fund. Such investment management fees are 0.70%, 0.80%, 0.50% and 0.85% for the
Growth Fund, Mid-Cap Growth Fund, Bond Fund and Real Estate Securities Fund,
respectively.
The Trust has a Distribution and Services Agreement (the "Agreement") with
Seneca Distributors, Inc. ("Seneca Distributors"), a corporation wholly-owned by
Seneca Management, under which Seneca Distributors serves as the distributor and
principal underwriter of each Fund's shares. Pursuant to the Agreement, Seneca
Distributors receives a fee from each Fund at an annual rate of 0.25% of the
average daily net assets attributable to the Administrative Shares of each Fund.
<PAGE> 4
DELOITTE &
TOUCHE LLP
50 Fremont Street
San Francisco, California 94105-2230
Telephone: (415) 247-4000
Facsimile: (415) 247-4329
INDEPENDENT AUDITORS' CONSENT
To the Board of Trustees of Seneca Funds:
We consent to the use in this Pre-Effective Amendment No. 2 to Registration
Statement No. 33- 65137 of Seneca Funds of our report dated February 27, 1996,
appearing in Part C "Other Information," which is a part of such Registration
Statement.
February 28, 1996
<PAGE> 1
Exhibit 13
SHARE PURCHASE AGREEMENT
Seneca Funds (the "Trust Funds"), a Delaware business trust, and GMG/Seneca
Capital Management, L.P. ("GMG/Seneca"), a California limited partnership hereby
agree with each other as follows:
1. The Trust hereby offers GMG/Seneca and GMG/Seneca hereby purchases 2,500
Series A units of beneficial interest (representing 1,250 Administrative class
share and 1,250 Institutional class share interests in the Seneca Growth Fund),
2,500 Series B units of beneficial interest (representing 1,250 Administrative
class share and 1,250 Institutional class share interests in the Seneca Mid-Cap
Growth Series Fund), 2,500 Series C units of beneficial interest (representing
1,250 Administrative class share and 1,250 Institutional class share interests
in the Seneca Bond Fund), and 2,500 Series D units of beneficial interest
(representing 1,250 Administrative class share and 1,250 Institutional class
share interests in the Seneca Real Estate Fund) in the Trust (such 10,000 units
of beneficial interest being hereinafter collectively known as "Shares") at a
price of $10.00 per share. GMG/Seneca hereby acknowledges purchase of the Shares
and the Trust hereby acknowledges receipt from GMG/Seneca of funds in the amount
of $100,000 in full payment for the Shares.
2. GMG/Seneca represents and warrants to the Trust that the Shares are being
acquired for investment purposes and not with a view to the distribution
thereof.
3. GMG/Seneca agrees that if it or any direct or indirect transferee of any of
the Shares redeems any of the Shares prior to the second anniversary of the date
the Trust begins its investment activities, GMG/Seneca will pay to the Trust an
amount equal to the number resulting from multiplying the Trust's total
unamortized organizational expenses by a fraction, the numerator of which is
equal to the number of Shares redeemed by GMG/Seneca or such transferee and the
denominator of which is equal to the number of Shares outstanding as of the date
of such redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the
28th day of February 1996.
SENECA FUNDS
By:/s/Gail P. Seneca
--------------------------------
Gail P. Seneca
President
GMG/SENECA CAPITAL MANAGEMENT, L.P.
By:/s/Gail P. Seneca
--------------------------------
Gail P. Seneca
General Partner
