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PART B
SENECA FUNDS
SENECA GROWTH FUND
SENECA MID-CAP "EDGE"(SM) FUND
SENECA BOND FUND
SENECA REAL ESTATE SECURITIES FUND
(each a "Fund" and collectively, the "Funds")
ADMINISTRATIVE SHARES
and
INSTITUTIONAL SHARES
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STATEMENT OF ADDITIONAL INFORMATION
January 2, 1997
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This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of the Funds, dated October 31, 1996, as
amended and/or supplemented from time to time (the "Prospectus"), 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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TABLE OF CONTENTS
Page
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GENERAL 1
INVESTMENT OBJECTIVES AND POLICIES 1
INVESTMENT RESTRICTIONS 19
CALCULATION OF THE FUNDS' PERFORMANCE 23
ADVISORY AND ADMINISTRATIVE SERVICES 25
TRUSTEES AND OFFICERS 31
NET ASSET VALUE 34
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS 35
PORTFOLIO BROKERAGE 38
PORTFOLIO TURNOVER 41
ORGANIZATION 41
CUSTODIAN 43
TRANSFER AGENT 43
INDEPENDENT AUDITORS 43
FINANCIAL STATEMENTS 45
APPENDIX
GLOSSARY
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GENERAL
The Trust consists of four separate Funds: The Seneca Growth Fund; the Seneca
Mid-Cap "EDGE"(sm) Fund; the Seneca Bond Fund; and the Seneca Real Estate
Securities Fund. Each Fund offers two classes of shares: Institutional Shares
and Administrative Shares, except for the Bond Fund which only offers
Institutional 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 Administrative
shareholders.
All capitalized terms not defined herein have the meanings set forth in the
Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and general investment policies of each Fund are
described in the Prospectus. 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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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 "EDGE"(sm) 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 the 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 "EDGE"sm 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 may
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 exchange 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 such 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 AND FUTURES
The Funds may, as described in the Prospectus, 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.
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OPTIONS
The purpose of writing covered put and call options generally 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 with one of the top three ratings categories by
Moody's or S&P ("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, 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
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price of the option and the value of the underlying securities index on the
exercise date multiplied 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
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effectively depends upon the ability to predict movements in interest rates or
the stock market. 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 FUTURES OPTIONS
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 futures
options 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 the Fund's custodian (or a subcustodian) 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
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<PAGE> 15
to purchase 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 that is 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 through
one or more brokers). An exchange may order the liquidation of positions found
to be
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<PAGE> 16
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 counterparty. 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 counterparty 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 counterparty or any guarantor or credit enhancement of the counterparty'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
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<PAGE> 17
the relative values of the positions held by each party to the agreement (the
"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
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<PAGE> 18
marketplace. Foreign currency warrants may be used to reduce the foreign
exchange risk assumed 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
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<PAGE> 19
rate of return that is below, and a potential maximum rate of return that is
above, market yields 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 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
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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.
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 qualified, 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.
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<PAGE> 21
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. Under the 1940 Act, and as used in the Prospectus
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
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<PAGE> 22
and repurchase agreements entered into in accordance with the Fund's
investment policies, subject to restrictions as may be set forth
elsewhere in the Prospectus or this Statement of Additional
Information.
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.
8. 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.
9. 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 that are not
publicly traded. To the extent that undertaking is no longer required by the
state securities commission, the Trust may interpret that restriction
differently.
The following restrictions are designated as non-fundamental and may be changed
by the Trustees without the approval of shareholders.
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<PAGE> 23
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 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 interests 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
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<PAGE> 24
of its investable assets in an open-end investment company with
substantially the same investment objectives, policies and restrictions
as the Fund.
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
3, 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.
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<PAGE> 25
CALCULATION OF THE FUNDS' PERFORMANCE
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 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:
ERV = P(1+T)n
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.
The cumulative total returns for the period from commencement of investment
operations through September 30, 1996 were as follows:
<TABLE>
<CAPTION>
Administrative Institutional
Shares Shares
<S> <C> <C>
Seneca Growth Fund 36.30% 37.40%
Seneca Mid-Cap "EDGE"(sm) Fund 49.30% 49.70%
Seneca Bond Fund * 4.02%
Seneca Real Estate Securities Fund 12.22% 12.39%
</TABLE>
* Not currently being offered
YIELD
The 30-day yield quotation as to a class of shares of the Seneca Bond Fund and
the Seneca Real Estate Securities 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:
[(a-b + 1)6-1]
YIELD = 2
cd
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<PAGE> 26
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.
The yields for the 30-day period ended September 30, 1996 were as follows:
<TABLE>
<CAPTION>
Administrative Institutional
Shares Shares
<S> <C> <C>
Seneca Bond Fund * 6.02%
Seneca Real Estate Securities Fund 2.15% 2.80%
</TABLE>
* Not currently being offered
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 performance of the Seneca Real Estate Securities Fund may be
compared to the Wilshire Real Estate Securities Index, an unmanaged index
consisting of publicly-traded REITs and real estate operating companies.
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
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<PAGE> 27
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. The Wilshire Real Estate Securities Index is an
unmanaged, market-capitalization-weighted index consisting of publicly-traded
REITs and real estate operating companies. It excludes healthcare and other
"special-purpose" REITs. It is rebalanced monthly and reconstituted quarterly.
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.
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,
LLC ("GMG/Seneca" or the "Investment Manager") has 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.
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<PAGE> 28
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 "EDGE"sm 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.
For the period ended September 30, 1996, the Investment Manager earned
investment management fees of $30,334, $18,471, $6,283, and $1,630 for services
rendered pursuant to the Management Agreement to Seneca Growth Fund, Seneca
Mid-Cap "EDGE"(sm) Fund, Seneca Bond Fund and Seneca Real Estate Securities
Fund, respectively. Each of these fees was waived in its entirety by the
Investment Manager.
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 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. Recent federal legislation preempts states'
abilities in most circumstances to impose such expense limits. 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 in such amounts as may be necessary to prevent
the overall expenses of each Fund from exceeding the levels set forth in the
Prospectus
-26-
<PAGE> 29
at least until the earlier of March 31, 1997 or such time as the Trust's
aggregate assets exceed $60 million and may, in its discretion as to any Fund
continue such waivers and/or reimbursements, in whole or in part, beyond such
time.
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, 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.
GMG/Seneca Capital Management, LLC is owned by certain of its employees,
including Gail P. Seneca, the former limited partners of GMG/Seneca Capital
Management, L.P., and certain of the partners of Genesis Merchant Group, L.P.
Ms. Seneca is the largest single holder of "membership" interests and is the
sole "Managing Member." GMG/Seneca has approximately 39 full-time employees and
acts as investment adviser or manager for approximately $3.9 billion of
institutional and private investment accounts.
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 the sole "Managing Member," 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,
in the Investment Manager's judgment, 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
-27-
<PAGE> 30
inadequate for a distribution to all such accounts, securities are generally
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 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. In
addition, 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. During each year, each Fund will be obligated to
pay a minimum Administrative Services Fee of $55,000. 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 is obligated to pay to
GMG/Seneca a termination fee equal to certain amounts by which GMG/Seneca was
required to waive its Administrative Services Fee under the terms of the
Administration Agreement. For the period ended September 30, 1996, GMG/Seneca
earned Administrative Services Fees of $35,112, $34,955, $35,001 and $34,976 for
services rendered pursuant to the Administration Agreement to Seneca
-28-
<PAGE> 31
Growth Fund, Seneca Mid-Cap "EDGE"(sm) Fund, Seneca Bond Fund and Seneca Real
Estate Securities Fund, respectively. Each of these fees was waived in its
entirety by GMG/Seneca.
The above fees may be changed by the Trustees without shareholder approval.
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 (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 UNDERWRITERS
Genesis Merchant Group Securities, LLC ("GMG Securities") and Seneca
Distributors, LLC ("Seneca Distributors") have entered into a Distribution
Agreement with the Trust pursuant to which they serve as principal underwriters
to the Trust. It is expected that GMG Securities will terminate its agreement
with the Trust shortly after Seneca Distributors completes the process of
becoming registered as a broker-dealer under the laws of certain states, and
Seneca Distributors will become the principal underwriter and distributor of the
Funds' shares. The Trustees, including the Independent Trustees, approved the
Distribution Agreement before the Funds began selling shares to the public. The
Distribution Agreement continues in effect from year to year, if annually
approved by the Trustees, including the Independent Trustees. It provides that
the principal underwriters will bear certain distribution expenses not borne by
the Funds.
The Distributors will bear all expenses they incur in providing services under
the Distribution 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 receive compensation
under the Distribution Agreement 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.
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<PAGE> 32
Seneca Distributors is 99% owned by GMG/Seneca. GMG Securities is a California
limited liability company whose principal members have a membership interest in
GMG/Seneca.
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, (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.
For the fiscal year ended September 30, 1996, the Funds paid to Seneca
Distributors $313.73 pursuant to the Distribution Agreement; as of September 30,
1996 the Funds had accrued expenses of $568 pursuant to the Distribution
Agreement. During the last fiscal year, the Distributors expended the amounts
indicated below in connection with the distribution of the Funds' shares:
<TABLE>
<S> <C>
Advertising: $80,532.78
Printing and mailing
of Prospectuses: $90,000.00
Other (includes develop-
ment of certain graphics
as well as establishment
of Internet capabilities): $27,000.00
</TABLE>
The Distributors are not entitled to reimbursement for such expenditures, and
the Funds will not bear such costs, beyond the payment of fees under the
Distribution Agreement, as described above.
Under the terms of the Plan, the Distributors 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 their
quarterly review of the Plan, the Trustees consider the continued
appropriateness and the level of compensation that the Plan provide for each
Trust.
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<PAGE> 33
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 a
President, and San Francisco, CA Trustee of the Trust since February
Trustee 94133 1996. Since July 1, 1996, she has
been the Managing Member of GMG/Seneca.
Since November 1989, she has been Chief
Investment Officer and a managing
general partner of GMG/Seneca Capital
Management, L.P.
Sandra J. 909 Montgomery Street 36 Ms. Westhoff has been Treasurer and
Westhoff,* San Francisco, CA a Trustee of the Trust since February
Treasurer and 94133 1996. From September 1994 to
Trustee present, she has been Chief
Administrative Officer of GMG/Seneca
Capital Management, L.P., and, since
July 1, 1996, 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 Trustee of the Trust since February
Trustee 94133 1996. From July 1990 to present he has
been a Portfolio Manager of GMG/Seneca
Capital Management, L.P., and since July
1, 1996, a Portfolio Manager of
GMG/Seneca.
Mary Ann 2109 Santa Cruz 39 Ms. Cusenza has been a Trustee of the
Cusenza,** Avenue, Menlo Park, Trust since February 1996. She joined
Trustee CA 94025 Apple Computer, Inc. in 1985 and was
a Vice President and Treasurer of
Apple Computer, Inc. from 1992 until
February 1996.
</TABLE>
-31-
<PAGE> 34
<TABLE>
<S> <C> <C> <C>
Melinda Ellis c/o Ellis Partners, 351 35 Ms. Evers has been a Trustee of the
Evers,** Trustee California Street, Suite Trust since February 1996. She is a
1150, San Francisco, founding partner of Ellis Partners, Inc.,
CA 94104 a real 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.
Victor 333 Twin Dolphin 40 Mr. Guinasso has been a Trustee of
Guinasso,** Drive, Redwood City, the Trust since February 1996. He
Trustee CA 94065 joined DHL Worldwide Express in
1982, and has served as Chief Operating
Officer of DHL Worldwide Express since
1991 and in October 1996 was named
President of DHL Airway Inc.'s
operations in the United States.
</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 its officers or Trustees affiliated with the
Investment Manager. 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 sets forth the estimated compensation to be paid to the
Trust's Trustees for the fiscal year ending September 30, 1997.
<TABLE>
<S> <C> <C> <C>
Name of Trustee Aggregate Pension or Retirement Total Compensation
Compensation Benefits Accrued as Part of from Trust and other
from the Trust Trust's Expenses Funds in Complex
</TABLE>
-32-
<PAGE> 35
<TABLE>
<S> <C> <C> <C>
Gail P. Seneca $0 - $0
Sandra J. Westhoff $0 - $0
Ronald K. Jacks $0 - $0
Mary Ann Cusenza $10,000 - $10,000
Melinda Ellis Evers $10,000 - $10,000
Paul E. Erdman $10,000 - $10,000
Victor Guinasso $10,000 - $10,000
</TABLE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information as of October 1, 1996 with respect to
each person who owns of record or is known by the registrant to own of record or
beneficially 5% or more of any class of the registrant's outstanding equity
securities:
<TABLE>
<CAPTION>
Name of Name of Number of Percent
Shareholder Fund(1) of Shares of Class
----------- -------- --------- --------
<S> <C> <C> <C>
Charles Schwab & Company(2) Growth 175,928.15 18.7%
101 Montgomery Street Mid-Cap "EDGE"(sm) 131,838 14%
San Francisco, CA 94104 Bond 126,750 32.56%
Real Estate Securities 18,468.9 15.8%
Alex Brown & Sons(2) Mid-Cap "EDGE"(sm) 55,910 5.5%
Bond 32,443 8.3%
Chicago Corporation(2) Real Estate Securities 14,204.55 12.17%
P.O. Box 6108
Chicago, IL 60680
Harold C. Nathan and
Gail P. Seneca, JTWROS*(3) Real Estate Securities 6,323.4 5.6%
</TABLE>
- -----------------------
* The business address of each individual shareholder is c/o
Seneca Funds, 909 Montgomery Street, Suite 500, San Francisco,
California 94133
(1) Institutional Class of shares only.
(2) Shares owned of record.
(3) Shares owned of record and beneficially.
As of the September 30, 1996, the Trustees and officers of the Trust as a group
beneficially owned (i.e., had voting or investing power with respect to) shares
of the Funds as follows: 791 shares of Seneca Growth Fund; 14,550 shares of
Seneca Mid-Cap "EDGE"(sm) Fund; and 11,543 of shares of Seneca Real Estate
Securities Fund. The shares owned by the Trustees and officers were of the
Institutional Class only.
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<PAGE> 36
NET ASSET VALUE
(See "Net Asset Value" in the Prospectus.)
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 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.
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<PAGE> 37
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. For each taxable year, each Fund intends to qualify as a regulated
investment company under Subchapter M of the Code.
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 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, as determined under a prescribed formula.
The formula requires that a Fund
-35-
<PAGE> 38
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 are
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")
are 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 are subject to tax the character of which will be determined under
Section 1234 of the Code. In general, no loss is recognized by a Fund upon
payment of a 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 such option, on the
Fund's holding period for such option, and in the case of an exercise of a 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 such 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) are 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 are 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 are 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 recognized as 60% is 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,
-36-
<PAGE> 39
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 are 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.
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).
-37-
<PAGE> 40
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 are subject to any corporate excise or franchise tax in the State of
Delaware, nor are they 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.
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.
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 Prospectus.)
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 may 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
-38-
<PAGE> 41
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. Nonetheless, the Trust believes that such
investment information provides the Trust with benefits by supplementing the
research otherwise available to the Trust.
GMG Securities may act as broker for the Funds on exchange transactions, subject
to the general policy of the Trust set forth above. Further, because of its
relationship to GMG/Seneca, the Trust has decided to treat GMG Securities as if
it were an "affiliated person" of GMG/Seneca and will apply certain procedures
adopted by the Trustees. Commissions (if any) 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.
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 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
-39-
<PAGE> 42
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 may not effect transactions on such exchange for the account
of an investment company of which the member firm or its affiliate 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. Any transactions, GMG
Securities effects on any exchange of which it is a member on behalf of the
Funds will be effected in compliance with these conditions.
If GMG Securities effects any transactions on behalf of a Fund, it 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 such transactions and the Trustees of the Trust
will review and approve all the Trust's portfolio transactions and the
compensation received by GMG Securities in connection therewith.
GMG Securities does not knowingly participate in commissions paid by the Trust
to other brokers or dealers and does not seek or knowingly receive any
reciprocal business as the result of the 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 have an equity
ownership interest in GMG Securities may receive indirect compensation from the
Trust through their participation in such brokerage commissions.
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.
-40-
<PAGE> 43
It is possible that situations may arise in which legal and regulatory
considerations would preclude certain trading for the Funds' accounts by reason
of activities of GMG Securities or its affiliates.
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 may not serve as the Trust's dealer in connection with such
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
Prospectus.
The annual portfolio turnover rate of a Fund is 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 is 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"), are 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 Prospectus.)
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
-41-
<PAGE> 44
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 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 have not determined 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
-42-
<PAGE> 45
have authorized the issuance of two classes of shares for each series,
designated Institutional Shares and Administrative Shares. The Seneca Bond Fund
currently offers only Institutional Shares. See "General Information" in the
Prospectus 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 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 nor 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
-43-
<PAGE> 46
perform other professional services for the Trust including preparation of
income tax returns of the Funds.
-44-
<PAGE> 47
FINANCIAL STATEMENTS
SENECA FUNDS
SENECA GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
------------------ ------ -----
<S> <C> <C>
COMMON STOCKS - 88.0%
DRUGS & HEALTH CARE - 9.5%
Cardinal Health Incorporated ........... 4,250 $ 351,157
Merck and Company Incorporated ......... 5,235 368,413
Healthsouth Corporation (1) ............ 7,195 276,108
Humana, Incorporated ................... 6,290 127,373
Pharmacia & Upjohn, Incorporated ....... 3,460 142,725
----------
1,265,776
----------
FINANCIAL SERVICES - 8.9%
BankAmerica Corporation ................ 3,700 303,864
Beneficial Corporation ................. 4,880 280,600
Charles Schwab Corporation ............. 11,947 276,274
Chase Manhattan Corporation New (2) .... 4,200 336,525
----------
1,197,263
----------
RETAIL TRADE - 8.7%
Corporate Express, Incorporated (1) .... 7,550 293,506
Safeway, Incorporated .................. 6,090 259,586
Saks Holdings, Incorporated ............ 9,870 345,450
Wal-Mart Stores, Incorporated .......... 10,140 267,443
----------
1,165,985
----------
ELECTRONICS - 7.7%
BMC Industries Incorporated ............ 7,830 224,134
Checkpoint Systems Incorporated(1) ..... 9,817 260,150
General Instruments Corporation (1) .... 10,480 259,380
Honeywell Incorporated ................. 4,640 292,900
----------
1,036,564
----------
PETROLEUM SERVICES - 5.0%
Schlumberger Limited ................... 3,980 336,310
Sonat, Incorporated .................... 7,560 334,530
----------
670,840
----------
HOTELS & RESTAURANTS - 4.9%
HFS, Incorporated (1) .................. 6,270 419,306
Hilton Hotels Corporation .............. 8,160 231,540
----------
650,846
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
1
<PAGE> 48
SENECA FUNDS
SENECA GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
------------------ ------ -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
INTERNATIONAL OIL - 4.5%
Atlantic Richfield Company ................. 2,150 $274,125
Mobil Corporation .......................... 2,860 331,045
--------
605,170
--------
COMPUTER SOFTWARE - 3.7%
Intel Corporation .......................... 2,500 238,594
Microsoft Corporation (1) .................. 1,970 259,794
--------
498,388
--------
COMMERCIAL SERVICES - 2.4%
Envoy Corporation New (1) .................. 6,500 251,875
ICT Group, Incorporated (1) ................ 5,750 71,875
--------
323,750
--------
ELECTRICAL EQUIPMENT - 2.4%
General Electric Company ................... 3,460 314,860
--------
TELECOMMUNICATIONS - 2.3%
Ascend Communication, Incorporated (1) ..... 4,710 311,449
--------
FOOD & BEVERAGES - 2.3%
Pepsico, Incorporated ...................... 11,060 312,445
--------
DIVERSIFIED - 2.3%
Unilever NV - NY Shares .................... 1,950 307,369
--------
ADVERTISING - 2.2%
Outdoor Systems, Incorporated (1) .......... 6,260 294,220
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
2
<PAGE> 49
SENECA FUNDS
SENECA GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
------------------ ------ -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BROADCASTING - 2.2%
Evergreen Media(1) ................... 9,197 $ 287,406
-----------
NETWORKING PRODUCTS - 2.1%
Cisco Systems, Incorporated (1) ...... 4,430 274,937
-----------
COMPUTERS - 2.0%
Sun Microsystems, Incorporated (1) ... 4,370 271,486
-----------
HUMAN RESOURCES - 2.0%
Accustaff, Incorporated (1) .......... 10,260 265,477
-----------
AEROSPACE - 2.0%
United Technology Corporation ........ 2,210 265,476
-----------
HOUSEHOLD PRODUCTS - 1.9%
Colgate Palmolive .................... 2,910 252,806
-----------
APPAREL MANUFACTURER - 1.7%
Gucci Group, NV ...................... 3,120 226,220
-----------
OFFICE SUPPLIES - 1.7%
Xerox Corporation .................... 4,190 224,668
-----------
ATHLETIC FOOTWARE - 1.6%
Fila Holdings Spa Sponsored ADR ...... 2,280 219,165
-----------
CHEMICALS - 1.6%
Hercules, Incorporated ............... 3,850 210,787
-----------
FORESTRY - 1.5%
Georgia Pacific Corporation .......... 2,460 194,647
-----------
SCHOOLS - 0.9%
Apollo Group, Incorporated ........... 4,630 123,853
-----------
TOTAL COMMON STOCKS (COST $11,152,434) .... $11,771,853
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE> 50
SENECA FUNDS
SENECA GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE
------------------
<S> <C> <C>
SHORT TERM INVESTMENT - 19.5% (COST $2,614,206)
REPURCHASE AGREEMENT
State Street Bank and Trust Company, 4.00%, to be repurchased at
$2,614,496 on 10/1/96 (collateralized by $2,445,000 par value U.S.
Treasury Note 7.875% due 11/15/2007,
with a value of $2,671,896) ...................................... 2,614,206
------------
TOTAL INVESTMENTS (COST $13,766,640*) 107.5% 14,386,059
OTHER ASSETS LESS LIABILITIES (7.5%) (1,000,133)
------------ ------------
NET ASSETS 100.0% $ 13,385,926
============ ============
</TABLE>
(1) Non-income producing security.
(2) Name change from Chemical Banking Corporation
*At September 30, 1996, the aggregate cost of investment securities for income
tax purposes was $13,770,110. Net unrealized appreciation aggregated $615,949,
of which $869,339 related to appreciated investment securities and $253,390
related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE> 51
SENECA FUNDS
SENECA MID-CAP "EDGE" (SM) FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
------------------ ------ -----
<S> <C> <C>
COMMON STOCKS - 88.4%
COMMERCIAL SERVICES - 10.8%
Envoy Corporation New (1) .................... 5,720 $221,650
ICT Group, Incorporated (1) .................. 5,750 71,875
TeleSpectrum Worldwide, Incorporated (1) ..... 9,680 188,760
Teletech Holdings Incorporated (1) ........... 12,700 463,550
--------
945,835
--------
ADVERTISING SERVICES - 8.7%
National Media Corporation (1) ............... 12,280 182,665
Outdoor Systems, Incorporated (1) ............ 4,140 194,580
Universal Outdoor Holdings, Incorporated (1) . 10,800 388,800
--------
766,045
--------
MEDICAL INSTRUMENTS & PRODUCTS - 7.0%
Guidant Corporation .......................... 3,280 181,220
HCIA, Incorporated ........................... 1,520 91,200
Nitinol Medical Technologies (1) ............. 6,150 69,187
Physio-Control International Corporation (1) . 10,750 271,438
--------
613,045
--------
ELECTRONICS - 6.9%
Altera Corporation (1) ....................... 2,690 136,181
BMC Industries Incorporated (1) .............. 7,510 214,974
Checkpoint Systems Incorporated (1) .......... 5,833 154,574
Triquint Semiconductor, Incorporated (1) ..... 4,340 100,905
--------
606,634
--------
SOFTWARE - 6.5%
ANSYS, Incorporated (1) ...................... 4,990 58,009
Arbor Software Corporation (1) ............... 3,240 138,510
Citrix Systems, Incorporated (1) ............. 3,060 156,825
HNC Software, Incorporated (1) ............... 5,500 220,000
--------
573,344
--------
FINANCIAL SERVICES- 5.5%
Charles Schwab Corporation ................... 8,633 199,638
Coast Savings Financial, Incorporated (1) .... 4,600 147,200
Comerica, Incorporated ....................... 2,640 135,960
--------
482,798
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE> 52
SENECA FUNDS
SENECA MID-CAP "EDGE" (SM) FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
------------------ ------ -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
HUMAN RESOURCES - 5.4%
AccuStaff, Incorporated (1) ....................... 7,170 $185,524
COREStaff, Incorporated (1) ....................... 5,755 153,946
Romac International, Incorporated (1) ............. 4,560 139,080
--------
478,550
--------
RETAIL TRADE - 5.3%
Corporate Express, Incorporated (1) ............... 5,150 200,206
Kenneth Cole Productions, Incorporated, Class A (1) 1,860 35,107
Saks Holdings, Incorporated (1) ................... 6,450 225,750
--------
461,063
--------
DRUGS & HEALTHCARE - 4.7%
Amerisource Health Corporation Class A (1) ........ 5,165 229,843
United Healthcare Corporation ..................... 4,400 183,150
--------
412,993
--------
HOTELS & RESTAURANTS - 4.2%
HFS Incorporated (1) .............................. 4,100 274,187
Logan's Roadhouse, Incorporated (1) ............... 4,545 91,468
--------
365,655
--------
COMPUTER SERVICES - 2.7%
Checkfree Corporation (1) ......................... 4,900 98,000
Computer Task Group, Incorporated (1) ............. 4,440 138,195
--------
236,195
--------
OIL - 2.7%
BJ Services Company (1) ........................... 2,670 96,788
Houston Exploration Company (1) ................... 8,200 139,400
--------
236,188
--------
TELEPHONE - 2.6%
Cincinnati Bell Incorporated ...................... 4,305 228,165
--------
COMPUTERS - 2.5%
Sun Microsystems, Incorporated (1) ................ 3,480 216,195
--------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE> 53
SENECA FUNDS
SENECA MID-CAP "EDGE" (SM) FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
------------------ ------ -----
<S> <C> <C>
COMMON STOCKS (CONTINUED)
TELECOMMUNICATIONS EQUIPMENT - 2.3%
Ascend Communications, Incorporated (1) ........ 3,000 $ 198,375
---------
BROADCASTING - 2.1%
Evergreen Media Corporation Class A (1) ........ 5,975 186,719
---------
NETWORKING PRODUCTS - 2.0%
Cisco Systems, Incorporated (1) ................ 2,870 178,119
---------
HOME FURNISHINGS - 1.7%
Furniture Brands International, Incorporated (1) 10,170 148,736
---------
THEATERS - 1.7%
Regal Cinemas, Incorporated (1) ................ 6,060 151,500
---------
APPAREL MANUFACTURER - 1.3%
Gucci Group, NV ................................ 1,590 115,275
---------
SCHOOLS - 1.3%
Apollo Group, Incorporated Class A (1) ......... 4,360 116,630
---------
OFFICE SUPPLIES - 0.5%
American Pad & Paper Company (1) ............... 2,200 46,750
---------
TOTAL COMMON STOCKS (COST $6,752,948) 7,764,809
---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE> 54
SENECA FUNDS
SENECA MID-CAP "EDGE" (SM) FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
------------------ ---- ---- ------ -----
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 1.0 %
(COST $83,000)
HOTELS - 1.0%
Hilton Hotels Corporation ........................................ 5.00% 05/15/2006 $ 83,000 $ 88,914
------------
TOTAL INVESTMENTS IN SECURITIES (COST $6,835,948) 7,853,723
------------
SHORT TERM INVESTMENT - 21.5% (COST $1,885,039)
REPURCHASE AGREEMENT
State Street Bank and Trust Company, 4.00%, to be repurchased at
$1,885,648 on 10/1/96 (collateralized by $1,760,000 par value U.S.
Treasury Note 7.875% due 11/15/07,
with a value of $1,923,328) 1,885,039
------------
TOTAL INVESTMENTS (COST $8,720,987*) 110.9% 9,738,762
OTHER ASSETS LESS LIABILITIES (10.9)% (955,613)
------------ ------------
NET ASSETS 100.0% $ 8,783,149
============ ============
</TABLE>
(1) Non-income producing security.
*At September 30, 1996, the aggregate cost of investment securities for income
tax purposes was $8,720,987. Net unrealized appreciation aggregated $1,017,775,
of which $1,219,070 related to appreciated investment securities and $201,295
related to depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 55
SENECA FUNDS
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
------------------ ---- ---- ------ -----
<S> <C> <C> <C> <C>
CORPORATE BONDS - 86.5 %
FINANCE & BANKING - 12.2%
Aetna Services, Incorporated ................... 7.625% 08/15/2026 $ 75,000 $ 73,633
Countrywide Funding ............................ 5.920% 04/22/1999 30,000 29,960
Dean Witter Discover ........................... 6.110% 03/10/1999 60,000 59,963
Bear Stearns Company ........................... 5.580% 08/26/1997 60,000 59,987
Citicorp ....................................... 6.165% 04/15/1999 60,000 59,908
Donaldson Lufkin & Jenrette .................... 6.875% 11/01/2005 50,000 47,688
General Electric Capital Mortgage Services ..... 6.500% 08/25/2009 36,183 33,980
Lehman Brothers Holdings ....................... 8.800% 03/01/2015 80,000 87,408
Lehman Brothers Holdings ....................... 7.110% 09/27/1999 50,000 50,301
-----------
502,828
-----------
HOTELS - 10.2%
Bally Park Place Funding ....................... 9.250% 03/15/2004 50,000 54,000
Caesars World .................................. 8.875% 08/15/2002 170,000 179,563
California Hotels Finance ...................... 11.000% 12/01/2002 75,000 78,750
John Q. Hammons Hotels ......................... 8.875% 02/15/2004 30,000 28,913
Wyndham Hotel Corporation ...................... 10.500% 05/15/2006 75,000 78,375
-----------
419,601
-----------
DRUGS & HEALTH CARE - 9.8%
Abbey Healthcare Group ......................... 9.500% 11/01/2002 25,000 25,875
Hook-SupeRx, Incorporated ...................... 10.125% 06/01/2002 140,000 149,951
Manor Care, Incorporated ....................... 7.500% 06/15/2006 90,000 90,447
Paraclesus Healthcare Corporation .............. 10.000% 08/15/2006 75,000 77,531
Quorum Health Group, Incorporated .............. 11.875% 12/15/2002 5,000 5,538
Smith's Food & Drug Centers, Incorporated ...... 11.250% 05/15/2007 50,000 53,500
-----------
402,842
-----------
ASSET BACKED - 7.3%
Chrysler Financial Corporation Grantor
Trust, Series 11A, Class A ................... 8.900% 08/15/1997 115,151 117,211
General Motors Acceptance Corporation
Series 1994-A, Class A ....................... 6.300% 06/15/1999 25,450 25,569
Olympic Automobile Receivables Trust,
Series 1996-B ................................ 6.900% 02/15/2004 120,000 120,880
Standard Credit Card Master Trust I,
Series 1993-2, Class A ....................... 5.950% 10/07/2004 40,000 37,725
-----------
301,385
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 56
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
------------------ ---- ---- ------ -----
<S> <C> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
BROADCASTING - 7.1%
Chancellor Broadcasting Corporation 12.500% 10/01/2004 $ 50,000 $ 56,250
EZ Communication, Incorporated .... 9.750% 12/01/2005 50,000 50,875
Jacor, Incorporated ............... 10.125% 06/15/2006 100,000 104,375
Young Broadcasting Corporation .... 11.750% 11/15/2004 75,000 81,375
-----------
292,875
-----------
AIRLINES - 6.4%
Alaska Airlines, Incorporated ..... 9.500% 04/12/2010 125,628 129,683
United Airlines, Incorporated ..... 10.110% 02/19/2006 23,493 26,816
United Airlines, Incorporated ..... 9.760% 05/27/2006 96,024 107,570
-----------
264,069
-----------
MULITMEDIA - 6.3%
Cablevision Industries Corporation 9.250% 04/01/2008 20,000 20,600
Cablevision Industries Corporation 10.750% 01/30/2002 70,000 74,900
Continental Cablevision ........... 10.625% 06/15/2002 90,000 96,751
Continental Cablevision ........... 8.300% 05/15/2006 30,000 31,112
Time Warner Incorporated .......... 9.125% 01/15/2013 35,000 37,104
-----------
260,467
-----------
REAL ESTATE - 6.2%
ERP Operating Limited Partnership . 7.570% 08/15/2026 150,000 148,852
Spieker Properties, Incorporated .. 8.000% 07/19/2005 100,000 100,544
Property Trust America ............ 6.875% 02/15/2008 5,000 4,771
-----------
254,167
-----------
RETAIL STORES - 5.1%
Orchard Supply Hardware Corporation 9.375% 02/15/2002 100,000 106,500
Saks Holdings, Incorporated ....... 5.500% 09/15/2006 100,000 105,125
-----------
211,625
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 57
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
------------------ ---- ---- ------ -----
<S> <C> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
OFFICE SUPPLIES - 4.6%
Corporate Express Incorporated ........ 9.125% 03/15/2004 $ 75,000 $ 74,719
Scottsman Group ....................... 9.500% 12/15/2000 40,000 40,800
Xerox Corporation ..................... 6.080% 05/05/1999 75,000 74,949
-------------
190,468
-------------
THEATERS - 3.8%
Act III Theaters, Incorporated ........ 11.875% 02/01/2003 75,000 82,031
Plitt Theaters, Incorporated .......... 10.875% 06/15/2004 75,000 75,750
-------------
157,781
-------------
AUTOMOBILE PARTS - 2.5%
Speedy Muffler King, Incorporated ..... 10.875% 10/01/2006 100,000 103,250
-------------
OTHER - 2.2%
SFP Pipeline Holdings ................. 11.160% 08/15/2010 75,000 90,782
-------------
COMMERCIAL SERVICES - 1.3%
Iron Mountain, Incorporated ........... 10.125% 10/01/2006 50,000 51,500
-------------
INDUSTRIAL - 0.8%
MVE, Incorporated ..................... 12.500% 02/15/2002 30,000 32,700
-------------
TELECOMMUNICATIONS - 0.7%
Comcast Cellular Corporation .......... 0.00% 03/05/2000 40,000 28,500
-------------
TOTAL CORPORATE BONDS (COST $3,518,045) 3,564,840
-------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 58
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
------------------ ---- ---- ------ -----
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCIES - 6.5%
COLLATERALIZED MORTGAGE OBLIGATIONS - 5.9%
Federal Home Loan Mortgage Corporation,
REMIC, Series 151, Class E .............. 9.000% 09/15/2020 $ 45,757 $ 46,900
Federal Home Loan Mortgage Corporation,
REMIC, Series 1032, Class E ............. 8.750% 12/15/2020 42,284 43,759
Federal National Mortgage Association,
REMIC, Series 1991-31, Class K ......... 6.500% 04/25/2019 5,413 5,400
Federal National Mortgage Association,
REMIC, Series 1989-80, Class E .......... 9.000% 09/25/2018 103,481 106,870
Federal National Mortgage Association,
Interest Only, Series 1993-179, Class S . 2.969% 10/25/2023 776,902 38,845
-----------
241,774
-----------
MORTGAGE-BACKED PASS-THROUGH SECURITY - 0.6%
Government National Mortgage
Association, Pool #408215 .................. 7.000% 02/15/2026 24,838 23,945
-----------
TOTAL U.S. GOVERNMENT AGENCIES (COST $264,937) 265,719
-----------
FOREIGN BONDS - 1.3%
CORPORATE - 0.7%
Banco Nacional De Comercio .................. 7.500% 07/01/2000 30,000 28,688
-----------
GOVERNMENT - 0.6%
Republic of Brazil .......................... 6.688% 01/01/2001 27,300 26,141
-----------
TOTAL FOREIGN BONDS (COST $52,801) .......... 54,829
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
WARRANTS - 0.0% (COST $0)
MVE, Incorporated ............................... 30 0
---------
TOTAL INVESTMENTS IN SECURITIES (COST $3,835,783) 3,885,388
---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 59
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
------------------ ---- ---- ------ -----
<S> <C> <C>
SHORT TERM INVESTMENT - 1.1% (COST $45,624)
REPURCHASE AGREEMENT
State Street Bank and Trust Company, 4.00%, to be repurchased at $45,629
on 10/1/96 (collateralized by $51,000 par value U.S. Treasury Note 6.25%
due 8/15/23,
with a value of $46,665) ............................................ $ 45,624
-------------
TOTAL INVESTMENTS (COST $3,881,407*) 95.4% 3,931,012
OTHER ASSETS LESS LIABILITIES 4.6% 191,582
------ -------------
NET ASSETS 100.0% $ 4,122,594
====== =============
</TABLE>
*AT SEPTEMBER 30, 1996, THE AGGREGATE COST OF INVESTMENT SECURITIES FOR INCOME
TAX PURPOSES WAS $3,876,922. NET UNREALIZED APPRECIATION AGGREGATED $54,090,
OF WHICH $63,064 RELATED TO APPRECIATED INVESTMENT SECURITIES AND $8,974
RELATED TO DEPRECIATED INVESTMENT SECURITIES.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 60
SENECA FUNDS
SENECA REAL ESTATE SECURITIES FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
------------------ ------ -----
<S> <C> <C>
COMMON STOCKS - 96.4%
FINANCIAL SERVICES - 11.8%
Federal National Mortgage Association ............. 3,000 $104,625
Thornburg Mortgage Association .................... 3,000 48,750
--------
153,375
--------
HOTELS AND RESTAURANTS - 7.8%
Circus Circus Entertainment (1) ................... 1,000 35,375
ITT Corporation (1) ............................... 1,500 65,437
--------
100,812
--------
REAL ESTATE INVESTMENT TRUSTS - 76.8%
Ambassador Apartments, Incorporated ............... 1,100 19,663
Apartment Investment and Management Company Class A 1,170 24,570
Avalon Properties Incorporated .................... 1,100 25,575
Burnham Pacific Properties ........................ 2,100 24,675
Cali Realty Company ............................... 1,000 27,125
Centerpoint Properties ............................ 1,000 26,875
Del Webb Corporation .............................. 1,100 19,113
Developers Diversified Realty ..................... 1,000 32,125
Equity Residential Properties ..................... 1,000 35,750
Felcor Suite Hotels Incorporated .................. 3,275 105,619
First Industrial Realty Trust Incorporated ........ 4,100 106,088
Gables Residential Trust .......................... 2,121 51,699
Highwoods Properties Incorporated ................. 1,075 32,653
Irvine Apartment Communities Incorporated ......... 2,136 47,259
Kaufman & Broad Home Corporation .................. 1,500 19,500
Liberty Property Trust ............................ 5,150 112,013
Manufactured Home Communities ..................... 2,800 53,900
Pacific Gulf Properties Incorporated .............. 1,050 19,556
Patriot American Hospitality Incorporated ......... 2,080 69,940
Post Properties Incorporated ...................... 1,000 36,625
Security Capital Pacific Trust .................... 1,100 23,237
Simon Debartolo Group, Incorporated ............... 1,115 28,432
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 61
SENECA FUNDS
SENECA REAL ESTATE SECURITIES FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1996
-CONTINUED-
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
------------------ ------ -----
<S> <C> <C>
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
Speiker Properties Incorporated ........................................ 1,000 $ 29,375
Wellsford Residential Properties ....................................... 1,100 24,200
-----------
995,567
-----------
TOTAL COMMON STOCKS (COST $1,185,588) ........................................ 1,249,754
-----------
SHORT TERM INVESTMENT - 5.7% (COST $73,561)
REPURCHASE AGREEMENT
State Street Bank and Trust Company, 4.00%, to be repurchased at $73,569
on 10/1/96 (collateralized by $90,000 par value U.S. Treasury Note 6.25%
due 8/15/23, with a value of $82,350) .................................. 73,561
-----------
TOTAL INVESTMENTS (COST $1,259,149*) ......................................... 102.1% 1,323,315
OTHER ASSETS LESS LIABILITIES ................................................ (2.1)% (27,752)
----------- -----------
NET ASSETS ................................................................... 100.0% $ 4,122,594
=========== ===========
</TABLE>
(1) Non-income producing security.
*At September 30, 1996, the aggregate cost of investment securities for income
tax purposes was $1,263,000. Net unrealized appreciation aggregated $60,315, of
which $70,237 related to appreciated investment securities and $9,922 related to
depreciated investment securities.
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 62
SENECA FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MID-CAP REAL ESTATE
GROWTH "EDGE"(SM) BOND SECURITIES
FUND FUND FUND FUND
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at value
(Note 2) ............................. $11,771,853 $ 7,853,723 $ 3,885,388 $ 1,249,754
Investments in repurchase agreements,
at cost and value ................... 2,614,206 1,885,039 45,624 73,561
Cash ..................................... 5,200 -- -- --
Dividends and interest receivable ........ 6,927 2,722 68,714 8,165
Receivable for securities sold ........... -- 34,091 77,595 104,073
Receivable for Fund shares sold .......... 40,450 -- 72,876 --
Deferred organizational costs (Note 5) ... 64,403 62,038 64,403 64,403
----------- ----------- ----------- -----------
TOTAL ASSETS ........................... 14,503,039 9,837,613 4,214,600 1,499,956
----------- ----------- ----------- -----------
LIABILITIES
Payable for securities purchased ......... 1,058,666 1,005,824 50,000 162,109
Due to custodian ......................... -- -- 695 786
Organizational costs payable to
Investment Manager (Note 5) ....... 24,833 18,212 11,368 15,680
Trustees fees payable (Note 3) ........... 2,496 2,497 2,496 2,496
Distribution fees payable (Note 3) ....... 167 304 45 51
Other accrued expenses ................... 30,951 27,627 27,402 23,271
----------- ----------- ----------- -----------
TOTAL LIABILITIES ...................... 1,117,113 1,054,464 92,006 204,393
----------- ----------- ----------- -----------
NET ASSETS ............................. $13,385,926 $ 8,783,149 $ 4,122,594 $ 1,295,563
=========== =========== =========== ===========
NET ASSETS
Capital paid-in .......................... $11,750,432 $ 7,665,195 $ 4,039,868 $ 1,215,584
Undistributed net investment income ..... 50,611 22,765 19,427 18,381
Accumulated net realized gain (loss) on
investments ......................... 965,464 77,414 13,694 (2,568)
Net unrealized appreciation of investments 619,419 1,017,775 49,605 64,166
----------- ----------- ----------- -----------
NET ASSETS ............................. $13,385,926 $ 8,783,149 $ 4,122,594 $ 1,295,563
=========== =========== =========== ===========
INSTITUTIONAL SHARES:
Net assets ............................. $12,919,525 $ 7,427,656 $ 3,926,664 $ 1,073,080
Total shares outstanding .............. 940,105 496,095 389,207 96,708
NET ASSET VALUE, offering and redemption
price per Institutional share .......... $ 13.74 $ 14.97 $ 10.09 $ 11.10
=========== =========== =========== ===========
ADMINISTRATIVE SHARES:
Net assets ............................. $ 466,401 $ 1,355,493 $ 195,930 $ 222,483
Total shares outstanding .............. 34,222 90,756 19,419 20,085
NET ASSET VALUE, offering and redemption
price per Administrative share ......... $ 13.63 $ 14.94 $ 10.09 $ 11.08
=========== =========== =========== ===========
INVESTMENTS IN SECURITIES, AT COST ....... $11,152,434 $ 6,835,948 $ 3,835,783 $ 1,185,588
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 63
SENECA FUNDS
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED SEPTEMBER 30, 1996*
<TABLE>
<CAPTION>
MID-CAP REAL ESTATE
GROWTH "EDGE"(SM) BOND SECURITIES
FUND FUND FUND FUND
---- ---- ---- ----
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (a) ............................ $ 39,023 $ 3,223 $ -- $ 9,376
Interest ................................. 29,201 23,592 100,397 1,258
----------- ----------- ----------- -----------
TOTAL INCOME ........................... 68,224 26,815 100,397 10,634
----------- ----------- ----------- -----------
EXPENSES
Management fee (Note 3) .................. 30,334 18,471 6,283 1,630
Administrative fee (Note 3) .............. 35,112 34,955 35,001 34,976
Transfer agent fees ...................... 33,009 25,710 23,420 17,821
Custodian fees ........................... 13,381 13,163 12,103 9,150
Distribution fees (Note 3) ............... 228 507 68 78
Registration and filing fees ............. 3,763 2,677 1,590 530
Audit fees ............................... 1,457 1,457 1,457 1,457
Legal fees ............................... 13,750 13,750 13,750 13,750
Trustees fees ............................ 4,996 4,997 4,996 4,996
Amortization of organization expenses
(Note 5) ........................... 24,837 24,702 24,837 24,837
Other .................................... 130 122 130 130
----------- ----------- ----------- -----------
Expenses before waiver
and reimbursement ................... 160,997 140,511 123,635 109,355
Fees waived and expenses reimbursed by ...
Investment Manager (Note 3) ......... (123,564) (117,273) (115,284) (107,126)
Fees paid indirectly (Note 2) ............ (1,535) (1,038) (1,103) (96)
----------- ----------- ----------- -----------
TOTAL EXPENSES ......................... 35,898 22,200 7,248 2,133
----------- ----------- ----------- -----------
NET INVESTMENT INCOME .................. 32,326 4,615 93,149 8,501
----------- ----------- ----------- -----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) on investments .. 965,464 77,414 13,694 (2,568)
Change in net unrealized appreciation
of investments ........................ 619,419 1,017,775 49,605 64,166
----------- ----------- ----------- -----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS ................. 1,584,883 1,095,189 63,299 61,598
----------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .............. $ 1,617,209 $ 1,099,804 $ 156,448 $ 70,099
=========== =========== =========== ===========
(a) Net of foreign withholding taxes of: $ 120 $ 76 $ -- $ --
=========== =========== =========== ===========
</TABLE>
*The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 10, 1996, March 10, 1996, March 7,
1996, and March 12, 1996, respectively.
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 64
SENECA FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED SEPTEMBER 30, 1996*
<TABLE>
<CAPTION>
MID-CAP REAL ESTATE
GROWTH "EDGE"(SM) BOND SECURITIES
FUND FUND FUND FUND
---- ---- ---- ----
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
From operations:
Net investment income ............................... $ 32,326 $ 4,615 $ 93,149 $ 8,501
Net realized gain (loss) on investments ............. 965,464 77,414 13,694 (2,568)
Change in net unrealized appreciation
of investments .................................... 619,419 1,017,775 49,605 64,166
----------- ----------- ----------- -----------
Net increase in net assets
resulting from operations ......................... 1,617,209 1,099,804 156,448 70,099
Dividends to shareholders from net investment income:
Administrative Shares ............................. -- -- (1,994) (1,227)
Institutional Shares .............................. -- -- (90,013) (7,178)
Net increase from Fund share
transactions (Note 6) .......................... 11,743,717 7,658,345 4,033,153 1,208,869
----------- ----------- ----------- -----------
TOTAL INCREASE .................................... 13,360,926 8,758,149 4,097,594 1,270,563
Net Assets
Beginning of period ................................. 25,000 25,000 25,000 25,000
----------- ----------- ----------- -----------
End of period (a) ................................... $13,385,926 $ 8,783,149 $ 4,122,594 $ 1,295,563
=========== =========== =========== ===========
(a) Including undistributed net investment
income ....................................... $ 50,611 $ 22,765 $ 19,427 $ 18,381
</TABLE>
*The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 10, 1996, March 10, 1996, March 7,
1996, and March 12, 1996, respectively.
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 65
SENECA FUNDS - INSTITUTIONAL SHARES
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD ENDED SEPTEMBER 30, 1996*
<TABLE>
<CAPTION>
MID-CAP REAL ESTATE
GROWTH "EDGE"(SM) BOND SECURITIES
FUND FUND FUND FUND
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD $ 10.00 $ 10.00 $ 10.00 $ 10.00
---------------- ---------------- ---------------- ----------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) ....... 0.03 0.01 0.31 0.13
Net Realized and Unrealized Gain
on Investments ................ 3.71 4.96 0.08 1.10
---------------- ---------------- ---------------- ----------------
TOTAL FROM INVESTMENT OPERATIONS 3.74 4.97 0.39 1.23
---------------- ---------------- ---------------- ----------------
Distributions to Shareholders from
Net Investment Income ........... -- -- (0.30) (0.13)
---------------- ---------------- ---------------- ----------------
NET ASSET VALUE AT END OF PERIOD ..... $ 13.74 $ 14.97 $ 10.09 $ 11.10
================ ================ ================ ================
TOTAL RETURN (2) ..................... 37.40% 49.70% 4.02% 12.39%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period .......... $ 12,919,525 $ 7,427,656 $ 3,926,664 $ 1,073,080
Ratio of Operating Expenses to
Average Net Assets (3)(4) .... 0.81% 0.90% 0.56% 1.00%
Ratio of Net Investment Income to
Average Net Assets (3) ....... 0.76% 0.27% 7.54% 4.39%
Portfolio Turnover Rate ......... 87.66% 72.34% 52.82% 30.70%
Average Commission Rate (5) ..... $ 0.0598 $ 0.0595 N/A $ 0.0564
</TABLE>
*The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 10, 1996, March 10, 1996, March 7,
1996, and March 12, 1996, respectively.
(1) Net investment income is after waiver of certain fees and reimbursement of
certain expenses by the Investment Manager (see Note 3 to the financial
statements). If the Investment Manager had not waived fees and reimbursed
expenses, net investment income (loss) per share would have been $(0.09) for
the Growth Fund; $(0.19) for Mid-Cap "EDGE"SM Fund; $(0.05) for the Bond
Fund; and $(1.45) for the Real Estate Securities Fund.
(2) Total return represents total return for the period indicated. The total
return would have been lower if certain fees and expenses had not been
waived or reimbursed by the advisor.
(3) Annualized.
(4) If the Investment Manager had not waived fees and reimbursed expenses, the
ratio of operating expenses to average net assets would have been 3.49% for
the Growth Fund; 5.73% for Mid-Cap "EDGE"SM Fund; 9.31% for the Bond Fund;
and 53.04% for the Real Estate Securities Fund.
(5) The average commission paid is applicable for the Funds that invest greater
than 10% of average net assets in equity securities transactions on which
commissions are charged.
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 66
SENECA FUNDS - ADMINISTRATIVE SHARES
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD ENDED SEPTEMBER 30, 1996*
<TABLE>
<CAPTION>
MID-CAP REAL ESTATE
GROWTH "EDGE"(SM) BOND SECURITIES
FUND FUND FUND FUND
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD ...... $ 10.00 $ 10.00 $ 10.00 $ 10.00
--------------- --------------- --------------- ---------------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss) (1) ....... -- (0.01) 0.29 0.13
Net Realized and Unrealized Gain
on Investments ...................... 3.63 4.94 0.09 1.08
--------------- --------------- --------------- ---------------
TOTAL FROM INVESTMENT OPERATIONS ....... 3.63 4.93 0.39 1.21
--------------- --------------- --------------- ---------------
Distributions to Shareholders from
Net Investment Income .................. -- -- (0.29) (0.13)
--------------- --------------- --------------- ---------------
NET ASSET VALUE AT END OF PERIOD ............ $ 13.63 $ 14.93 $ 10.09 $ 11.08
=============== =============== =============== ===============
TOTAL RETURN (2) ............................ 36.30% 49.30% 3.86% 12.22%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period ............ $ 466,401 $ 1,355,493 $ 195,930 $ 222,483
Ratio of Operating Expenses to
Average Net Assets (3) (4) .......... 1.46% 1.55% 1.21% 1.65%
Ratio of Net Investment Income (Loss) to
Average Net Assets (3) .............. 0.16% (0.46)% 6.46% 4.61%
Portfolio Turnover Rate ................ 87.66% 72.34% 52.82% 30.70%
Average Commission Rate (5) ............ $ 0.0598 $ 0.0595 N/A $ 0.0564
</TABLE>
*The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 10, 1996, March 10, 1996, March 7,
1996, and March 12, 1996, respectively.
(1)Net investment income (loss) is after waiver of certain fees and
reimbursement of certain expenses by the Investment Manager (see Note 3 to
the financial statements). If the Investment Manager had not waived fees and
reimbursed expenses, net investment income (loss) per share would have been
$(0.34) for the Growth Fund; $(0.20) for Mid-Cap "EDGE"SM Fund; $(1.41) for
the Bond Fund; and $(1.96) for the Real Estate Securities Fund.
(2) Total return represents total return for the period indicated. The total
return would have been lower if certain fees and expenses had not been
waived or reimbursed by the advisor.
(3) Annualized.
(4) If the Investment Manager had not waived fees and reimbursed expenses, the
ratio of operating expenses to average net assets would have been 14.01% for
the Growth Fund; 9.73% for Mid-Cap "EDGE" SM Fund; 39.23% for the Bond Fund;
and 73.01% for the Real Estate Securities Fund.
(5) The average commission paid is applicable for the Funds that invest greater
than 10% of average net assets in equity securities transactions on which
commissions are charged.
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 67
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 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 was
organized as a Delaware business trust on December 18, 1995. The Trust consists
of four series: Seneca Growth Fund, Seneca Mid-Cap "EDGE"SM 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.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS: Equity securities traded on a national securities
exchange are valued at their last sales price on the exchange on which they are
traded most extensively; or if no sales are reported, at the mean between the
most recent high bid and the most recent low asked quotations (the "Calculated
Mean") on such exchange. Securities traded on the National Association of
Securities Dealers Automated Quotation ("Nasdaq") system will be valued at the
most recent sales price reported on such system on the valuation date or, if
there are no sales reported, the Calculated Mean based on quotations reported on
Nasdaq. Securities not quoted on Nasdaq but traded in an over-the-counter market
will be valued at the most recent sale price if the sales price for any sales of
the security on the valuation date are reported on such market or, if there are
no such sales, the Calculated Mean based on quotations reported on such market.
In each case, if there is no Calculated Mean, the value shall be the most recent
bid quotation on the relevant market. Fixed income securities, other than those
having a maturity of 60 days or less, are valued on the basis of quotes obtained
from brokers or pricing services. Short-term investments having a maturity of 60
days or less will be valued at amortized cost. If, in the Investment Manager's
opinion, the fair market value of an investment cannot be determined pursuant to
the foregoing procedures, the value will be an amount that, in the opinion of
the Trustees, represents the fair market value determined based on all available
information.
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. Because the security constitutes collateral for the repurchase
obligation, a repurchase agreement can be considered a collateralized loan.
Security pledged as collateral for the repurchase agreement are held by the
Fund's Custodian until maturity date of the repurchase agreement. The Fund's
risk is the ability of the seller to pay the agreed-upon price on delivery date.
The Trustees have established criteria to evaluate the creditworthiness of
parties with whom the Funds may enter into repurchase agreements. The Funds
limit the repurchase agreements to securities issued by the United States
Government, its agencies, and its instrumentalities. The market value of the
underlying security throughout the term of the agreement will always equal or
exceed the agreed-upon repurchase price.
SECURITY TRANSACTIONS, INVESTMENT INCOME and EXPENSES: Investment security
transactions are recorded as of trade date. Realized gains and losses on
investment security sales are determined on the basis of identified cost.
Dividend income is recorded on the ex-dividend date. Interest income and
expenses are recorded daily on an accrual basis. Fund expenses not directly
attributable to a specific fund are allocated evenly among all funds. Fund
expenses that are not related to the distribution of shares of a particular
class or to services provided specifically to a particular class are allocated
between the classes on the basis of relative average daily net assets of each
class. Expenses that relate to the distribution or services provided to a
particular class are allocated to that class. Investment income and realized and
unrealized gains/losses are allocated between the classes on the basis of net
assets of each class.
21
<PAGE> 68
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(CONTINUED)
DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income on shares of
the Seneca Bond Fund are determined at the class level and are declared and paid
monthly. Dividends from net investment income on shares of the Seneca Real
Estate Securities Fund are determined at the class level and are declared and
paid quarterly. Dividends from net investment income on shares of the Seneca
Growth Fund and Seneca Mid-Cap "EDGE"SM Fund are determined at the class level
and are declared and paid annually. Each Fund distributes net realized capital
gains, if any, at least annually.
FEDERAL INCOME TAXES: Each Fund intends to qualify as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended, by
distributing to shareholders substantially all of its taxable income. Therefore,
no Federal income or excise tax provision is required. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences are
primarily due to differing treatments for market discount, losses deferred due
to wash sales and excise tax regulations.
Income and capital gain distribution requirements are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatment for organizational
expenses. Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to capital paid-in. Undistributed
net investment income and accumulated net realized gain (loss) may include
temporary book and tax basis differences which will reverse in a subsequent
period.
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 and the reported amounts of income and expenses
during the reporting period. Actual results could differ from these estimates.
FEES PAID INDIRECTLY: Funds leaving excess cash in demand deposit accounts may
receive credits which are available to offset custody expenses. The Statements
of Operations report gross custody expense, and reflect the amount of such
credits as a reduction in total expenses.
NOTE 3 - AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
The Trust has an Investment Management Agreement with GMG/Seneca Capital
Management LLC ("GMG/Seneca"), under which GMG/Seneca manages the investments of
each Fund. For its services, GMG/Seneca 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
"EDGE"(SM) Fund, Bond Fund, and Real Estate Securities Fund, respectively.
The Trust has a Distribution and Services Agreement (the "Agreement") with
Genesis Merchant Group Securities LLC ("GMG Securities") and Seneca Distributors
LLC ("Seneca Distributors"), affiliates of GMG/Seneca, under which GMG
Securities and Seneca Distributors serve as the distributors and principal
underwriters of each Fund's shares. Pursuant to the Agreement, GMG Securities
and Seneca Distributors receive an aggregate 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.
22
<PAGE> 69
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(CONTINUED)
The Trust has an Administrative Services Agreement with GMG/Seneca pursuant to
which GMG/Seneca is responsible for the day-to-day administrative functions of
the Trust. For these services, GMG/Seneca receives a fee from each Fund at an
annual rate of 0.08% of the first $125 million, 0.06% of the next $125 million,
and 0.04% thereafter, subject to certain minimums which GMG/Seneca has agreed to
waive through September 30, 1996. GMG/Seneca has entered into an agreement with
State Street Bank & Trust Company ("State Street") to provide most of the
administrative functions for the Trust.
GMG/Seneca has agreed to voluntarily waive its Management and Administrative
fees and reimburse other operating expenses of each Fund (other than certain
extraordinary or nonrecurring expenses) until the earlier of March 31, 1997, or
such time as the Trust's aggregate assets exceed $60 million, to the extent
necessary to prevent the expenses for each Fund and class from exceeding the
following percentages of average daily assets:
<TABLE>
<CAPTION>
FUND ADMINISTRATIVE CLASS INSTITUTIONAL CLASS
---- -------------------- -------------------
<S> <C> <C>
Seneca Growth 1.50 % 0.85 %
Seneca Mid-Cap "EDGE"(SM) 1.60 0.95
Seneca Bond 1.30 0.65
Seneca Real Estate Securities 1.70 1.05
</TABLE>
For the period ended September 30, 1996, GMG/Seneca waived and reimbursed
expenses as follows:
<TABLE>
<CAPTION>
MANAGEMENT ADMINISTRATIVE EXPENSES
FEES WAIVED FEES WAIVED REIMBURSED TOTAL
----------- ----------- ---------- -----
<S> <C> <C> <C> <C>
Seneca Growth $ 30,334 $ 35,112 $ 58,118 $ 123,564
Seneca Mid-Cap "EDGE"(SM) 18,471 34,955 63,847 117,273
Seneca Bond 6,283 35,001 74,000 115,284
Seneca Real Estate Securities 1,630 34,976 70,520 107,126
</TABLE>
Each Trustee of the Trust who is not an interested person receives a fee of
$2,500 for each regular, quarterly meeting attended and is reimbursed for
expenses incurred in connection with such attendance.
NOTE 4 - INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of investments, excluding short
term securities, for the Trust, for the period ended September 30, 1996 were as
follows:
23
<PAGE> 70
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(CONTINUED)
<TABLE>
<CAPTION>
NON- NON-
GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT
PURCHASES PURCHASES SALES SALES
--------- --------- ----- -----
<S> <C> <C> <C> <C>
Seneca Growth Fund.......................... $ 16,372,674 $ - $ 6,183,702 $ -
Seneca Mid-Cap "EDGE"(SM) Fund.............. 9,342,337 - 2,583,204 -
Seneca Bond Fund............................ 4,716,591 404,211 1,096,802 100,400
Seneca Real Estate Securities Fund.......... 1,213,804 92,765 113,636 -
</TABLE>
NOTE 5 - ORGANIZATION COSTS
The Trust bears all costs in connection with its organization. The organization
costs are amortized on a straight-line basis over a period of sixty months from
the commencement of investment operations. The costs associated with 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 unamortized organization and state registration costs.
NOTE 6 - CAPITAL STOCK TRANSACTIONS
Capital stock transactions for the period from commencement of investment
operations through September 30, 1996 are as follows:
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES ADMINISTRATIVE SHARES
Shares Dollars Shares Dollars
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
GROWTH FUND (1)
Shares sold ... 944,161 $ 11,381,266 55,186 $ 721,427
Shares redeemed (5,306) (70,645) (22,214) (288,331)
------------ ------------ ------------ ------------
Net increase .. 938,855 $ 11,310,621 32,972 $ 433,096
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES ADMINISTRATIVE SHARES
Shares Dollars Shares Dollars
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
MID-CAP "EDGE"(SM) FUND (1)
Shares sold ........ 509,221 $ 6,613,122 104,231 $ 1,422,572
Shares redeemed .... (14,376) (188,718) (14,725) (188,631)
----------- ----------- ----------- -----------
Net increase ....... 494,845 $ 6,424,404 89,506 $ 1,233,941
=========== =========== =========== ===========
</TABLE>
24
<PAGE> 71
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(CONTINUED)
NOTE 6- CAPITAL STOCK TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES ADMINISTRATIVE SHARES
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
BOND FUND (2)
Shares sold........................ 385,776 $3,831,086 18,065 $179,966
Shares issued upon reinvestment of
dividends........................ 8,635 85,975 104 1,031
Shares redeemed.................... (6,454) (64,905) - -
------------ -------------- ----------- ------------
Net increase....................... 387,957 $3,852,156 18,169 $180,997
=========== ============= =========== ============
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL SHARES ADMINISTRATIVE SHARES
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
REAL ESTATE SECURITIES FUND (3)
Shares sold........................ 94,875 $1,001,801 18,779 $200,099
Shares issued upon reinvestment of
dividends........................ 583 6,370 56 599
Shares redeemed.................... - - - -
----------- ------------- ----------- ------------
Net increase....................... 95,458 $1,008,171 18,835 $200,698
=========== ============= =========== ============
</TABLE>
(1) Fund commenced investment operations on March 10, 1996.
(2) Fund commenced investment operations on March 7, 1996.
(3) Fund commenced investment operations on March 12, 1996.
NOTE 7 - SHARES OF BENEFICIAL INTEREST
At September 30, 1996, certain shareholders were record owners of more than 10%
of total outstanding shares of the following Funds:
<TABLE>
<CAPTION>
NAME OF PORTFOLIO NUMBER OF PERCENTAGE OF
SHAREHOLDERS SHARES OWNED
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Growth Fund 1 18%
Mid-Cap "EDGE"(SM) Fund 1 22%
Bond Fund 1 31%
Real Estate Securities Fund 3 54%
</TABLE>
25
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and the Shareholders of Seneca Funds:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments, of Seneca Growth Fund, Seneca Mid-Cap "EDGE"(SM)
Fund, Seneca Bond Fund, and Seneca Real Estate Securities Funds (the Funds) as
of September 30, 1996, and the related statements of operations, the statements
of changes in net assets, and the financial highlights for the periods ended
September 30, 1996. These financial statements and financial highlights are the
responsibility of the Funds' management. Our responsibility is to express an
opinion on these financial statements and financial highlights 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 and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at
September 30, 1996 by correspondence with the custodian and brokers. 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 financial statements and financial highlights present
fairly, in all material respects, the financial position of the Funds as of
September 30, 1996, the results of their operations, the changes in their net
assets, and their financial highlights for the periods then ended in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Francisco, California
October 22, 1996
26
<PAGE> 73
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
27
<PAGE> 74
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.
28
<PAGE> 75
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.
29
