As filed with the Securities and Exchange Commission on January 28, 1998
File No. 33-65137
File No. 811-7455
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT
Under the
SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post-Effective Amendment No. 4 [X]
and/or
REGISTRATION STATEMENT
Under the
INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 4 [X]
(Check appropriate box or boxes)
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SENECA FUNDS
(Exact Name of Registrant as Specified in Charter)
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909 Montgomery Street, San Francisco, California 94133
(Address of Principal Executive Office) (Zip Code)
(415) 677-1500
(Registrant's Telephone Number, Including Area Code)
SANDRA J. WESTHOFF
Chief Administrative Officer, GMG/Seneca Capital Management, L.P.
909 Montgomery Street, San Francisco, California 94133
(Name and Address of Agent for Service)
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It is proposed that this filing will become effective (check
appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on January 30, 1998 or at such later date as the Commission
shall order pursuant to paragraph (a)(3)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
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Copy to:
Andre W. Brewster, Esq.
Howard, Rice, Nemerovski, Canady, Falk & Rabkin
A Professional Corporation
Three Embarcadero Center
San Francisco, CA 94111
(415) 434-1600
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<PAGE>
SENECA FUNDS
Seneca Growth Fund
Seneca Mid-Cap "EDGE"(SM) Fund
Seneca Bond Fund
Seneca Real Estate Securities Fund
Cross-Reference Sheet Showing Location in Prospectus
and Statement of Additional Information of
Information Required by Items of the Registration Form
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
N-1A Location in
Item No. Item Registration Statement
- ---------- ----------------------------------------------------- ---------------------------------------------------
<S> <C> <C>
Part A:
Information Required in Prospectus
1. Cover Page Cover Page
2. Synopsis Introduction; Fund Expenses
3. Condensed Financial Information Financial Highlights Table
4. General Description of Registrant Introduction; Management; Investment Practices and
Risk Considerations; The Seneca Funds in
Detail; General Information
5. Management of the Fund Fund Expenses; Management; Investment Adviser
and Administrator; General Information
5A. Management's Discussion of Fund Performance Performance Information
6. Capital Stock and Other Securities Dividends and Capital Gains; General Information
7. Purchase of Securities Being Offered Purhase of Shares;
8. Redemption or Repurchase Redemption of Shares
9. Pending Legal Proceedings Not Applicable
Part B:
Information Required in Statement of Additional Information
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History The Trust
13. Investment Objectives and Policies Investment Objectives and Policies; Investment
Restrictions; Portfolio Turnover
14. Management of the Fund Trustees and Officers; Organization
15. Control Persons and Principal Holders of Securities Principal Shareholders and Control Persons;
Trustees and Officers
16. Investment Advisory and Other Services Advisory and Administrative Services
17. Brokerage Allocation and Other Practices Portfolio Brokerage; Portfolio Turnover
18. Capital Stock and Other Securities Organization
19. Purchase, Redemption and Pricing of Securities Net Asset Value
Being Offered
20. Tax Status Dividends, Distributions and Tax Status
21. Underwriters Advisory and Administrative Services
22. Calculation of Performance Data Calculation of the Funds' Returns
23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C of this Registration Statement.
<PAGE>
[FRONT COVER]
P R O S P E C T U S
January 28, 1998
S E N E C A
F U N D S
<PAGE>
SENECA GROWTH FUND
SENECA MID-CAP "EDGE"(SM) FUND
SENECA BOND FUND
SENECA REAL ESTATE SECURITIES FUND
PROSPECTUS
January 28, 1998
Seneca Growth Fund seeks capital appreciation primarily through
investments in equity securities of companies that, in the Investment Adviser's
opinion, have the potential for above average market appreciation. Production
of income is incidental to this objective. The Fund seeks to outperform the
Standard & Poor's Index of 500 Stocks.
Seneca Mid-Cap "EDGE"(SM) Fund seeks capital appreciation primarily
through investments in equity securities of companies that, in the Investment
Adviser's opinion, have the potential for above average market appreciation.
Production of income is incidental to this objective. The Fund invests primarily
in companies with market capitalizations between $500 million and $5 billion.
The Fund seeks to outperform the Standard & Poor's Mid-Cap 400 Index.
Seneca Bond Fund seeks both current income and capital appreciation
primarily by investing in a diversified portfolio of government and corporate
bonds and other debt securities. The Fund seeks a total return higher than that
of the Lehman Brothers Government/Corporate Index.
Seneca Real Estate Securities Fund seeks a high total return through both
long-term capital appreciation and current income from investments related to
United States real estate. The Fund invests primarily in securities of issuers
that are engaged principally in or whose businesses relate to ownership and
operation of real estate in the United States.
There can be no assurance that any of the Funds will achieve its
investment objectives or succeed in outperforming the indices described above.
For information about some of the principal risks involved in investments in
the Funds, see "Investment Practices and Risk Considerations."
This Prospectus sets forth concisely the information about the Funds that
a prospective investor should know before investing. No dealer, salesperson or
any other person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having
been authorized by the Funds, Adviser or Distributor. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby in any state in which, or to any person to whom, it
is unlawful to make such offer. Neither the delivery of this Prospectus nor any
sale hereunder shall, under any circumstances, create any implication that
information herein is correct at any time subsequent to its date. Investors
should read and retain this Prospectus for future reference. Additional
information about the Funds and the Trust is contained in the Statement of
Additional Information ("SAI"), dated January 28, 1998, which has been filed
with the Securities and Exchange Commission (the "Commission") and is available
upon request at no charge by calling (800) 243-4361 or by writing to Phoenix
Equity Planning Corporation at 100 Bright Meadow Boulevard, P.O. Box 2200,
Enfield, Connecticut 06083-2200. The Statement of Additional Information is
incorporated herein by reference. The Commission maintains a Web site
(http://www.sec.gov) that contains this Prospectus, the Statement of Additional
Information, material incorporated by reference, and other information
regarding registrants that file electronically with the Commission.
Fund shares are not deposits or obligations of, or endorsed or guaranteed
by, any bank or other financial institution, and they are not insured by the
Federal Deposit Insurance Corporation or any other agency of the United States
Government or any other governmental subdivision.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
INTRODUCTION ................................................. 3
FUND EXPENSES ................................................ 4
FINANCIAL HIGHLIGHTS ......................................... 6
PERFORMANCE INFORMATION ...................................... 8
MANAGEMENT ................................................... 8
THE SENECA FUNDS IN DETAIL ................................... 9
SENECA GROWTH FUND AND SENECA MID-CAP "EDGE"(SM) FUND ........ 9
SENECA BOND FUND ............................................. 10
SENECA REAL ESTATE SECURITIES FUND ........................... 11
INVESTMENT PRACTICES AND RISK CONSIDERATIONS ................. 11
PURCHASE OF SHARES ........................................... 15
REDEMPTION OF SHARES ......................................... 17
NET ASSET VALUE .............................................. 18
PORTFOLIO TRANSACTIONS ....................................... 18
DIVIDENDS AND CAPITAL GAINS .................................. 19
INCOME TAX CONSIDERATIONS .................................... 19
INVESTMENT ADVISER AND ADMINISTRATOR ......................... 20
GENERAL INFORMATION .......................................... 21
</TABLE>
2
<PAGE>
INTRODUCTION
This Prospectus describes certain of the shares offered by and the
operations of the Seneca Funds (the "Trust"). The Trust is a diversified,
open-end management investment company established as a Delaware business
trust. Shares of the Trust are divided into four series, each a "Fund" and
collectively the "Funds." Each Fund has a different investment objective, and
is designed to meet different investment needs.
The Investment Adviser
GMG/Seneca Capital Management, L.P. ("GMG/Seneca" or the "Investment
Adviser") serves as investment adviser to the Seneca Funds. See "Management"
for a description of the Investment Management Agreement and management fees.
Distributors and Distribution Plan
Genesis Merchant Group Securities LLC and Seneca Distributors, LLC (the
"Distributors") serve as national distributors of the Funds' shares. The Funds
have adopted a distribution plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940, as amended (the "1940 Act"), for the Administrative Class
of each of the Funds. Pursuant to the distribution plan, the Funds pay the
Distributors 0.25% of the average daily net assets of each Fund for
distribution expenditures incurred in connection with the sale and promotion of
each Fund.
Purchase of Shares
The Seneca Growth Fund, Seneca Mid-Cap "EDGE"(SM) Fund, and Seneca Real
Estate Securities Fund each offers two classes of shares: Administrative Shares
and Institutional Shares. The Seneca Bond Fund currently offers only
Institutional Shares. Administrative Shares are offered primarily to
participant-directed employee benefit plans and to investors purchasing through
accounts maintained with broker-dealers and other financial service companies.
Institutional Shares are offered primarily to institutional investors such as
pension and profit sharing plans, other employee benefit trusts, investment
advisers, endowments, foundations and corporations ("Institutional Investors").
Shares of each Class represent an identical interest in the investment
portfolio of a Fund and have the same rights. For more information on fees and
charges applicable for each Fund and Class, refer to "Fund Expenses" and
"Purchase of Shares." Completed applications for the purchase of shares should
be mailed to the Seneca Funds, c/o State Street Bank and Trust Company, P.O.
Box 8301, Boston, MA 02266-8301 ("State Street").
Minimum Initial and Subsequent Investments
The minimum initial investment for purchases of Administrative Shares is
$1,000 and the minimum subsequent investment is $250. Exceptions to the minimum
and subsequent investment amounts are available under certain circumstances.
The minimum initial investment for purchases of Institutional Shares is
$250,000 except for the Seneca Bond Fund which has a minimum initial investment
of $10,000. The minimum subsequent investment is $10,000 except for the Seneca
Bond Fund which has a minimum subsequent investment of $1,000. See "Purchase of
Shares."
Redemption of Shares
Each Class of Shares of a Fund may be redeemed at any time at the net
asset value per share next computed after receipt of a redemption request by
State Street. See "How to Redeem Shares."
Risk Factors
There can be no assurances that a Fund will achieve its investment
objectives. The net asset value of a Fund's shares will fluctuate significantly
in response to changes in market and economic conditions, as well as the
financial condition and prospects of issuers in which each Fund invests. See
"Investment Practices and Risk Considerations" for more information on relevant
risks.
Pending Changes
Subject to approval of Trust shareholders, the Funds expect to enter into
new investment management agreements with advisory affiliates of Phoenix Duff &
Phelps Corporation ("PDP"). At the same time, it is anticipated that the Trust
will enter into new distribution arrangements with another affiliate of PDP,
establish new classes of shares, and make other related changes. These changes
are not expected to have a material effect on the management of the Funds'
portfolios, but may otherwise affect an investment in the shares. See
"Management," "Investment Adviser and Administrator" and "General Information."
The Trust has filed a preliminary proxy statement with the Commission that
provides additional details. At such time as the Trust files the definitive
proxy statement, the Trust will make available copies of that proxy statement
upon request.
3
<PAGE>
FUND EXPENSES
The following table illustrates all fees and expenses a shareholder is
expected to incur. The expenses below are for the fiscal year ended September
30, 1997.
<TABLE>
<CAPTION>
Administrative Shares
-------------------------------------------------------
Seneca Seneca Mid-Cap Seneca Real
Growth "EDGE"(SM) Estate Securities
<S> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None None None
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested Dividends None None None
Deferred Sales Load (as a percentage of original purchase price or None None None
redemption proceeds, as applicable)
Early Withdrawal Fee(1) 1.00% 1.00% 1.00%
Exchange Fee None None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.70% 0.80% 0.85%
12b-1 Fees(2) 0.25% 0.25% 0.25%
Other Expenses (After Expense Reimbursement) 1.53%(3) 1.32%(4) 1.86%(6)
--------- --------- ---------
Total Fund Operating Expenses 2.48% 2.37% 2.91%
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Institutional Shares
---------------------------
Seneca Seneca Mid-Cap
Growth "EDGE"(SM)
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None None
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load (as a percentage of original purchase price or None None
redemption proceeds, as applicable)
Early Withdrawal Fee(1) 1.00% 1.00%
Exchange Fee None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.70% 0.80%
12b-1 Fees(2) None None
Other Expenses (After Expense Reimbursement) 0.82% 0.94%(4)
----- ---------
Total Fund Operating Expenses 1.52% 1.74%
===== =========
<CAPTION>
Seneca Real Seneca
Estate Securities Bond
<S> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None None
(as a percentage of offering price)
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load (as a percentage of original purchase price or None None
redemption proceeds, as applicable)
Early Withdrawal Fee(1) 1.00% 1.00%
Exchange Fee None None
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management Fees 0.85% 0.50%
12b-1 Fees(2) None None
Other Expenses (After Expense Reimbursement) 1.14%(6) 1.03%(5)
--------- ---------
Total Fund Operating Expenses 1.99% 1.53%
========= =========
</TABLE>
- -----------
(1) Applies only to redemptions (including by exchanges) of shares held less
than 90 days. The fee is paid to the Fund and is intended to protect
long-term investors from the cost of frequent investments and redemptions
by short-term investors. See "Redemption of Shares."
(2) "12b-1 Fees" represent an asset based sales charge that, for long term
shareholders, may be higher than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. ("NASD")
(3) The Investment Adviser and the proposed new investment advisers have agreed
to reimburse the Growth Fund for the amount by which the operating
expenses of Administrative Shares and Institutional Shares exceed 2.55%
and 1.95%, respectively, of the average net assets through the fiscal year
ended September 30, 1998. Total Fund Operating Expenses for Administrative
and Institutional Shares would have been 2.63% and 1.52%, respectively,
and Other Expenses would have been 1.68% and 0.82%, respectively, absent
such waiver or reimbursement for the fiscal year ended September 30, 1997.
(4) The Investment Adviser and the proposed new investment advisers have agreed
to reimburse the Mid-Cap "EDGE"(SM) Fund for the amount by which the
operating expenses of Administrative shares and Institutional shares
exceed 2.70% and 2.10%, respectively, of the average net assets through
the fiscal year ended September 30, 1998. Total Fund Operating Expenses
for Administrative and Institutional shares would have been 4.32% and
2.77%, respectively, and Other Expenses would have been 3.27% and 1.97%,
respectively, absent such waiver or reimbursement for the fiscal year
ended September 30, 1997.
(5) The Investment Adviser and the proposed new investment advisers have agreed
to reimburse the Bond Fund for the amount by which the operating expenses
of Institutional shares exceed 1.85% of the average net assets through the
fiscal year ended September 30, 1998. Total Fund Operating Expenses for
Institutional shares would have been 3.41% and Other Expenses would have
been 2.91% absent such waiver or reimbursement for the fiscal year ended
September 30, 1997.
(6) The Investment Adviser and the proposed new investment advisers have agreed
to reimburse the Real Estate Securities Fund for the amount by which the
operating expenses of Administrative shares and Institutional shares
exceed 3.05% and 2.35%, respectively, of the average net assets through
the fiscal year ended September 30, 1998. Total Fund Operating Expenses
for Administrative and Institutional shares would have been 3.79% and
1.99%, respectively, and Other Expenses would have been 2.69% and 1.14%,
respectively, absent such waiver or reimbursement for the fiscal year
ended September 30, 1997.
4
<PAGE>
Example:
<TABLE>
<CAPTION>
Cumulative Expenses Paid for the Period
1 Year 3 Years 5 Years 10 Years
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a hypothetical $1,000
investment assuming (1) a 5% annual return and (2) redemption at the
end of each time period:
Seneca Growth Fund
Institutional Shares 16 50 85 186
Administrative Shares 26 80 137 290
Seneca Mid-Cap "EDGE"(SM) Fund
Institutional Shares 18 57 97 211
Administrative Shares 25 77 131 279
Seneca Bond Fund
Institutional Shares 16 50 86 188
Seneca Real Estate Securities Fund
Institutional Shares 21 65 111 239
Administrative Shares 31 93 159 334
</TABLE>
The purpose of the table above is to help the investor understand the
various costs and expenses that the investor will bear directly or indirectly.
The Example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown. See
"Management" and "Purchase of Shares."
5
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights covering the periods from commencement
of operations of each Fund through September 30, 1997 have been audited by
Deloitte & Touche LLP, independent auditors, whose report thereon appears in
the Trust's Annual Report. The financial statements and financial highlights
are incorporated by reference into the SAI. The Annual Report contains
additional performance information and will be made available upon request and
without charge.
Seneca Funds--Institutional Shares
(selected data for a share outstanding throughout the indicated period)
<TABLE>
<CAPTION>
Real Estate
Bond Fund Securities Fund
--------------------------------- ---------------------------------
Year Period Year Period
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996* 1997 1996*
--------------- ------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period ..... $ 10.09 $ 10.00 $ 11.10 $ 10.00
--------- --------- ---------- ---------
Income from Investment Operations:
Net Investment Income (Loss)(1) ........... 0.62 0.31 0.13 0.13
Net Realized and Unrealized Gain on
Investments ............................... 0.47 0.08 3.77 1.10
--------- --------- ---------- ---------
Total from Investment Operations ......... 1.09 0.39 3.90 1.23
--------- --------- ---------- ---------
Distributions to Shareholders from
Net Investment Income ..................... (0.69) (0.30) (0.28) (0.13)
Net Realized Gains ........................ (0.02) -- (0.01) --
---------- --------- ----------- ---------
Total Distribution ....................... (0.71) (0.30) ( 0.29) (0.13)
---------- --------- ----------- ---------
Net Asset Value at End of Period ........... $ 10.47 $ 10.09 $ 14.71 $11.10
========== ========= =========== =========
Total Return(2) ............................ 11.26% 4.02% 35.44% 12.39%
Ratios & Supplemental Data
Net Assets at End of Period ............... $8,922,161 $3,926,664 $28,192,515 $1,073,080
Ratio of Operating Expenses to Average
Net Assets ................................ 1.53% 0.56%(3) 1.99% 1.00%(3)
Ratio of Operating Expenses to Average
Net Assets(4) ............................. 3.41% 9.31%(3) 1.99% 53.04%(3)
Ratio of Net Investment Income
(Loss) to Average Net Assets .............. 6.31% 7.54%(3) 2.38% 4.39%(3)
Portfolio Turnover Rate ................... 99.68% 52.82% 75.68% 30.70%
Average Commission Rate(5) ................ N/A N/A $ 0.0559 $0.0564
<CAPTION>
Mid-Cap
Growth Fund "EDGE"(SM) Fund
---------------------------------- ---------------------------------
Year Period Year Period
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996* 1997 1996*
--------------- ------------------ --------------- -----------------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period ..... $ 13.74 $ 10.00 $ 14.97 $ 10.00
---------- ---------- --------- ---------
Income from Investment Operations:
Net Investment Income (Loss)(1) ........... 0.03 0.03 (0.17) 0.01
Net Realized and Unrealized Gain on
Investments ............................... 3.50 3.71 1.84 4.96
---------- ---------- --------- ---------
Total from Investment Operations ......... 3.53 3.74 1.67 4.97
---------- ---------- --------- ---------
Distributions to Shareholders from
Net Investment Income ..................... (0.07) -- (0.07) --
Net Realized Gains ........................ (0.77) -- (0.10) --
----------- ---------- --------- ---------
Total Distribution ....................... (0.84) -- (0.17) --
----------- ---------- --------- ---------
Net Asset Value at End of Period ........... $ 16.43 $ 13.74 $ 16.47 $ 14.97
=========== ========== ========= =========
Total Return(2) ............................ 27.27% 37.40% 11.39% 49.70%
Ratios & Supplemental Data
Net Assets at End of Period ...............$34,092,888 $12,919,525 $9,390,224 $7,427,656
Ratio of Operating Expenses to Average
Net Assets ................................ 1.52% 0.81%(3) 1.74% 0.90%(3)
Ratio of Operating Expenses to Average
Net Assets(4) ............................. 1.52% 3.49%(3) 2.77% 5.73%(3)
Ratio of Net Investment Income
(Loss) to Average Net Assets .............. 0.31% 0.76%(3) (0.97)% 0.27%(3)
Portfolio Turnover Rate ................... 145.69% 87.66% 283.60% 72.34%
Average Commission Rate(5) ................ $0.0595 $0.0598 $0.0580 $ 0.0595
</TABLE>
* The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 8, 1996, March 8, 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 Adviser. If the
Investment Adviser had not waived fees and reimbursed expenses, net
investment income (loss) per share would have been as follows for the year
ended September 30, 1997 and the period ended September 30, 1996,
respectively: $0.47 and $(0.05) for the Bond Fund; $0.13 and $(1.45) for
the Real Estate Securities Fund; $0.03 and $(0.09) for the Growth Fund;
$(0.33) and $(0.19) for the Mid-Cap "Edge"(SM) 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 Investment Adviser.
(3) Annualized.
(4) If the Investment Adviser had not waived fees and reimbursed expenses, the
ratio of operating expenses to average net assets would have been as indicated.
(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.
6
<PAGE>
Seneca Funds--Administrative Shares (selected data for a share outstanding
throughout the indicated period)
<TABLE>
<CAPTION>
Real Estate
Bond Fund* Securities Fund
--------------- ------------------------------
Period Year Period
Ended Ended Ended
September 30, September 30 September 30,
1996** 1997 1996*
--------------- -------------- ---------------
<S> <C> <C> <C>
Net Asset Value at Beginning of Period ...... $ 10.00 $ 11.08 $ 10.00
--------- --------- --------
Income from Investment Operations:
Net Investment Income (Loss)(1) ............ 0.29 0.03 0.13
Net Realized and Unrealized Gain on
Investments ................................ 0.09 3.78 1.08
--------- --------- --------
Total from Investment Operations .......... 0.38 3.81 1.21
--------- --------- --------
Distributions to Shareholders from
Net Investment Income ...................... (0.29) (0.20) (0.13)
Net Realized Gains ......................... -- (0.01) --
--------- ---------- ---------
Total Distribution ........................ (0.29) (0.21) (0.13)
--------- ---------- ---------
Net Asset Value at End of Period ............ $ 10.09 $ 14.68 $ 11.08
========= ========== =========
Total Return(2) ............................. 3.86% 34.54% 12.22%
Ratios & Supplemental Data
Net Assets at End of Period ................ $ 195,930 $3,175,932 $ 222,483
Ratio of Operating Expenses to Average
Net Assets ................................. 1.21%(3) 2.91% 1.65%(3)
Ratio of Operating Expenses to Average
Net Assets(4) .............................. 39.23%(3) 3.79% 73.01%(3)
Ratio of Net Investment Income (Loss) to
Average Net Assets ......................... 6.46%(3) 1.37% 4.61%(3)
Portfolio Turnover Rate .................... 52.82% 75.68% 30.70%
Average Commission Rate(5) ................. N/A $ 0.0559 $ 0.0564
<CAPTION>
Mid-Cap
Growth Fund "EDGE"(SM) Fund
------------------------------- ---------------------------------
Year Period Year Period
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
1997 1996* 1997 1996*
--------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Net Asset Value at Beginning of Period ...... $ 13.63 $ 10.00 $ 14.94 $ 10.00
--------- -------- --------- ----------
Income from Investment Operations:
Net Investment Income (Loss)(1) ............ (0.08) -- (0.25) (0.01)
Net Realized and Unrealized Gain on
Investments ................................ 3.50 3.63 1.90 4.95
--------- --------- --------- ----------
Total from Investment Operations .......... 3.42 3.63 1.65 4.94
--------- --------- --------- ----------
Distributions to Shareholders from
Net Investment Income ...................... -- -- -- --
Net Realized Gains ......................... (0.77) -- (0.10) --
--------- --------- --------- ----------
Total Distribution ........................ (0.77) -- (0.10) --
--------- --------- --------- ----------
Net Asset Value at End of Period ............ $ 16.28 $ 13.63 $ 16.49 $ 14.94
========= ========= ========= ==========
Total Return(2) ............................. 26.51% 36.30% 11.25% 49.30%
Ratios & Supplemental Data
Net Assets at End of Period ................ $6,013,427 $466,401 $2,419,475 $1,355,493
Ratio of Operating Expenses to Average
Net Assets ................................. 2.48% 1.46%(3) 2.37% 1.55%(3)
Ratio of Operating Expenses to Average
Net Assets(4) .............................. 2.63% 14.01%(3) 4.32% 9.73%(3)
Ratio of Net Investment Income (Loss) to
Average Net Assets ......................... (0.62)% 0.16%(3) (1.60)% (0.46)%(3)
Portfolio Turnover Rate .................... 145.69% 87.66% 283.60% 72.34%
Average Commission Rate(5) ................. $0.0595 $0.0598 $ 0.0580 $0.0595
</TABLE>
* The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 8, 1996, March 8, 1996, March 7,
1996 and March 12, 1996, respectively.
** As of December 26, 1996, the Bond Administrative Shares merged with the Bond
Institutional Shares.
(1) Net investment income (loss) is after waiver of certain fees and
reimbursement of certain expenses by the Investment Adviser. If the
Investment Adviser had not waived fees and reimbursed expenses, net
investment income (loss) per share would have been as follows for the year
ended September 30, 1997 and the period ended September 30, 1996,
respectively: $(0.09) and $(0.34) for the Growth Fund; $(0.55) and $(0.20)
for Mid-Cap "Edge"(SM) Fund; $(0.04) and $(1.96) for the Real Estate
Securities Fund and $(1.41) for the Bond Fund for the period ended
September 30, 1996.
(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 Investment Adviser.
(3) Annualized.
(4) If the Investment Adviser had not waived fees and reimbursed expenses, the
ratio of operating expenses to average net assets would have been as indicated.
(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.
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PERFORMANCE INFORMATION
Each Fund may, from time to time, include its yield and total return in
advertisements or reports to shareholders or prospective investors. Both yield
and total return figures are computed separately for each Class of Shares of
each Fund in accordance with formulas specified by the Securities and Exchange
Commission and are based on historical earnings and are not intended to
indicate future performance.
The yield of each Fund will be computed by dividing the Fund's net
investment income over a 30-day period by an average value of invested assets
(using the average number of shares entitled to receive dividends and the
maximum offering price per share at the end of the period), all in accordance
with applicable regulatory requirements. Such amount will be compounded for six
months and then annualized for a twelve-month period to derive the Fund's
yield.
Standardized quotations of average annual total return for each Class of
Shares of a Fund will be expressed in terms of the average annual compound rate
of return of a hypothetical investment in such Class of Shares over a period of
1, 5 and 10 years (or up to the life of the Fund). Standardized total return
quotations reflect the deduction of a proportional share of each Class's
expenses (on an annual basis) and assume that all dividends and distributions
are reinvested when paid. Each Fund may also quote supplementally a rate of
total return over different periods of time by means of aggregate, average, and
year-by-year or other types of total return figures. In addition, each Fund may
from time to time publish materials citing historical volatility for shares of
that Fund.
Each Fund may from time to time include in advertisements containing total
return the ranking of those performance figures relative to such figures for
groups of mutual funds having similar investment objectives as categorized by
ranking services such as Lipper Analytical Services, Inc., CDA Investment
Technologies, Inc., Weisenberger Financial Services, Inc. and Morningstar, Inc.
Additionally, each Fund may compare that Fund's performance results to other
investment or savings vehicles (such as certificates of deposit) and may refer
to results published in various publications such as Changing Times, Forbes,
Fortune, Money, Barrons, Business Week, Investor's Daily, Stanger's Mutual Fund
Monitor, The Stanger Register, Stanger's Investment Adviser, The Wall Street
Journal, The New York Times, Consumer Reports, Registered Representative,
Financial Planning, Financial Services Weekly, Financial World, U.S. News and
World Report, Standard & Poor's The Outlook, and Personal Investor. The Funds
may from time to time illustrate the benefits of tax deferral by comparing
taxable investments to investments made through tax-deferred retirement plans.
The total return may also be used to compare the performance of each Fund
against certain widely acknowledged outside standards or indices for stock and
bond market performance, such as the S&P 500, S&P Mid-Cap Index, Dow Jones
Industrial Average, Europe Australia Far East Index (EAFE), Consumer Price
Index, Lehman Brothers Government/Corporate Bond Index, Lehman Brothers T-Bond
Index and the Wilshire Real Estate Securities Index. The S&P 500 is a commonly
quoted measure of stock market performance and represents common stocks of
companies of varying sizes segmented across 90 different industries which are
listed on the New York Stock Exchange, the American Stock Exchange or traded
over the NASDAQ National Market System.
Advertisements, sales literature and other communications may contain
information about a Fund or Adviser's current investment strategies and
management style. Current strategies and style may change to allow a Fund to
respond quickly to changing market and economic conditions. From time to time,
a Fund may include specific portfolio holdings or industries in such
communications. To illustrate components of overall performance, a Fund may
separate its cumulative and average annual returns into income and capital
gains components.
Performance information for a Fund reflects only the performance of a
hypothetical investment in each Class of Shares of the Fund during the
particular time period in which the calculations are based. Performance
information should be considered in light of each Fund's investment objectives
and policies, characteristics and quality of its portfolio, and the market
conditions during the given time period, and should not be considered as a
representation of what may be achieved in the future. For a description of the
methods used to determine total return for each Fund, see the SAI.
The Trust's Annual Report, available upon request and without charge, will
contain a discussion of the performance of each Fund and a comparison of that
performance to a securities market index.
MANAGEMENT
Overall responsibility for the management and supervision of the Trust and
the Funds rests with the Trustees of Seneca Funds (the "Trustees").
The Funds' Investment Adviser is GMG/Seneca, 909 Montgomery Street, San
Francisco, California 94133. Under an Investment Management Agreement with the
Trust, GMG/Seneca's duties to each Fund include: (1) supervising and managing
the investments of that Fund and directing the purchase and sale of its
investments; and (2) ensuring that investments follow the investment objective,
strategies, and policies of that Fund and comply with government regulations.
GMG/Seneca has engaged Seneca Capital Management LLC ("Seneca") to provide
these services to the Funds.
Seneca has also entered into an Administrative Services Agreement with the
Trust under which it performs, or arranges for the performance of, the
following services, among others: (1) providing the Funds with administrative
and clerical services; (2) overseeing the maintenance of the Funds' books and
records by the Funds' custodian; (3) preparing the Funds' income tax returns;
(4) registering the Funds' shares with those states and other jurisdictions
where shares are offered or sold and arranging periodic updating of the Funds'
prospectus; (5) initial preparation and filing of proxy materials and reports
to
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Fund shareholders and the Securities and Exchange Commission; and (6) providing
the Funds with adequate office space and all necessary office equipment to
perform the foregoing services. Seneca has entered into an agreement with State
Street, 1776 Heritage Drive, North Quincy, Massachusetts 02171, pursuant to
which State Street will perform substantially all of those services.
Seneca and its affiliate, Phoenix Investment Counsel, Inc. ("PIC"), are
expected to become the subadviser and adviser of the Funds, respectively, upon
approval by Trust shareholders of new investment advisory agreements with the
Funds.
For more information about GMG/Seneca, Seneca and their affiliates, see
"Investment Adviser and Administrator."
The Custodian and Transfer Agent
The custodian of the assets of the Trust is Investors Fiduciary Trust
Company at 801 Pennsylvania Street, Kansas City, Missouri 64105. The Trust has
authorized the custodian to appoint one or more subcustodians for the assets of
the Trust held outside the United States.
Pursuant to a Transfer Agent and Service Agreement with the Seneca Funds,
Phoenix Equity Planning Corporation ("PEPCO"), an affiliate of Seneca, acts as
transfer agent for the Trust (the "Transfer Agent") for which it is paid $19.25
for daily dividend accounts and $14.95 for non-daily dividend shareholder
accounts plus out-of-pocket expenses. The Transfer Agent is authorized to
engage sub-agents to perform certain shareholder servicing functions from time
to time. PEPCO has retained State Street as subagent and PEPCO will pay State
Street's fee.
THE SENECA FUNDS
IN DETAIL
Fund Objectives, Strategies and Policies. The investment objectives,
strategies, and policies of each Fund are described below. There can be no
assurance that these objectives will be met. The "Investment Practices and Risk
Considerations" section describes in greater detail some specific risks of the
types of securities in which the Funds invest and practices in which the Funds
may engage.
Fundamental Policies. An investment policy that a Fund has adopted as
"fundamental" may be changed only with the approval of a majority of
shareholders. Most of the strategies and policies described below and described
in the SAI are not fundamental. This means those strategies and policies may be
changed by the Trustees without shareholder approval. See "Investment
Restrictions" in the SAI for more information concerning the fundamental and
non-fundamental investment policies of the Funds.
SENECA GROWTH FUND and
SENECA MID-CAP
"EDGE"(SM) FUND
Investment Objective: Capital appreciation; production of income is
incidental. The Seneca Growth Fund seeks appreciation greater than that of the
S&P 500 Index and the Seneca Mid-Cap "EDGE"(SM) Fund seeks appreciation greater
than that of the S&P Mid-Cap Index.
Investment Strategies and Policies. Each of these Funds invests primarily
in common stocks of growth companies that meet certain fundamental standards
and that the Investment Adviser believes have the potential for above average
market appreciation. These Funds generally invest at least 65% of their assets
in common stocks. The Seneca Growth Fund has no limitations as to the market
capitalizations of companies in which it invests, but generally focuses a
portion of its portfolio on large, well-known companies, many with market
capitalizations in excess of $5 billion, that have an established history of
profitability and/or dividend payment. The Seneca Mid-Cap "EDGE"(SM) Fund
generally invests at least 65% of its assets in companies with market
capitalizations between $500 million and $5 billion, although it may at times
have significant investments in companies with higher or lower market
capitalizations. At times, both Funds may invest in some of the same
securities.
In evaluating companies' potential for market appreciation, the Investment
Adviser seeks companies that, among other things, it believes will demonstrate
greater long-term earnings growth than the average company included in, for the
Seneca Growth Fund, the S&P 500 or, for the Seneca Mid-Cap "EDGE"(SM) Fund, the
S&P Mid-Cap Index. This approach is based on the belief that growth in a
company's earnings will correlate with growth in the price of its stock. The
Investment Adviser seeks to identify companies that have the most attractive
earnings prospects and favorable valuations. Although this analysis stresses
the long-term potential for earnings growth, these Funds may buy securities in
anticipation of relatively short-term price gains and may engage in other
opportunistic trading activities.
These Funds may also invest in preferred stocks, warrants, and debt
instruments, including bonds convertible into common stocks. When the
Investment Adviser determines that market conditions warrant, the Funds may
invest without limit in cash and cash equivalents for temporary defensive
purposes, although this is not expected to occur routinely. These Funds may
engage in hedging transactions using, among other things, options and futures
contracts. See "Investment Practices and Risk Considerations--Options, Futures,
and Other Derivatives."
These Funds may invest as much as 20% of their assets in foreign
securities if those securities meet the same criteria for the Funds'
investments in general. At times the Funds may have no foreign investments.
Generally, the Funds' foreign investments will be made through American
depositary receipts ("ADRs") or stocks of foreign issuers that are traded
directly on U.S. securities exchanges or in the Nasdaq Stock Market.
To enable the Seneca Mid-Cap "EDGE"(SM) Fund to invest effectively in
companies with(SM)all- to medium-sized market capitalizations, the Trust
currently does not expect to offer
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shares of that Fund to the public at any time when the net assets of the Fund
exceed $500 million. This limit is subject to change.
As these Funds invest primarily in common stocks, their investments are
subject to stock market price volatility. The Funds are intended for investors
who have the perspective, patience, and financial ability to take on
above-average stock market volatility in pursuit of long-term capital growth.
Prices of securities issued by medium-capitalization companies are often more
volatile than those of large, well-established companies, in part because of
the relatively fewer shares available and the potential for developments in a
smaller company's business to have a relatively greater impact on its earnings
and revenues than developments in the business of larger companies. In
addition, the risk of insolvency (with attendant losses to shareholders) is
greater for smaller companies than for larger companies. As a result, because
of its investment focus on companies with medium-capitalizations, the Seneca
Mid-Cap "EDGE"(SM) Fund's performance can be expected to be more volatile than
that of the Seneca Growth Fund.
SENECA BOND FUND
Investment Objective: High total return--both current income and capital
appreciation. This Fund seeks to outperform the Lehman Brothers
Government/Corporate Index.
Investment Strategies and Policies. This Fund invests in a diversified
portfolio of corporate bonds and other debt securities. It normally maintains a
dollar-weighted average maturity of between two and ten years, although
maturities of individual securities may be significantly longer. The Fund also
generally seeks to maintain a dollar-weighted average duration of between two
and eight years. The Investment Adviser actively manages this Fund's portfolio,
adjusting the weighted average portfolio maturity in response to expected
changes in interest rates. During periods of rising interest rates, the
Investment Adviser may shorten the portfolio's average maturity to reduce the
effect of bond price declines on the Fund's net asset value. Conversely, when
interest rates are falling and bond prices are rising, the Fund may lengthen
its average maturity. The Investment Manager also considers bond performance in
particular industry sectors and individual issue characteristics and may engage
in opportunistic trading activities.
The Fund's investments may include securities issued or guaranteed by the
U.S. Government or its agencies and instrumentalities, publicly-traded and
privately-placed corporate securities, and municipal obligations. The Fund may
also invest in mortgage-backed securities issued by various federal agencies
and government-sponsored enterprises and in other mortgage-related or
asset-backed securities. Investments in mortgage-related and other asset-backed
securities can be subject to the risk of early repayment of principal. For more
information, see "Investment Practices and Risk Considerations--Mortgage-Backed
and Asset-Backed Securities" and the SAI.
"Duration" is an important criterion in selecting securities for this
Fund. Duration is a measure of the expected life of a debt security that was
developed as a more precise alternative to the concept of "term to maturity."
Traditionally, a debt security's "term to maturity" has been used as a proxy
for the sensitivity of the security's price to changes in interest rates (the
"interest rate risk" or "volatility" of the security). But "term to maturity"
measures only the time until a security provides its final payment, taking no
account of the pattern of payments before maturity. Duration is a measure of
the expected life of a debt security on a present-value basis, incorporating a
bond's yield, coupon interest payments, final maturity, and call features into
one measure. It takes the length of the time intervals between the present time
and the time that interest and principal payments are scheduled or, in the case
of a callable bond, expected to be received, and weights them by the present
values of the cash to be received at each future time. For any debt security
with interest payments occurring before the payment of principal, duration is
always less than maturity. In general, all other things being equal, the lower
the stated or coupon rate of interest on a security, the longer the security's
duration. Conversely, the higher the stated or coupon rate of interest, the
shorter the duration.
There are situations where even the standard duration calculation does not
properly reflect the interest rate exposure of a security. For example,
floating- and variable-rate securities often have final maturities of ten or
more years. However, their interest rate exposure corresponds to the frequency
of the coupon reset. With mortgage pass-through securities, the stated final
maturity is generally 30 years, but currently expected prepayment rates are
more critical in determining the securities' interest rate exposure.
The Fund invests at least 65% of its assets in investment-grade bonds (i.e.,
rated Baa or higher by Moody's Investors Service ("Moody's") or BBB or higher
by Standard & Poor's Corporation ("S&P")), although it may invest to a lesser
extent in securities rated as low as B by Moody's or S&P. The Fund may also
invest in unrated securities of similar qualities, as determined by the
Investment Adviser.
In general, lower-rated bonds, which will be a lesser component of this
Fund, offer higher returns than investment-grade bonds, but they also carry
higher risks. These can include: a) a higher risk of insolvency, especially
during economic downturns; b) a lower degree of liquidity; and c) greater price
volatility. The Fund will not purchase below-investment-grade securities when
the purchase would increase the Fund's holdings of such securities to 35% or
more of the Portfolio's value. If the Fund owns a security that was
"investment-grade" when the Fund acquired it but the security is downgraded by
a ratings service, the Fund may or may not choose to sell the security. This
depends on the Investment Adviser's asses(SM)ent of the issuer's prospects. See
"General Information--Summary of Bond Ratings" for a description of bond
ratings and "Investment Practices and Risk
Considerations--Below-Investment-Grade Securities" for a discussion of some of
the risks involved in investments in low-rated bonds.
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The Fund may invest as much as 20% of its assets in securities of issuers
organized in jurisdictions outside the United States if they meet the same
criteria described above for the Fund's investments in general. At times the
Fund may have no foreign investments. See "Investment Practices and Risk
Considerations--Foreign Securities."
This Fund ordinarily invests in common stock only as a result of
conversion of bonds, exercise of warrants, or extraordinary business events.
SENECA REAL ESTATE
SECURITIES FUND
Investment Objective: High total return, both current income and long-term
capital appreciation, through investments in REITs and real estate-related
securities.
Investment Strategies and Policies. This Fund generally invests at least
65% of its assets in equity or debt securities of issuers that are principally
engaged in businesses in the United States real estate industry or in related
businesses. An issuer is considered "principally" engaged in such a business if
at least 50% of the issuer's assets, gross income, or net income are
attributable to ownership, construction, management, or sale of real estate
located in the United States, or to products or services related to the real
estate industry. Examples of issuers participating directly in the real estate
industry include equity REITs (which own real estate directly), mortgage REITs
(which make short-term construction or real estate development loans or invest
in long-term mortgages or mortgage pools), other companies whose assets consist
substantially of real property and interests in real property, real estate
brokers and developers and companies that manage real estate. Issuers are not
considered to be participating in the real estate industry simply because they
own significant amounts of real estate if such ownership is incidental to
another business unrelated to real estate. Examples of issuers whose products
or services are related to the real estate industry include manufacturers and
distributors of building supplies and financial institutions that originate or
service mortgage loans.
This Fund generally focuses on investments in common stocks but also may
invest in debt securities of REITs and other real estate-related issuers,
preferred stocks, convertible securities, warrants, and publicly-traded limited
partnerships that invest in real estate. In addition, the Fund may invest up to
35% of its assets in equity and debt securities outside the real estate
industry or related businesses. Investments in debt securities are primarily
limited to investment-grade securities; the Fund may not invest 35% or more of
its assets in securities rated lower than BBB by S&P or Baa by Moody's and
unrated debt securities that the Adviser considers to be of comparable quality.
In general, lower-rated debt securities offer higher returns than
investment-grade bonds but also carry higher risks. See "General
Information--Summary of Bond Ratings" for a description of bond ratings and
"Investment Practices and Risk Considerations--Below-Investment Grade
Securities" for a discussion of some of the risks involved in investments in
low-rated debt securities.
This Fund is classified as a non-diversified investment company under the
Investment Company Act of 1940 (the "1940 Act"), which means that it is not
limited by that Act in the proportion of its assets it may invest in the
securities of any single issuer. The Fund does, however, comply with
diversification requirements imposed by the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company. As a
non-diversified investment company, the Fund may invest a greater proportion of
its assets in the securities of a small number of issuers and, as a result,
may be subject to a greater risk as to portfolio securities. If the Fund takes
concentrated positions in a small number of issuers, its return may fluctuate
more than that of a diversified company as a result of changes in the price of
any of those securities.
This Fund does not make direct investments in real estate. However,
because it may invest in debt securities of issuers primarily engaged in real
estate ownership, it is possible that the Fund could become the direct owner of
real estate as a result of a default on those securities. Rental income or
income from the disposition of such assets could adversely affect the Fund's
status as a regulated investment company for Federal income tax purposes. See
"Income Tax Considerations."
INVESTMENT PRACTICES
AND RISK CONSIDERATIONS
Portfolio Turnover. The rate of portfolio turnover generally is not
important in investment decisionmaking for any of the Funds. Decisions to buy
and sell securities are based on the anticipated contribution of a security to
achievement of a Fund's investment objectives. Sales can result from, for
example, securities reaching a price objective, anticipated changes in interest
rates, changes in the creditworthiness of issuers, or general financial or
market developments. The Funds may sell one security and simultaneously buy
another of comparable quality and may simultaneously buy and sell the same
security to take advantage of short-term differences in bond yields. Funds may
buy individual securities in anticipation of relatively short-term price gains.
A Fund's liquidity needs may also necessitate sales. Because these factors
generally are not tied to the length of time a security has been held, a
significant number of short-term transactions may result.
The total portfolio turnover rate of each Fund for the period ended
September 30, 1997, is shown in the Financial Highlights table that appears
earlier in this Prospectus. A 100% annual turnover rate would occur if all of a
Fund's securities were replaced one time during a one-year period.
While portfolio transactions are necessary to achieve a Fund's investment
objectives, a high level of turnover entails certain costs. The higher the
turnover, the higher the overall brokerage commissions, dealer mark-ups and
mark-downs, and other direct transaction costs. High turnover can also result
in acceleration of the realization of gains, which may be short-term in nature
and thus taxable to shareholders at
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ordinary rates. In any particular period a Fund's turnover rate may be higher
than that of other mutual funds with similar investment objectives.
Certain tax considerations can restrict a Fund's ability to sell
securities in some circumstances when those securities have been held for less
than three months. See "Income Tax Considerations" and the SAI.
Repurchase Agreements. Each Fund may enter into repurchase agreements. In
a repurchase agreement, a Fund buys a security and the seller simultaneously
agrees to repurchase the security on a specified future date at an agreed-upon
price. The repurchase price reflects an agreed-upon interest rate during the
time the Fund's money is invested in the security. Because the security
constitutes collateral for the repurchase obligation, a repurchase agreement
can be considered a collateralized loan. The Fund's risk is the ability of the
seller to pay the agreed-upon price on the delivery date. If the seller is
unable to make a timely repurchase, the Fund could experience delays in the
receipt of expected proceeds, suffer a loss in principal or current interest,
or incur costs in liquidating the collateral. The Trustees have established
criteria to evaluate the creditworthiness of parties with whom the Funds may
enter into repurchase agreements.
The securities underlying repurchase agreements are not subject to the
average weighted maturity or duration restrictions otherwise applicable to the
Seneca Bond Fund's investments. The Funds will limit repurchase agreements to
securities issued by the United States Government, its agencies, and its
instrumentalities.
Reverse Repurchase Agreements; Borrowing. Funds may enter into reverse
repurchase agreements and "dollar roll" transactions with selected banks, U.S.
securities dealers and other financial institutions. In a reverse repurchase
agreement, a Fund sells securities and simultaneously agrees to repurchase them
at a price that reflects an agreed-upon rate of interest. A dollar roll
transaction is similar to a reverse repurchase agreement, except that the
counterparty is not required to deliver the same security to the Fund that it
received (or had the right to receive) from the Fund, but may deliver a
substantially identical security to the Fund upon the closing of the
transaction. Funds will use the proceeds of reverse repurchase agreements and
dollar rolls to make other investments that either mature or are subject to an
agreement to resell at or before the date the reverse repurchase agreement or
dollar roll expires. When a Fund enters into a reverse repurchase agreement or
dollar roll transaction, it will maintain a segregated account consisting of
cash or high-quality liquid debt securities in an amount at least equal to its
repurchase obligation under the agreement. Reverse repurchase agreements and
dollar rolls are a form of leverage that increases the opportunity for gain and
the risk of loss for a given change in market value. There may also be a risk
of delay in the recovery of the underlying securities if the counterparty
experiences financial difficulties.
Each Fund may borrow money from banks and, to secure borrowings, may
mortgage or pledge securities. A Fund may incur such borrowings, together with
amounts borrowed through reverse repurchase agreements and dollar rolls, up to
one-third of the Fund's net assets. These limitations on borrowings are a
fundamental policy of the Funds. If a Fund borrows money, its share price may
be subject to greater fluctuation until the borrowing is paid off.
Below-Investment-Grade Securities. No Fund may invest 35% or more of its
net assets in debt securities that are rated below "investment grade" by S&P or
Moody's. A Fund will not invest in securities rated lower than B by S&P or
Moody's or unrated securities whose quality the Investment Adviser determines
to be lower than those ratings. "Investment grade" refers to securities rated
BBB or better by S&P or Baa or better by Moody's. Below-investment-grade
securities (so-called "junk bonds") generally pay higher current income but may
be considered speculative because they present a greater risk that the issuer
will not be able to make interest or principal payments on time. If this
happens, a Fund would lose income and could expect a decline in the market
value of the securities affected. Prices of such securities tend to react more
to prevailing economic and industry conditions, issuers' unique financial
situations, and the bonds' coupon rates than to small changes in prevailing
interest rates. However, during an economic downturn or a period of rising
interest rates, issuers of these securities, generally highly-leveraged
companies, can have trouble making principal and interest payments, meeting
projected business goals, and obtaining additional financing.
Each Fund may also invest in unrated debt securities. Unrated debt
securities, while not necessarily of lower quality than rated securities, may
not have as broad a market. Because of the size and perceived demand for an
issue, among other factors, certain issuers may decide not to pay the cost of
getting a rating for their bonds. The Investment Adviser will analyze the
creditworthiness of the issuer of an unrated security, as well as any financial
institution or other party responsible for payments on the security. Unrated
debt securities are included in Seneca Bond Fund's 35% limit on
below-investment-grade debt unless the Investment Adviser determines those
securities to be the equivalent of investment-grade securities. See "General
Information--Summary of Bond Ratings" and the SAI for a description of bond
rating categories.
REITs and Other Real Estate-Related Investments. The value of investments
in issuers that hold real estate, particularly equity REITs, may be affected by
changes in the values of real properties owned by the issuers, and the value of
investments in mortgage REITs may also be affected by the quality of the credit
they have extended. Investments in businesses related to the real estate
industry may also be affected by changes in the value of real estate generally
or in particular geographical areas in which the businesses operate primarily.
Interest rates can be a significant factor both in real estate values and in
related businesses. Increases in interest rates can cause or contribute to
declines in real estate prices and can cause slowdowns in such related
businesses as real estate sales and construction.
Investing in REITs, particularly equity REITs, may also involve risks
similar to those associated with small-
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capitalization companies, in that their securities may trade less frequently
and in a lower volume than those of larger-capitalization companies and may be
subject to abrupt and large price movements. At times, the market price of a
REIT's securities may be less than the value of its investments in real estate.
REITs often are not diversified and are therefore subject to the risk of
financing a limited number of projects or properties. REITs depend on the
skills of their management and are often heavily dependent on cash flow from
properties. Mortgage REITs are subject to risks of default by borrowers. Some
REITs are "self-liquidating"--i.e., their existence is limited to a specific
term--and present the risk of liquidating at a time that is not economically
opportune for their investors. REITs also run the risks of failing to qualify
for special tax treatment under the Code and of maintaining exemptions under
the 1940 Act.
Delayed Delivery Transactions. Funds may sometimes purchase or sell
securities on a when-issued or forward commitment basis. In such "delayed
delivery" transactions, the price of securities is established at the time the
commitment to purchase or sell is made. Delivery of and payment for these
securities typically occur up to 90 days after the commitment is made. The
market price of a security at the time of delivery may be higher or lower than
the price contracted for, and there is some risk the transaction may not be
consummated. When a Fund makes a commitment to buy securities on a forward
commitment or when-issued basis, it will maintain a segregated account
consisting of cash or high-quality liquid debt securities in an amount at least
equal to the commitments.
Short Sales. A Fund may sell securities that it owns or has the right to
acquire at no additional cost but does not intend to deliver to the buyer, a
practice known as selling short "against the box." These transactions allow a
Fund to hedge against price fluctuations by locking in a sale price for
securities the Fund does not wish to sell immediately, for example, to postpone
recognition of a gain or loss for federal income tax purposes or satisfy
certain tests applicable to regulated investment companies under the Code.
Subject to restrictions (if any) imposed by state law, a Fund may also sell
securities that it does not own or have the right to acquire. When a Fund does
so, it will maintain with its custodian in a segregated account cash or
high-quality liquid debt securities in an amount at least equal to the
difference between the current market value of the securities sold short and
any amounts required to be deposited as collateral with the selling broker in
connection with the short sale (not including the proceeds of the short sale).
It is currently expected that a Fund will not sell securities short if, as a
result, the total amount of all "open" short positions would exceed one-third
of the value of the Fund. This limitation may be changed at any time.
Illiquid Securities. A Fund may invest up to 15% of its net assets in
illiquid securities--securities that may not be sold within seven days at
approximately the price used in determining the Fund's net asset value.
Securities may be illiquid when they are held subject to legal or contractual
restrictions on resale, usually because they have not been registered for sale
to the general public ("restricted securities"), or when there is a limited
market for them. Repurchase agreements that mature in more than seven days are
considered illiquid securities.
Certain restricted securities that may be resold to institutional
investors pursuant to Rule 144A under the Federal Securities Act of 1933 may
not be considered illiquid if a sufficient dealer or institutional trading
market exists for them. The Investment Adviser is responsible for determining
whether such a market exists as to Rule 144A securities, and whether such
securities must be considered illiquid, under guidelines approved by the
Trustees. Institutional trading markets for Rule 144A securities are relatively
new. Liquidity of the Funds' investments could be impaired if trading markets
for these securities do not develop further or decline.
Foreign Securities. Each Fund may invest in securities, including U.S.
dollar- or foreign currency-denominated debt securities, of foreign issuers.
Foreign equity investments are generally limited to securities traded on U.S.
exchanges or in the Nasdaq Stock Market and ADRs evidencing ownership of
foreign securities. ADR's are dollar-denominated and are issued by domestic
banks or securities firms and traded in the U.S.
Securities of foreign issuers involve different, and sometimes greater,
risks than securities of U.S. issuers. These include an increased risk of
adverse political and economic developments, and, as to certain countries, the
possibility of expropriation, nationalization or confiscatory taxation or
limitations on the removal of the funds or other assets of a Fund.
Currency exchange rates may fluctuate significantly over short periods and
can be subject to unpredictable change based on such factors as political
developments and currency controls by foreign governments. Because the Funds,
particularly the Seneca Bond Fund, may invest in securities denominated in
foreign currencies, they may seek to hedge foreign currency risks by engaging
in foreign currency exchange transactions. These may include buying or selling
foreign currencies on a spot basis, entering into foreign currency forward
contracts, and buying and selling foreign currency options, foreign currency
futures, and options on foreign currency futures. Many of these activities
constitute "derivatives" transactions. See "Options, Futures, and Other
Derivatives."
Lending Securities. As a way to earn additional income, each of the Funds
may lend its portfolio securities to creditworthy persons not affiliated with
the Funds. Such loans must be secured by cash collateral or by irrevocable
letters of credit maintained on a current basis in an amount at least equal to
the market value of the securities lent. Under the terms of these loans, a Fund
must continue to receive the equivalent of the interest and dividends paid by
the issuer on the securities lent and interest on the investment of the
collateral and must have the right to call the loan and obtain the securities
lent at any time on five trading days' notice. This
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includes the right to call the loan to enable the Fund to exercise its voting
rights. Such loans may not exceed one-third of the lending Fund's net assets at
market value. This percentage limitation constitutes a "fundamental" policy
that can be changed only by a vote of a majority of shareholders. Lending
securities to broker-dealers and institutions could result in a loss or a delay
in recovering the Fund's securities.
Options, Futures, Swaps and Other Derivatives. The Funds may buy and write
call and put options on securities, securities indices, and foreign currencies,
and may enter into futures contracts and use options on futures contracts. The
Funds may also enter into swap agreements relating to interest rates, foreign
currencies, and securities indices and forward foreign currency contracts. All
of these may be referred to as "derivatives" transactions. The Funds may use
these techniques to hedge against changes in interest rates, foreign currency
exchange rates, changes in securities prices or other factors affecting the
value of their investments, or as part of their overall investment strategies.
Each Fund will maintain segregated accounts consisting of liquid assets, such
as cash, U.S. Government securities, or other high-grade debt securities (or,
as permitted by applicable regulations, enter into certain offsetting positions
to cover its obligations under derivatives transactions) to avoid "leveraging"
the Fund.
Gains and losses on "derivatives" transactions depend on the Investment
Adviser's ability to predict correctly the direction of interests rates,
securities prices, currency exchange rates, or other factors. Risks in the use
of these derivatives include: a) the risk that interest rates, securities
prices, or currency exchange rates or other factors affecting the value of the
Fund's investments do not move in the directions being hedged against, in which
case the Fund will have incurred the cost of the derivative (either its
purchase price or, by writing an option, losing the opportunity to profit from
increases in the value of the securities covered) with no tangible benefit; b)
imperfect correlation between the price of derivatives and the movements of the
securities prices, interest rates or currency exchange rates being hedged; c)
the possible absence of a liquid secondary market for any particular derivative
at any time; d) the potential loss if the counterparty to the transaction does
not perform as promised; and e) the possible need to defer closing out certain
positions to avoid adverse tax consequences. In particular, the risk of loss
from certain types of futures transactions is potentially unlimited. More
information on derivatives is contained in the SAI.
Mortgage-Backed and Asset-Backed Securities. Each Fund may invest in
mortgage-backed and other asset-backed securities. The Seneca Bond Fund and the
Seneca Real Estate Securities Fund are more likely to invest in such securities
than the other Funds. Mortgage-backed securities represent direct or indirect
participations in, or are secured by and payable from, mortgage loans secured
by real property. They include pass-through instruments, representing an
undivided interest in a pool of mortgages, in which the holder receives a share
of all interest and principal payments from the mortgages in the pool. For many
of these securities, the U.S. government, the issuing agency, or a private
entity guarantees payment of interest and principal or provides other forms of
credit enhancement. Some mortgage pass-through securities entitle the holders
to all or a substantial portion of the interest payments on a pool of mortgage
assets ("Interest Only" securities, or "IOs") while others entitle the holders
to all or a substantial portion of the principal payments ("Principal Only"
securities or "POs"). Mortgage-backed securities also include collateralized
mortgage obligations ("CMOs"), a term that generally includes debt instruments
collateralized by mortgage loans or mortgage pass-through securities and multi-
class pass-through securities. CMO's are generally issued in classes, each
representing an obligation with a stated maturity or final distribution date
and a specific fixed or floating coupon rate. Payments of principal and
interest on the underlying mortgage assets may be allocated among the classes
in various ways, resulting in differing predictability of cash flows among the
classes. Other asset-backed securities apply techniques similar to those used
in mortgage-backed securities to base obligations on financial assets other
than mortgages, including automobile receivables, credit card receivables,
loans to finance boats, recreational vehicles, and mobile homes, computer,
copier, railcar, and medical equipment leases, and trade, healthcare, and
franchise receivables.
Part of the cash flow of mortgage-backed or other asset-backed securities may
be from the early payoff of some of the underlying loans. The specific amount
and timing of such prepayments are difficult to predict, creating "prepayment
risk." For mortgage-related securities, prepayments are likely to increase
during periods of declining long-term interest rates because borrowers tend to
refinance when interest rates drop. In the event of very high prepayments, a
Fund may be required to invest these proceeds at a lower interest rate, causing
the Fund to earn less than if the prepayments had not occurred. Prepayments are
likely to decrease during periods of rising interest rates, causing the
expected average life of mortgage-related securities to become longer. This
variability of prepayments will tend to limit price gains when interest rates
drop and to exaggerate price declines when interest rates rise. In general, the
obligations supporting other asset-backed securities are of shorter maturities
than mortgage loans and are less likely to experience substantial prepayments.
However, the risks relating to default may be greater.
The Investment Adviser 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.
Structured Securities. The Funds may invest in debt securities, preferred
stock, or convertible securities, the principal amount, redemption terms, or
conversion terms of which are related to a specified securities or other index,
the market prices of specified securities, commodities, or other assets, or
specified foreign currency exchange rates. These securities are sometimes
referred to as "structured notes," "structured securities," or "asset-based"
securities. A Fund's investments in these securities are subject to the limits
as to quality that are applicable to debt securities generally. If a structured
security is backed by a bank letter of credit or other
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credit enhancement, a Fund may take the enhancement into account in assessing
the quality of the security. The prices of structured securities have
historically been subject to high volatility and their interest or dividend
rates may at times be substantially below prevailing market rates.
Zero Coupon Bonds. Each Fund may invest in zero coupon bonds and "strips."
The Seneca Bond Fund is more likely to invest in such securities than the other
Funds. Zero coupon bonds do not make regular interest payments. Instead, they
are sold at a discount from face value. A single lump sum that represents both
principal and interest is paid at maturity. Strips are debt securities whose
interest coupons have been "stripped" away and traded separately after the
securities are issued, and are therefore generally comparable to zero coupon
bonds. The market value of zero coupon bonds and strips generally is more
sensitive to interest rate fluctuations than interest-paying securities of
comparable term and quality.
Variable Rate, Floating Rate, or Variable Amount Securities. Each Fund may
invest in variable rate, floating rate, or variable amount securities. These
are generally short-term unsecured obligations of private issuers. They are
generally interest-bearing notes on which the interest rate fluctuates on a
scheduled basis.
Investments in Other Investment Companies. Each Fund may invest up to 10%
of its total assets in the shares of other investment companies, but only up to
5% of its assets in any one other investment company. In addition, a Fund may
not purchase more than 3% of the total outstanding voting securities of any one
investment company. Investments in other investment companies involve
investment management, distribution, and other fees and expenses paid by such
investment companies. These are in addition to the fees and expenses the Funds
incur directly in connection with their operations. The Funds may invest cash
balances in money market mutual funds.
Notwithstanding these limitations, the Funds reserve the right to convert
to a "master/feeder" structure at a future date. Under such a structure, one or
more "feeder" funds, such as the Funds, invest all of their assets in a
"master" fund, which, in turn, invests directly in a portfolio of securities.
If required by applicable law, the Funds will seek shareholder approval before
converting to a master/feeder structure. If the requisite regulatory
authorities determine that such approval is not required, shareholders will be
deemed, by purchasing shares, to have consented to such a conversion and no
further shareholder approval will be sought. Such a conversion is expressly
permitted under the investment objective and fundamental policies of each Fund.
Diversification. Diversifying a Fund's investment portfolio can reduce the
risks of investing. With the exception of the Seneca Real Estate Securities
Fund, as to 75% of its assets no Fund will make an investment that would result
in more than 5% of its total assets being invested in any one issuer or in the
Fund owning more than 10% of the outstanding voting securities of any issuer,
in each case excluding certain government securities, cash and certain other
assets. In addition, with the exception of Seneca Real Estate Securities Fund,
no Fund invests more than 25% of its assets in any one industry. These
limitations are fundamental policies of the Funds (other than the Seneca Real
Estate Securities Fund). The Seneca Real Estate Securities Fund generally
invests at least 65% of its assets in securities of issuers that are
principally engaged in businesses in the U.S. real estate industry or related
businesses. See "The Seneca Funds in Detail--Seneca Real Estate Securities
Fund."
PURCHASE OF SHARES
The Seneca Growth Fund, Seneca Mid-Cap "EDGE"(SM) Fund, and Seneca Real
Estate Securities Fund each offers two Classes of Shares: "Administrative
Shares" and "Institutional Shares." The Seneca Bond Fund currently only offers
only Institutional Shares. Administrative Shares are offered primarily to
participant-directed employee benefit plans and to investors purchasing through
accounts maintained with broker-dealers and other financial service companies.
Institutional Shares are offered to "Institutional Investors" such as pension
and profit sharing plans, other employee benefit trusts, investment advisers
(for themselves and/or accounts they manage), foundations and corporations and
others who purchase in the minimum amounts described below. In addition,
Institutional Shares may be offered to trustees and/or employees of the Funds,
the Investment Adviser or the Distributors' clients of the Investment Adviser
or persons associated with or related to, or members of the immediate family
of, any such persons ("Related Persons").
No sales charges are assessed upon the sale of either class of shares,
although shares may be purchased through certain financial intermediaries, such
as broker-dealers, that charge their customers transaction or other fees
relating to customers' investments in the Funds. Sales are all at the
respective net asset value of the shares for the particular class.
Genesis Merchant Group Securities, 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.
Minimum Investment in the Funds. Except for purchases of Administrative
Shares through certain pension or retirement plans or accounts, the minimum
initial investment for Administrative Shares is currently $1,000. The minimum
initial investment for Administrative Shares through pension or retirement
plans or accounts, including 401(k) plans, 403(b) plans, 457 plans,
governmental plans, tax-sheltered annuity plans and individual retirement
accounts ("Retirement Accounts"), is currently $1,000. The minimum investment
for Institutional Shares is $250,000, except the Bond Fund, which has a minimum
investment of $10,000. There is no minimum investment requirement for Related
Persons purchasing such shares. Certain other exceptions to these minimum
requirements may apply.
Opening An Account. To open an account, an investor should (i) complete a
New Account Application and send it,
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together with payment for the amount to be invested, to Seneca Funds, c/o State
Street Bank and Trust Company at P.O. Box 8301, Boston, MA 02266-8301 or (ii)
contact his or her employee benefit plan administrator or broker or other
financial services provider. Payments may be made by check or money order or by
electronic transfer or wiring of funds to Seneca Funds, c/o State Street Bank
and Trust Company. See "How to Purchase Shares." Investors may call the
Transfer Agent at 1-800-243-1574 with questions concerning opening an account.
See "How to Purchase Shares."
How to Purchase Shares. Investors who are not buying shares through an
account with a broker-dealer or other financial service company may purchase
shares in the following ways:
By Mail. Fill out a Client Registration Application (for a new account) or
fill out the investment coupon from a previous confirmation statement (for
an existing account), and mail it, together with a check or money order
payable to Seneca Funds, to Seneca Funds, c/o State Street Bank and Trust
Company at P.O. Box 8301, Boston, MA 02266-8301. Checks should be bank or
certified checks. The Trust, at its option, may accept a check that is not
a bank or certified check, however, third party checks will not be
accepted. There are restrictions on the redemption of shares purchased by
check for which the Funds are being collected. See "Redemption of Shares."
By Electronic or Wire Transfer. Investors may also make initial or
subsequent investments by electronic transfer of funds or wire transfer of
Federal funds to Seneca Funds, c/o State Street Bank and Trust Company.
Before transferring or wiring funds, an investor must first telephone the
Transfer Agent at 1-800-243-1574 for instructions. On the telephone, the
following information will be requested: name of authorized person;
shareholder account number (if you have one); name of Fund and share Class;
amount being transferred or wired; and transferring or wiring bank name.
By Telephone. If an investor elects the telephone purchasing service on
the Client Registration Application (or subsequently in writing), the
investor may authorize electronic withdrawals from his or her bank account
over the telephone. The Transfer Agent may employ additional reasonable
procedures to confirm that such instructions are genuine, possibly
including recording telephone calls requesting purchases and/or verifying
authorization and requiring some form of personal identification. A Fund
and the Transfer Agent may be liable for losses due to unauthorized or
fraudulent instructions only if reasonable procedures are not followed.
Otherwise, neither the Trust nor its Transfer Agent will be liable for any
loss, cost or expense for acting on instructions (whether in writing or by
telephone) believed by the party receiving such instructions to be genuine
and in accordance with the procedures described in this Prospectus.
Shareholders should realize that by electing the telephone purchasing
service, they may be giving up a measure of security that they might have
if they were to purchase their shares by means of written instructions.
Furthermore, interruptions in telephone service may mean that a shareholder
will be unable to effect a purchase by telephone when desired.
By Internet The Seneca Funds website is www.senecafunds.com.
Automatic Investment Plan. Additional investments may be made
automatically by electing this service on the Client Registration Application
and providing bank account and certain other information. This authorizes the
Fund and the Transfer Agent to make regular, automatic withdrawals from the
shareholder's bank account. Periodic investments must be at least $100 for each
Fund in which the shareholder is automatically investing. A shareholder may
change the date or amount of the monthly investment, or terminate the Automatic
Investment Plan, at any time by notifying the Transfer Agent in writing or by
telephone. The Transfer Agent must receive the request at least 10 business
days before the change is to become effective. A shareholder may also be able
to have investments automatically deducted from his or her: (1) paycheck at
work; (2) savings account; or (3) choice of other sources. Call the Transfer
Agent at 1-800-243-1574 for more information.
All purchase orders are effected at the net asset value for the relevant
class next determined after receipt of the purchase order. A purchase order
received prior to the close of business (4:00 p.m., Eastern Time) on a day the
Trust is open for business is effected at that business day's net asset value.
An order received after the close of business will be effected at the net asset
value determined on the next business day. The Trust is "open for business" on
each day the New York Stock Exchange is open for trading, which excludes the
following holidays: New Year's Day, Martin Luther King Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. Purchase orders will be accepted only on days on which the Trust
is open for business.
Additional Investments. Additional investments may be made at any time at
the net asset value for the relevant class by following the procedures
described above. See "How to Purchase Shares." The minimum additional
investment for Institutional Shares is generally $10,000, except for the Bond
Fund which has a minimum additional investment of $1,000. The minimum
additional investment for Administrative Shares generally is $250; for
participants in Retirement Accounts, the minimum additional investment is $250.
Additional investments for as little as $100 per month for each Fund may also
be made through the Automatic Investment Plan. See "Automatic Investment Plan."
Other Purchase Information. Purchases of a Fund's shares are made in full
and fractional shares. In the interest of economy and convenience, certificates
for shares will generally not be issued.
The Trust reserves the right, in its sole discretion, to suspend the
offering of shares of either Class of any Fund or to reject purchase orders
when, in the judgment of management, such
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suspension or rejection is in the best interests of the Trust; to waive the
minimum initial investment for certain investors; and to redeem shares if
information provided in the Client Registration Application proves to be
incorrect in any material manner (e.g., in a manner such as to render the
shareholder ineligible to purchase shares).
Shares of the Trust may not be available for purchase in all states.
Prospective investors should inquire as to whether shares of a particular Fund
are available in their state of residence.
Investors may, subject to the approval of the Trust, purchase shares of a
Fund with liquid securities that are eligible for purchase by the Fund
(consistent with such Fund's investment policies and restrictions) and that
have a value that is readily ascertainable. The transactions will be effected
only if the Investment Adviser intends to retain the securities in the Fund as
an investment. Assets so purchased by a Fund will be valued in generally the
same manner as they would be valued for purposes of pricing the Fund's shares,
if such assets were included in the Fund's assets at the time of purchase. The
Trust reserves the right to amend or terminate this practice at any time.
Retirement Accounts. Investors may establish an Individual Retirement
Account (IRA), Simplified Employee Plan (SEP), or certain other types of
retirement plan with the Distributors. Contributions to an IRA, SEP or other
type of retirement plan may be deductible from an investor's taxable income,
depending on his or her personal tax situation. An investor receiving a
distribution from his or her pension plan or wishing to transfer his or her IRA
or other tax-deferred retirement account from another financial institution,
will continue to get tax-deferred growth by transferring these accounts to the
Distributors. Please call 1-800-243-1574 for additional information.
REDEMPTION OF SHARES
Each Fund redeems its shares at the net asset value for the relevant Class
next determined following receipt of a redemption request. Redemptions may be
made by mail or, if elected on the Trust's Client Registration Application (or
subsequently in writing), by telephone. Although no charge is generally made
for redemptions, when shares have been held for fewer that 90 days, a fee of 1%
of the amount redeemed will be assessed on a first-in-first-out basis. This
amount is retained by the appropriate Fund and does not apply to the redemption
or exchange of shares acquired through reinvestment of dividends. The early
withdrawal fee is intended to protect long-term shareholders from the expenses
involved in frequent purchases and redemptions by short-term investors. Shares
may be worth more or less upon redemption than their purchase price, generally,
depending on the market value of the investment securities held by the
particular Fund at the time of redemption.
Redemptions By Mail. Shares may be redeemed by submitting a written
request to Seneca Funds, c/o State Street Bank and Trust Company, P.O. Box
8301, Boston, MA 02266-8301, stating the Fund from which the shares are to be
redeemed, the Class of shares, the number or dollar amount of the shares to be
redeemed and the account number. The request must be signed exactly as the
names of the registered owners appear on the Trust's account records, and the
request must be signed by all registered shareholders designated on the Client
Registration Application. Requests for redemptions in excess of $100,000 must
be accompanied by a signature guarantee from an eligible institution, as
determined by Trust policy.
Redemptions by Telephone or Other Wire Communications. A shareholder may
authorize the Trust to effect redemptions or exchanges between Funds (see
"Other Redemption Information" and "Exchange Privilege") on telephonic or other
electronic instructions. This may be done either through the Client
Registration Application or with a subsequent written authorization, a form of
which may be obtained from the Transfer Agent. Once the shareholder has given
such authorization, he or she may redeem shares by calling the Trust at
1-800-243-1574, by sending a facsimile to Seneca Funds, c/o State Street Bank
and Trust Company, at (617) 774-3286 or by other means of wire communication.
Investors must state the Fund and Class from which the shares are to be
redeemed, the number or dollar amount of the shares to be redeemed and the
account number. Requests for redemptions in excess of $100,000 must be made by
mail. See "Redemptions by Mail."
In electing telephone or other electronic redemption privileges, an
investor authorizes the Transfer Agent to act on instructions from any person
representing himself to be the investor and reasonable believed by the Transfer
Agent to be genuine. The Transfer Agent provides written confirmation of
transactions initiated electronically as a procedure designed to confirm that
such instructions are genuine. The Transfer Agent may employ additional
reasonable procedures to confirm that such instructions are genuine, possible
including recording telephone calls requesting redemptions and/or verifying
authorization and requiring some form of personal identification. A Fund and
the Transfer Agent may be liable for losses due to unauthorized or fraudulent
instructions only if reasonable procedures are not followed. Otherwise, neither
the Trust nor its Transfer Agent will be liable for any loss, cost or expense
for acting on instructions (whether in writing or by telephone) believed by the
party receiving such instructions to be genuine and in accordance with the
procedures described in this Prospectus. Shareholders should realize that by
electing the telephone or wire redemption option, they may be giving up a
measure of security that they might have if they were to redeem their shares in
writing. Furthermore, interruptions in telephone service may mean that a
shareholder will be unable to effect a redemption by telephone when desired.
All redemptions, whether initiated by letter, by telephone, or by other
electronic means, will be processed in a timely manner and proceeds will be
forwarded by wire in accordance with the redemption policies of the Trust
detailed under the heading "Other Redemption Information."
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Other Redemption Information. Payment of the redemption price is
ordinarily wired to the investor's bank three business days after the tender
request, but may take up to seven business days. Redemption proceeds will be
sent by wire only to the bank name designated on the Client Registration
Application. Because the cost of such wire transfers are borne by the
shareholder, Administrative Class shareholders may elect to receive redemption
proceeds by check. The Trust may suspend the right of redemption as to any Fund
or postpone the payment date at time when the New York Stock Exchange is
closed, or during certain other periods as permitted under the federal
securities laws. If the shares being redeemed were purchased by check, payment
may be delayed pending verification that the check used to purchase such shares
has been honored. Any such delay may be avoided if shares are purchased by
means of certified or bank check or electronic transfer or wire transfer of
Federal funds.
For shareholder protection, a request to change information contained in a
shareholder's account registration (for example, a request to change the bank
designated to receive wire redemption proceeds or to send redemption proceeds
made payable to someone other than the registered shareholder(s) or to an
address or bank account other than that previously designated in the Client
Registration Application) must be received in writing, signed by all registered
shareholders designated on the Client Registration Application, and accompanied
by a signature guarantee from any eligible guarantor institution, as determined
in accordance with the Trust's procedures. Shareholders should inquire as to
whether a particular institution is an eligible guarantor institution. A
signature guarantee cannot be provided by a notary public. In addition,
corporations, trusts and other institutional organizations are required to
furnish evidence of the authority of the persons designated on the Client
Registration Application to effect transactions for the organizations.
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right unilaterally to redeem shares in any account (other than in
Retirement Accounts) for their then-current value (which will be promptly paid
to the investor) if at any time, due to other redemptions by the investors, the
Institutional Shares in the account do not have a value of at least $10,000 or
the Administrative Shares in the account do not have a value of at least
$1,000. A shareholder will receive advance notice of such an involuntary
redemption and will be given at least 30 days to bring the value of his or her
account up to at least $1,000.
The Trust agrees to redeem shares of each Fund solely in cash up to the
lesser of $250,000 or 1% of its net assets during any 90-day period for any one
shareholder. In consideration of the best interests of the remaining
shareholders, the Trust reserves the right to pay any redemption price
exceeding this amount in whole or in part by a distribution in kind of
securities held by a Fund in lieu of cash. Although it is highly unlikely that
shares would ever be redeemed in kind, if they are, the redeeming shareholder
should expect to incur transaction costs upon the disposition of the securities
received.
Exchange Privilege. Shares of a Fund may be exchanged for shares of the
same Class of any other Fund based on the respective net asset values of the
shares involved. Exchanges may be made only as to Funds registered in the state
of residence of the investor or where an exemption from registration is
available. An exchange order is treated the same as a redemption followed by a
purchase and may result in a capital gain or loss for tax purposes, and special
rules may apply in computing tax basis when determining gain or loss. See
"Income Tax Considerations" and "Dividends, Distributions and Tax Status" in
the SAI. An exchange may be made by following the redemption procedure
described above under "Redemptions by Mail" or, if the telephone redemption
option has been elected, by calling the Transfer Agent at 1-800-243-1574.
NET ASSET VALUE
The net asset value per share of each Fund is determined as of the close
of regular trading of the New York Stock Exchange (the "Exchange") on days when
the Exchange is open for trading. The net asset value per share of a Fund is
determined by adding the values of all securities and other assets of the Fund,
subtracting liabilities, and dividing by the total number of outstanding shares
of the Fund. The total liability allocated to a Class, plus that Class's
distribution fee and any other expenses allocated solely to that class, are
deducted from the proportionate interest of such Class in the assets of the
Fund, and the resulting amount of each is divided by the number of shares of
that Class outstanding to produce the net asset value per share.
The Funds' investments are valued at market value or, where market
quotations are not available, at fair value as determined in good faith by the
Trustees or their delegates. Foreign and domestic debt securities (other than
short-term investments) are valued on the basis of broker quotations or
valuations provided by a pricing service approved by the Trustees when such
prices are believed to reflect the fair value of such securities. Foreign and
domestic equity securities are valued at the last sale price or, if there has
been no sale that day, at the last bid price, generally. Short-term investments
having a remaining maturity of less than sixty-one days are valued at amortized
cost, which the Trustees have determined approximates market value. For further
information about security valuations, see the SAI.
PORTFOLIO TRANSACTIONS
Pursuant to the Investment Management Agreement, the Investment Adviser
places orders for the purchase and sale of portfolio investments for the Funds'
accounts with brokers or dealers selected by it in its discretion. In effecting
such purchases and sales, the Investment Adviser seeks the best price and
execution of the Funds' orders. Commission rates are a component of the
Investment Adviser's analysis of price. Factors the Investment Adviser
considers in evaluating execution quality include the ability of a broker or
dealer to effect the transaction, the broker's or dealer's clearance and
settlement facilities and capabilities, its reliability and
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financial stability, a dealer's willingness to commit capital, the size of the
transaction, and the market for the security involved.
Many securities, both debt and equity, are traded primarily in the
over-the-counter market. For transactions traded in that market, dealers
generally act as principal rather than as agent and receive a markup or
markdown on the transaction price rather than a commission. The Funds intend to
deal with primary market makers for securities traded in the over-the-counter
markets except where more favorable execution and price can be obtained
elsewhere. Funds may also purchase securities directly from issuers or from
underwriters or dealers as part of an offering of securities. Purchases from
dealers and underwriters in such offerings include a discount or concession
granted by the issuer to the underwriter.
In selecting brokers and dealers, the Investment Adviser considers not
only the factors described above relating to price and execution quality, but
also the value of research services and products provided to the Investment
Adviser. As a result, a Fund may pay higher commission rates to such brokers
than the lowest available when the Investment Adviser believes it is reasonable
to do so in light of the value of the brokerage and research services provided
by the broker effecting the transaction. The Investment Adviser also may
consider sales of shares of the Trust as a factor in selection of
broker-dealers to execute portfolio transactions of the Trust. In addition, the
Trust may direct the Investment Adviser, subject to obtaining best execution,
to execute a portion of one or more Fund's portfolio transactions through
certain broker-dealers in exchange for the broker-dealers' agreement to satisfy
or pay obligations that the Fund has incurred for, among other things,
custodial, accounting, or transfer agency services. These practices could
result in a Fund paying higher aggregate transaction costs than would otherwise
be the case.
Subject to the foregoing considerations of price and execution, the Funds
may use GMG Securities in connection with portfolio transactions in
exchange-traded securities. GMG Securities is a member of the American Stock
Exchange and the National Association of Securities Dealers, Inc. The ownership
of GMG Securities overlaps with the ownership of the Investment Adviser
although GMG Securities may not be an "affiliated person" of the Investment
Adviser within the meaning of the 1940 Act.
GMG Securities may receive brokerage commissions from the Funds, limited
to "usual and customary broker's commissions," as contemplated by the 1940 Act,
and subject to GMG Securities being able to provide execution at least as
favorable as that provided by other qualified brokers. The Trustees have
developed procedures to ensure that the commissions paid to GMG Securities are
limited to "usual and customary broker's commissions" as contemplated in the
1940 Act. On a quarterly basis, the Trustees will review the securities
transactions of each Fund effected by GMG Securities (if any) for compliance
with those procedures.
Some securities considered for investment by the Funds may also be
appropriate for other clients served by the Investment Adviser or its
affiliates, including accounts in which the Investment Adviser or persons
associated with the Investment Adviser are investors, such as investment
partnerships of which the Investment Adviser or such associated persons is the
general partner. If a purchase or sale of securities consistent with the
investment policies of a Fund and one or more of these clients served by the
Investment Adviser or its affiliates is considered at or about the same time,
transactions in such securities will be allocated among the Fund and clients in
a manner deemed fair and reasonable by the Investment Adviser.
DIVIDENDS AND CAPITAL GAINS
The Funds distribute substantially all of their net investment income in
the form of dividends to shareholders. The following table shows how often each
Fund pays dividends.
Dividend
Fund Paid
- ------------------------------------ ----------
Seneca Growth Fund Annually
Seneca Mid-Cap "EDGE" (SM) Fund Annually
Seneca Bond Fund Monthly
Seneca Real Estate Securities Fund Quarterly
Each of the Funds distributes net capital gains, if any, annually.
Shareholders may select from among the following distribution options:
Reinvested Have all dividends and capital gains
distributions reinvested in additional shares
of the same or any other Seneca Fund. If a
shareholder does not choose one of the other
options, this option will be selected
automatically.
Cash and Have either dividends or capital gains paid in
Reinvested cash and the other reinvested in additional
shares in the same or any other Seneca Fund;
or
All Cash Have dividends and capital gains distributions
paid in cash.
Each Fund makes distributions on a per share basis to the shareholders of
record as of the distribution date of that Fund, regardless of how long the
shares have been held. That means if an investor buys shares just before or on
a record date, he or she will pay the full price for the shares and then may
receive a portion of the price back as a taxable distribution.
INCOME TAX CONSIDERATIONS
Federal Taxes. For each taxable year, each Fund intends to qualify as a
regulated investment company under Subchapter M of the Code. Qualifying
regulated investment companies distributing substantially all of their ordinary
income and capital gains are not subject to federal income or excise tax on any
net investment income and net realized capital gains distributed to
shareholders. However, the shareholders are subject to tax on these
distributions.
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Dividends paid by a Fund from net investment income, the excess of net
short-term capital gain over net long-term capital loss, and original issue
discount or certain market discount income are taxable to shareholders as
ordinary income. Distributions paid by a Fund from the excess of net long-term
capital gain over net short-term capital loss are taxable as long-term capital
gains regardless of how long the shareholders have held their shares. These tax
consequences apply regardless of whether distributions are received in cash or
reinvested in shares. A portion of the dividends paid to corporate shareholders
may qualify for the corporate dividends-received deduction to the extent the
Fund earns qualifying dividends. Each Fund will notify shareholders after each
calendar year of the amount and character of distributions they received from
that Fund for federal tax purposes.
For IRAs and pension plans, dividends and capital gains will be reinvested
and not taxed until the beneficiary receives a qualified distribution from the
IRA or pension plan.
Shareholders should consider the tax implications of buying shares
immediately prior to a distribution. Investors who purchase shares shortly
before the record date for a distribution will pay a per share price that
includes the value of the anticipated distribution. They will be taxed when
they receive the distribution even though the distribution represents a return
of a portion of the purchase price.
Redemptions and exchanges of shares are taxable events that may represent
a gain or a loss for the shareholder.
Individuals and certain other types of shareholders may be subject to
backup withholding of federal income tax on distributions, redemptions and
exchanges if they fail to furnish their correct taxpayer identification number.
Individuals, corporations and other shareholders that are not U.S. persons
under the Code are subject to different tax rules. They may be subject to
nonresident alien withholding on amounts considered ordinary dividends from the
Fund.
New investors must certify that their social security or taxpayer
identification numbers are correct. They must also certify that they are not
subject to backup withholding for failure to report income to the Internal
Revenue Service.
Other Taxes. In addition to federal taxes, investors may be subject to
state and local taxes on payments received from a Fund. Depending on the state
tax rules pertaining to a shareholder, a portion of the dividends paid by a
Fund that come from direct obligations of the U.S. Treasury and certain
agencies may be exempt from state and local taxes. Investors should consult
their tax advisers regarding specific questions as to federal, state and local
taxes.
INVESTMENT ADVISER
AND ADMINISTRATOR
As Investment Adviser, GMG/Seneca is responsible for making investment
decisions for the Funds and for selecting brokers and dealers to execute
transactions for each Fund. Seneca has been an investment adviser since 1989,
managing equity and fixed-income securities portfolios primarily for
institutions and individuals. Gail P. Seneca is a Managing General Partner and
the Chief Executive and Investment Officer of GMG/Seneca, and may be deemed to
control GMG/Seneca.
GMG/Seneca has engaged Seneca to provide investment and related
administrative services to the Funds. Seneca is owned by certain of its
employees, including Ms. Seneca and PDP. Under Seneca's "operating agreement,"
Ms. Seneca is the Chief Executive and Investment Officer of Seneca. PDP is a
majority-owned indirect subsidiary of Phoenix Home Life Mutual Insurance
Company ("Phoenix Home Life"). Ms. Seneca and Phoenix Home Life may be deemed
to control Seneca.
Investment and trading decisions for each Fund are made by a team of
managers and analysts headed by two team leaders. The team leaders for each
Fund are primarily responsible for the day-to-day decisions related to that
Fund. The team leader of any one Fund may be on another Fund team.
Gail P. Seneca is a team leader for each of the Funds. From October 1987
until October 1989, she was Senior Vice President of the Asset Management
Division of Wells Fargo Bank and from October 1983 to September 1987, she was
Investment Strategist and Portfolio Manager for Chase Lincoln Bank, heading the
fixed income division.
Richard D. Little is the other team leader for the Seneca Growth Fund and
the Seneca Mid-Cap "EDGE" (SM) Fund. Mr. Little has been with Seneca since
December 1989. He is a general partner and director of Equities. Before he
joined Seneca, Mr. Little held positions as an analyst, board member, and
regional manager with Smith Barney, NatWest Securities, and Montgomery
Securities.
Charles B. Dicke is the other team leader for the Seneca Bond Fund. He has
been a Fixed-Income Portfolio Manager with Seneca since October 1991. Before
joining Seneca, he was a Vice President with Lehman Brothers, serving as a
Product Manager for Government agency securities and a strategist on
fixed-income portfolios.
David Shapiro is the other team leader for the Seneca Real Estate
Securities Fund. He has been a Portfolio Manager with Seneca since February
1996. Before joining Seneca, he was a Portfolio Manager with Genesis Realty
since May 1995. Prior to that, he was a managing director of The ADCO Group
from 1992 to 1995.
Management Fee. For its services to the Funds, the Investment Adviser
receives a management fee based on an annual percentage of the average daily
net assets of each Fund. It is accrued daily, and paid monthly. The annual fee
percentages are 0.70% for the Seneca Growth Fund, 0.80% for the Seneca Mid-Cap
"EDGE"(SM) Fund, 0.50% for the Seneca Bond Fund, and 0.85% for the Seneca Real
Estate Securities Fund. The Investment Adviser's approach to locating
attractive investments in medium-capitalization companies,
20
<PAGE>
evaluating and monitoring them, and effecting transactions in such securities
requires more effort and resources than traditional management of
large-capitalization equity portfolios and bond portfolios, as does the
specialized nature of investing in real estate and real estate-related
securities. Accordingly, the management fees for the Seneca Mid-Cap "EDGE"(SM)
Fund and the Seneca Real Estate Securities Fund are higher than the management
fees paid by most other mutual funds that do not pursue these types of
investment programs. The Investment Adviser will reduce the management fee each
Fund must pay if the fee exceeds any state-imposed expense limitations,
excluding permissible items, such as brokerage commissions, Rule 12b-1
payments, interest, taxes and litigation expenses.
Administrative Services. Pursuant to an Administrative Services Agreement,
Seneca is responsible for the day-to-day administrative functions of the Trust.
Seneca has entered into an agreement with State Street pursuant to which State
Street performs most of those functions. Among other things, State Street
provides the Trust and each Fund with clerical, data processing, and other,
similar services and support; handles the registration of the Funds' shares
under the securities laws of those states and other jurisdictions where the
shares are offered; assists in the preparation of SEC registration materials,
periodic reports, and proxy materials; and provides bookkeeping and accounting
services, including maintaining the accounts, books and records that are
required under applicable laws. For these services, each Fund pays Seneca a fee
based on the average net assets of the Fund.
The Investment Adviser may waive some or all of its management fee and/or
administrative fee as to any Fund from time to time at its discretion, and may
reimburse a Fund for a portion of the Fund's expenses. These practices will
increase a Fund's return and are intended to make the Fund more competitive.
The Investment Adviser has undertaken to effect such waivers and reimbursements
to the extent necessary to prevent each Fund's overall expenses from exceeding
certain levels until shareholder approval of the proposed new advisory
agreements. It is expected that Seneca and PIC will continue such an
undertaking at least through September 30, 1998. Thereafter, any such waivers
or reimbursements may be terminated at any time.
GENERAL INFORMATION
Seneca Funds. Seneca Funds was organized as a Delaware business trust on
December 18, 1995 under the name "Seneca Funds." The Trust is registered with
the Securities and Exchange Commission under the 1940 Act as an open-end
management investment company of the series type. Each Fund constitutes a
separate series. The fiscal year-end of each of the Funds is September 30.
The Trust is authorized to issue and sell multiple Classes of shares for
each series of shares of the Funds. Three of the Trust's existing series, the
Seneca Growth Fund, the Seneca Mid-Cap "EDGE"(SM) Fund and the Seneca Real
Estate Securities Fund, currently have two Classes of shares, Administrative
Shares and Institutional Shares; the Seneca Bond Fund currently offers only
Institutional Shares. The Trust may issue additional series and additional
Classes of existing series of shares in the future with such rights,
preferences, and privileges as the Trustees may determine (subject to compliance
with applicable law), without the consent of shareholders. It is expected that
the Trust will make available new Classes of shares after shareholder approval
of the new advisory agreements.
Except for the differences noted elsewhere in this Prospectus, each share
of a Fund has equal dividend, redemption and liquidation rights with other
shares of that Fund and upon issuance is fully paid and nonassessable. Each
share of each Class represents an identical legal interest in the same
investments of a Fund, except that each class bears certain expenses related
solely to that class. In particular, Administrative Shares have higher fees and
expenses relating to the way in which they are distributed and the services
provided to their Class. Each Class has exclusive voting rights under the 12b-1
Distribution and Administrative Services Plan (the "Distribution Plan"). In the
event that a meeting of shareholders is called, separate votes will be taken by
each Class only if a matter affects, or requires the vote of, just that Class.
Although the legal rights of holders of each Class of shares are identical, it
is likely that the difference in expenses will result in different net asset
values and/or dividends. The Classes may also have different exchange
privileges.
As a Delaware business trust, the Trust is not required to hold regular
annual meetings of shareholders. Ordinarily there will be no shareholder
meetings, unless called by the Trustees, requested by shareholders holding 10%
or more of the outstanding shares under circumstances in which the 1940 Act or
Delaware law require that a meeting be held upon such request, or required by
the 1940 Act or Delaware law. Shareholders are entitled to cast one vote for
each dollar of net asset value of their shares on the record date. At a
shareholders meeting, if one is called, issues that affect all the Funds and
Classes in substantially the same way will be voted on by all shareholders of
all Funds. Issues that do not affect a Fund or a Class will not be voted on by
shareholders of that Fund or Class. Issues that affect all Funds, but in which
their interests are not substantially the same, will be voted on separately by
each Fund.
Distributors. GMG Securities and Seneca Distributors are currently the
principal underwriters and distributors of both Classes of shares of each of
the Funds. As previously noted, the Seneca Bond Fund currently offers only
Institutional Shares. The ownership of GMG Securities overlaps significantly
with that of Seneca although GMG Securities may not be an "affiliated person"
of Seneca within the meaning of the 1940 Act. Seneca Distributors is 99% owned
by Seneca.
Distribution and Related Services. Pursuant to the Distribution Plan, the
Trust has entered into a Distribution Agreement with the Distributors under
which the Trust pays the Distributors a fee at an annual rate 0.25% of the
average daily net assets attributable to the Administrative Shares of
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<PAGE>
each Fund. No Distribution Fee is paid as to the Institutional Shares of any
Fund. Amounts paid under the Distribution Plan may be used by the Distributors
to cover expenses that are primarily intended to result in, or are primarily
attributable to (i) the sale of Administrative Shares, (ii) ongoing servicing
and/or maintenance of accounts of holders of Administrative Shares, and (iii)
subaccounting, recordkeeping, and administrative services related to the sale
of Administrative Shares, all as set forth in the Distribution Plan. Payments
under the Distribution Plan are not tied directly to the expenses actually
incurred by the Distributors in connection with the foregoing activities and
may exceed those expenses. The Trustees will evaluate the appropriateness of
the Distribution Plan annually. For a more complete disclosure of the Plan and
its terms, see the SAI. It is expected that the Trust will enter into new
distribution arrangements with PEPCO upon shareholder approval of the new
advisory arrangements.
Shares may also be offered through certain brokers and financial
intermediaries ("service agents"). Service agents may impose additional or
different conditions on the purchase or redemption of a Fund's shares by their
customers and may charge their customers transaction fees or other account fees
on the purchase and/or redemption of a Fund's shares. Each service agent is
responsible for tran(SM)itting to its customers a schedule of any such fees and
information regarding any additional or different conditions regarding
purchases and redemptions. Shareholders who are customers of service agents
should consult their service agent for information regarding these fees and
conditions and should be aware that, if they satisfy the minimum purchase
requirements, they could avoid those fees by investing directly through the
Distributors.
Other Expenses. The Trust bears all costs of its operations. Trust
expenses directly attributable to a Fund or a Class of shares are charged to
that Fund or Class; other expenses are allocated among all the Funds.
Administrative Shares may be purchased in employee benefit plan accounts and in
accounts maintained with financial institutions and financial services
companies such as broker-dealers. Employee benefit plan administrators and
financial institutions and financial services companies through which
Administrative Shares are purchased may be paid fees by the Funds for transfer
agency, accounting, recordkeeping, and administrative and other services
provided with respect to such shares. Those services may include maintaining
account records, aggregating and processing orders to purchase, redeem, and
exchange Administrative Shares, processing dividend payments, forwarding
shareholder communications, and providing subaccounting services for shares
held beneficially.
Material Legal Proceedings. There are no material legal proceedings to
which the Trust is subject, or to which the Investment Adviser or the
Distributors are subject, that are likely to have a material adverse effect on
their ability to perform their obligations to the Trust or on the Trust itself.
Summary of Bond Ratings. Following is a summary of the grade indicators
used by two of the most prominent, independent rating agencies (Moody's
Investors Service, Inc. and Standard & Poor's Corporation) to rate the quality
of bonds. The first four categories are generally considered investment quality
bonds. Those below that level are of lower quality and are sometimes referred
to as "junk bonds."
Standard &
Investment Grade Moody's Poor's
- ------------------------------------------------ --------- -----------
Highest quality Aaa AAA
High quality Aa AA
Upper medium A A
Medium, speculative features Baa BBB
Lower Quality
- ------------------------------------------------
Moderately speculative Ba BB
Speculative B B
Very Speculative Caa CCC
Very high risk Ca CC
Highest risk, may not be paying interest C C
In arrears or default C D
For more detailed information on bond ratings, including gradations within
each category of quality, see the SAI.
22
<PAGE>
BACKUP WITHHOLDING INFORMATION
Step 1. Please make sure that the social security number or taxpayer
identification number (TIN) which appears on the Application complies
with the following guidelines:
Account Type Give Social Security Number or Tax Identification Number
of:
<TABLE>
<S> <C>
Individual Individual
Joint (or Joint Tenant) Owner who will be paying tax
Uniform Gifts to Minors Minor
Legal Guardian Ward, Minor or Incompetent
Sole Proprietor Owner of Business (also provide owner's name)
Trust, Estate, Pension Plan Trust Trust, Estate, Pension Plan Trust (not personal TIN of fiduciary)
Corporation, Partnership,
Other Organization Corporation, Partnership, Other Organization
Broker/Nominee Broker/Nominee
</TABLE>
Step 2. If you do not have a TIN, you must obtain Form SS-5 (Application for
Social Security Number) or Form SS-4 (Application for Employer
Identification Number) from your local Social Security or IRS office and
apply for one. Write "Applied For" in the space on the application.
Step 3. If you are one of the entities listed below, you are exempt from backup
withholding.
[bullet] A corporation
[bullet] Financial institution
[bullet] Section 501(a) exempt organization (IRA, Corporate Retirement
Plan, 403(b), Keogh)
[bullet] United States or any agency or instrumentality thereof
[bullet] A State, the District of Columbia, a possession of the United
States, or any subdivision or instrumentality thereof
[bullet] International organization or any agency or instrumentality
thereof
[bullet] Registered dealer in securities or commodities registered in the
U.S. or a possession of the U.S.
[bullet] Real estate investment trust
[bullet] Common trust fund operated by a bank under section 584(a)
[bullet] An exempt charitable remainder trust, or a non-exempt trust
described in section 4947(a)(1)
[bullet] Regulated Investment Company
If you are in doubt as to whether you are exempt, please contact the Internal
Revenue Service.
Step 4. IRS Penalties--If you do not supply us with your TIN, you will be
subject to an IRS $50 penalty unless your failure is due to reasonable
cause and not willful neglect. If you fail to report interest, dividend
or patronage dividend income on your federal income tax return, you will
be treated as negligent and subject to an IRS 5% penalty tax on any
resulting underpayment of tax unless there is clear and convincing
evidence to the contrary. If you falsify information on this form or make
any other false statement resulting in no backup withholding on an
account which should be subject to a backup withholding, you may be
subject to an IRS $500 penalty and certain criminal penalties including
fines and imprisonment.
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[BACK COVER]
S E N E C A
- ---------------
F U N D S
c/o State Street Bank & Trust
P.O. Box 8301
Boston, MA 02266-8301
PDP 1637 (1/98)
<PAGE>
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")
Statement of Additional Information
January 28, 1998
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the prospectus of the Funds, dated January 28, 1998,
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, Phoenix Equity Planning Corporation ("PEPCO"), 100
Bright Meadow Boulevard, Enfield, Connecticut 06082, or by calling
1-800-243-4361.
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.
TABLE OF CONTENTS
PAGE
THE TRUST ................................................................ 1
INVESTMENT OBJECTIVES AND POLICIES ....................................... 1
INVESTMENT RESTRICTIONS .................................................. 12
CALCULATION OF THE FUNDS' PERFORMANCE .................................... 15
ADVISORY AND ADMINISTRATIVE SERVICES ..................................... 17
TRUSTEES AND OFFICERS .................................................... 20
NET ASSET VALUE .......................................................... 22
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS .................................. 23
PORTFOLIO BROKERAGE ...................................................... 25
PORTFOLIO TURNOVER ....................................................... 27
ORGANIZATION ............................................................. 27
CUSTODIAN ................................................................ 28
TRANSFER AGENT ........................................................... 28
INDEPENDENT AUDITORS ..................................................... 28
FINANCIAL STATEMENTS ..................................................... 29
APPENDIX ................................................................. 29
GLOSSARY ................................................................. 30
<PAGE>
THE TRUST
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: Administrative Shares
and Institutional Shares. Institutional Shares are offered 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 Adviser 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, or a subcustodian for the securities and other collateral, if any,
acquired under a repurchase agreement for the term of the agreement.
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 Adviser'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
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<PAGE>
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 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
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.
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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 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 Adviser 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.
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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 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
("(SM)BS") 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
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
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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 Adviser 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.
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 the 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
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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.
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 Adviser 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 Adviser 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 Adviser believes the value of the underlying security will decline.
A Fund may purchase put options on securities in its portfolio in order to
hedge against a decline in the value of such securities ("protective puts") or
to effect closing purchase transactions as to puts it has written. A Fund will
realize a profit (or loss) from a closing purchase transaction if the amount
paid to purchase a put is less (or more) than the amount received from the sale
thereof.
Options on Securities Indices. Unlike a stock option, which gives the
holder the right to purchase or sell a specified stock at a specified price, an
option on a securities index gives the holder the right to receive a cash
"exercise settlement amount" equal to (i) the difference between the exercise
price of the option and the value of the underlying securities index on the
exercise date multiplied 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
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be able to profitably exercise the option and will lose the amount of the
premium and any transaction costs. Such loss may be partially or wholly offset
by an increase in the value of a Fund's portfolio securities.
A Fund may purchase call options on securities indices in order to
participate in an anticipated increase in stock market prices or to offset
anticipated price increases on securities that it intends to buy in the future.
If a Fund purchases a call option on a securities index, the amount of the
payment it would receive upon exercising the option would depend on the extent
of any increase in the level of the securities index above the exercise price.
Such payments would in effect allow the Fund to benefit from stock market
appreciation even though it may not have had sufficient cash to purchase the
underlying stocks. Such payments may also offset increases in the prices of
stocks that the Fund intends to purchase. If, however, the level of the
securities index declines and remains below the exercise price while the call
option is outstanding, a Fund will not be able to exercise the option
profitably and will lose the amount of the premium and transaction costs. Such
loss may be partially or wholly offset by a reduction in the price a Fund pays
to buy additional securities for its portfolio.
Each of the Funds may write (sell) covered call or put options on a
securities index. Such options may be covered by purchasing an offsetting
option which, by virtue of its exercise price or otherwise, reduces the Fund's
net exposure on its written option position or by owning securities whose price
changes are expected to be similar to those of the underlying index or by
having an absolute and immediate right to acquire such securities without
additional cash consideration or for additional cash consideration (held in a
segregated account by its custodian) upon conversion or exchange of other
securities in their respective portfolios. In addition, the Fund may cover such
options by maintaining cash, U.S. Government securities or High-Grade Debt
Securities with a value equal to the exercise price in a segregated account
with the Custodian or by using the other methods described above.
The extent to which options on securities indices will provide a Fund with
an effective hedge against interest rate or stock market risk will depend on
the extent to which the stocks comprising the indices correlate with the
composition of the Fund's portfolio. Moreover, the ability to hedge effectively
depends upon the ability to predict movements in interest rates or the stock
market. 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 Adviser 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 Adviser
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 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
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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 in violation of applicable trading limits and it may
impose other sanctions or restrictions. The Trust and other clients advised by
the Investment Adviser 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 Adviser 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 Adviser 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 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
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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 Adviser'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 Adviser 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 ("CEWs") are warrants that entitle the holder to receive from
the issuer an amount of cash (generally, for warrants issued in the United
States, in U.S. Dollars) that is calculated pursuant to a predetermined formula
and based on the exchange rate between a specified foreign currency and the
U.S. Dollar as of the exercise date of the warrant. Foreign currency warrants
generally are exercisable upon their issuance and expire as of a specified date
and time. Foreign currency warrants have been issued in connection with U.S.
Dollar-denominated debt offerings by major corporate issuers in an attempt to
reduce the foreign currency exchange risk that, from the point of view of
prospective purchasers of the securities, is inherent in the international
fixed-income marketplace. Foreign currency warrants may be used to reduce the
foreign exchange risk assumed 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") 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
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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") is U.S.
Dollar-denominated commercial paper the yield of which is linked to certain
foreign exchange rate movements. The yield to the investor on performance
indexed paper is established at maturity as a function of spot exchange rates
between the U.S. Dollar and a designated currency as of or about that time
(generally, the index maturity two days prior to maturity). The yield to the
investor will be within a range stipulated at the time of purchase of the
obligation, generally with a guaranteed minimum rate of return that is below,
and a potential maximum rate of return that is above, market yields 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 Adviser 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 Adviser the daily function of
determining and monitoring the liquidity of restricted securities and
determining whether a Rule 144A security restricted security should be
considered "illiquid." The Trustees, however, retain oversight and are
ultimately responsible for the determinations. Please see the non-fundamental
investment restrictions for further limitations regarding the Funds'
investments in restricted and illiquid securities.
Short Sales
The Funds may sell securities short as part of their overall portfolio
management strategies involving the use of derivative instruments and to offset
potential declines in long positions in similar securities. A short sale is a
transaction in which a Fund sells a security it does not own or have the right
to acquire (or that it owns but does not wish to deliver) in anticipation that
the market price of that security will decline.
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
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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 Adviser to be qualified, and when,
in the judgment of the Investment Adviser, the consideration that can be earned
currently from securities loans of this type justifies the attendant risk. The
value of the securities lent may not exceed one-third of the value of the total
assets of the Fund.
A Fund may pay reasonable negotiated fees to the Custodian in connection
with loaned securities as long as such fees are pursuant to a contract approved
by the Trustees.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following fundamental investment restrictions
which may not be changed without approval of a majority of the applicable
Fund's outstanding voting securities. 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.
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(6) Invest in commodities, except that the Fund may purchase and sell
options on securities, securities indices and currency, futures contracts on
securities, securities indices and currency and options on such futures,
forward foreign currency exchange contracts (including, foreign currency
warrants, principal exchange rated linked securities, and performance indexed
paper), forward commitments, securities index put or call warrants and
repurchase agreements entered into in accordance with the Fund's investment
policies, subject to restrictions as may be set forth elsewhere in the
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:
(1) 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
(2) 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 Adviser 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 Adviser 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 Adviser 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.
A Fund may not:
(1) 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.
(2) 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 Adviser or any subadviser to save commissions or to average prices
among them is not deemed to result in a joint securities trading account.
(3) 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
Adviser, any subadviser or any investment management subsidiary of the
Investment Adviser individually owns beneficially more than 0.5% and together
own beneficially more than 5% of the securities of such issuer.
(4) 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
13
<PAGE>
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.
(5) 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.
(6) 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.
(7) 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 tran(SM)ission of oil, gas
or other minerals.
(8) Invest for the purpose of exercising control over or management of any
company; provided that the Fund may do so where it is deemed advisable to
protect or enhance the value of an existing investment; and provided further,
that the Fund may invest all or part of its investable assets in an open-end
investment company with substantially the same investment objectives, policies
and restrictions as the Fund.
(9) 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.
(10) 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.
(11) 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.
(12) 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 Adviser waives its fee on all assets of any Fund invested in shares
of other open-end investment management companies pursuant to investment
restriction (4), 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.
14
<PAGE>
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 average annual total returns for the one year period ended September
30, 1997 were as follows:
Administrative Institutional
Shares Shares
---------------- --------------
Seneca Growth Fund 26.51% 27.27%
Seneca Mid-Cap "EDGE"(SM) Fund 11.25% 11.39%
Seneca Bond Fund N/A 11.26%
Seneca Real Estate Securities Fund 34.54% 35.44%
The average annual total returns for the period from commencement of
investment operations through September 30, 1997 were as follows:
Administrative Institutional
Shares Shares
---------------- --------------
Seneca Growth Fund 41.58% 42.85%
Seneca Mid-Cap "EDGE"(SM) Fund 38.23% 38.58%
Seneca Bond Fund N/A 9.83%
Seneca Real Estate Securities Fund 30.15% 31.16%
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:
YIELD = 2[(a-b + 1)(6)-1]
---
cd
Where:
a = dividends and interest earned during the period.
b = net expenses accrued for the period.
c = the average daily number of shares of the class outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share of the class (net asset value
per share) on the last day of the period.
15
<PAGE>
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, 1997 were as follows:
Administrative Shares Institutional Shares
--------------------- --------------------
Seneca Bond Fund N/A 5.81%
Seneca Real Estate Securities Fund 0.87% 2.25%
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 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 Changing Times, Forbes, Fortune, Money, Barrons, Business
Week, Investor's Daily, Stanger's Mutual Fund Monitor, The Stanger Register,
Stanger's Investment Adviser, The Wall Street Journal, The New York Times,
Consumer Reports, Registered Representative, Financial Planning, Financial
Services Weekly, Financial World, U.S. News and World Report, Standard & Poor's
The Outlook, and Personal Investor 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 Adviser's agreement to limit each Fund's operating expenses will
increase investment performance.
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<PAGE>
ADVISORY AND ADMINISTRATIVE SERVICES
Investment Adviser
Pursuant to the Investment Management Agreement, the Investment Adviser
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 Adviser furnishes continuously
an investment program for each Fund consistent with the investment objectives
and policies of that Fund. More specifically, the Investment Adviser 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 Adviser places orders for the investment and reinvestment of
each Fund's assets (see "Portfolio Brokerage"). The Investment Adviser has
engaged Seneca to provide these services. Seneca and PIC are expected to become
the subadviser and adviser of the Funds, respectively, upon approval by Trust
shareholders of new investment advisory agreements with the Funds.
For its investment advisory services under the Investment Management
Agreement, the Investment Adviser 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, 1997, GMG/Seneca and Seneca earned
investment management fees of $200,056, $89,157, $34,294 and $164,147 for
services rendered pursuant to the Investment Management Agreement to Seneca
Growth Fund, Seneca Mid-Cap "EDGE"(SM) Fund, Seneca Bond Fund and Seneca Real
Estate Securities Fund, respectively. For the fiscal year ended September 30,
1997, GMG/Seneca and Seneca reimbursed $5,174 for the Seneca Growth Fund,
$135,798 for the Seneca Mid-Cap "EDGE"(SM) Fund, $126,387 for the Seneca Bond
Fund and $16,628 for the Seneca Real Estate Securities Fund.
For the period ended September 30, 1996, GMG/Seneca and Seneca earned
investment management fees of $30,334, $18,471, $6,283, and $1,630 for services
rendered pursuant to the Investment 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
GMG/Seneca and Seneca.
The management fees are accrued daily and will be prorated with respect to
any Fund if the Investment Adviser 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 Adviser 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 Adviser for fees foregone or other
expenses paid by the Investment Adviser 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 Adviser upon termination of its
Investment Management Agreement.
The Investment Adviser has voluntarily agreed to reimburse the Funds'
operating expenses until shareholder approval of the proposed new advisory
agreements to prevent total operating expenses from exceeding, on an annualized
basis, the following:
Fund Institutional Shares Administrative Shares
Growth Fund 1.95% 2.55%
Mid-Cap "EDGE"(SM) Fund 2.10% 2.70%
Bond Fund 1.85% N/A
Real Estate Securities Fund 2.35% 3.05%
It is expected that Seneca and PIC will continue such an undertaking at
least through September 30, 1998. Thereafter, any such waivers or
reimbursements may be terminated at any time.
Under the Investment Management Agreement, the Trust, on behalf of each
Fund, agrees (i) not to hold the Investment Adviser or any of its officers or
employees liable for, and (ii) to indemnify or insure the Investment Adviser
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
17
<PAGE>
act or omission of the Trust's custodian of assets, or of any broker or agent
selected by the Investment Adviser 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 or Seneca may receive indirect compensation by reason
of investment advisory fees paid by the Trust to GMG/Seneca in its capacity as
the Investment Adviser.
Gail P. Seneca, President and Trustee of the Trust, Sandra J. Westhoff,
Treasurer and Trustee of the Trust, and Ronald K. Jacks, Secretary of the
Trust, are each an "affiliated person" of the Trust (as defined in the 1940
Act). Gail P. Seneca, as the Chief Executive and Investment Officer, a managing
general partner 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, the Investment
Adviser allocates investment opportunities to all accounts for which they are,
in the Investment Adviser'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 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. See "Portfolio Brokerage."
In an attempt to avoid any potential conflict with portfolio transactions
for the Funds, the Investment Adviser and the Trust, on behalf of each Fund,
have adopted restrictions on personal securities trading by personnel of the
Investment Adviser 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 Adviser 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 Adviser.
Administrator
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"). 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 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 each Fund's net asset value,
(b) overseeing the maintenance by the Custodian of certain books and records of
the Funds as required by Rule 31a-1(b) under the 1940 Act, (c) preparing each
Fund's tax returns, (d) preparing financial information for each Fund's
semiannual and annual reports, proxy statements, and other communications to
shareholders, (e) preparing each 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 each 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 Trust's securities.
For its services under the Administration Agreement, 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
Seneca is entitled to receive from each Fund an annual fee equal to $5,000 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 March 1999, the Trust is
obligated to pay to Seneca a termination fee equal to certain amounts by which
Seneca was required to waive its Administrative Services Fee under the terms of
the Administration Agreement. For the period ended September 30, 1997, Seneca
earned Administrative Services Fees of $57,514, $56,326, $55,433 and $57,899
for services rendered pursuant to the Administration Agreement to Seneca Growth
Fund, Seneca Mid-Cap "EDGE"(SM) Fund, Seneca Bond Fund and Seneca Real Estate
Securities Fund, respectively. For the period ended September 30, 1996, Seneca
18
<PAGE>
earned Administrative Services Fees of $35,122, $34,955, $35,001 and $34,976
for services rendered pursuant to the Administration Agreement to Seneca Growth
Fund, Seneca Mid-Cap "EDGE" Fund, Seneca Bond Fund and Seneca Real Estate
Securities Fund, respectively. Each of these fees in 1996 was waived in its
entirety by 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 Adviser; (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
each class of shares.
The Funds' Investment Management and Administration Agreements each
provide that GMG/Seneca and 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. 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.
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 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. It is expected that the Trust will enter into new
distribution arrangements with PEPCO upon shareholder approval of the new
advisory agreements.
For the fiscal year ended September 30, 1997, the Funds paid to GMG
Securities, $13,453 pursuant to the Distribution Agreement. As of September 30,
1997, the Funds had accrued expenses of $4,506 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:
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<PAGE>
Advertising: $26,000
Printing and mailing of Prospectuses: $83,000
Other: $28,000
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
Fund.
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 Trustee of the Trust
President and Trustee San Francisco, CA 94133 since February 1996. Since July 1, 1996, she has been
President and Chief Executive and Investment Officer of
Seneca. Since November 1989, she has been Chief
Executive and Investment Officer and a managing
general partner of GMG/Seneca.
Sandra J. Westhoff,* 909 Montgomery Street 36 Ms. Westhoff has been Treasurer and a Trustee of the
Treasurer and Trustee San Francisco, CA 94133 Trust since February 1996. From September 1994 to
present, she has been Chief Administrative Officer of
GMG/Seneca, and, since July 1, 1996, Chief Operating
Officer of 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 of the Trust since February
Secretary San Francisco, CA 94133 1996. He served as a Trustee of the Trust from February
1996 through June 1997. From July 1990 to present he
has been a Portfolio Manager of GMG/Seneca and since
July 1, 1996, a Portfolio Manager of Seneca.
Mary Ann Cusenza,** 909 Montgomery Street 39 Ms. Cusenza has been a Trustee of the Trust since
Trustee San Francisco, CA 94133 February 1996. From October 1996 to present, she has
been Vice President and Chief Financial Officer of
Tularik Inc. She joined Apple Computer, Inc. in 1985
and was a Vice President and Treasurer of Apple
Computer, Inc. from 1992 until February 1996.
Melinda Ellis Evers,** 909 Montgomery Street 35 Ms. Evers has been a Trustee of the Trust since February
Trustee San Francisco, CA 94133 1996. She is a founding partner of Ellis Partners, Inc.,
a real estate investment firm, established in 1993. From
1991 to 1993 she attended Stanford University's
Graduate School of Business.
Paul E. Erdman,** 909 Montgomery Street 63 Mr. Erdman has been a Trustee of the Trust since
Trustee San Francisco, CA 94133 February 1996. He is an economist and novelist, and,
since 1979, has served on the Board of Advisors of The
University of Georgetown School of Foreign Service.
</TABLE>
* "Interested persons" within the meaning of the 1940 Act.
** Each of the Independent Trustees is 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 Adviser. Each Trustee of the Trust who is not an "interested
person" of the Trust ("Independent Trustee") receives a fee of $2,500 for each
regular, quarterly meeting
20
<PAGE>
of the Board of Trustees attended and is reimbursed for expenses incurred in
connection with such attendance. Effective July 1, 1997, the Independent
Trustees received an additional $2,500 quarterly retainer.
The following table sets forth the compensation paid to the Trustees
during the fiscal year ended September 30, 1997.
Pension or Total
Aggregate Retirement Benefits Compensation
Compensation Accrued as Part from Trust and
Name of Trustee from the Trust of Trust's Expenses Funds in Complex
- -------------------- --------------- --------------------- ----------------
Gail P. Seneca $ 0 -- $ 0
Sandra J. Westhoff $ 0 -- $ 0
Mary Ann Cusenza $10,000 -- $10,000
Melinda Ellis Evers $10,000 -- $10,000
Paul E. Erdman $10,000 -- $10,000
For services to the Funds during the last fiscal year, the Trustees
received an aggregate of $32,524.
Principal Shareholders
The following table sets forth information as of September 30, 1997 with
respect to each person who owns of record or is known by the Trust to own of
record or beneficially 5% or more of any class of the Trust's outstanding
equity securities:
<TABLE>
<CAPTION>
Name of Name of Number of Percent
Shareholder Fund Shares of Class
- ----------------------------------- ---------------------------------------------- ---------------- -----------
<S> <C> <C> <C>
Charles Schwab & Company Growth Administrative Shares 281,604.222 76.23%
101 Montgomery Street Growth Institutional Shares 299,247.838 14.43%
San Francisco, CA 94104 Mid-Cap "EDGE"(SM) Administrative Shares 37,795.333 25.76%
Mid-Cap "EDGE"(SM) Institutional Shares 67,027.014 11.76%
Bond Institutional Shares 172,910.655 20.53%
Real Estate Securities Administrative Shares 107,410.287 49.87%
BT Alex. Brown Incorporated Mid-Cap "EDGE"(SM) Institutional Shares 164,303.862 28.82%
PO Box 1346 Bond Institutional Shares 165,143.400 19.61%
Baltimore, MD 21203 Real Estate Securities Institutional Shares 196,435.506 10.33%
State Street Bank & Trust Co. Mid-Cap "EDGE"(SM) Administrative Shares 8,426.111 5.74%
C/F Thomas A Silberman IRA
270 Euclid Ave.
Winnetka, IL 60093
WPO/NCC Investors LLC Mid-Cap "EDGE"(SM) Administrative Shares 8,909.48 6.07%
3000 Sand Hill Rd Ste 3-290
Menlo Park, CA 94025
Susan R. Mintz Real Estate Securities Administrative Shares 16,240.544 7.54%
1750 Saint Charles Ave. Apt 610
New Orleans, LA 70130
NFSC FEBO Real Estate Securities Administrative Shares 13,102.573 6.08%
Donald J Riskind TTEE
Donald J Riskind Trust U/A 8/3/94
5855 N Kolb Rd Apt 8212
Tucson, AZ 85750
Roxanne B Chapman Growth Institutional Shares 105,420.496 5.08%
David S Wang Co TTEES
MacDonald Family Foundation
PO Box 64788
Los Angeles, CA 90064
RAS CRT Growth Institutional Shares 143,678.161 6.93%
DTD 9-15-94
c/o K&E Management LTD
400 S El Camino Real Ste 1289
San Mateo, CA 94402
Tenderloin Neighborhood Dev Corp Bond Institutional Shares 54,947.833 6.52%
201 Eddy St
San Francisco, CA 94102
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Name of Name of Number of Percent
Shareholder Fund Shares of Class
- ------------------------------------ --------------------------------------------- --------------- ---------
<S> <C> <C> <C>
Eileen Feather Tr Bond Institutional Shares 64,758.189 7.69%
U/A 11-13-86
John V Feather Trust
PO Box 737
Pebble Beach, CA 93953
Builders of the Adytum Bond Institutional Shares 54,042.473 6.42%
5101 N Figueroa St
Los Angeles, CA 90042
Pacific Bank Cust Real Estate Securities Institutional Shares 296,166.192 15.58%
Blair Walker Stratford TTEE
Blair Walker Stratford 1994 Fam Tr
ATTN Ginger Bradley
100 Montgomery St
San Francisco, CA 94104
Pacific Bank Cust Real Estate Securities Institutional Shares 263,852.517 13.88%
Walker Security Investments LLC
ATTN Ginger Bradley
100 Montgomery St
San Francisco, CA 94194
</TABLE>
As of December 31, 1997, 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: 15,325.025 shares of Seneca Growth Fund; 9,690.488
shares of Seneca Mid-Cap "EDGE"(SM) Fund; and 20,197.745 shares of Seneca Real
Estate Securities Fund. The shares owned by the Trustees and officers were of
the Institutional Class only.
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), Martin Luther King, Jr. Day (the
Monday following Martin Luther King, Jr.'s birthday), 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
22
<PAGE>
on that day, at the mean between the most recent bid and asked price.
Securities listed on more than one exchange shall be valued on the exchange the
security is most extensively traded. Quotations of foreign securities in
foreign currency will be converted to U.S. Dollar equivalents using foreign
exchange quotations received from independent dealers. Short-term investments
having a maturity of 60 days or less will be valued at amortized cost, when the
Trustees determines that amortized cost is their fair market value. Certain
debt securities for which daily market quotations are not available may be
valued, pursuant to guidelines established by the Trustees, with reference to
fixed income securities whose prices are more readily obtainable and whose
durations are comparable to the securities being valued. Subject to the
foregoing, other securities for which market quotations are not readily
available will be valued at fair value as determined in good faith by the
Trustees.
For purposes of determining the net asset value of the Funds' shares,
options transactions will be treated as follows: When a Fund sells an option,
an amount equal to the premium received by that Fund will be included in that
Fund's accounts as an asset and a deferred liability will be created in the
amount of the option. The amount of the liability will be marked to the market
to reflect the current market value of the option. If the option expires or if
that Fund enters into a closing purchase transaction, that Fund will realize a
gain (or a loss if the cost of the closing purchase exceeds the premium
received), and the related liability will be extinguished. If a call option
contract sold by a Fund is exercised, that Fund will realize the gain or loss
from the sale of the underlying security and the sale proceeds will be
increased by the premium originally received.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
Each Fund within the Trust is separate for investment and accounting
purposes and is treated as a separate entity for federal income tax purposes.
A regulated investment company qualifying under Subchapter M of the Code
is not subject to federal income tax on distributed amounts to the extent that
it distributes annually its taxable and, if any, tax-exempt net investment
income and net realized capital gains in accordance with the timing
requirements of the Code. 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 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 (c) 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.
Under certain state tax laws, each Fund must also comply with the
"short-short" test to qualify for treatment as a RIC for state tax purposes.
Under the "short-short" test the Fund must derive less than 30% of its gross
income each taxable year as gains (without deduction for losses) from the sale
or other disposition of securities for less than three months. If in any
taxable year each Fund does not qualify as a regulated investment company, all
of its taxable income will be taxed at corporate rates. In addition, if in any
tax year a Fund does not qualify as a RIC for state tax purposes, a capital
gain dividend may not retain its character in the hands of the shareholder for
state tax purposes.
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 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
23
<PAGE>
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, 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
24
<PAGE>
treaties. However, the Funds will not be eligible to pass through to
shareholders any foreign tax credits or deductions for foreign taxes paid by
the Funds that are not thus reduced or eliminated. Certain foreign exchange
gains and losses realized by the Funds with respect to such securities or
related currency transactions will generally be treated as ordinary income and
losses. Certain uses of foreign currency and investments by the Funds in
certain "passive foreign investment companies" may be limited in order to avoid
adverse tax consequences for the Funds (or an election, if available, may be
made with respect to such investments).
Different tax treatment, including a penalty on certain distributions,
excess contributions or other transactions is accorded to accounts maintained
as IRAs or other retirement plans. Investors should consult their tax advisers
for more information.
Redemptions, including exchanges, of shares may give rise to recognized
gains or losses, except as to those investors subject to tax provisions that do
not require them to recognize such gains or losses. All or a portion of a loss
realized upon the redemption of shares may be disallowed under "wash sale"
rules to the extent shares are purchased (including shares acquired by means of
reinvested dividends) within a 61-day period beginning 30 days before and
ending 30 days after such redemption. Any loss realized upon a shareholder's
sale, redemption or other disposition of shares with a tax holding period of
six months or less will be treated as a long-term capital loss to the extent of
any distribution of long-term capital gains with respect to such shares.
The Trust is organized as a Delaware business trust, and neither the Trust
nor the Funds 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 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 the Investment Adviser and its affiliates in the
performance their decision-making responsibilities.
Each year, the Investment Adviser 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
25
<PAGE>
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 the Investment Adviser (and its subsidiaries) in servicing all its
accounts and not all such information may be used by the Investment Adviser, in
its capacity as the Investment Adviser, 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 the Investment Adviser, the Trust has decided to treat GMG
Securities as if it were an "affiliated person" of the Investment Adviser 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 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 Adviser. Investment decisions for a Fund and
for the Investment Adviser'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 Adviser, including accounts (such as
investment limited partnerships) in which the Investment Adviser or affiliated
or associated persons of the Investment Adviser are investors or have
26
<PAGE>
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.
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.
For the fiscal year ended September 30, 1997, the Funds paid brokerage
commissions of $212,912.
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 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.
27
<PAGE>
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 have authorized the issuance of two
classes of shares for each series, designated Institutional Shares and
Administrative Shares. The Seneca Bond Fund currently offers Institutional
Shares only. See "General Information" in the Prospectus for a detailed
description of the respective rights of the classes of shares. It is expected
that the Trust will make available new Classes of shares after shareholder
approval of the new advisory agreements.
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 801
Pennsylvania 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
Phoenix Equity Planning Corporation acts as transfer agent for the Trust
and may enter into agreements with subagents to perform certain functions
including: processing purchases, transfers and redemptions of shares; dividend
disbursing agent; maintaining records and handling correspondence with respect
to shareholder accounts. PEPCO has retained State Street as subagent and PEPCO
will pay State Street's fee.
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
28
<PAGE>
on financial, accounting and reporting matters, review and consultation
regarding various filings with the SEC and attendance at the meetings of the
Audit Committee and Board of Trustees. The independent auditors also perform
other professional services for the Trust including preparation of income tax
returns of the Funds. Price Waterhouse LLP, 160 Federal Street, Boston, MA
02110, is expected to become independent auditors for the Trust, subject to
approval by Trust shareholders of Price Waterhouse LLP and the proposed new
investment advisory agreements.
FINANCIAL STATEMENTS
The Funds' financial statements as of and for the period ending September
30, 1997 are included in the Funds' annual report and are incorporated herein
by reference. The annual report must precede or accompany this Statement of
Additional Information.
APPENDIX
Description of certain 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 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.
29
<PAGE>
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.
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.
30
<PAGE>
SENECA FUNDS
SENECA GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
- ------------------------------------------------- ------ -----------
<S> <C> <C> <C>
COMMON STOCKS -- 98.2%
AEROSPACE -- (1.3%)
United Technologies Corporation.............. 6,590 $ 533,790
----------
AIRLINES -- (1.6%)
UAL Corporation (1).......................... 7,470 632,149
----------
CHEMICALS -- (2.9%)
Air Products & Chemicals, Incorporated....... 13,980 1,159,466
----------
COMPUTERS -- (4.7%)
Compaq Computer Corporation (1).............. 14,490 1,083,127
International Business Machines
Corporation................................ 7,500 794,531
----------
1,877,658
----------
COMPUTER SOFTWARE & SERVICES -- (6.4%)
HBO & Company................................ 21,240 801,810
J.D. Edwards & Company....................... 2,500 83,750
Microsoft Corporation (1).................... 5,550 734,334
Oracle Corporation (1)....................... 25,725 937,355
----------
2,557,249
----------
CONSUMER DURABLE -- MOTOR VEHICLE
PARTS -- (2.4%)
Eaton Corporation............................ 10,250 946,844
----------
CONSUMER NON-DURABLE -- (1.9%)
Colgate-Palmolive Company.................... 10,860 756,806
----------
DRUGS & HEALTH CARE -- (7.8%)
Eli Lilly & Company.......................... 10,360 1,250,323
McKesson Corporation......................... 9,330 951,077
Warner Lambert Company....................... 6,990 943,213
----------
3,144,613
----------
ELECTRICAL EQUIPMENT -- (5.1%)
General Electric Company..................... 18,260 1,242,821
Westinghouse Electric Corporation............ 30,310 820,264
----------
2,063,085
----------
</TABLE>
See notes to financial statements.
5
<PAGE>
SENECA FUNDS
SENECA GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONTINUED)
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
- ------------------------------------------------- ------ -----------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
ELECTRONICS -- (6.8%)
ASM Lithography Holding NV (1)............... 3,570 $ 352,537
KLA-Tencor Corporation (1)................... 13,390 904,662
Maxim Integrated Products, Incorporated
(1)........................................ 10,080 720,090
Texas Instruments, Incorporated.............. 5,580 753,998
----------
2,731,287
----------
FINANCIAL SERVICES -- (14.6%)
American Express Company..................... 14,170 1,160,169
BankAmerica Corporation...................... 16,290 1,194,261
Federal National Mortgage Association........ 12,500 587,500
First Union Corporation...................... 17,000 851,063
H.F. Ahmanson & Company...................... 6,940 394,279
Household International, Incorporated........ 10,770 1,219,029
Merrill Lynch & Company...................... 5,710 423,611
----------
5,829,912
----------
FOOD & BEVERAGES -- (4.7%)
Hershey Foods Corporation.................... 19,330 1,092,145
PepsiCo, Incorporated........................ 19,730 800,298
----------
1,892,443
----------
INSURANCE -- (2.9%)
Travelers Group, Incorporated................ 17,280 1,179,360
----------
LEISURE -- (2.5%)
The Walt Disney Company...................... 12,530 1,010,231
----------
MANUFACTURING -- (1.5%)
Illinois Tool Works, Incorporated............ 11,790 588,763
----------
NEWSPAPER -- (1.4%)
New York Times Company Class A............... 10,820 568,050
----------
OIL -- (6.7%)
Mobil Corporation............................ 16,960 1,255,040
Royal Dutch Petroleum Company................ 18,700 1,037,850
Tosco Corporation............................ 11,810 411,136
----------
2,704,026
----------
</TABLE>
See notes to financial statements.
6
<PAGE>
SENECA FUNDS
SENECA GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONCLUDED)
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
- ------------------------------------------------- ------ -----------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
PAPER -- (2.1%)
Union Camp Corporation....................... 13,290 $ 819,827
----------
PETROLEUM SERVICES -- (6.9%)
Helmerich & Payne, Incorporated.............. 11,510 920,800
Nabors Industries, Incorporated (1).......... 4,050 157,697
Santa Fe International Corporation (1)....... 11,920 554,280
Schlumberger Limited......................... 13,520 1,138,215
----------
2,770,992
----------
RETAIL TRADE -- (7.9%)
Dayton Hudson Corporation.................... 16,950 1,015,941
Dillard Department Stores.................... 23,160 1,014,697
TJX Companies, Incorporated.................. 37,220 1,137,536
----------
3,168,174
----------
TELECOMMUNICATIONS -- (6.1%)
AT&T Corporation............................. 26,800 1,187,575
Bell Atlantic Corporation.................... 7,860 632,239
BellSouth Corporation........................ 13,040 603,100
----------
2,422,914
----------
TOTAL COMMON STOCKS (COST $33,732,177)........... 39,357,639
----------
SHORT TERM INVESTMENT -- 2.0%
REPURCHASE AGREEMENT (Cost $820,482)
State Street Bank and Trust Company, 4.250%,
to be repurchased at $820,579 on 10/01/97
(collateralized by $830,000 par value U.S.
Treasury Note 6.25% due 08/31/02, with a
value of $841,413)......................... 820,482
----------
TOTAL INVESTMENTS -- (COST $34,552,659*)......... 100.2% 40,178,121
OTHER ASSETS LESS LIABILITIES.................... (0.2)% (71,806)
---- ----------
NET ASSETS....................................... 100.0% $40,106,315
==== ==========
</TABLE>
(1) Non-income producing security.
* At September 30, 1997, the aggregate cost of investment in securities and
short term investments for income tax purposes was $34,575,275. Net
unrealized appreciation aggregated $5,602,846 of which $5,633,373 related to
appreciated investment securities and $30,527 related to depreciated
investment securities.
See notes to financial statements.
7
<PAGE>
SENECA FUNDS
SENECA MID-CAP "EDGE"(SM) FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
- -------------------------------------------------- ------ -----------
<S> <C> <C> <C>
COMMON STOCKS -- 97.4%
ADVERTISING SERVICES -- (2.9%)
Outdoor Systems, Incorporated (1)............. 13,240 $ 347,550
----------
AIRLINES -- (2.0%)
US Airways Group, Incorporated (1)............ 5,600 231,700
----------
AEROSPACE & DEFENSE -- (4.0%)
Armor Holdings, Incorporated (1).............. 9,190 117,173
Precision Castparts Corporation............... 5,390 350,350
----------
467,523
----------
APPAREL MANUFACTURER -- (8.3%)
Jones Apparel Group, Incorporated (1)......... 4,100 221,400
Kellwood Company.............................. 6,540 231,761
The Men's Wearhouse, Incorporated (1)......... 6,660 248,085
Wolverine World Wide, Incorporated............ 11,000 277,750
----------
978,996
----------
BROADCASTING -- (1.3%)
Jacor Communications, Incorporated (1)........ 3,380 149,354
----------
BUSINESS SERVICES -- (1.3%)
Inacom Corporation (1)........................ 3,970 147,634
----------
COMPUTER SOFTWARE & SERVICES -- (21.1%)
Computer Horizon Corporation (1).............. 6,560 237,800
Compuware Corporation......................... 4,430 268,015
Electronics for Imaging, Incorporated (1)..... 6,030 307,530
HBO & Company................................. 7,600 286,900
HNC Software, Incorporated (1)................ 6,050 240,487
Oracle Corporation (1)........................ 7,410 270,002
PeopleSoft, Incorporated (1).................. 4,780 285,605
Saville Systems Ireland plc ADR (1)........... 4,130 290,132
Wind River Systems (1)........................ 7,250 299,062
----------
2,485,533
----------
CONSUMER NON-DURABLE -- (2.1%)
Fort James Corporation........................ 5,440 249,220
----------
</TABLE>
See notes to financial statements.
8
<PAGE>
SENECA FUNDS
SENECA MID-CAP "EDGE"(SM) FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONTINUED)
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
- -------------------------------------------------- ------ -----------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
DRUGS & HEALTHCARE -- (3.2%)
McKesson Corporation.......................... 3,700 $ 377,169
----------
ELECTRICAL EQUIPMENT -- (2.0%)
Westinghouse Electric Corporation............. 8,520 230,573
----------
ELECTRONICS -- (11.6%)
Applied Materials, Incorporated (1)........... 3,550 338,138
ASM Lithography Holding NV (1)................ 1,210 119,487
KLA-Tencor Corporation (1).................... 4,670 315,517
Lattice Semiconductor Corporation (1)......... 1,660 108,108
Micrel, Incorporated (1)...................... 5,680 240,335
Maxim Integrated Products, Incorporated (1)... 3,440 245,745
----------
1,367,330
----------
FINANCIAL SERVICES -- (11.7%)
CMAC Investment Corporation................... 6,190 331,939
Comerica, Incorporated........................ 3,650 288,122
E*Trade Group, Incorporated (1)............... 4,980 234,060
Household International, Incorporated......... 2,430 275,046
Morgan Stanley Dean Witter Discover &
Company..................................... 4,760 257,337
----------
1,386,504
----------
FOOD & BEVERAGES -- (2.5%)
Interstate Bakeries Corporation............... 4,340 297,561
----------
HOUSEHOLD PRODUCTS -- (1.0%)
Windmere Durable Holdings, Incorporated....... 5,020 119,539
----------
INSURANCE -- (3.9%)
SunAmerica, Incorporated...................... 4,155 162,824
Travelers Property Casualty Corporation Class
A........................................... 7,320 296,460
----------
459,284
----------
MEDICAL PRODUCTS -- (0.9%)
Nitinol Medical Technologies, Incorporated
(1)......................................... 7,850 111,862
----------
OFFICE FURNISHINGS -- (1.8%)
Knoll, Incorporated (1)....................... 6,480 217,080
----------
</TABLE>
See notes to financial statements.
9
<PAGE>
SENECA FUNDS
SENECA MID-CAP "EDGE"(SM) FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONCLUDED)
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
- -------------------------------------------------- ------ -----------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
OIL & GAS -- (0.9%)
Tosco Corporation............................. 3,200 $ 111,400
----------
OIL EQUIPMENT & SERVICES -- (9.4%)
Camco International, Incorporated............. 3,210 223,897
Diamond Offshore Drilling, Incorporated....... 4,320 238,410
EVI, Incorporated (1)......................... 5,130 328,320
Patterson Energy, Incorporated (1)............ 6,040 316,345
----------
1,106,972
----------
RETAIL TRADE -- (4.5%)
Proffitt's, Incorporated (1).................. 3,880 229,890
TJX Companies, Incorporated................... 10,030 306,542
----------
536,432
----------
TELECOMMUNICATIONS -- (1.0%)
RSL Communications, Ltd. Class A (1).......... 5,360 117,920
----------
TOTAL COMMON STOCKS (COST $10,109,745)............ 11,497,136
----------
SHORT TERM INVESTMENT -- 5.2%
REPURCHASE AGREEMENT (Cost $617,321)
State Street Bank and Trust Company, 4.25%,
to be repurchased at $617,394 on 10/01/97
(collateralized by $625,000 par value U.S.
Treasury Note 6.25% due 08/31/02, with a
value of $633,594).......................... 617,321
----------
TOTAL INVESTMENTS (COST $10,727,066*)............. 102.6% 12,114,457
OTHER ASSETS LESS LIABILITIES..................... (2.6)% (304,758)
---- ----------
NET ASSETS........................................ 100.0% $11,809,699
==== ==========
</TABLE>
(1) Non-income producing security.
* At September 30, 1997, the aggregate cost of investment in securities and
short term investments for income tax purposes was $10,731,140. Net
unrealized appreciation aggregated $1,383,317, of which $1,393,988, related
to appreciated investment securities and $10,671, related to depreciated
investment securities.
See notes to financial statements.
10
<PAGE>
SENECA FUNDS
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
- ------------------------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS -- 85.7%
AIRLINES -- (5.1%)
Alaska Airlines,
Incorporated (2)........ 9.500% 04/12/2010 $121,979 $ 133,986
Delta Air Lines,
Incorporated............ 10.060% 01/02/2016 65,000 79,834
United Airlines,
Incorporated (2)........ 10.110% 02/19/2006 23,107 26,148
United Airlines,
Incorporated (2)........ 9.760% 05/27/2006 93,012 104,750
United Airlines,
Incorporated (2)........ 9.020% 04/19/2012 94,462 107,083
--------
451,801
--------
APPAREL -- (1.7%)
Ann Taylor,
Incorporated............ 8.750% 06/15/2000 150,000 149,625
--------
ASSET BACKED -- (2.5%)
General Electric Capital
Mortgage Services,
Incorporated, Series
1994-21, Class B1 (2)... 6.500% 08/25/2009 34,225 33,287
General Motors Acceptance
Corporation Series
1994-A, Class A......... 6.300% 06/15/1999 30,547 30,598
Olympic Automobile
Receivable Trust Series
1996-B.................. 6.900% 02/15/2004 120,000 121,939
Standard Credit Card
Master Trust I, Series
1993-2, Class A......... 5.950% 10/07/2004 40,000 39,050
--------
224,874
--------
BROADCASTING -- (6.2%)
Chancellor Broadcasting
Corporation............. 9.375% 10/01/2004 75,000 78,563
Chancellor Broadcasting
Corporation............. 8.750% 06/15/2007 100,000 102,750
</TABLE>
See notes to financial statements.
11
<PAGE>
SENECA FUNDS
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONTINUED)
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
- ------------------------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
BROADCASTING (CONTINUED)
Commodore Media,
Incorporated............ 7.500% 05/01/2003 $150,000 $ 165,375
Jacor, Incorporated....... 10.125% 06/15/2006 100,000 109,500
SFX Broadcasting,
Incorporated............ 10.750% 05/15/2006 85,000 93,606
--------
549,794
--------
COMMUNICATION SERVICES -- (2.3%)
PanAmStat Corporation..... 9.750% 08/01/2000 200,000 209,000
--------
DRUGS & HEALTH CARE -- (2.0%)
Abbey Healthcare Group.... 9.500% 11/01/2002 175,000 182,437
--------
DEFENSE -- (1.1%)
Tracor, Incorporated...... 8.500% 03/01/2007 100,000 103,000
--------
ENERGY -- (7.3%)
El Paso Tenneco........... 9.140% 12/31/2001 300,000 300,000
SFP Pipeline Holdings..... 11.160% 08/15/2010 275,000 353,493
--------
653,493
--------
FINANCE & BANKING -- (17.6%)
BankAmerica............... 8.070% 12/31/2026 400,000 416,079
Countrywide Capital,
Incorporated............ 8.000% 12/15/2026 200,000 205,950
Countrywide Funding....... 5.900% 04/22/1999 30,000 29,948
Dollar Financial Group.... 10.875% 11/15/2006 150,000 162,000
Donaldson Lufkin &
Jenrette................ 6.875% 11/01/2005 50,000 50,101
First Republic Bancorp.... 7.750% 09/15/2012 100,000 99,383
Lehman ABS Corporation
(2)..................... 8.145% 11/02/2007 83,040 82,209
Lehman Brothers
Holdings................ 8.800% 03/01/2015 80,000 92,756
Socgen Real Estate........ 7.640% 12/29/2049 150,000 152,510
Wells Fargo Capital A..... 8.125% 12/01/2026 100,000 103,155
Wells Fargo Capital B..... 7.950% 12/01/2026 125,000 125,451
Williams Scotsman,
Incorporated............ 9.875% 06/01/2007 50,000 51,250
--------
1,570,792
--------
</TABLE>
See notes to financial statements.
12
<PAGE>
SENECA FUNDS
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONTINUED)
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
- ------------------------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
GROCERY STORES -- (1.3%)
Smith's Food & Drug
Centers, Incorporated... 8.640% 07/02/2012 $100,000 $ 108,500
Vons Company,
Incorporated............ 8.375% 10/01/1999 10,000 10,062
--------
118,562
--------
HOTELS -- (11.5%)
Bally Park Place
Funding................. 9.250% 03/15/2004 100,000 107,000
Caesars World............. 8.875% 08/15/2002 350,000 363,125
Casino America............ 11.500% 11/15/2001 75,000 78,341
HMH Properties............ 8.875% 07/15/2007 150,000 154,686
John Q. Hammons Hotels.... 8.875% 02/15/2004 130,000 131,950
John Q. Hammons Hotels.... 9.750% 10/01/2005 100,000 104,875
Wyndham Hotel
Corporation............. 10.500% 05/15/2006 75,000 85,500
--------
1,025,477
--------
INDUSTRIAL -- (0.3%)
MVE, Incorporated......... 12.500% 02/15/2002 30,000 31,500
--------
INSURANCE -- (2.8%)
Terra Nova Holdings....... 7.200% 08/15/2007 250,000 252,427
--------
MANAGEMENT SERVICES -- (1.8%)
Blount, Incorporated...... 9.000% 06/15/2003 150,000 157,500
--------
MANUFACTURING -- (0.2%)
Hawk Corporation.......... 10.250% 12/01/2003 15,000 16,012
--------
MULTIMEDIA -- (3.6%)
Cablevision Industries
Corporation............. 9.250% 04/01/2008 90,000 97,396
News Corporation
Limited................. 0.000% 06/15/1999 200,000 180,000
Time Warner,
Incorporated............ 9.125% 01/15/2013 35,000 40,166
--------
317,562
--------
NEWSPAPER -- (0.9%)
Garden State Newspapers... 8.750% 10/01/2009 75,000 75,938
--------
OFFICE SUPPLIES -- (0.9%)
Corporate Express,
Incorporated............ 9.125% 03/15/2004 75,000 76,875
--------
</TABLE>
See notes to financial statements.
13
<PAGE>
SENECA FUNDS
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONTINUED)
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
- ------------------------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
CORPORATE BONDS (CONTINUED)
OIL -- (5.7%)
Falcon Holding Group
L.P..................... 11.000% 09/15/2003 $200,000 $ 208,500
Noble Drilling
Corporation............. 9.125% 07/01/2006 90,000 97,650
Trico Marine Services..... 8.500% 08/01/2005 200,000 203,250
--------
509,400
--------
REAL ESTATE -- (7.1%)
ERP Operating Limited
Partnership............. 7.570% 08/15/2026 150,000 157,375
Property Trust America.... 6.875% 02/15/2008 5,000 4,939
Security Capital Pacific
Trust................... 7.900% 02/15/2016 200,000 201,239
Washington REIT........... 7.125% 08/13/2003 110,000 112,127
Weingarten Realty......... 6.880% 06/25/2027 150,000 154,928
--------
630,608
--------
THEATERS -- (3.8%)
AMC Entertainment
Incorporated............ 9.500% 03/15/2009 100,000 102,250
Plitt Theaters,
Incorporated............ 10.875% 06/15/2004 75,000 79,688
United Artists Theatre
Circuit, Incorporated
Sr. Secured Notes,
Series B................ 11.500% 05/01/2002 150,000 158,250
--------
340,188
--------
TOTAL CORPORATE BONDS (COST $7,430,664)............. 7,646,865
--------
U.S. GOVERNMENT AGENCIES -- 7.5%
COLLATERALIZED MORTGAGE OBLIGATIONS -- (6.2%)
Federal Home Loan Mortgage
Corporation, REMIC,
Series 151, Class E
(2)..................... 9.000% 09/15/2020 24,124 24,470
Federal Home Loan Mortgage
Corporation, REMIC,
Series 1032, Class E
(2)..................... 8.750% 12/15/2020 31,973 33,093
Federal Home Loan Mortgage
Corporation, REMIC,
Series 1142, Class H.... 7.950% 12/15/2020 300,000 308,092
</TABLE>
See notes to financial statements.
14
<PAGE>
SENECA FUNDS
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONTINUED)
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
- ------------------------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCIES -- (CONTINUED)
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
Federal National Mortgage
Association, REMIC, Series
1989-80, Class E (2)...... 9.000% 09/25/2018 $ 71,067 $ 72,996
Federal National Mortgage
Association, REMIC, Series
1990-4, Class G (2)....... 8.750% 05/25/2017 76,415 78,759
Federal National Mortgage
Association, REMIC, Series
1993-179,
Class S, I.O.............. 3.031% 10/25/2023 655,169 32,349
--------
549,759
--------
MORTGAGE-BACKED PASS-THROUGH SECURITY -- (0.3%)
Government National Mortgage
Association, Pool #408215
(2)....................... 7.000% 02/15/2026 23,501 23,523
--------
U.S. TREASURY STRIPS -- (1.0%)
U.S. Treasury Strips........ 0.000% 08/15/2020 400,000 90,384
--------
TOTAL U.S. GOVERNMENT AGENCIES (COST $661,679)............... 663,666
--------
FOREIGN BONDS -- 0.3% (COST $22,147)
Republic of Brazil........ 6.500% 01/01/2001 23,550 23,397
--------
<CAPTION>
SHARES
---------
<S> <C> <C> <C> <C> <C>
PREFERRED STOCK -- 3.9% (COST $331,250)
Microsoft Corporation,
Pfd Series A.................................. 4,000 350,750
--------
WARRANTS -- 0.0% (COST $0)
MVE, Incorporated............................... 30 0
--------
TOTAL INVESTMENTS IN SECURITIES (COST $8,445,740).............. 8,684,678
--------
</TABLE>
See notes to financial statements.
15
<PAGE>
SENECA FUNDS
SENECA BOND FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONCLUDED)
<TABLE>
<CAPTION>
NAME OF ISSUER INTEREST MATURITY PRINCIPAL
AND TITLE OF ISSUE RATE DATE AMOUNT VALUE
- ------------------------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
SHORT TERM INVESTMENTS -- 1.1%
U.S. GOVERNMENT AGENCIES (Cost $100,000)
Federal Home Loan Bank,
Discount Note........... 5.920% 10/01/1997 $100,000 $ 100,000
----------
TOTAL INVESTMENTS -- (COST $8,545,740*)............. 98.5% 8,784,678
OTHER ASSETS LESS LIABILITIES....................... 1.5% 137,483
----- ----------
NET ASSETS.......................................... 100.0% $8,922,161
===== =========
</TABLE>
(2) Subject to principal paydowns as a result of prepayments or refinancings of
the underlying mortgage instruments. As a result, the average life may be
substantially less than the original maturity.
* At September 30, 1997, the aggregate cost of investment in securities and
short term investments for income tax purposes was $8,555,857. Net
unrealized appreciation aggregated $228,821, of which $245,550 related to
appreciated investment securities and $16,729 related to depreciated
investment securities.
See notes to financial statements.
16
<PAGE>
SENECA FUNDS
SENECA REAL ESTATE SECURITIES FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
- ------------------------------------------------ ------ -----------
<S> <C> <C> <C>
COMMON STOCKS -- 93.0%
BUILDING -- MANUFACTURED HOUSING -- (1.2%)
Oakwood Homes Corporation................... 13,000 $ 368,875
-----------
HOTELS AND RESTAURANTS -- (4.3%)
Circus Circus Entertainment (1)............. 27,400 690,138
Host Marriott Corporation (1)............... 29,000 659,750
-----------
1,349,888
-----------
REAL ESTATE DEVELOPMENT -- (3.1%)
Catellus Development Corporation (1)........ 46,400 962,800
-----------
REAL ESTATE INVESTMENT TRUSTS -- (84.4%)
Ambassador Apartments, Incorporated......... 6,100 145,256
American General Hospitality Corporation.... 23,000 669,875
Apartment Investment and Management Company
Class A................................... 17,470 631,104
Arden Realty Group, Incorporated............ 10,000 313,750
Avalon Properties, Incorporated............. 16,500 490,875
Bedford Property Investors, Incorporated.... 37,100 816,200
Berkshire Realty Company, Incorporated...... 28,500 349,125
Boston Properties, Incorporated (1)......... 28,000 918,750
Burnham Pacific Properties.................. 12,000 177,750
Cali Realty Corporation..................... 25,300 1,053,113
Centerpoint Properties...................... 13,700 497,481
Cornerstone Properties, Incorporated........ 26,100 499,162
Developers Diversified Realty Corporation... 12,200 488,000
Equity Office Properties Trust.............. 15,000 509,062
Equity Residential Properties Trust......... 31,200 1,702,350
Essex Property Trust, Incorporated.......... 4,000 139,250
Evans Withycombe Residential,
Incorporated.............................. 20,000 540,000
Felcor Suite Hotels, Incorporated........... 20,275 832,542
First Industrial Realty Trust,
Incorporated.............................. 27,500 935,000
General Growth Properties................... 12,400 458,800
Glenborough Realty Trust, Incorporated...... 2,500 69,219
Irvine Apartment Communities,
Incorporated.............................. 13,436 448,426
Liberty Property Trust...................... 30,550 822,941
Manufactured Home Communities............... 27,700 720,200
</TABLE>
See notes to financial statements.
17
<PAGE>
SENECA FUNDS
SENECA REAL ESTATE SECURITIES FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONTINUED)
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE SHARES VALUE
- ------------------------------------------------ ------ -----------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
REAL ESTATE INVESTMENT TRUSTS (CONTINUED)
Merry Land & Investment Trust Company,
Incorporated.............................. 2,300 $ 50,744
Pacific Gulf Properties, Incorporated....... 37,050 879,937
Patriot American Hospitality,
Incorporated.............................. 38,859 1,238,631
Prentiss Properties Trust................... 33,400 964,425
Redwood Trust, Incorporated................. 32,300 981,112
SL Green Realty Trust (1)................... 15,000 388,125
Security Capital Atlantic, Incorporated..... 33,525 750,122
Security Capital Pacific Trust.............. 26,971 633,818
Simon Debartolo Group, Incorporated......... 24,615 812,295
Sovran Self Storage, Incorporated........... 9,000 283,500
Speiker Properties, Incorporated............ 27,000 1,095,188
Sunstone Hotel Investors, Incorporated...... 46,900 826,613
The Macerich Company........................ 27,500 794,062
Thornburg Mortgage Asset Association........ 29,700 623,700
TriNet Corporate Realty Trust,
Incorporated.............................. 25,500 895,688
Urban Shopping Centers, Incorporated........ 32,500 1,040,000
----------
26,486,191
----------
TOTAL COMMON STOCKS (Cost $25,279,736).......... 29,167,754
----------
WARRANTS -- 0.1% (Cost $30,639)
Security Capital Group, Expire 9/98......... 3,804 29,244
----------
TOTAL INVESTMENTS IN SECURITIES (COST
$25,310,375).................................... 29,196,998
----------
SHORT TERM INVESTMENT -- 5.6%
REPURCHASE AGREEMENT (Cost $1,760,547)
State Street Bank and Trust Company, 4.25%,
to be repurchased at $1,760,755 on
10/01/97 (collateralized by $1,775,000 par
value U.S. Treasury Note 6.25% due
08/31/02, with a value of $1,799,406)..... 1,760,547
----------
</TABLE>
See notes to financial statements.
18
<PAGE>
SENECA FUNDS
SENECA REAL ESTATE SECURITIES FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1997
(CONCLUDED)
<TABLE>
<CAPTION>
NAME OF ISSUER
AND TITLE OF ISSUE VALUE
- ------------------------------------------------ -----------
<S> <C> <C> <C>
TOTAL INVESTMENTS -- (COST $27,070,922*)........ 98.7% $30,957,545
OTHER ASSETS LESS LIABILITIES................... 1.3% 410,902
----- -----------
NET ASSETS...................................... 100.0% $31,368,447
===== ==========
</TABLE>
(1) Non-income producing security.
* At September 30, 1997, the aggregate cost of investment in securities and
short term investments for income tax purposes was $27,095,742. Net
unrealized appreciation aggregated $3,861,803, of which $4,495,936 related
to appreciated investment securities and $634,133 related to depreciated
investment securities.
See notes to financial statements.
19
<PAGE>
SENECA FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1997
<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)..................................... $39,357,639 $11,497,136 $8,684,678 $29,196,998
Short Term Investments................... 820,482 617,321 100,000 1,760,547
Cash..................................... -- 37,578 2,367 --
Dividends and interest receivable........ 46,943 4,302 149,805 162,628
Receivable for securities sold........... 613,516 1,101,816 -- 471,960
Receivable for Fund shares sold.......... 8,094 -- 70,500 178,000
Deferred organization costs (Note 5)..... 33,859 33,994 33,859 33,859
Other assets............................. 445 224 113 43,026
Due from Investment Manager (Note 3)..... 10,285 -- -- 67
----------- ----------- ---------- -----------
TOTAL ASSETS........................... 40,891,263 13,292,371 9,041,322 31,847,085
----------- ----------- ---------- -----------
LIABILITIES
Due to Investment Manager (Note 3)....... -- 12,023 12,157 --
Payable for securities purchased......... 710,160 1,426,486 74,561 314,755
Payable for Fund shares redeemed......... 1,071 -- -- 91,632
Trustees fees payable (Note 3)........... 3,753 3,753 3,753 3,753
Distribution fees payable (Note 3)....... 3,643 1,405 -- 1,807
Dividends payable........................ -- -- 1,110 2,097
Other accrued expenses................... 66,321 39,005 27,580 64,594
----------- ----------- ---------- -----------
TOTAL LIABILITIES...................... 784,948 1,482,672 119,161 478,638
----------- ----------- ---------- -----------
NET ASSETS............................. $40,106,315 $11,809,699 $8,922,161 $31,368,447
=========== =========== ========== ===========
NET ASSETS
Capital paid-in.......................... $32,095,920 $ 9,193,888 $8,569,263 $26,235,633
Undistributed net investment income...... 28,234 -- 4,453 23,407
Accumulated net realized gain on
investments............................ 2,356,699 1,228,420 109,507 1,222,784
Net unrealized appreciation of
investments............................ 5,625,462 1,387,391 238,938 3,886,623
----------- ----------- ---------- -----------
NET ASSETS............................. $40,106,315 $11,809,699 $8,922,161 $31,368,447
=========== =========== ========== ===========
INVESTMENTS IN SECURITIES, AT COST....... $34,552,659 $10,727,066 $8,545,740 $27,070,922
INSTITUTIONAL SHARES:
Net assets............................. $34,092,888 $ 9,390,224 $8,922,161 $28,192,515
Total shares outstanding............... 2,074,597 570,101 852,565 1,915,934
Net asset value, offering and redemption
price per Institutional share.......... $ 16.43 $ 16.47 $ 10.47 $ 14.71
=========== =========== ========== ===========
ADMINISTRATIVE SHARES:
Net assets............................. $ 6,013,427 $ 2,419,475 $ -- $ 3,175,932
Total shares outstanding............... 369,418 146,739 -- 216,409
Net asset value, offering and redemption
price per Administrative share......... $ 16.28 $ 16.49 $ -- $ 14.68
=========== =========== ========== ===========
</TABLE>
See notes to financial statements.
20
<PAGE>
SENECA FUNDS
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
MID-CAP REAL ESTATE
GROWTH "EDGE"(SM) BOND SECURITIES
FUND FUND FUND FUND
---------- ---------- --------- -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Dividends (a)................. $ 405,505 $ 35,305 $ 4,307 $ 742,196
Interest...................... 119,808 50,505 530,318 99,995
---------- ---------- --------- ----------
TOTAL INCOME................ 525,313 85,810 534,625 842,191
---------- ---------- --------- ----------
EXPENSES
Management fee (Note 3)....... 200,056 89,157 34,294 164,147
Administrative fee (Note 3)... 57,514 56,326 55,433 57,899
Transfer agent fees........... 53,404 52,094 21,342 43,373
Custodian fees................ 47,040 40,605 33,210 42,888
Distribution fees (Note 3).... 8,465 5,652 154 4,688
Registration and filing
fees........................ 24,233 17,969 14,397 24,384
Audit fees.................... 12,874 12,839 11,374 11,374
Legal fees.................... 18,389 18,366 18,384 18,384
Trustees fees................. 8,131 8,131 8,131 8,131
Amortization of organization
expenses (Note 5)........... 30,545 30,545 30,545 30,545
Other......................... 12,104 12,230 4,374 12,556
---------- ---------- --------- ----------
Expenses before waiver and
reimbursement............... 472,755 343,914 231,638 418,369
Fees waived and expenses
reimbursed by Investment
Manager (Note 3)............ (5,174) (135,798) (126,387) (16,628)
---------- ---------- --------- ----------
TOTAL EXPENSES.............. 467,581 208,116 105,251 401,741
---------- ---------- --------- ----------
NET INVESTMENT INCOME
(LOSS).................... 57,732 (122,306) 429,374 440,450
---------- ---------- --------- ----------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on
investments................. 2,408,148 1,355,512 111,291 1,229,877
Change in net unrealized
appreciation of
investments................. 5,006,042 369,616 189,346 3,822,456
---------- ---------- --------- ----------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS....... 7,414,190 1,725,128 300,637 5,052,333
---------- ---------- --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS..... $7,471,922 $1,602,822 $ 730,011 $5,492,783
========== ========== ========= ==========
(a) Net of foreign withholding
taxes of: .................. $ 1,524 $ -- $ -- $ --
========== ========== ========= ==========
</TABLE>
See notes to financial statements.
21
<PAGE>
SENECA FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MID-CAP
GROWTH FUND "EDGE"(SM) FUND
----------------------------- -----------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996* 1997 1996*
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
From operations:
Net investment income
(loss).................... $ 57,732 $ 32,326 $ (122,306) $ 4,615
Net realized gain on
investments............... 2,408,148 965,464 1,355,512 77,414
Change in net unrealized
appreciation of
investments............... 5,006,042 619,419 369,616 1,017,775
----------- ----------- ----------- ----------
Net increase in net assets
resulting from
operations................ 7,471,922 1,617,209 1,602,822 1,099,804
Dividends and Distributions
to shareholder from Net
investment income:
Administrative Shares..... (3) -- (7) --
Institutional Shares...... (99,739) -- (22,426) --
Net realized gains:
Administrative Shares..... (19,063) -- (12,053) --
Institutional Shares...... (997,531) -- (89,792) --
----------- ----------- ----------- ----------
Total Dividends and
Distributions............... (1,116,336) -- (124,278) --
Net increase from Fund share
transactions (Note 6)....... 20,364,803 11,743,717 1,548,006 7,658,345
----------- ----------- ----------- ----------
TOTAL INCREASE............ 26,720,389 13,360,926 3,026,550 8,758,149
Net Assets
Beginning of period......... 13,385,926 25,000 8,783,149 25,000
----------- ----------- ----------- ----------
End of period (a)........... $40,106,315 $13,385,926 $11,809,699 $ 8,783,149
=========== =========== =========== ==========
(a) Including undistributed
net investment income..... $ 28,234 $ 50,611 $ -- $ 22,765
</TABLE>
* The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 8, 1996, March 8, 1996, March 7,
1996, and March 12, 1996, respectively.
See notes to financial statements.
22
<PAGE>
SENECA FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
REAL ESTATE
BOND FUND SECURITIES FUND
---------------------------- ----------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996* 1997 1996*
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
From operations:
Net investment income.... $ 429,374 $ 93,149 $ 440,450 $ 8,501
Net realized gain (loss)
on investments......... 111,291 13,694 1,229,877 (2,568)
Change in net unrealized
appreciation of
investments............ 189,346 49,605 3,822,456 64,166
---------- ---------- ----------- ----------
Net increase in net
assets resulting from
operations............. 730,011 156,448 5,492,783 70,099
Dividends and Distributions
to shareholder from Net
investment income:
Administrative
Shares............... (2,145) (1,994) (29,699) (1,227)
Institutional Shares... (462,401) (90,013) (425,038) (7,178)
Net realized gains:
Administrative
Shares............... (672) -- (194) --
Institutional Shares... (13,922) -- (4,331) --
---------- ---------- ----------- ----------
Total Dividends and
Distributions............ (479,140) (92,007) (459,262) (8,405)
Net increase from Fund
share transactions (Note
6)....................... 4,548,696 4,033,153 25,039,363 1,208,869
---------- ---------- ----------- ----------
TOTAL INCREASE......... 4,799,567 4,097,594 30,072,884 1,270,563
Net Assets
Beginning of period...... 4,122,594 25,000 1,295,563 25,000
---------- ---------- ----------- ----------
End of period (a)........ $ 8,922,161 $ 4,122,594 $31,368,447 $ 1,295,563
========== ========== =========== ==========
(a) Including undistributed
net investment
income................. $ 4,453 $ 19,427 $ 23,407 $ 18,381
</TABLE>
* The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 8, 1996, March 8, 1996, March 7,
1996, and March 12, 1996, respectively.
See notes to financial statements.
23
<PAGE>
SENECA FUNDS -- INSTITUTIONAL SHARES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MID-CAP
GROWTH FUND "EDGE"(SM) FUND
---------------------------- ----------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996* 1997 1996*
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD.......................... $ 13.74 $ 10.00 $ 14.97 $ 10.00
---------- ----------- ---------- ----------
INCOME FROM INVESTMENT
OPERATIONS:
Net Investment Income (Loss)
(1)........................... 0.03 0.03 (0.17) 0.01
Net Realized and Unrealized Gain
on Investments................ 3.50 3.71 1.84 4.96
---------- ----------- ---------- ----------
TOTAL FROM INVESTMENT
OPERATIONS.................... 3.53 3.74 1.67 4.97
---------- ----------- ---------- ----------
Distributions to Shareholders
from Net Investment Income...... (0.07) -- (0.07) --
Net Realized Gains.............. (0.77) -- (0.10) --
---------- ----------- ---------- ----------
Total Distribution.............. (0.84) -- (0.17) --
---------- ----------- ---------- ----------
NET ASSET VALUE AT END OF
PERIOD.......................... $ 16.43 $ 13.74 $ 16.47 $ 14.97
========== =========== ========== ==========
TOTAL RETURN (2)................. 27.27% 37.40% 11.39% 49.70%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period..... $34,092,888 $12,919,525 $ 9,390,224 $ 7,427,656
Ratio of Operating Expenses to
Average Net Assets............ 1.52% 0.81%(3) 1.74% 0.90%(3)
Ratio of Operating Expenses to
Average Net Assets (4)........ 1.52% 3.49%(3) 2.77% 5.73%(3)
Ratio of Net Investment Income
(Loss) to Average Net
Assets........................ 0.31% 0.76%(3) (0.97)% 0.27%(3)
Portfolio Turnover Rate......... 145.69% 87.66% 283.60% 72.34%
Average Commission Rate (5)..... $ 0.0595 $ 0.0598 $ 0.0580 $ 0.0595
</TABLE>
* The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 8, 1996, March 8, 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 as follows
for the year ended September 30, 1997 and the period ended September 30,
1996, respectively: $0.03 and $(0.09) for the Growth Fund; $(0.33) and
$(0.19) for the Mid-Cap "Edge"(SM) 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 Investment Manager.
(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 as
indicated.
(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.
24
<PAGE>
SENECA FUNDS -- INSTITUTIONAL SHARES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
REAL ESTATE
BOND FUND SECURITIES FUND
------------------------------ ------------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996* 1997 1996*
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD... $ 10.09 $ 10.00 $ 11.10 $ 10.00
--------- --------- ---------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1)............... 0.62 0.31 0.13 0.13
Net Realized and Unrealized Gain on
Investments........................... 0.47 0.08 3.77 1.10
--------- --------- ---------- ---------
TOTAL FROM INVESTMENT OPERATIONS........ 1.09 0.39 3.90 1.23
--------- --------- ---------- ---------
Distributions to Shareholders from
Net Investment Income................... (0.69) (0.30) (0.28) (0.13)
Net Realized Gains...................... (0.02) -- (0.01) --
--------- --------- ---------- ---------
Total Distribution...................... (0.71) (0.30) (0.29) (0.13)
--------- --------- ---------- ---------
NET ASSET VALUE AT END OF PERIOD......... $ 10.47 $ 10.09 $ 14.71 $ 11.10
========= ========= ========== =========
TOTAL RETURN (2)......................... 11.26% 4.02% 35.44% 12.39%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period............. $ 8,922,161 $ 3,926,664 $28,192,515 $ 1,073,080
Ratio of Operating Expenses to Average
Net Assets............................ 1.53% 0.56%(3) 1.99% 1.00%(3)
Ratio of Operating Expenses to Average
Net Assets (4)........................ 3.41% 9.31%(3) 1.99% 53.04%(3)
Ratio of Net Investment Income to
Average Net Assets.................... 6.31% 7.54%(3) 2.38% 4.39%(3)
Portfolio Turnover Rate................. 99.68% 52.82% 75.68% 30.70%
Average Commission Rate (5)............. N/A N/A $ 0.0559 $ 0.0564
</TABLE>
* The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 8, 1996, March 8, 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 as follows
for the year ended September 30, 1997 and the period ended September 30,
1996, respectively: $0.47 and $(0.05) for the Bond Fund; $0.13 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 Investment Manager.
(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 as
indicated.
(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.
25
<PAGE>
SENECA FUNDS -- ADMINISTRATIVE SHARES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
MID-CAP
GROWTH FUND "EDGE"(SM) FUND
---------------------------- ----------------------------
YEAR PERIOD YEAR PERIOD
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996* 1997 1996*
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF
PERIOD........................... $ 13.63 $ 10.00 $ 14.94 $ 10.00
---------- -------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment (Loss) (1)........ (0.08) -- (0.25) (0.01)
Net Realized and Unrealized Gain
on Investments................. 3.50 3.63 1.90 4.95
---------- -------- ---------- ----------
TOTAL FROM INVESTMENT
OPERATIONS..................... 3.42 3.63 1.65 4.94
---------- -------- ---------- ----------
Distributions to Shareholders from
Net Investment Income............ -- -- -- --
Net Realized Gains............... (0.77) -- (0.10) --
---------- -------- ---------- ----------
Total Distribution............... (0.77) -- (0.10) --
---------- -------- ---------- ----------
NET ASSET VALUE AT END OF
PERIOD........................... $ 16.28 $ 13.63 $ 16.49 $ 14.94
========== ======== ========== ==========
TOTAL RETURN (2).................. 26.51% 36.30% 11.25% 49.30%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period...... $ 6,013,427 $ 466,401 $ 2,419,475 $ 1,355,493
Ratio of Operating Expenses to
Average Net Assets............. 2.48% 1.46%(3) 2.37% 1.55%(3)
Ratio of Operating Expenses to
Average Net Assets (4)......... 2.63% 14.01%(3) 4.32% 9.73%(3)
Ratio of Net Investment Income
(Loss) to Average Net Assets... (0.62)% 0.16%(3) (1.60)% (0.46)%(3)
Portfolio Turnover Rate.......... 145.69% 87.66% 283.60% 72.34%
Average Commission Rate (5)...... $ 0.0595 $ 0.0598 $ 0.0580 $ 0.0595
</TABLE>
* The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 8, 1996, March 8, 1996, March 7,
1996, and March 12, 1996, respectively.
(1) Net investment 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 as follows
for the year ended September, 1997 and the period ended September 30, 1996,
respectively: $(0.09) and $(0.34) for the Growth Fund; $(0.55) and $(0.20)
for Mid-Cap "EDGE"(SM) 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 Investment Manager.
(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 as
indicated.
(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.
26
<PAGE>
SENECA FUNDS -- ADMINISTRATIVE SHARES
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
REAL ESTATE
BOND FUND SECURITIES FUND
------------- -----------------------------
PERIOD YEAR PERIOD
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1996* 1997 1996*
------------- ------------- -------------
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD....... $ 10.00 $ 11.08 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (1)................... 0.29 0.03 0.13
Net Realized and Unrealized Gain on
Investments............................... 0.09 3.78 1.08
-------- ---------- --------
TOTAL FROM INVESTMENT OPERATIONS............ 0.38 3.81 1.21
-------- ---------- --------
Distributions to Shareholders from Net
investment income........................... (0.29) (0.20) (0.13)
Net realized gains.......................... -- (0.01) --
-------- ---------- --------
Total distribution.......................... (0.29) (0.21) (0.13)
-------- ---------- --------
NET ASSET VALUE AT END OF PERIOD............. $ 10.09 $ 14.68 $ 11.08
======== ========== ========
TOTAL RETURN (2)............................. 3.86% 34.54% 12.22%
RATIOS & SUPPLEMENTAL DATA
Net Assets at End of Period................. $ 195,930 $ 3,175,932 $ 222,483
Ratio of Operating Expenses to Average Net
Assets (3)................................ 1.21%(3) 2.91% 1.65%(3)
Ratio of Operating Expenses to Average Net
Assets (3)(4)............................. 39.23% 3.79% 73.01%
Ratio of Net Investment Income to Average
Net Assets (3)............................ 6.46% 1.37% 4.61%
Portfolio Turnover Rate..................... 52.82% 75.68% 30.70%
Average Commission Rate (5)................. N/A $ 0.0559 $ 0.0564
</TABLE>
* The Growth, Mid-Cap "EDGE"(SM), Bond, and Real Estate Securities Funds
commenced investment operations on March 8, 1996, March 8, 1996, March 7,
1996, and March 12, 1996, respectively.
** As of December 26, 1996, the Bond Administrative Shares merged with Bond
Institutional Shares.
(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 as follows
for the year ended September 30, 1997 and the period ended September 30,
1996, respectively: $(0.04) and $(1.96) for the Real Estate Securities Fund
and $(1.41) for the Bond Fund for the period ended September 30, 1996.
(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 Investment Manager.
(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 as
indicated.
(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.
27
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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 and was declared
effective as of March 1, 1996. 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. As of December 26, 1996,
the Bond Administrative Shares merged with the Bond Institutional Shares in a
tax free transaction.
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,
28
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
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.
Securities 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.
DIVIDENDS AND DISTRIBUTIONS: Dividends from net investment income on shares of
the Seneca Bond Fund are determined at the
29
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
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.
For the year ended September 30, 1997, the Funds identified permanent
differences in each fund's organization costs resulting from differing book and
tax accounting methods. Adjusting for this difference resulted in a $19,314
decrease in each fund's paid-in capital and a corresponding increase in the
fund's undistributed net investment income.
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
30
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
reported amounts of income and expenses during the reporting period. Actual
results could differ from these estimates.
NOTE 3 -- AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
The Trust has an Investment Management Agreement with GMG/Seneca Capital
Management LP ("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.
On July 17, 1997, GMG/Seneca Capital Management LLC transferred its rights and
obligations as investment manager of the Funds to GMG/Seneca, which was at that
time owned by the same persons as then owned Seneca Capital Management LLC.
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.
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, 1997. GMG/Seneca has entered
31
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
into an agreement with State Street Bank & Trust Company ("State Street") to
provide most of the administrative functions for the Trust.
GMG/Seneca had agreed to voluntarily waive its Management and Administrative
fees and reimburse other operating expenses of each Fund (other than certain
extraordinary or non-recurring expenses) until the earlier of September 30, 1997
or such time as the Trust's aggregate assets exceeded $60 million, to the extent
necessary to prevent the expenses for each Fund and class from exceeding the
following percentages of average daily net assets:
<TABLE>
<CAPTION>
ADMINISTRATIVE INSTITUTIONAL
FUND CLASS CLASS
- ------------------------------------------- -------------- -------------
<S> <C> <C>
Seneca Growth Fund......................... 1.50% 0.85%
Seneca Mid-Cap "EDGE"(SM) Fund............. 1.60% 0.95%
Seneca Bond Fund........................... 1.30% 0.65%
Seneca Real Estate Fund.................... 1.70% 1.05%
</TABLE>
These percentages were in effect from October 1, 1996 through January 31, 1997
at which time the aggregate assets of the Trust exceeded $60 million. From
February 1, 1997 to September 30, 1997, GMG/Seneca had agreed to voluntarily
waive its Management and Administrative fees and reimburse other operating
expenses of each Fund to the extent necessary to prevent the expenses for each
Fund and class from exceeding the following percentages of average daily net
assets:
<TABLE>
<CAPTION>
ADMINISTRATIVE INSTITUTIONAL
FUND CLASS CLASS
- ------------------------------------------- -------------- -------------
<S> <C> <C>
Seneca Growth Fund......................... 2.55% 1.95%
Seneca Mid-Cap "EDGE"(SM) Fund............. 2.70% 2.10%
Seneca Bond Fund........................... -- 1.85%
Seneca Real Estate Fund.................... 3.05% 2.35%
</TABLE>
32
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
For the year ended September 30, 1997, GMG/Seneca waived and reimbursed expenses
as follows:
<TABLE>
<CAPTION>
MANAGEMENT
FEES ADMINISTRATIVE EXPENSES
FUND WAIVED FEES WAIVED REIMBURSED TOTAL
- ---------------------- ---------- -------------- ---------- --------
<S> <C> <C> <C> <C>
Seneca Growth......... $ -- $ -- $ 5,174 $ 5,174
Seneca Mid-Cap
"EDGE"(SM).......... -- -- 135,798 135,798
Seneca Bond........... -- -- 126,387 126,387
Seneca Real Estate.... -- -- 16,628 16,628
</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. Effective July 1, 1997
each Trustee of the Trust who is not an interested person receives a quarterly
retainer of $2,500.
NOTE 4 -- INVESTMENT TRANSACTIONS
Purchases and proceeds from sales and maturities of investments, excluding short
term securities, for the Trust, for the year ended September 30, 1997 were as
follows:
<TABLE>
<CAPTION>
NON- NON-
GOVERNMENT GOVERNMENT GOVERNMENT GOVERNMENT
FUND PURCHASES PURCHASES SALES SALES
- --------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Seneca Growth........ $57,312,920 $ -- $37,141,324 $ --
Seneca Mid-Cap
"EDGE"(SM)......... 30,288,698 -- 28,370,414 --
Seneca Bond.......... 10,268,362 991,816 5,962,571 499,998
Seneca Real Estate
Securities......... 35,097,333 921,957 11,746,897 1,091,535
</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
33
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
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, 1997 are as follows:
GROWTH FUND (1)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
----------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ------- -----------
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES
Shares sold............ 1,193,698 $16,740,404 944,161 $11,381,266
Shares issued upon
reinvestment of
dividends............ 83,095 1,095,100 -- --
Shares redeemed........ (142,301) (2,144,300) (5,306) (70,645)
--------- ----------- ------- -----------
Net increase........... 1,134,492 $15,691,204 938,855 $11,310,621
========= =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------- ----------- ------- ---------
<S> <C> <C> <C> <C>
ADMINISTRATIVE SHARES
Shares sold........... 410,550 $ 5,770,465 55,186 $ 721,427
Shares issued upon
reinvestment of
dividends........... 1,364 17,844 -- --
Shares redeemed....... (76,718) (1,114,710) (22,214) (288,331)
------- ----------- ------- --------
Net increase.......... 335,196 $ 4,673,599 32,972 $ 433,096
======= =========== ======= ========
</TABLE>
(1) Fund commenced investment operations on March 8, 1996.
34
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
NOTE 6 -- CAPITAL STOCK TRANSACTIONS (CONTINUED)
MID-CAP "EDGE"(SM) FUND (1)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ------- ----------
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES
Shares sold............. 403,926 $ 5,517,592 509,221 $6,613,122
Shares issued upon
reinvestment of
dividends............. 7,844 109,284 -- --
Shares redeemed......... (337,764) (4,917,052) (14,376) (188,718)
-------- ---------- ------- ----------
Net increase............ 74,006 $ 709,824 494,845 $6,424,404
======== ========== ======= ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ------- ----------
<S> <C> <C> <C> <C>
ADMINISTRATIVE SHARES
Shares sold............. 291,421 $ 4,064,517 104,231 $1,422,572
Shares issued upon
reinvestment of
dividends............. 851 11,875 -- --
Shares redeemed......... (236,289) (3,238,210) (14,725) (188,631)
--------- ----------- ------- -----------
Net increase............ 55,983 $ 838,182 89,506 $1,233,941
========= =========== ======= ===========
</TABLE>
35
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
NOTE 6 -- CAPITAL STOCK TRANSACTIONS (CONTINUED)
BOND FUND (2)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
---------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ------- ----------
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES
Shares sold............. 496,127 $ 5,079,683 385,776 $3,831,086
Shares merged (3)....... 23,704 250,425 -- --
Shares issued upon
reinvestment of
dividends............. 45,088 460,532 8,635 85,975
Shares redeemed......... (101,560) (1,048,447) (6,454) (64,905)
--------- ----------- ------- -----------
Net increase............ 463,359 $ 4,742,193 387,957 $3,852,156
========= =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
-------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------- --------- ------ --------
<S> <C> <C> <C> <C>
ADMINISTRATIVE SHARES
Shares sold............ 7,990 $ 82,034 18,065 $179,966
Shares issued upon
reinvestment of
dividends............ 140 1,437 104 1,031
Shares merged (3)...... (24,954) (250,425) -- --
Shares redeemed........ (2,595) (26,543) -- --
----------- -------
-------- ----------
- -
Net
increase/(decrease)... $(193,497) 18,169
(19,419) $180,997
=========== =======
========= ===========
</TABLE>
(1) Fund commenced investment operations on March 8, 1996.
(2) Fund commenced investment operations on March 7, 1996.
(3) As of December 26, 1996, the Bond Administrative Shares merged with Bond
Institutional Shares in a tax free transaction.
36
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
NOTE 6 -- CAPITAL STOCK TRANSACTIONS (CONTINUED)
REAL ESTATE SECURITIES FUND (4)
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
----------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ------ ----------
<S> <C> <C> <C> <C>
INSTITUTIONAL SHARES
Shares sold............ 2,618,177 $ 32,751,944 94,875 $1,001,801
Shares issued upon
reinvestment of
dividends............ 31,702 424,162 583 6,370
Shares redeemed........ (830,654) (10,635,920) -- --
--------- ----------- ------- -----------
Net increase........... 1,819,225 $ 22,540,186 95,458 $1,008,171
========= =========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
--------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- ------ --------
<S> <C> <C> <C> <C>
ADMINISTRATIVE SHARES
Shares sold............ 262,586 $3,366,423 18,779 $200,099
Shares issued upon
reinvestment of
dividends............ 2,082 27,973 56 599
Shares redeemed........ (68,344) (895,219) -- --
------- ---------- ------ --------
Net increase........... 196,324 $2,499,177 18,835 $200,698
======= ========== ====== ========
</TABLE>
(4) Fund commenced investment operations on March 12, 1996.
NOTE 7 -- SHARES OF BENEFICIAL INTEREST
At September 30, 1997, certain shareholders were record owners of more than 10%
of total outstanding shares of the following Funds:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF OF
NAME OF PORTFOLIO SHAREHOLDERS SHARES OWNED
- ---------------------------------------- ------------ ------------
<S> <C> <C>
Growth Fund............................. 2 24%
Bond Fund............................... 1 10%
Real Estate Securities Fund............. 2 26%
</TABLE>
37
<PAGE>
SENECA FUNDS
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(CONTINUED)
NOTE 8 -- SUBSEQUENT EVENTS
On June 18, 1997, GMG/Seneca entered into an agreement with Phoenix Duff &
Phelps Corporation ("Phoenix") for the sale of a majority of the partnership
interest in GMG/Seneca to Phoenix. Closing of the purchase is conditioned upon
approval of the shareholders of the Seneca Funds of the "change in control" that
would result. Management expects that a proxy statement will be prepared and
distributed to the shareholders by mid-December, 1997, and that the meeting to
consider approval would be held in late January, 1998. The close of the sale
would follow shortly after approval of the change in control. At that time the
name of the Funds would change to "Phoenix-Seneca Funds".
On October 15, 1997, the Trustees approved the appointment of Phoenix Equity
Planning Corporation as transfer agent of the Seneca Funds.
NOTE 9 -- TAX INFORMATION (UNAUDITED)
For the fiscal year ended September 30, 1997, 19.32% and 2.97% of all dividends
paid to Shareholders of the Seneca Growth and Mid-Cap "EDGE"(SM) Funds
respectively, qualified for the Dividends Received Deduction for eligible
corporate investors. Shareholders should refer to Form 1099 when preparing their
tax returns to determine the appropriate tax treatment for the distributions
they received from the respective Fund(s) in the fiscal year 1997.
For the fiscal year ended September 30, 1997, ordinary income distributions to
the Institutional Shares of the Seneca Mid-Cap "EDGE"(SM) Fund of $24,431 were
redesignated as realized gain distributions.
38
<PAGE>
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
(collectively the "Funds"), comprising Seneca Funds as of September 30, 1997,
and the related statements of operations for the year then ended, and the
statements of changes in net assets, and the financial highlights for the year
ended September 30, 1997 and 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, 1997 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, 1997, the results of their operations, the changes in their net
assets, and their financial highlights for the respective stated periods then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
November 5, 1997
<PAGE>
PART C--OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements:
Part A: Financial Highlights
Part B: For each of the Seneca Growth Fund, the Seneca Mid-Cap "EDGE"(SM) Fund,
the Seneca Bond Fund and the Seneca Real Estate Securities Fund, the
following are incorporated by reference to the Annual Report to
Shareholders of such Funds for the year ended September 30, 1997;
Financial Statements, Notes to Financial Statements and Independent
Auditors' Report on the foregoing.
(b) Exhibits:
1. (a) Agreement and Declaration of Trust.(1)
(b) Certificate of Trust.(1)
2. By-Laws.(1)
3. None.
4. Instruments defining shareholder rights incorporated by reference to
Exhibits 1 and 2 above.
5.(a) Form of Investment Management Agreement (the "Investment Management
Agreement") between the Registrant, on behalf of Seneca Growth Fund,
Seneca Mid-Cap "EDGE"(SM) Fund, Seneca Bond Fund, and Seneca Real Estate
Securities Fund, on the one hand, and Seneca Capital Management LLC
("Seneca") on the other.(4)
(b) Proposed Form of Investment Advisory Agreement between the Registrant,
on behalf of Seneca Growth Fund, Seneca Mid-Cap "EDGE"(SM) Fund, Seneca
Bond Fund, and Seneca Real Estate Securities Fund, on the one hand, and
Phoenix Investment Counsel, Inc. ("PIC") on the other.(5)
(c) Proposed Form of Subadvisory Agreement between PIC and Seneca.(5)
(d) Investment Advisory Services Agreement dated July 15, 1997 between
GMG/Seneca Capital Management, L.P. ("GMG/Seneca") and Seneca.
6.(a) Form of Distribution Agreement (the "Distribution Agreement") among
the Registrant, Genesis Merchant Group Securities, L.P. and Seneca
Distributors, LLC ("Seneca Distributors").(1)
(b) Proposed Form of Underwriting Agreement between the Registrant and
Phoenix Equity Planning Corporation ("PEPCO").(5)
7. None.
8. Form of Custody and Investment Accounting Agreement (the "Custody
Agreement") between the Registrant and Investors Fiduciary Trust Company
("IFTC").(2)
9.(a) Form of Transfer Agency and Service Agreement (the "Transfer Agency
Agreement") between the Registrant and PEPCO.(5)
(b) Form of Administration Agreement (the "Administration Agreement")
between the Registrant, on behalf of Seneca Growth Fund, Seneca Mid-Cap
"EDGE"(SM) Fund, Seneca Bond Fund, and Seneca Real Estate Securities
Fund, on the one hand, and Seneca on the other.(4)
(c) Form of Sub-Administration Agreement (the "Sub-Administration
Agreement") between the Registrant, Seneca and State Street Bank and
Trust Company.(4)
10. Opinion and consent of Morris, Nichols, Arsht & Tunnell.(3)
11. Consent of Deloitte & Touche LLP, Independent Public Accountants.
12. None.
13. Form of Share Purchase Agreement (the "Share Purchase Agreement") between
Registrant and GMG/Seneca.(3)
14. Model IRA Plan.(3)
15.(a) Form of Distribution Plan Pursuant to Rule 12b-1(2)
(b) Distribution Agreement(1)
C-1
<PAGE>
(c) Proposed Form of Distribution Plan Pursuant to Rule 12b-1 for Class A
Shares(5) (d) Proposed Form of Distribution Plan Pursuant to Rule 12b-1
for Class B Shares(5)
(e) Proposed Form of Distribution Plan Pursuant to Rule 12b-1 for Class C
Shares(5)
(f) Proposed Form of Distribution Plan Pursuant to Rule 12b-1 for Class M
Shares(5)
16. Schedule for computation of each performance quotation provided in
response to Item 22.
17. Financial Data Schedules
18. (a) Proposed Form of Amended and Restated Rule 18f-3 Plan.(5)
(b) Form of Rule 18f-3 Plan(2)
19. Powers of Attorney for Sandra J. Westhoff, Melinda Ellis Evers, Paul E.
Erdman and Mary Ann Cusenza.(3)
-----------
(1) Incorporated by reference to Registrant's Registration Statement on Form
N-1A dated December 18, 1995.
(2) Incorporated by reference to Pre-effective Amendment No. 1 to Registrant's
Registration Statement dated February 13, 1996.
(3) Incorporated by reference to Pre-effective Amendment No. 2 to Registrant's
Registration Statement dated February 29, 1996.
(4) Incorporated by reference by Registrant to Post-Effective Amendment No. 1
by Registrant's Registration Statement dated October 30, 1996.
(5) Incorporated by reference by Registrant to Post-Effective Amendment No. 2
by Registrant's Registration Statement dated November 28, 1997.
Item 25. Persons Controlled By or Under Common Control With Registrant.
None.
Item 26. Number of Holders of Securities.
Number of
Record Holders as
Title of Class of December 31, 1997
- ----------------------------------- ---------------------
Seneca Growth Fund
Institutional Shares 151
Administrative Shares 125
Seneca Mid-Cap "EDGE"(SM) Fund
Institutional Shares 111
Administrative Shares 175
Seneca Bond Fund
Institutional Shares 71
Seneca Real Estate Securities Fund
Institutional Shares 107
Administrative Shares 99
Item 27. Indemnification
The Agreement and Declaration of Trust dated December 18, 1995 and the
By-Laws of the Registrant provide that no trustee or officer will be
indemnified against any liability to which the Registrant would otherwise be
subject by reason of or for willful misfeasance, bad faith, gross negligence or
reckless disregard of such person's duties. The Investment Management Agreement
(Section 12), Distribution Agreement (Section 6), Custody Agreement (Section 5)
and Transfer Agency Agreement (Section 6) each provides that the Trust will
indemnify the other party (or parties, as the case may be) to the agreement for
losses arising from such party's good faith exercise of its duties under the
applicable agreement, provided, however, that the Trust will not indemnify such
other party (or parties) in the case of willful misfeasance, bad faith, gross
negligence or reckless disregard of such person's duties under the applicable
agreement.
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "Act"), may be available to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has
C-2
<PAGE>
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 28. Business and Other Connections of Investment Adviser.
All of the information required by this item is set forth in the Form ADV,
as currently amended, of GMG/Seneca (SEC File No. 801-35374), which is
incorporated herein by reference.
Item 29. Principal Underwriter.
(a) Neither GMG Securities nor Seneca Distributors serves as principal
underwriter, depositor or investment adviser to any investment company other
than the Registrant.
(b) Directors, Officers and Partners
Positions and Offices with Positions and Offices
Name Principal Underwriters with Registrant
- ---------------------- ---------------------------- ----------------------
Seneca Distributors
Philip C. Stapleton Chief Financial Officer N/A
Seneca Member N/A
GMG Securities
William K. Weinstein Member and Chief Operating N/A
Officer
Philip C. Stapleton Managing Member N/A
- -----------
The principal business address of each director, officer and partner of GMG
Securities and each member and officer of Seneca Distributors is 909 Montgomery
Street, San Francisco, California 94133.
(c) To the best of the Registrant's knowledge, no commissions or other
compensation was received by any principal underwriter who is not an affiliated
person of the Registrant or an affiliated person of such affiliated person,
directly or indirectly, from the Registrant during the Registrant's last fiscal
year.
Item 30. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules thereunder will be maintained at
the offices of (1) the Registrant at 909 Montgomery Street, Suite 500, San
Francisco, California 94133, (2) Seneca, at 909 Montgomery Street, San
Francisco, California, 94133, (3) State Street Bank and Trust Company, at 1776
Heritage Drive, North Quincy, Massachusetts, 02171-2197, (4) Registrant's
Transfer Agent, Phoenix Equity Planning Corporation, at 100 Bright Meadow
Blvd., Enfield, Connecticut 06082, and (5) Registrant's Custodian, Investors
Fiduciary Trust Company, at 801 Pennsylvania Street, Kansas City, Missouri
64105.
Item 31. Management Services.
None.
Item 32. Undertakings.
(a) Not applicable.
(b) Not applicable.
(c) Registrant undertakes that it will furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual
report to shareholders, upon request and without charge.
(d) Registrant undertakes that it will, if requested to do so by the holders
of at least 10% of its outstanding shares, call a meeting of shareholders
for the purpose of voting upon the question of removal of a trustee or
trustees and will assist in communications among shareholders as required
by Section 16(c) of the 1940 Act.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this registration statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of San Francisco, and the State of California on
the 28th day of January, 1998.
SENECA FUNDS
By: /s/GAIL P. SENECA
----------------------------------
Gail P. Seneca
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-1A has been signed below by the following
persons in the capacities and on the date indicated.
Signature Title Date
- ------------------------------ -------------------------- -----------------
/s/ GAIL P. SENECA Trustee and President January 28, 1998
- ---------------------------- (Chief Executive Officer)
Gail P. Seneca
* Trustee and Treasurer January 28, 1998
- ---------------------------- (Chief Financial Officer
Sandra J. Westhoff and Accounting Officer)
* Trustee January 28, 1998
- ----------------------------
Mary Ann Cusenza
* Trustee January 28, 1998
- ----------------------------
Paul E. Erdman
* Trustee January 28, 1998
- ----------------------------
Melinda Ellis Evers
*By: /s/ GAIL P. SENECA
------------------------
Gail P. Seneca as
Attorney-in-fact
S-1(c)
EXHIBIT 5(d)
INVESTMENT ADVISORY SERVICES AGREEMENT
This INVESTMENT ADVISORY SERVICES AGREEMENT (this "Agreement") is entered
into as of July 15, 1997, by and between GMG/Seneca Capital Management, L.P., a
limited partnership organized and existing under the laws of the State of
California, having its principal place of business at 909 Montgomery Street,
Suite 600, San Francisco, California 94133 (the "Partnership"), and GMG/Seneca
Capital Management LLC, a limited liability company organized and existing under
the laws of the State of California, having its principal place of business at
909 Montgomery Street, Suite 500, San Francisco, California 94133 (the
"Company").
WHEREAS, the Partnership and the Company are registered investment advisers
registered under the Investment Advisers Act of 1940, as amended from time to
time;
WHEREAS, the Partnership performs investment advisory services pursuant to
certain investment advisory contracts (collectively, the "Investment Advisory
Contracts"), including, without limitation, as manager of the Seneca Bond Fund,
the Seneca Growth Fund, the Seneca Mid-Cap "EDGE" Fund and the Seneca Real
Estate Securities Fund (collectively, the "Seneca Sponsored Funds") and the
subadvisor for the Working Assets Money Market Portfolio, E*Fund, Muir
California Tax-Free Income, Citizens Income and Emerging Growth Portfolios
(collectively, the "Citizens Funds") and, together with the Seneca Sponsored
Funds, the "Funds");
WHEREAS, the Partnership desires to obtain from the Company, upon request
of the Partnership, all services necessary or convenient to the conduct of its
business as investment manager or subadvisor with respect to the Funds and the
performance of the Investment Advisory Contracts including, without limitation,
investment research and analysis services, human resource software), building
services, supplies and other investment, operating, administrative and clerical
services necessary or appropriate in connection with supervising and managing
the investments of that Funds, directing the purchase and sale of investments of
the Funds and ensuring that investments follow the investment objective,
strategies, and policies of the applicable Fund and comply with government
regulations (the "Services"); and
WHEREAS, the Company is willing to provide the Services subject to and in
accordance with the terms of this Agreement and to maintain a qualified staff
possessing the necessary experience and expertise to provide the Services.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1
---------
SERVICES TO BE PROVIDED BY THE COMPANY: COMPENSATION
----------------------------------------------------
1.01 The Company shall provide such Services to the Partnership, as
applicable, as the Partnership may request from time to time, in accordance with
and subject to the terms hereof,
<PAGE>
and shall maintain a properly qualified staff and perform its obligations
hereunder in accordance with its current standard practices, policies and
procedures. In particular, the Company shall provide the Partnership with the
investment management services of Gail P. Seneca, Richard D. Little, Charles B.
Dickie and David Shapiro and each other employee of the Company who is a member
of any investment team with respect to any of the Seneca Sponsored Funds, for so
long as such employees remain employees of the Company (it being understood that
the Company has no present intention of terminating any of such employees during
the term of this Agreement). In addition, the Company acknowledges that Gail P.
Seneca is the Investment Officer of the Partnership and may provide Services
directly to the Partnership in such capacity.
1.02 For providing the Services (including any services rendered by Gail P.
Seneca in her capacity as the Investment Officer of the Partnership), the
Partnership shall reimburse and compensate the Company in an amount equal to the
reasonable cost to the Company (as determined by the Company with the prior
written approval of the Partnership) of providing the Services, which shall
include the pro rata portion of all fixed costs (such as annual salaries,
equipment and office leases, and similar expenses) and all variable costs
relating to the Company's performance of the Services. The Partnership shall pay
all amounts due pursuant to this Section 1.02 within a reasonable period of time
after accrual thereof and in accordance with the customary payment practices of
the Partnership.
ARTICLE 2
---------
TERM
----
2.01 This Agreement shall commence on the date hereof and continue in full
force and effect until the earlier of (i) the LP Closing Date (as defined in the
Purchase Agreement) and (ii) the effective date of termination of this Agreement
in accordance with Section 2.02 hereof.
2.02 In the event that the parties to the Purchase Agreement determine that
the LP Closing will not take place for any reason, either the Partnership or the
Company may terminate this Agreement upon written notice to the other party in
accordance with Section 3.01 hereof, with such termination being effective
immediately or on such other date as may be indicated in such notice, provided
that such termination may not be effected unless and until the Investment
Advisory Contracts have terminated.
2.03 The termination of this Agreement shall not affect the obligation of
the Partnership to pay the Company the amounts due to the Company hereunder with
respect to the performance of its Services prior to the date of termination.
2
<PAGE>
ARTICLE 3
---------
MISCELLANEOUS
-------------
3.01 All notices, requests and other communications to any party hereunder
shall be in writing (including facsimile transmission) and shall be given,
if to the Partnership, to:
GMG/Seneca Capital Management, L.P.
909 Montgomery Street
Suite 600
San Francisco, California 94133
Attention: Gail P. Seneca
Telephone: (415) 677-1550
Facsimile: (415) 677-1692
with a copy to:
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attention: Richard E. Floor, P.C.
Telephone: (617) 570-1260
Facsimile: (617) 523-1231
if to the Company, to:
GMG/Seneca Capital Management LLC
909 Montgomery Street
Suite 500
San Francisco, California 94133
Attention: Gail P. Seneca
Telephone: (415) 677-1550
Facsimile: (415) 677-1692
with a copy to:
Phoenix Duff & Phelps Corporation
56 Prospect Street
Hartford, Connecticut 06115-0480
Attention: Thomas N. Steenburg, Esq.
Vice President and General Counsel
Telephone: (860) 403-5261
Facsimile: (860) 403-7600
3
<PAGE>
and
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attention: Richard E. Floor, P.C.
Telephone: (617) 570-1260
Facsimile: (617) 523-1231
Except as expressly set forth to the contrary in this Agreement, all such
notices, requests or other communications provided for or permitted to be given
under this Agreement must be in writing and shall be given either by registered
or certified mail, addressed to the recipient, with return receipt requested, or
by delivering the writing to the recipient in person, by courier, or by
facsimile transmission; and a notice, request or communication given under this
Agreement is effective upon receipt or three (3) days after the date mailed,
whichever is sooner.
3.02 (a) Any provision of this Agreement may be amended or waived if, but
only if, such amendment or waiver is in writing and is signed, in the case of an
amendment, by each party to this Agreement, or in the case of a waiver, by the
party against whom the waiver is to be effective.
(b) No failure of delay by any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights and remedies herein
provided shall be cumulative and not exclusive of any rights or remedies
provided by law.
3.03 This Agreement is personal to the parties, and no rights or
obligations under this Agreement may be assigned by any party (including as a
result of an assignment by operation of law) without the prior written consent
of the other party. No assignment of this Agreement by a party hereto shall
relieve such party of any of its obligations hereunder.
3.04 Subject to the provisions of Section 3.03, the provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns.
3.05 This Agreement shall be governed by and construed in accordance with
the law of the State of California, without regard to the conflict of laws rules
of such state.
3.06 If any provision of this Agreement or the application thereof to any
person or circumstance is held invalid or unenforceable to any extent, the
remainder of this Agreement and the application of that provision shall be
enforced to the fullest extent permitted by law.
4
<PAGE>
3.07 This Agreement may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument.
3.08 This Agreement constitutes the entire agreement between the parties
with respect to the subject matter of this Agreement and supersedes all prior
agreements and understandings, both oral and written, between the parties with
respect to the subject matter of this Agreement. No representation, inducement,
promise, understanding, condition or warranty not set forth herein has been made
or relied upon by either party hereto. Neither this Agreement nor any provision
hereof is intended to confer upon any person other than the parties hereto any
rights or remedies hereunder, including the rights of employment. The
individuals providing the Services on behalf of the Company shall be for all
purposes employees of the Company and shall not be employees of the Partnership.
[Remainder of page intentionally left blank.]
5
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Investment Advisory
Services Agreement to be executed by their duly authorized representative as of
the day and year first written above.
GMG/SENECA CAPITAL MANAGEMENT L.P.
By: /s/ Gail P. Seneca
--------------------------------------
Name: Gail P. Seneca
Title: Managing General Partner/Chief
Executive Officer
GMG/SENECA CAPITAL MANAGEMENT LLC
By: /s/ Gail P. Seneca
--------------------------------------
Name: Gail P. Seneca
Title: President/Chief Executive Officer
INDEPENDENT AUDITORS' CONSENT
Seneca Funds
We consent to the use in Post-Effective Amendment No. 4, to Registration
Statement No. 33-65137 of our report dated November 5, 1997 incorporated by
reference in the Statement of Additional Information, which is a part of such
Registration Statement, and to the reference to us under the caption "Financial
Highlights" appearing in the Prospectus, which also are a part of such
Registration Statement.
/s/ Deloitte & Touche LLP
Kansas City, Missouri
January 26, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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</TABLE>
