REG. ICA NO. 811-07665
File No. 333-05675
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 1 |X|
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 3 |X|
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THE FBR FAMILY OF FUNDS
(Exact Name of Registrant as Specified in Charter)
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (703) 312-9583
Robert S. Smith, Esq. Copy To:
Friedman, Billings, Ramsey & Co., Inc. Paul F. Roye, Esq.
Potomac Tower Dechert Price & Rhoads
1001 Nineteenth Street North 1500 K Street, N.W.
Arlington, VA 22209 Washington, D.C. 20005
(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box):
_____ immediately upon filing pursuant to paragraph (b)
X on June 30, 1997 pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)
_____ on (date) pursuant to paragraph (a) of Rule 485
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Pursuant to Rule 24f-2 under the Investment Company Act of 1940 the Registrant
has declared that an indefinite number of shares of beneficial interest of the
Registrant be registered under the Securities Act of 1933. The Rule 24f-2 Notice
with respect to the Registrant's fiscal year ending October 30, 1997 will be
filed on or before December 30, 1997.
<PAGE>
THE FBR FAMILY OF FUNDS
CROSS-REFERENCE SHEET
(Pursuant to Rule 404 showing location in each form of
Prospectus of the responses to the Items in Part A and location in each form of
Prospectus and the Statement of Additional Information of the responses to the
Items in Part B of Form N-1A).
<TABLE>
<CAPTION>
FORM N-1A PART A ITEM PROSPECTUS CAPTION
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis Highlights; Summary of Fund Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Highlights; Investment Objectives; Investment Policies
and Risk Factors; Additional Information About the
Funds; Fund Organization and Fees
5. Management of the Fund Fund Organization and Fees
5A. Management's Discussion of Fund Performance Fund Organization and Fees
6. Capital Stock and Other Securities How to Purchase Shares; How to Redeem Shares;
Dividends, Distributions and Taxes; Additional
Information
7. Purchase of Securities Being Offered Highlights; How to Purchase Shares; How to Redeem Shares
8. Redemption or Repurchase Highlights; How to Purchase Shares; How to Redeem Shares
9. Pending Legal Proceedings Inapplicable
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM N-1A PART B ITEM PROSPECTUS CAPTION
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Additional Information-Description of Shares
13. Investment Objectives and Policies Investment Objectives and Policies
14. Management of the Fund Trustees and Officers
15. Control Persons and Principal Holders of Additional Information - Control Persons and Principal
Securities Holders of Securities
16. Investment Advisory and Other Services Advisory & Other Contracts
17. Brokerage Allocation and Other Practices Advisory & Other Contracts-Portfolio Transactions
18. Capital Stock and Other Securities Valuation of Portfolio Securities; Additional
Redemption Information; Additional Information
19. Purchase, Redemption and Pricing of Securities Valuation of Portfolio Securities; Additional
Being Offered Redemption Information; Trustees and Officers
20. Tax Status Additional Redemption Information; Additional Tax
Information
21. Underwriters Advisory & Other Contracts-Distributor
22. Calculation of Performance Data Performance
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 to this Registration Statement.
-2-
<PAGE>
The
FBR Family of Funds
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FBR Financial Services Fund
FBR Small Cap Financial Fund
FBR Small Cap Growth/Value Fund
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FBR
FUNDS
PROSPECTUS
June 30, 1997
[PAGE]
The FBR Family of Funds
Prospectus For information, call toll free: 1-888-888-0025
June 30, 1997 e-mail: [email protected]
Internet: http://www.fbrfunds.com
The FBR Family of Funds is an open-end management investment company which
currently consists of four series: FBR Financial Services Fund ("Financial
Services Fund"), FBR Small Cap Financial Fund ("Small Cap Financial Fund"), each
of which are diversified portfolios, FBR Small Cap Growth/Value Fund
("Growth/Value Fund"), and FBR Information Technologies Fund ("Information
Technologies Fund"), each of which are non-diversified portfolios (collectively,
the portfolios are referred to as the "Funds"). This Prospectus relates to the
Financial Services Fund, the Small Cap Financial Fund and the Growth/Value Fund
only. FBR Fund Advisers, Inc. (the "Adviser") is the investment adviser to the
Funds. Friedman, Billings, Ramsey & Co., Inc. (the "Distributor" or "FBR"), a
registered broker-dealer, is the Funds' distributor. The Adviser and the
Distributor are both affiliates of Friedman, Billings, Ramsey Investment
Management, Inc. and FBR Offshore Management, Inc., each of which is a
registered investment adviser.
Each of the Funds seeks capital appreciation.
Please read this Prospectus before investing. It is designed to provide you
with information and to help you decide if a Fund's goals match your own. Retain
this document for future reference. A Statement of Additional Information (dated
June 30, 1997) for the Funds has been filed with the Securities and Exchange
Commission (the "Commission") and is incorporated herein by reference. The
Statement of Additional Information is available without charge upon request by
writing to The FBR Family of Funds, Potomac Tower, 1001 Nineteenth Street North,
Arlington, Virginia 22209 or by calling toll free 1-888-888-0025.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION (THE "COMMISSION") OR ANY SECURITIES REGULATORY
AUTHORITY OF ANY STATE, NOR HAS THE COMMISSION OR ANY SUCH STATE AUTHORITY
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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HIGHLIGHTS
INTRODUCTION.
The FBR Family of Funds (the "Trust") is an open-end management investment
company organized under the laws of the State of Delaware on April 30, 1996. The
Trust currently consists of four series which represent interests in one of the
following investment portfolios: FBR Financial Services Fund, FBR Small Cap
Financial Fund, FBR Small Cap Growth/Value Fund and FBR Information Technologies
Fund. Currently, shares of the FBR Information Technologies Fund are not being
offered.
FUND MANAGEMENT.
FBR Fund Advisers, Inc. serves as the investment adviser to the Funds. See
"Fund Organization and Fees".
THE FUNDS.
Each Fund seeks capital appreciation. There is no assurance that a Fund
will achieve its investment objective. See "Investment Objectives" and
"Investment Policies and Risk Factors".
HOW TO PURCHASE, EXCHANGE AND REDEEM SHARES.
Shares representing interests in the Funds are offered at the next
determined net asset value after receipt of an order by FBR, another authorized
dealer or PFPC Inc. ("PFPC" or the "Transfer Agent"). Shares are offered on a
no-load basis; there is no sales charge imposed on purchases of shares.
Shares may be purchased or redeemed through FBR account executives, other
authorized dealers or directly through the Transfer Agent. The minimum initial
investment for each Fund is $2,000. Subsequent investments must be $100 or more.
The minimum initial investment for Individual Retirement Accounts ("IRAs"), or
pension, profit-sharing or other employee benefit plans is $1,000 and minimum
subsequent investments are $100. See "How to Purchase Shares".
Shares of the Funds may be exchanged for shares of other funds advised by
the Adviser and the FBR Money Market Portfolio of The RBB Fund, Inc. at the net
asset value next determined after receipt by the Transfer Agent of an exchange
request. In addition, the Funds reserve the right to impose an administrative
charge for each exchange or to reject any exchange request that is reasonably
deemed to be disruptive to efficient portfolio management. See "Shareholder
Services -- Exchange Privilege".
Shares may be redeemed at their net asset value next determined after
receipt by the Transfer Agent of a redemption request. There is a 1.00%
redemption fee on shares redeemed which have been held 90 days or less. In
addition, the Funds reserve the right, upon 60 days' written notice, to redeem
an account if the net asset value of the investor's shares in that account falls
below $500 and is not increased to at least such amount within such 60-day
period. See "How to Redeem Shares".
RISK FACTORS.
Investment in any of the Funds is subject to certain risks, as set forth in
detail under "Investment Policies and Risk Factors". Each Fund's net asset value
per share can be expected to fluctuate. In addition, the Financial Services Fund
and the Small Cap Financial Fund each concentrate their investments in a
particular industry and therefore are designed for those investors who are
interested in actively monitoring the progress of, and can accept the risks of,
industry-focused investing. The Small Cap Financial Fund and the Growth/Value
Fund will each, as a non-fundamental policy, invest at least 65% of its total
assets in smaller capitalization companies. The Funds may engage in short
selling. Investors should consider investment in the Funds as a supplement to an
overall investment program and should invest only if they are willing to
undertake the risks involved.
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FUND EXPENSES
The table below summarizes the estimated expenses associated with the
Funds. This standard format was developed for use by all mutual funds to help an
investor make investment decisions. You should consider this expense information
along with other important information in this Prospectus, including the Funds'
investment objectives, policies and risk factors.
SHAREHOLDER TRANSACTION EXPENSES(1)
<TABLE>
<CAPTION>
FINANCIAL SMALL CAP GROWTH/VALUE
SERVICES FUND FINANCIAL FUND FUND
------------- -------------- ------------
<S> <C> <C> <C>
Maximum Sales Charge Imposed on Purchases (as a percentage
of the offering price) NONE NONE NONE
Maximum Sales Charge Imposed on Reinvested Dividends NONE NONE NONE
Deferred Sales Charge NONE NONE NONE
Redemption Fees on Shares held 90 days or less (as a percentage
of redemption amount)(2) 1.00% 1.00% 1.00%
Exchange Fee NONE NONE NONE
Annual Fund Operating Expenses
(as a percentage of average daily net assets)
Investment Advisory Fees (after fee waviers)(4) 0.00% 0.00% 0.00%
Rule 12b-1 Fees(3) 0.25% 0.25% 0.25%
Other Expenses (after expense reimbursements)(4) 1.40% 1.40% 1.40%
----- ----- -----
Total Fund Operating Expenses (after fee waivers and
expense reimbursements)(4) 1.65% 1.65% 1.65%
===== ===== =====
<FN>
- -----------
(1) Investors may be charged a fee if they effect transactions in Fund shares
through a broker or agent. (See "How to Purchase Shares" and "How to
Redeem Shares".)
(2) In addition, a $15.00 redemption fee will be charged for all payments by
wire. Redemption fees are retained by the Fund.
(3) As a result of Rule 12b-1 fees, a long-term investor in the Funds may pay
more than the economic equivalent of the maximum sales charge allowed by
the rules of the National Association of Securities Dealers, Inc.
(4) The Adviser has voluntarily undertaken to waive its investment advisory
fees and assume certain expenses of each Fund other than brokerage
commissions, extraordinary items, interest and taxes to the extent annual
fund operating expenses exceed 1.65% of each Fund's average daily net
assets. For the period January 3, 1997 (commencement of investment
operations) through April 30, 1997, without such fee waivers and expense
reimbursements, investment advisory fees stated would have been 0.90% for
each Fund. Other expenses would have been 3.58%, 4.52% and 13.72% and
total fund operating expenses would have been 4.73%, 5.67% and 14.87% for
Financial Services Fund, Small Cap Financial Fund and Growth/Value Fund,
respectively.
</FN>
</TABLE>
EXAMPLE: You would pay the following expenses on a $1,000 investment, assuming
(1) a 5% annual return and (2) full redemption at the end of each time period.
1 Year 3 Years
------ -------
FINANCIAL SERVICES FUND $17 $52
SMALL CAP FINANCIAL FUND $17 $52
GROWTH/VALUE FUND $17 $52
The purpose of the table above is to assist the investor in understanding
the various costs and expenses that an investor in a Fund will bear directly or
indirectly. See "Fund Organization and Fees" for a more complete discussion of
annual operating expenses of the Funds. The foregoing example is based upon
estimated expenses for the current fiscal year. The foregoing example should not
be considered a representation of past or future expenses. Actual expenses may
be greater or less than those shown.
2
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FINANCIAL HIGHLIGHTS
FOR THE PERIOD JANUARY 3, 1997* THROUGH APRIL 30, 1997
Contained below is per share operating performance data for each share
outstanding, total investment return, ratios to average net assets and other
supplemental data for the period January 3, 1997 (commencement of investment
operations) through April 30, 1997. This information has been derived from
information provided in the financial statements for that period which have not
been audited by the Fund's independent public accountants. The financial data
included in this table should be read in conjunction with the financial
statements and related notes incorporated by reference in the Statement of
Additional Information.
<TABLE>
<CAPTION>
FINANCIAL SMALL CAP
SERVICES FUND FINANCIAL FUND GROWTH/VALUE FUND
------------- -------------- -----------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE**
Net asset value, beginning of period .............. $12.00 $12.00 $12.00
------- ------- -------
Net investment income/(loss)(1) ................... 0.02 0.02 0.00
Net realized and unrealized gain/(loss)
on investments and options transactions(2) ..... 0.66 0.72 (0.30)
------- ------- -------
Net increase/(decrease) in net assets
resulting from operations ...................... 0.68 0.74 (0.30)
------- ------- -------
Net asset value, end of period .................... $12.68 $12.74 $11.70
======= ======= =======
Total investment return(3) ........................ 5.67% 6.17% (2.50)%
======= ======= =======
Ratios/Supplemental Data
Net assets, end of period (000's omitted) ......... $8,405 $7,055 $1,697
Ratios of expenses to average net assets***(1) .... 1.65% 1.65% 1.65%
Ratio of net investment income/(loss) to
average net assets***(1) ....................... 1.05% 0.88% (0.16)%
Decrease reflected in above expense ratios
and net investment income/(loss) due to
waivers and reimbursements*** .................. 3.08% 4.02% 13.22%
Portfolio turnover rate**** ....................... 34.45% 22.52% 14.09%
Average commission rate per share(4) .............. $0.0599 $0.0601 $0.0726
<FN>
- -------------
* Commencement of investment operations.
** Calculated based on shares outstanding on the first and last day of the
period, except for dividends and distributions, if any, which are based on
actual shares outstanding on the dates of distributions.
*** Annualized.
**** Not annualized.
(1) Reflects waivers and reimbursements.
(2) The amount shown for a share outstanding throughout the period is not in
accord with the changes in the aggregate gains and losses in investments
during the period because of the timing of sales and repurchases of Fund
shares in relation to fluctuating net asset value during the period.
(3) Total investment return is calculated assuming a purchase of shares on the
first day and a sale of shares on the last day of each period reported and
will include reinvestments of dividends and distributions, if any. Total
investment return is not annualized.
(4) Computed by dividing the total amount of commissions paid by the total
number of shares purchased and sold during the period subject to such
commissions.
</FN>
</TABLE>
3
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INVESTMENT OBJECTIVES
Each of the Funds seeks capital appreciation. The investment objective of
each Fund is fundamental and may not be changed without a vote of the holders of
a majority of its outstanding voting securities (as defined in the Statement of
Additional Information). There can be no assurance that a Fund will achieve its
investment objective.
INVESTMENT POLICIES AND
RISK FACTORS
SUMMARY OF PRINCIPAL INVESTMENT POLICIES.
The Financial Services Fund pursues its objective by concentrating its
investments in equity securities of companies providing financial services to
consumers and industry. As a non-fundamental policy, under normal market
conditions, the Financial Services Fund will invest at least 65% of its total
assets in such equity securities. Examples of companies in the financial
services group of industries include commercial banks, savings and loan
associations, brokerage companies, insurance companies, real estate and leasing
companies, companies that combine some or all of these businesses and holding
companies for each of the foregoing. Under Commission regulations, the Financial
Services Fund may not invest more than 5% of its total assets in the equity
securities of any company that derives more than 15% of its revenues from
brokerage or investment management activities. The Financial Services Fund's
strategy in seeking to achieve its investment objective may lead to investments
in smaller companies with less than $500 million market capitalization at the
time of purchase. Securities of smaller companies, especially those whose
business involves emerging products or concepts, may be more volatile due to
their limited product lines, markets, or financial resources; or their
susceptibility to major setbacks or downturns. The Financial Services Fund may
also invest in com-panies in the information technology industries which provide
products and/or services to these companies.
Financial services companies are subject to extensive governmental
regulation which may limit both the amounts and types of loans and other
financial commitments they can make, and the interest rates and fees they can
charge. Changes in governmental policies and the need for regulatory approval
may have a material effect on these companies. Profitability is largely
dependent on the availability and cost of capital funds, and can fluctuate
significantly when interest rates change. Credit losses resulting from financial
difficulties of borrowers can negatively impact the industry. Insurance
companies may be subject to severe price competition. Legislation is currently
being considered which would reduce the separation between commercial and
investment banking businesses, which if enacted, could significantly impact
financial services companies and the Financial Services Fund.
Commercial banks, savings and loan institutions and their holding companies
are especially influenced by adverse effects of volatile interest rates,
portfolio concentrations in loans to particular businesses, such as real estate
and energy, and competition from new entrants in their areas of business. These
institutions are subject to extensive federal regulation and, in some cases, to
state regulation as well. However, neither federal insurance of deposits nor
regulation of the bank and savings and loan industries ensures the solvency or
profitability of commercial banks or savings and loan institutions or their
holding companies, or insures against the risk of investing in the equity
securities issued by these institutions.
Investment banking, securities and commodities brokerage and investment
advisory companies also are subject to governmental regulation and investments
in those companies are subject to the risks related to securities and
commodities trading and securities underwriting activities. Insurance companies
also are subject to extensive governmental regulation, including the imposition
of maximum rate levels, which may be inadequate for
4
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some lines of business. The performance of insurance companies will be affected
by interest rates, severe competition in the pricing of services, claims
activities, marketing competition and general economic conditions.
The SMALL CAP FINANCIAL FUND pursues its objective by investing primarily
in equity securities of companies providing financial services to consumers and
industry with an emphasis on those companies engaged in investing in real
estate, usually through mortgages and other consumer-related loans.
These companies may also offer other financial services such as discount
brokerage services, insurance products, leasing services, and joint venture
financing. This may include, for example, mortgage banking companies, banks, and
other depository institutions. As a nonfundamental policy, under normal
conditions, the Small Cap Financial Fund will invest at least 65% of its total
assets in securities of smaller capitalization companies (companies of less than
$750 million market capitalization at the time of purchase) principally engaged
in the business of providing financial services to consumers and industry. It is
expected that the Fund will focus its investments on companies with market
capitalizations below $200 million. An issuer is considered to be principally
engaged in such business activity if at least 50% of its assets, gross income,
or net profits are committed to, or derived from, that activity. The Small Cap
Financial Fund may also invest in companies in the information technology
industries which provide products and/or services to the companies described
above and may invest in real estate investment trusts. The Small Cap Financial
Fund will invest primarily in equity securities, although it may invest in other
types of instruments as well.
The residential real estate finance industry has changed rapidly over the
last decade and is expected to continue to change. Factors expected to continue
driving change among the smaller capitalization issues include regulatory
changes, consolidation, mutual conversion activity, management changes,
residential loan demand, credit quality trends, interest rate movements and new
business development.
Although at least 65% of the Small Cap Financial Fund's total assets will
be invested in smaller capitalization companies, the Small Cap Financial Fund
may invest a portion of its assets in equity securities of companies with larger
market capitalizations. Smaller capitalization companies may have limited
product lines, markets, or financial resources. These conditions may make them
more susceptible to setbacks and reversals. Therefore, their securities may be
subject to more abrupt or erratic movements than securities of larger companies.
Small capitalization stocks as a group may not respond to general market rallies
or downturns as much as other types of equity securities. In addition, the stock
of such companies may be thinly traded and/or newly issued and not tested by
market demand. See "Illiquid Investments and Restricted Securities" below.
The Financial Services Fund and the Small Cap Financial Fund may be
appropriate for investors who want to pursue growth aggressively by
concentrating their investment on domestic and for- eign securities within an
industry or group of industries. The Funds are designed for those who are
actively interested in, and can accept the risks of, industry-focused investing.
Because of their narrow industry focus, the performance of the Small Cap
Financial Fund and the Financial Services Fund is closely tied to and affected
by, its industry. Companies in an industry are often faced with the same
obstacles, issues, or regulatory burdens, and their securities may react
similarly and move in unison to these or other market conditions.
THE GROWTH/VALUE FUND seeks to achieve its objective of capital
appreciation primarily through equity investments in companies whose securities
5
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are believed by the Adviser to be currently undervalued or may not yet reflect
the prospect for accelerating earnings/cash flow growth. The Growth/ Value Fund
invests primarily in common stocks but may also invest in preferred stocks,
convertible bonds, and warrants of companies which in the opinion of the Adviser
are expected to achieve growth of investment principal over time. The investment
strategy is to focus on companies that have a demonstrated record of achievement
and with excellent prospects for earnings and/or cash flow growth over a 3 to 5
year period.
As a non-fundamental policy, at least 65% of the Fund's assets will be
invested in companies of less than $1 billion market capitalization at the time
of purchase, however, the Growth/Value Fund may invest a portion of its assets
in equity securities of companies with larger market capitalizations.
In general, the value of a Fund's domestic and foreign investments varies
in response to many factors. Stock values fluctuate in response to the
activities of individual companies, and general market and economic conditions.
Investments in foreign securities may involve risks in addition to those of U.S.
investments, including increased political and economic risk, as well as
exposure to currency fluctuations. This is especially true for securities of
emerging markets, such as those found in developing countries of Asia and Latin
America.
The Adviser may use various investment techniques to hedge a portion of a
Fund's risks, but there is no guarantee that these strategies will work as the
Adviser intends. Because each Fund invests primarily in equity securities, which
fluctuate in value, each Fund's shares will fluctuate in value. When you sell
your shares, they may be worth more or less than what you paid for them.
ADDITIONAL INFORMATION REGARDING THE FUNDS' INVESTMENTS.
The following paragraphs provide a brief description of some of the types
of securities in which the Funds may invest, in accordance with their investment
objectives, policies and limitations, including certain transactions they may
make and strategies they may adopt. The following also contains a brief
description of certain risk factors. Each Fund may, following notice to its
shareholders, take advantage of other investment practices which are not at
present contemplated for use by the Funds or which currently are not available
but which may be developed, to the extent such investment practices are both
consistent with a Fund's investment objective and are legally permissible for
the Fund. Such investment practices, if they arise, may involve risks which
exceed those involved in the activities described in this Prospectus. The
Adviser may not buy all of these instruments or use all of these techniques to
the full extent permitted unless it believes that doing so will help a Fund
achieve its goals.
EQUITY SECURITIES. Equity securities may include common stocks, preferred
stocks, convertible securities, warrants and limited partnership interests.
Common stocks, the most familiar type, represent an equity (ownership) interest
in a corporation. Although equity securities have a history of long-term growth
in value, their prices fluctuate based on changes in a company's financial
condition and on overall market and economic conditions. The Fund may also
invest in convertible securities which may offer higher income than the common
stocks into which they are convertible. The convertible securities in which the
Funds may invest consist of bonds, notes, debentures and preferred stocks which
may be converted or exchanged at a stated or determinable exchange ratio into
underlying shares of common stock.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or variable
rate of interest, and must repay the amount borrowed at maturity. Some debt
securities, such as zero coupon bonds, do not pay
6
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current interest, but are purchased at a discount from their face values. In
general, bond prices rise when interest rates fall, and vice versa. Debt
securities, loans, and other direct debt have varying degrees of quality and
varying levels of sensitivity to changes in interest rates. Longer-term bonds
are generally more sensitive to interest rate changes than short-term bonds.
Investment-grade debt securities are securities rated at the time of
purchase within the four highest rating categories assigned by a nationally
recognized statistical ratings organization ("NRSRO") or, if unrated, which the
Adviser determines to be of comparable quality. The applicable securities
ratings are described in the Appendix to the Statement of Additional
Information. Some, however, may possess speculative characteristics and may be
more sensitive to economic changes and to changes in the financial condition of
issuers.
Lower-rated debt securities, commonly referred to as "junk bonds" are
considered speculative and involve greater risk of default or price changes due
to changes in the issuer's creditworthiness than higher-rated debt securities.
Each Fund currently intends to limit its investments in lower-rated securities
to no more than 5% of its total assets.
SHORT SALES. When the Adviser anticipates that the price of a security will
decline, it may sell the security short and borrow the same security from a
broker or other institution to complete the sale. A Fund may make a profit or
incur a loss depending upon whether the market price of the security decreases
or increases between the date of the short sale and the date on which the Fund
must replace the borrowed security.
All short sales must be fully collateralized, and a Fund will not sell
securities short if, immediately after and as a result of the sale, the value of
all securities sold short by the Fund exceeds 25% of its total assets. Each Fund
limits short sales of any one issuer's securities to 2% of the Fund's total
assets and to 2% of any one class of the issuer's securities.
SHORT-TERM OBLIGATIONS. With respect to each Fund there may be times when,
in the opinion of the Adviser, adverse market conditions exist, including any
period during which it believes that the return on certain money market-type
instruments would be more favorable than that obtainable through a Fund's normal
investment programs. Accordingly, for temporary defensive purposes, each Fund
may hold up to 100% of its total assets in cash and/or short-term obligations.
To the extent that a Fund's assets are so invested, they will not be invested so
as to meet its investment objective. The instruments may include high grade
liquid debt securities such as variable amount master demand notes, commercial
paper, certificates of deposit, bankers' acceptances, repurchase agreements
which mature in less than seven days and obligations issued or guaranteed by the
U.S. Government, its agencies and instrumentalities. Bankers' acceptances are
drafts or bills of exchange "accepted" by a bank or trust company as an
obligation to pay on maturity.
REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, a Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund would suffer a loss to the extent that
the proceeds from a sale of the underlying portfolio securities were less than
the repurchase price, or to the extent that the disposition of such securities
by the Fund was delayed pending court action. Repurchase agreements are
considered to be loans by the staff of the Commission.
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REAL ESTATE-RELATED INSTRUMENTS. Real estate-related investments include
real estate investment trusts, commercial and residential mortgage-backed
securities, and real estate financings. Real estate-related instruments are
sensitive to factors such as real estate values and property taxes, interest
rates, cash flow of underlying real estate assets, overbuilding, and the
management skill and creditworthiness of the issuer. Real estate-related
instruments may also be affected by tax and regulatory requirements, such as
those relating to the environment.
Other instruments may include securities of closed-end investment companies
and real estate-related investments.
LEAPs. The Growth/Value Fund may purchase long-term exchange-traded equity
options called Long-Term Equity Anticipation Securities ("LEAPs"). LEAPs provide
a holder the opportunity to participate in the underlying securities'
appreciation in excess of a fixed dollar amount. The Growth/Value Fund will not
purchase these options with respect to more than 25% of the value of its net
assets.
INVESTMENT COMPANY SECURITIES. Each Fund may invest up to 5% of its total
assets in the securities of any one investment company, but may not own more
than 3% of the securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies.
ILLIQUID INVESTMENTS AND RESTRICTED SECURITIES. Each Fund may invest up to
15% of its net assets in illiquid investments (investments that cannot be
readily sold within seven days), including restricted securities which do not
meet the criteria for liquidity established by the Trust's Board of Trustees
(the "Trustees"). The Adviser, under the supervision of the Trustees, determines
the liquidity of each Fund's investments. The absence of a trading market can
make it difficult to ascertain a market value for illiquid investments.
Disposing of illiquid investments may involve time-consuming negotiation and
legal expenses. Restricted securities are securities which cannot be sold to the
public without registration under the Securities Act of 1933. Unless registered
for sale, these securities can only be sold in privately negotiated transactions
or pursuant to an exemption from registration.
The ability of the Trustees to determine the liquidity of certain
restricted securities is permitted under a position of the staff of the
Commission set forth in the adopting release for Rule 144A under the Securities
Act of 1933 (the "Rule"). The Rule is a nonexclusive safe-harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under Federal securities laws. The Rule provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. The Rule was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under the Rule. The
staff of the Commission has left the question of determining the liquidity of
certain restricted securities, including Rule 144A securities and foreign
securities, to the Trustees. The Trustees consider the following criteria in
determining the liquidity of certain restricted securities: the frequency of
trades and quotes for the security; the number of dealers willing to purchase or
sell the security and the number of other potential buyers; dealer undertakings
to make a market in the security; and the nature of the security and the nature
of the marketplace trades. The Trustees have delegated to the Adviser the daily
function of determining and monitoring the liquidity of restricted securities
pursuant to the above criteria and guidelines adopted by the Trustees. The
Trustees will continue to monitor and periodically review the Adviser's
selection of Rule 144A securities as well as any determinations as to their
liquidity.
SECURITIES LENDING. In order to generate additional income, each Fund may,
from time to time, lend its portfolio securities. Each Fund must
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receive collateral equal to at least 100% of the securities' value in the form
of cash or U.S. Government and agency obligations, plus any interest due. The
collateral must be marked to market daily by the Adviser. Should the market
value of the loaned securities increase, the borrower must furnish additional
collateral to the Fund. During the time portfolio securities are on loan, the
borrower pays the Fund amounts equal to any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans are subject to termination by a Fund or the borrower at any
time. While a Fund does not have the right to vote securities on loan, the Fund
intends to terminate any loan and regain the right to vote if that is considered
important with respect to the Fund's investment. A Fund will only enter into
loan arrangements with broker-dealers, banks or other institutions which the
Adviser has determined are creditworthy under guidelines established by the
Trustees. Each Fund will limit its securities lending to 331/3% of its total
assets.
BORROWING. Each Fund may borrow from banks, other financial institutions or
from other funds advised by the Adviser, or through reverse repurchase
agreements, subject to a limit of 33 1/3 of the Fund's total assets. Under a
reverse repurchase agreement, a Fund sells portfolio securities to a financial
institution and agrees to repurchase them at a mutually agreed-upon date and
price. If a Fund borrows money, its share price may be subject to greater
fluctuation until the borrowing is paid off. If a Fund makes additional
investments while borrowings are outstanding, this may be considered a form of
leverage. Each Fund may borrow for temporary or emergency purposes, but not in
an amount exceeding 5% of its total assets.
EACH FUND CURRENTLY INTENDS TO LIMIT ITS INVESTMENT TO NO MORE THAN 5% OF
ITS TOTAL ASSETS IN THE FOLLOWING INSTRUMENTS AND TECHNIQUES:
FOREIGN SECURITIES. The Funds may invest in equity securities of foreign
issuers, including securities traded in the form of American Depositary
Receipts. Each Fund currently intends to limit its investments in foreign
securities.
ZERO COUPON BONDS. The Funds are permitted to purchase zero coupon bonds.
Zero coupon bonds are purchased at a discount from the face amount because the
buyer receives only the right to receive a fixed payment on a certain date in
the future and does not receive any periodic interest payments.
STRIPPED SECURITIES. The Funds may also purchase separately traded interest
and principal component parts of such obligations that are transferable through
the Federal book entry system, known as Separately Traded Registered Interest
and Principal Securities ("STRIPS") and Coupon Under Book Entry Safekeeping
("CUBES"). These instruments are issued by banks and brokerage firms and are
created by depositing U.S. Treasury notes and U.S. Treasury bonds into a special
account at a custodian bank; the custodian holds the interest and principal
payments for the benefit of the registered owner of the certificates or
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs") and
Certificates of Accrual on Treasury Securities ("CATS").
ASSET-BACKED SECURITIES. Asset-backed securities include interests in pools
of mortgages, loans, receivables, or other assets. Payments of principal and
interest may be largely dependent upon the cash flows generated by the assets
backing the securities.
VARIABLE AND FLOATING RATE SECURITIES. Variable and floating rate
securities have interest rates that are periodically adjusted either at specific
intervals or whenever a benchmark rate changes. These interest rate adjustments
are designed to help stabilize the security's price.
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OPTIONS AND FUTURES. Each Fund may buy and sell call and put options to
hedge against changes in net asset value or to attempt to realize a greater
current return. In addition, through the purchase and sale of futures contracts
and related options, a Fund may at times seek to hedge against fluctuations in
net asset value and to attempt to increase its investment return. A Fund may buy
and sell index futures contracts ("index futures") and options on index futures
and on indices for hedging purposes (or may purchase warrants whose value is
based on the value from time to time of one or more foreign securities indices).
An index future is a contract to buy or sell units of a particular bond or stock
index at an agreed price on a specified future date. Depending on the change in
value of the index between the time when the Fund enters into and terminates an
index futures or options transaction, the Fund realizes a gain or loss. A Fund
may also buy and sell index futures and options to increase its investment
return.
WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a when-issued
or delayed delivery basis. These transactions are arrangements in which a Fund
purchases securities with payment and delivery scheduled for a future time.
ADDITIONAL INFORMATION
ABOUT THE FUNDS
DIVERSIFICATION. Diversifying a Fund's investment portfolio may reduce the
risks of investing. This may include limiting the amount of money invested in
any one issuer or, on a broader scale, in any one industry. A fund that is not
diversified may be more sensitive to changes in the market value of a single
issuer or industry.
The Financial Services Fund and the Small Cap Financial Fund are considered
diversified. With respect to 75% of total assets, each Fund may not invest more
than 5% of its total assets in any one issuer. The Growth/Value Fund is
considered non-diversified. The Growth/Value Fund may not invest more than 25%
of its total assets in any one issuer and, with respect to 50% of total assets,
may not invest more than 5% of its total assets in any one issuer. The
Growth/Value Fund may not purchase the securities of an issuer if, as a result,
more than 25% of the Fund's total assets would be invested in the securities of
issuers whose principal business activities are in the same industry. These
limitations do not apply to U.S. Government securities.
Certain investment management techniques which the Funds may use, such as
the purchase and sale of futures and options may expose the Funds to special
risks. These products may be used to adjust the risk and return characteristics
of a Fund's portfolio of investments. These various products may increase or
decrease exposure to fluctuation in security prices, interest rates, or other
factors that affect security values, regardless of the issuer's credit risk.
Regardless of whether the intent was to decrease risk or increase return, if
market conditions do not perform consistently with expectations, these products
may result in a loss. In addition, losses may occur if counterparties involved
in transactions do not perform as promised. These products may expose the Funds
to potentially greater risk of loss than more traditional equity investments.
PORTFOLIO TRANSACTIONS. Each Fund may engage in the technique of short-term
trading. Such trading involves the selling of securities held for a short time,
ranging from several months to less than a day. The object of such short-term
trading is to take advantage of what the Adviser believes are changes in market,
industry or individual company conditions or outlook. Any such trading would
increase a Fund's turnover rate and its transaction costs. High turnover will
generally result in higher brokerage costs and possible tax consequences for the
Funds and their shareholders.
From time to time, each Fund, to the extent consistent with its investment
objective, policies
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and restrictions, may invest in securities of issuers with which the Adviser or
its affiliates have a lending relationship.
The portfolio turnover of a Fund may vary greatly from year to year as well
as within a particular year. High turnover rates will generally result in higher
transaction costs and higher levels of taxable realized gains to the Fund's
shareholders. It is expected that portfolio turnover for the Funds will not
exceed 250%. (See "Additional Tax Information" in the Statement of Additional
Information.)
BROKERAGE ALLOCATION. Subject to the supervision of the Trustees, the
Adviser is authorized to allocate brokerage to affiliated broker-dealers on an
agency basis to effect portfolio transactions. The Trustees have adopted
procedures incorporating the standards of Rule 17e-1 of the Investment Company
Act of 1940, as amended (the "1940 Act"), which require that the commission paid
to affiliated broker-dealers must be reasonable and fair compared to the
commission, fee or other remuneration received, or to be received, by other
brokers in connection with comparable transactions involving similar securities
during a comparable period of time. It is expected that brokerage will be
allocated to the Distributor, which is an affiliate of the Adviser. Bear,
Stearns Securities Corp., an affiliate of the administrator and the custodian,
acts as clearing broker to the Distributor.
NOTE: The Statement of Additional Information contains additional information
about the investment practices of the Funds and risk factors. The investment
policies and limitations of the Funds may be changed by the Trustees without any
vote of shareholders unless (1) a policy is expressly deemed to be a fundamental
policy of a Fund or (2) a policy is expressly deemed to be changeable only by
such majority vote.
HOW TO PURCHASE SHARES
GENERAL.
The minimum initial investment is $2,000, or $1,000 if the investment is
for IRAs, or pension, profit-sharing or other employee benefit plans
("Retirement Plans"). Subsequent investments ordinarily must be at least $100.
The Trust reserves the right to reject any purchase order. The Trust reserves
the right to vary the initial and subsequent investment minimum requirements at
any time. Investments by employees of the Adviser and its affiliates are not
subject to minimum investment requirements. Each Fund, at its own discretion,
reserves the right to suspend purchases of its shares.
Purchases of the Funds' shares may be made through a brokerage account
maintained with FBR or through certain investment dealers who are members of the
National Association of Securities Dealers, Inc. who have sales agreements with
the Distributor (an "Authorized Dealer"). Purchases of the Funds' shares also
may be made directly through the Transfer Agent.
Purchases are effected at a Fund's net asset value next determined after a
purchase order is received by FBR, another Authorized Dealer or the Transfer
Agent (the "trade date"). Payment for Fund shares generally is due to FBR or
another Authorized Dealer on the third business day (the "settlement date")
after the trade date.
PURCHASES CAN BE MADE THROUGH THE TRANSFER AGENT.
Shares representing interests in the Funds are offered continuously for
sale by the Distributor and may be purchased without imposition of a sales
charge through PFPC, the Funds' transfer agent. Shares may be purchased
initially by completing the application (the "Application") accompanying this
Prospectus and forwarding the application and payment to the Transfer Agent.
Subsequent purchases of shares may be effected by mailing a
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check or Federal Reserve Draft payable to the order of "The FBR Family of Funds"
c/o PFPC Inc., P. O. Box 8994, Wilmington, Delaware 19899-8994. The name of the
Fund for which shares are being purchased must also appear on the check or
Federal Reserve Draft. Federal Reserve Drafts are available at national banks or
any state bank which is a member of the Federal Reserve System.
An investor may also purchase shares by having his bank or his broker wire
Federal Funds to the Transfer Agent. An investor's bank or broker may impose a
charge for this service. In order to ensure prompt receipt of an investor's
Federal Funds wire, for an initial investment, it is important that an investor
follows these steps:
A. Telephone the Fund's Transfer Agent, toll-free 1-800-821-3460, and
provide the Transfer Agent with your name, address, telephone number, Social
Security or Tax Identification Number, the Fund selected, the amount being
wired, and by which bank. The Transfer Agent will then provide an investor with
a Fund account number. Investors with existing accounts should also notify the
Transfer Agent prior to wiring funds.
B. Instruct your bank or broker to wire the specified amount, together with
your assigned account number, to PFPC's account with PNC Bank, N.A.:
PNC Bank, N.A.
Philadelphia, Pennsylvania
ABA-0310-0005-3
CREDITING ACCOUNT NUMBER
86-1108-2435
FROM: (name of investor)
ACCOUNT NUMBER: (investor's account number with the Fund)
FOR PURCHASE OF: (name of the Fund)
AMOUNT: (amount to be invested)
C. Fully complete and sign the Application and mail it to the address shown
thereon. The Transfer Agent will not process redemptions until it receives a
fully completed and signed Application.
For subsequent investments, an investor purchasing shares directly through
the Transfer Agent should follow steps A and B above.
PURCHASES CAN BE MADE THROUGH FBR OR OTHER AUTHORIZED DEALERS.
Purchases through FBR account executives or other Authorized Dealers may be
made by check (except that a check drawn on a foreign bank will not be
accepted), Federal Reserve Draft or by wiring Federal Funds with funds held in
brokerage accounts at FBR or another Authorized Dealer. Checks or Federal
Reserve Drafts should be made payable as follows: (i) to FBR or an investor's
Authorized Dealer or (ii) to The FBR Family of Funds [Insert Fund Name] if
purchased directly from the Trust, and should be directed to the Transfer Agent:
PFPC Inc., Attention: The FBR Family of Funds [Insert Fund Name], P. O. Box
8994, Wilmington, Delaware 19899-8994. Direct overnight deliveries to PFPC,
Inc., 400 Bellevue Parkway, Suite 108, Wilmington, Delaware 19809. Payment by
check or Federal Reserve Draft must be received within three business days of
receipt of the purchase order by FBR or other Authorized Dealer. FBR or an
investor's Authorized Dealer is responsible for forwarding payment promptly to
the Trust. Checks for investment must be made payable to The FBR Family of
Funds. The payment proceeds of a redemption of shares recently purchased by
check may be delayed as described under "How to Redeem Shares."
Shares of the Funds may be purchased on any Business Day. A "Business Day"
is any day that the New York Stock Exchange (the "NYSE") is open for business.
Currently, the NYSE is closed on weekends and New Year's Day, Presidents' Day,
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Good Friday, Memorial Day, Independence Day (observed), Labor Day, Thanksgiving
Day and Christmas Day (observed). Such shares are offered at the next determined
net asset value per share. In those cases where an investor pays for shares by
check, the purchase will be effected at the net asset value next determined
after the Transfer Agent receives payment in good order. Shareholders may not
purchase shares of the Funds with a check issued by a third party and endorsed
over to the Funds.
Purchase orders received by FBR, another Authorized Dealer or the Transfer
Agent prior to 4:15 p.m., New York time on any day the Funds calculate their net
asset values are priced according to applicable net asset value determined on
that date. Purchase orders received after 4:15 p.m., New York time, are priced
as of the time the net asset value is next determined.
Shareholders whose shares are held in a street name account and who desire
to transfer such shares to another street name account should contact the record
holder of their current street name account.
The Funds understand that some broker-dealers (other than the Distributor),
financial institutions, securities dealers, financial planners and other
industry professionals ("Investment Professionals") may impose certain
conditions on their clients that invest in the Funds, which are in addition to
or different from those described in this Prospectus, and, to the extent
permitted by applicable regulatory authority may charge their clients direct
fees. Certain features of the Funds, such as the minimum initial or subsequent
investments, may be modified in these programs, and administrative charges may
be imposed for the services rendered. Therefore, a client or customer should
contact the organization acting on his behalf concerning the fees (if any)
charged in connection with a purchase or redemption of a Fund's shares and
should read this Prospectus in light of the terms governing his accounts with
Investment Professionals. Investment Professionals will be responsible for
promptly transmitting client or customer purchase and redemption orders to the
Funds in accordance with their agreements with clients or customers. If payment
is not received by such time, the Investment Professional could be held liable
for resulting fees or losses.
NET ASSET VALUE IS COMPUTED DAILY AS OF 4:15 P.M., NEW YORK TIME. Shares
of the Funds are sold on a continuous basis. Net asset value per share is
determined as of 4:15 p.m., New York time on each Business Day. The net asset
value per share of each Fund is computed by dividing the value of each Fund's
net assets (i.e., the value of its assets less liabilities) by the total number
of shares outstanding. Each Fund's investments are valued based on market value
or, where market quotations are not readily available, based on fair value as
determined in good faith by, or in accordance with procedures established by,
the Trustees. For further information regarding the methods employed in valuing
a Fund's investments, see "Determination of Net Asset Value" in the Funds'
Statement of Additional Information.
Federal regulations require that investors provide a certified Taxpayer
Identification Number (a "TIN") upon opening or reopening an account. See
"Dividends, Distributions and Taxes." Failure to furnish a certified TIN to the
Trust could subject the investor to a $50 penalty imposed by the Internal
Revenue Service (the "IRS").
IN-KIND PURCHASES. Shares of the Funds may be purchased with "in-kind"
securities, if approved in advance by the Trust. Securities used to purchase
Fund shares must be appropriate investments for that Fund, consistent with its
investment objective, policies and limitations, as determined by the Trust, and
must have readily available market quotations.The securities will be valued in
accor-
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dance with the Trust's policy for calculating net asset value, determined as of
the close of the day on which the securities are received by the Trust in
salable form. A prospective shareholder will receive shares of the applicable
Fund next computed after such receipt. To obtain the approval of the Trust,
prospective investors are directed to call 1-888-888-0025. Investors who are
affiliated persons of the Trust (as defined in the 1940 Act) may not purchase
shares in this manner in the absence of the Commission's approval.
SYSTEMATIC INVESTMENT PLAN. The Systematic Investment Plan permits
investors to purchase shares of a Fund at regular intervals selected by the
investor. Provided the investor's bank or other financial institution allows
automatic withdrawals, Fund shares may be purchased by transferring funds from
the account designated by the investor. At the investor's option, the account
designated will be debited in the specified amount, and Fund shares will be
purchased once a month, on or about the twentieth day. Only an account
maintained at a domestic financial institution which is an Automated Clearing
House member may be so designated. Investors desiring to participate in the
Systematic Investment Plan should call the Transfer Agent at 1-800-821-3460 to
obtain the appropriate forms. The Systematic Investment Plan does not assure a
profit and does not protect against loss in declining markets. Since the
Systematic Investment Plan involves the continuous investment in a Fund
regardless of fluctuating price levels of the Fund's shares, investors should
consider their financial ability to continue to purchase through periods of low
price levels. The Trust may modify or terminate the Systematic Investment Plan
at any time or charge a service fee. No such fee currently is contemplated.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE.
THE EXCHANGE PRIVILEGE PERMITS EASY TRANSFER TO OTHER FUNDS IN THE FBR
FAMILY OF FUNDS.
The exchange privilege is available to shareholders residing in any state
in which the shares being acquired may be legally sold. A shareholder may
exchange shares of any one of The FBR Family of Funds for shares of any other
fund advised by the Adviser and the FBR Money Market Portfolio of The RBB Fund,
Inc. Such exchange will be effected at the net asset value of the exchanged fund
and the net asset value of the fund to be acquired next determined after the
Transfer Agent's receipt of a request for an exchange. In addition, FBR reserves
the right to impose an administrative fee for each exchange. An exchange of
shares will be treated as a sale for U.S. Federal income tax purposes. See
"Dividends, Distributions and Taxes."
A shareholder wishing to make an exchange may do so by sending a written
request to the Transfer Agent. Shareholders are automatically provided with
telephone exchange privileges when opening an account, unless they indicate on
the account application that they do not wish to use this privilege. To add a
telephone exchange feature to an existing account that previously did not
provide for this option, a Telephone Exchange Authorization Form must be filed
with the Transfer Agent. This form is available from the Transfer Agent. Once
this election has been made, the shareholder may simply contact the Transfer
Agent by telephone to request the exchange by calling 1-800-821-3460. The Trust
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, and if the Trust does not employ such procedures, it may
be liable for any losses due to unauthorized or fraudulent telephone
instructions. Neither the Trust nor the Transfer Agent will be liable for any
loss, liability, cost or expense for following the Trust's telephone transaction
procedures described below or for following instructions communicated by
telephone that it reasonably believes to be genuine.
The Trust's telephone transaction procedures include the following
measures: (1) requiring the
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appropriate telephone transaction privilege forms; (2) requiring the caller to
provide the names of the account owners, the account social security number and
name of Fund, all of which must match the Trust's records; (3) requiring the
Trust's service representative to complete a telephone transaction form, listing
all of the above caller identification information; (4) permitting exchanges
only if the two account registrations are identical; (5) requiring that
redemption proceeds be sent only by check to the account owners of record at the
address of record, or by wire only to the owners of record at the bank account
of record; (6) sending a written confirmation for each telephone transaction to
the owners of record within five (5) business days of the call; and (7)
maintaining tapes of telephone transactions for six months, if the Trust elects
to record shareholder telephone transactions.
For accounts held of record by Investment Professionals, additional
documentation or information regarding the scope of a caller's authority is
required. Finally, for telephone transactions in accounts held jointly,
additional information regarding other account holders is required.
If the exchanging shareholder does not currently own shares of the fund
whose shares are being acquired, a new account will be established with the same
registration, dividend and capital gain options as the account from which shares
are exchanged, unless otherwise specified in writing by the shareholder with all
signatures guaranteed by an Eligible Guarantor Institution, as defined by rules
issued by the Commission, including banks, brokers, dealers, credit unions,
national securities exchanges and savings associations. The exchange privilege
may be modified or terminated at any time, or from time to time, by the Trust,
upon 60 days written notice to shareholders.
If an exchange is to a new fund, the dollar value of shares acquired must
equal or exceed the Trust's minimum for a new account; if to an existing
account, the dollar value must equal or exceed the Trust's minimum for
subsequent investments. If any amount remains in the fund from which the
exchange is being made, such amount must not drop below the minimum account
value required by the Trust.
RETIREMENT PLANS. Shares may be purchased in conjunction with IRAs,
rollover IRAs, or pension, profit-sharing or other employee benefit plans. For
further information as to annual fees, contact the Transfer Agent. To determine
whether the benefits of an IRA are available and/or appropriate, a shareholder
should consult with a tax adviser.
REDIRECTED DISTRIBUTION OPTION. THE REDIRECTED DISTRIBUTION OPTION PERMITS
INVESTMENT OF INVESTORS' DIVIDENDS AND DISTRIBUTIONS IN SHARES OF OTHER FUNDS IN
THE FBR FAMILY OF FUNDS.
The Redirected Distribution Option enables a shareholder to invest
automatically dividends and/or capital gain distributions, if any, paid in
shares of another fund advised by the Adviser of which the shareholder is an
investor, or the FBR Money Market Portfolio of The RBB Fund, Inc. Shares of the
other fund will be purchased at the then-current net asset value.
This privilege is available only for existing accounts and may not be used
to open new accounts. Minimum subsequent investments do not apply. The Funds may
modify or terminate this privilege at any time or charge a service fee. No such
fee currently is contemplated.
HOW TO REDEEM SHARES
GENERAL.
THE REDEMPTION PRICE WILL BE BASED ON THE NET ASSET VALUE NEXT COMPUTED
AFTER RECEIPT OF A REDEMPTION REQUEST.
Investors may request redemption of Fund shares at any time. Redemption
requests may be made as described below. When a request is
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received in proper form, a Fund will redeem the shares at the next determined
net asset value. The Trust imposes no charges when shares are redeemed directly
through the Transfer Agent, however, if a shareholder sells shares of a Fund
after holding them 90 days or less, the Fund will deduct a redemption fee equal
to 1.00% of the value of such shares, which will be retained by the Fund. This
redemption fee will also be charged if an investor exchanges shares which have
been held 90 days or less into the FBR Money Market Portfolio of The RBB Fund,
Inc.
Each Fund ordinarily will make payment for all shares redeemed within
three days after receipt by the Transfer Agent of a redemption request in proper
form, except as provided by the rules of the Commission. However, if an investor
has purchased Fund shares by check and subsequently submits a redemption request
by mail, the redemption proceeds will not be transmitted until the check used
for investment has cleared, which may take up to 15 days. The Trust will reject
requests to redeem shares by telephone or wire for a period of 15 days after
receipt by the Transfer Agent of the purchase check against which such
redemption is requested. This procedure does not apply to shares purchased by
wire payment.
The Trust reserves the right to redeem investor accounts, at its option,
upon not less than 60 days written notice if the account's net asset value is
$500 or less, for reasons other than market conditions, and remains so during
the notice period.
PROCEDURES.
SHAREHOLDERS MAY REDEEM SHARES IN SEVERAL WAYS.
REDEMPTION THROUGH FBR OR OTHER AUTHORIZED DEALERS.
Clients with a brokerage account may submit redemption requests to their
account executives or Authorized Dealers in person or by telephone, mail or
wire. As the Trust's agent, FBR or another Authorized Dealer may honor a
redemption request by repurchasing Trust shares from a redeeming shareholder at
the shares' net asset value next computed after receipt of the request by the
Authorized Dealer. Under normal circumstances, redemption proceeds will be paid
within three days by check or credited to the shareholder's brokerage account at
the election of the shareholder. FBR account executives or other Authorized
Dealers are responsible for promptly forwarding redemption requests to the
Transfer Agent.
REDEMPTION THROUGH THE TRANSFER AGENT.
REDEMPTION IN WRITING. Shareholders who are not clients with a brokerage
account and who wish to redeem shares must redeem their shares through the
Transfer Agent by mail; other shareholders also may redeem Fund shares through
the Transfer Agent. To do so, a written request in proper form must be sent
directly to: The FBR Family of Funds c/o PFPC Inc., P.O. Box 8994, Wilmington,
Delaware 19899-8994. Shareholders may also place redemption requests through an
Investment Professional, but such Investment Professional might charge a fee for
this service.
A request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption would exceed $10,000, or if the
proceeds are not to be paid to the record owner at the address of record, or if
the shareholder is a corporation, partnership, trust or fiduciary, signatures
must be guaranteed by an Eligible Guarantor Institution. (See "Additional
Information About Redemptions.") If a redemption is effected within 30 days of a
change in the shareholder's address of record, a signature guarantee will be
required. A signature guarantee verifies your signature. You may call the
Transfer Agent at 1-800-821-3460 to determine whether the entity that will
guarantee the signature is an Eligible Guarantor Institution.
Generally, a properly signed written request with any required signature
guarantee is all that is
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required for a redemption. In some cases, however, other documents may be
necessary. Additional documentary evidence of authority is also required in the
event redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator.
REDEMPTION BY TELEPHONE. Investors may redeem shares without charge by
telephone if they have checked the appropriate box and supplied the necessary
information on the Application, or have filed a Telephone Authorization with the
Transfer Agent. An investor may obtain a Telephone Authorization from the
Transfer Agent by calling 1-800-821-3460. The Trust will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine,
and if the Trust does not employ such procedures, it may be liable for any
losses due to unauthorized or fraudulent telephone instructions. The proceeds
will be mailed by check to an investor's registered address unless he has
designated in his Application or Telephone Authorization that such proceeds are
to be sent by wire transfer to a specified checking or savings account. If
proceeds are to be sent by wire transfer, a telephone redemption request
received prior to 4:00 p.m., New York time, will result in redemption proceeds
being wired to the investor's bank account on the next day that a wire transfer
can be effected. The minimum redemption for proceeds sent by wire transfer is
$10,000. There is no maximum for proceeds sent by wire transfer. The Funds may
modify this redemption service at any time. A transaction fee of $15.00 will be
charged for payments by wire. FBR and the Transfer Agent reserve the right to
refuse a telephone redemption if they deem it advisable to do so. Neither the
Trust, the Transfer Agent nor the Distributor will be liable for any loss,
liability, cost or expense for following these procedures or for following
instructions communicated by telephone that it reasonably believes to be
genuine. These procedures are set forth under "Shareholder Services -- Exchange
Privilege" above.
If an investor authorizes telephone redemption, the Transfer Agent may act
on telephone instructions from any person representing himself or herself to be
a representative of FBR or an Authorized Dealer and reasonably believed by the
Transfer Agent to be genuine. The Trust will require the Transfer Agent to
employ reasonable procedures, such as requiring a form of personal
identification, to confirm that instructions are genuine and, if it does not
follow such procedures, the Transfer Agent or the Trust may be liable for any
losses due to unauthorized or fraudulent instructions. Neither the Trust nor the
Transfer Agent will be liable for following telephone instructions reasonably
believed to be genuine.
OTHER INFORMATION ON REDEMPTIONS. The Funds are not responsible for the
efficiency of the Federal Wire System or a shareholder's investment adviser,
broker-dealer or bank. The shareholder is responsible for any charges imposed by
the shareholder's bank. To change the name of the single designated bank account
to receive redemptions, it is necessary to send a written request (with a
signature guaranteed by an Eligible Guarantor Institution) to The FBR Family of
Funds, c/o PFPC Inc., P.O. Box 8994, Wilmington, Delaware 19899-8994. For
Retirement Plan accounts, redemption requirements may be different; consult your
IRA plan document for further details.
PAYMENT OF REDEMPTION PROCEEDS. In all cases, the redemption price is the net
asset value per share next determined after the request for redemption is
received in proper form by the Transfer Agent. Payment for shares redeemed is
made by check mailed within three days after acceptance by the Transfer Agent of
the request and any other necessary documents in proper order. Such payment may
be postponed or the right of redemption suspended as provided by the rules of
the Commission. If the shares to be redeemed have been recently purchased by
check, the Transfer Agent may delay mailing a redemption check,
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which may be a period of up to 15 days, pending a determination that the check
has cleared.
REDEMPTION IN-KIND. The Funds reserve the right, if conditions exist which make
cash payments undesirable, to honor any request for redemption of a Fund's
shares by making payment in whole or in part in securities chosen by the Fund
and valued in the same way as they would be valued for purposes of computing a
Fund's net asset value. If payment is made in securities, a shareholder may
incur transaction costs in converting these securities into cash after they have
redeemed their shares. The Funds have elected, however, to be governed by Rule
18f-1 under the 1940 Act, so that a Fund is obligated to redeem its shares
solely in cash up to the lesser of $250,000 or 1% of its net asset value during
any 90 day period for any one shareholder of a Fund.
ADDITIONAL INFORMATION ABOUT REDEMPTIONS. A shareholder may have redemption
proceeds of $10,000 or more wired to the shareholder's brokerage account or a
commercial bank account designated by the shareholder. A transaction fee of $15
will be charged for payments by wire. Questions about this option, or redemption
requirements generally, should be referred to the shareholder's FBR account
executive, to another Authorized Dealer, or to the Transfer Agent if the shares
are not held in a brokerage account.
Written redemption instructions must be received by the Transfer Agent in
proper form and must be signed exactly as the shares are registered. If the
proceeds of the redemption would exceed $10,000, if the proceeds are not to be
paid to the record owner at the record address, if the record address has
changed within the past 30 days, or if the shareholder is a corporation,
partnership, trust or fiduciary, signatures must be guaranteed by an Eligible
Guarantor Institution. Eligible Guarantor Institutions are domestic banks,
brokers, dealers, credit unions, national securities exchanges, registered
securities associations, clearing agencies and savings associations
participating in a medallion program. The three recognized medallion programs
are Securities Transfer Agent Medallion Program (STAMP), Stock Exchanges
Medallion Program (SEMP), and New York Stock Exchange, Inc. Medallion Signature
Program (MSP). Signature guarantees received from institutions not participating
will not be accepted.
During times of drastic economic or market conditions, investors may
experience difficulty in contacting FBR or Authorized Dealers by telephone to
request a redemption of Fund shares. In such cases, investors should consider
using the other redemption procedures described herein. Use of these other
redemption procedures may result in the redemption request being processed at a
later time than it would have been if telephone redemption had been used. During
the delay, a Fund's net asset value may fluctuate. The Trust intends to pay cash
for all shares redeemed, but under abnormal conditions which make payment in
cash unwise, the Trust may make payment wholly or partly in portfolio securities
at their then market value equal to the redemption price. In such cases, an
investor may incur brokerage costs in converting such securities to cash.
AUTOMATIC WITHDRAWAL. Automatic Withdrawal permits investors to request
withdrawal of a specified dollar amount (minimum of $100) on either a monthly or
quarterly basis if the investor has a $10,000 minimum account balance. An
application for Automatic Withdrawal can be obtained from FBR or the Transfer
Agent. Automatic Withdrawal may be ended at any time by the investor, the Trust
or the Transfer Agent. Purchases of additional shares concurrently with
withdrawals generally are undesirable.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS WILL BE AUTOMATICALLY REINVESTED IN ADDITIONAL FUND SHARES AT NET
ASSET VALUE, UNLESS PAYMENT IN CASH IS REQUESTED OR DIVIDENDS ARE REDIRECTED
INTO ANOTHER FUND PURSUANT TO THE REDIRECTED DISTRIBUTION OPTION.
Each Fund ordinarily pays dividends from its net investment income and
distributes net realized securities gains, if any, once a year, but it may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code of 1986, as amended (the "IRS Code"),
in all events in a manner consistent with the provisions of the 1940 Act. A Fund
will not make distributions from net realized securities gains unless capital
loss carryovers, if any, have been utilized or have expired. Dividends are
automatically reinvested in additional Fund shares at net asset value, unless
payment in cash is requested. All expenses are accrued daily and deducted before
declaration of dividends to investors.
FEDERAL TAXES.
Each Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the IRS Code. Each Fund
contemplates the distribution of all of its net investment income and capital
gains, if any, in accordance with the timing requirements imposed by the IRS
Code, so that the Funds will not be subject to federal income taxes or the 4%
U.S. Federal excise tax on undistributed income.
Distributions by a Fund of its net investment income and the excess, if
any, of its net short-term capital gain over its net long-term capital loss are
taxable to shareholders as ordinary income. These distributions are treated as
dividends for federal income tax purposes, but only a portion thereof may
qualify for the 70% dividends-received deduction for corporate shareholders
(which portion may not exceed the aggregate amount of qualifying dividends from
domestic corporations received by a Fund and must be designated by the Fund as
so qualifying). Distributions by a Fund of the excess, if any, of its net
long-term capital gain over its net short-term capital loss are designated as
capital gain dividends and are taxable to shareholders as long-term capital
gain, regardless of the length of time shareholders have held their shares. Such
distributions are not eligible for the dividends-received deduction. If a
shareholder disposes of shares in a Fund at a loss before holding such shares
for more than six months, the loss will be treated as a long-term capital loss
to the extent that the shareholder has received a capital gain dividend on those
shares.
Distributions to shareholders of a Fund will be treated in the same manner
for federal income tax purposes whether received in cash or in additional
shares. Distributions received by shareholders of a Fund in January of a given
year will be treated as received on December 31 of the preceding year provided
that they were declared to shareholders of record on a date in October,
November, or December of such preceding year. Each Fund sends tax statements to
its shareholders (with copies to the IRS) by January 31 showing the amounts and
tax status of distributions made (or deemed made) during the preceding calendar
year.
Income from securities of foreign issuers may be subject to foreign
withholding taxes. Credit for such foreign taxes, if any, will not pass through
to the shareholders.
OTHER TAX INFORMATION.
The information above is only a summary of some of the federal income tax
consequences generally affecting each Fund and its U.S. shareholders, and no
attempt has been made to discuss individual tax consequences. A prospective
investor should also review the more detailed discussion of federal income tax
considerations in
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the Statement of Additional Information. In addition to the federal income tax,
a shareholder may be subject to state or local taxes on his or her investment in
a Fund, depending on the laws of the shareholder's jurisdiction. INVESTORS
CONSIDERING AN INVESTMENT IN A FUND SHOULD CONSULT THEIR TAX ADVISERS TO
DETERMINE WHETHER THE FUND IS SUITABLE TO THEIR PARTICULAR TAX SITUATION.
When investors sign their Account Application, they are asked to provide
their correct social security or taxpayer identification number and other
required certifications. If investors do not comply with IRS regulations, the
IRS requires each Fund to withhold 31% of amounts distributed to them by the
Fund as dividends or in redemption of their shares.
Because a shareholder's tax treatment depends on the shareholder's purchase
price and tax position, shareholders should keep their regular account
statements for use in determining their tax.
PERFORMANCE
From time to time, performance information for a Fund showing total return
may be presented in advertisements, sales literature and in reports to
shareholders. Such performance figures are based on historical performance and
are not intended to indicate future performance. Average annual total return
will be calculated over a stated period of more than one year. Average annual
total return is measured by comparing the value of an investment at the
beginning of the relevant period (as adjusted for sales charges, if any) to the
redemption value of the investment at the end of the period (assuming immediate
reinvestment of any dividends or capital gains distributions) and annualizing
that figure. Cumulative total return is calculated similarly to average annual
total return, except that the resulting difference is not annualized.
Investors may also judge, and the Trust may at times advertise, the
performance of a Fund by comparing it to the performance of other mutual funds
with comparable investment objectives and policies, which performance may be
contained in various unmanaged mutual fund or market indices or rankings such as
those prepared by Dow Jones & Co., Inc. and Standard & Poor's Corporation, in
publications issued by Lipper Analytical Services, Inc., and in the following
publications: IBC'S MONEY FUND REPORTS, VALUE LINE MUTUAL FUND SURVEY,
MORNINGSTAR, CDA/WIESENBERGER, MONEY MAGAZINE, FORBES, BARRON'S, THE WALL STREET
JOURNAL, THE NEW YORK TIMES, BUSINESS WEEK, AMERICAN BANKER, FORTUNE,
INSTITUTIONAL INVESTOR, U.S.A. TODAY and local newspapers. In addition, general
information about a Fund that appears in publications such as those mentioned
above may also be quoted or reproduced in advertisements, sales literature or in
reports to shareholders.
Performance is a function of the type and quality of instruments held in a
Fund's portfolio, operating expenses, and market conditions. Consequently,
performance will fluctuate and data reported are not necessarily representative
of future results. Any fees charged by service providers with respect to
customer accounts for investing in shares of a Fund will not be reflected in
performance calculations.
FUND ORGANIZATION AND FEES
The FBR Family of Funds is an open-end management investment company,
commonly known as a mutual fund, currently consisting of four series portfolios
three of which are currently offered. The FBR Family of Funds is a Delaware
business trust. The Trust's offices are located at Bellevue Corporate Center,
400 Bellevue Parkway, Wilmington, Delaware 19809.
Overall responsibility for management of the Trust rests with its Board of
Trustees.
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INVESTMENT ADVISER.
FBR Fund Advisers, Inc. is the investment adviser to the Funds. The Adviser
directs the investment of each Fund's assets, subject at all times to the
supervision of the Trust's Board of Trustees. The Adviser continually conducts
investment research and supervision for the Funds and is responsible for the
purchase and sale of the Funds' investments.
The Adviser was organized as a Delaware corporation on September 30, 1996
and is registered as an investment adviser under the Investment Advisers Act of
1940, as amended. It is an affiliate of Friedman, Billings, Ramsey & Co., Inc.,
Friedman, Billings, Ramsey Investment Management, Inc. and FBR Offshore
Management, Inc. The Adviser and its affiliates manage in excess of $280 million
for numerous clients including individuals, banks and thrift institutions,
investment companies, pension and profit sharing plans and trusts, estates and
charitable organizations. The Adviser is a new company and therefore has a short
operating history as an investment manager of mutual funds, but its officers and
employees are persons with extensive experience in managing investment
portfolios. The types of investments the Adviser's officers and employees offer
advice on include equity securities, corporate debt securities, commercial
paper, U.S. government securities and options.
For the services provided and expenses incurred pursuant to the investment
advisory agreement between the Trust and the Adviser on behalf of the Funds, the
Adviser is entitled to receive a fee, computed daily and paid monthly, at an
annual rate of 0.90% of the average daily net assets of each Fund. The
investment advisory fee paid by the Funds is higher than the advisory fees paid
by most mutual funds, although the Trust's Board of Trustees believes such fees
to be comparable to advisory fees paid by many funds having similar objectives
and policies. The advisory fees for the Funds have been determined to be fair
and reasonable in light of the services provided to a Fund. The Adviser may
periodically waive all or a portion of its advisory fee with respect to a Fund.
Under the investment advisory agreement between the Trust, on behalf of
each Fund, and the Adviser (the "Investment Advisory Agreement"), the Adviser
may delegate a portion of its responsibilities to a sub-adviser. The Investment
Advisory Agreement provides that the Adviser may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of the Funds and are under common
control with FBR as long as all such persons are functioning as part of an
organized group of persons, managed by authorized officers of the Adviser, and
the Adviser will be as fully responsible to the Funds for the acts and omissions
of such persons as it is for its own acts and omissions.
David Ellison serves as portfolio manager for the Small Cap Financial Fund
and the Financial Services Fund and has since the commencement of operations.
Previously, Mr. Ellison was portfolio manager of the Home Finance Portfolio of
Fidelity Select Portfolios since December 1985. Charles Thomas Akre, Jr. serves
as portfolio manager for the Growth/Value Fund and has since the commencement of
operations. Mr. Akre has been a registered representative with Friedman,
Billings, Ramsey & Co., Inc. since February, 1994 and senior vice president of
Friedman, Billings, Ramsey, Investment Management, Inc. since May, 1993. Prior
to that, he was president of The Akre Corporation, an investment manager.
DISTRIBUTOR.
Friedman, Billings, Ramsey & Co, Inc., located at Potomac Tower, 1001
Nineteenth Street North, Arlington, Virginia 22209 serves as the Funds'
principal underwriter and distributor of the
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Funds' shares pursuant to an agreement which is renewable annually. The
Distributor is entitled to receive payments under the Funds' Distribution Plan
described below.
ADMINISTRATOR.
Under the terms of an Administration Agreement with the Trust on behalf of
the Funds, Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned
subsidiary of The Bear Stearns Companies Inc., generally supervises certain
operations of the Funds, subject to the overall authority of the Trust's Board
of Trustees in accordance with Delaware law.
Under the terms of the Administration Agreement, BSFM is paid a monthly fee
at the annual rate of 0.075% on the first $250 million of each Fund's average
net assets and 0.050% of net assets in excess of $250 million, subject to a
minimum annual fee of $75,000, payable monthly by each Fund. From time to time,
BSFM may waive receipt of its fees, which would have the effect of lowering a
Fund's expense ratio and increasing yield to investors at the time such amounts
are waived or assumed, as the case may be. The Funds will not pay BSFM at a
later time for any amounts it may waive.
Under the terms of an Administration and Accounting Services Agreement with
the Trust on behalf of the Funds, PFPC Inc. provides certain administration and
accounting services to the Funds.
CUSTODIAN AND TRANSFER AGENT.
Custodial Trust Company, a wholly-owned subsidiary of The Bear Stearns
Companies Inc., 101 Carnegie Center, Princeton, New Jersey 08540, is the Funds'
custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue Parkway,
Wilmington, Delaware 19809, is the Funds' transfer agent, dividend disbursing
agent and registrar (the "Transfer Agent"). The Transfer Agent also provides
certain administrative services to the Funds.
DISTRIBUTION PLAN.
EACH FUND HAS ADOPTED A RULE 12B-1 PLAN UNDER WHICH THE FUND PAYS THE
DISTRIBUTOR AT THE ANNUAL RATE OF 0.25% OF AVERAGE DAILY NET ASSETS.
Under a plan adopted by the Trust's Board of Trustees pursuant to Rule
12b-1 under the 1940 Act (the "Plan"), each Fund pays the Distributor for
distributing Fund shares a fee at the annual rate of 0.25% of the average daily
net assets of the respective Fund. Distribution fees may be used by the
Distributor for: (a) costs of printing and distributing a Fund's prospectus,
statement of additional information and reports to prospective investors in the
Fund; (b) costs involved in preparing, printing and distributing sales
literature pertaining to a Fund; (c) an allocation of overhead and other branch
office distribution-related expenses of the Distributor; (d) payments to persons
who provide support services in connection with the distribution of a Fund's
shares, including but not limited to, office space and equipment, telephone
facilities, answering routine inquiries regarding a Fund, processing shareholder
transactions and providing any other shareholder services not otherwise provided
by a Fund's transfer agent; (e) accruals for interest on the amount of the
foregoing expenses that exceed the distribution fee; and (f) any other expense
primarily intended to result in the sale of a Fund's shares, including, without
limitation, payments to salesmen and selling dealers who have entered into
selected dealer agreements with the Distributor, at the time of the sale of
shares, if applicable, and continuing fees to each such salesmen and selling
dealers, which fee shall begin to accrue immediately after the sale of such
shares. The fees paid to the Distributor under the Plan are payable without
regard to actual expenses incurred. The Trust understands that these third
parties also may
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charge fees to their clients who are beneficial owners of Fund shares in
connection with their client accounts. These fees would be in addition to any
amounts which may be received by them from the Distributor under the Plan.
INDEPENDENT ACCOUNTANTS.
Arthur Andersen LLP serves as independent accountants to the Funds.
ADDITIONAL INFORMATION
The Trust may issue an unlimited number of shares and classes of each Fund.
Each Fund currently offers a single class of shares. When issued and paid for,
shares will be fully paid and nonassessable by the Trust and will have no
preference, conversion, exchange or preemptive rights. Shareholders are entitled
to one vote for each full share owned and fractional votes for fractional shares
owned. For those investors with qualified trust accounts, the trustee will vote
the shares at meetings of a Fund's shareholders in accordance with the
shareholder's instructions or will vote in the same percentage as shares that
are not so held in trust. The trustee will forward to these shareholders all
communications received by the trustee, including proxy statements and financial
reports. The Trust and the Funds are not required to hold annual meetings of
shareholders and in ordinary circumstances do not intend to hold such meetings.
The Trustees may call special meetings of shareholders for action by shareholder
vote as may be required by the 1940 Act or the Trust Instrument. Under certain
circumstances, the Trustees may be removed by action of the Trustees or by the
shareholders. Shareholders holding 10% or more of the Trust's outstanding shares
may call a special meeting of shareholders for the purpose of voting upon the
question of removal of Trustees.
The Trust's Board of Trustees may authorize the Trust to offer other funds
which may differ in the types of securities in which their assets may be
invested.
The Adviser and the Trust have adopted a Code of Ethics (the "Code") which
requires investment personnel (a) to pre-clear all personal securities
transactions, (b) to file reports regarding such transactions, and (c) to
refrain from personally engaging in (i) short-term trading of a security, (ii)
transactions involving a security within seven days of a Fund transaction
involving the same security, and (iii) transactions involving securities being
considered for investment by the Funds. The Code also prohibits investment
personnel from purchasing securities in an initial public offering. Personal
trading reports are reviewed periodically by the Adviser and the Board of
Trustees reviews annually such reports (including information on any substantial
violations of the Code). Violations of the Code may result in censure, monetary
penalties, suspension or termination of employment.
DELAWARE LAW.
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to stockholders of Delaware corporations and the Trust Instrument
provides that shareholders will not be personally liable for liabilities of the
Trust. In light of Delaware law, the nature of the Trust's business, and the
nature of its assets, management of the Trust believes that the risk of personal
liability to a Fund shareholder would be extremely remote.
In the unlikely event a shareholder is held personally liable for the
Trust's obligations, the Trust will be required to use its property to protect
or compensate the shareholder. On request, the Trust will defend any claim made
and pay any judgment against a shareholder for any act or obligation of the
Trust. Therefore, financial loss resulting from liability as a shareholder will
occur only if the Trust itself cannot meet its obligations to indemnify
shareholders and pay judgments against them.
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Delaware law authorizes electronic or telephone communications between
shareholders and the Trust. Under Delaware law, the Trust will have the
flexibility to respond to future business contingencies. For example, the
Trustees will have the power to incorporate the Trust, to merge or consolidate
it with another entity, to cause each fund to become a separate trust, and to
change the Trust's domicile without a shareholder vote. This flexibility could
help reduce the expense and frequency of future shareholder meetings for
non-investment related issues.
MISCELLANEOUS.
As of the date of this Prospectus, each Fund offers only the class of
shares that is offered by this Prospectus. Subsequent to the date of this
Prospectus, each Fund may offer additional classes of shares through a separate
prospectus. Any such additional classes may have different sales charges and
other expenses, which would affect investment performance. Further information
may be obtained by contacting your Authorized Dealer or by calling
1-800-821-3460.
Shareholders will receive Semi-Annual Reports, which are unaudited, and
Annual Reports, which are audited by independent public accountants ("Reports"),
describing the investment operations of each Fund. Each of these Reports, when
available for a particular fiscal year end or the end of a semi-annual period,
is incorporated herein by reference. The Trust may include information in its
Reports to shareholders that (a) describes general economic trends, (b)
describes general trends within the financial services industry or the mutual
fund industry, (c) describes past or anticipated portfolio holdings for a Fund
or (d) describes investment management strategies for a Fund. Such information
is provided to inform shareholders of the activities of the Funds for the most
recent fiscal year or semi-annual period and to provide the views of the Adviser
and/or the Trust's officers regarding expected trends and strategies.
The Trust intends to eliminate duplicate mailings of Reports to an address
at which more than one shareholder of record with the same last name has
indicated that mail is to be delivered. Shareholders may receive additional
copies of any Report at no cost by writing to the Funds at the address listed on
the cover page of this Prospectus or by calling 1-800-821-3460.
Inquiries regarding the Trust or the Funds may be directed in writing to
the Trust at PFPC Inc., Bellevue Corporate Center, P. O. Box 8994, Wilmington,
Delaware 19899-8994, or by telephone, toll-free, at 1-800-821-3460.
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INVESTMENT ADVISER
FBR Fund Advisers, Inc.
DISTRIBUTOR
Friedman, Billings, Ramsey & Co., Inc.
ADMINISTRATOR
Bear Stearns Funds Management Inc.
ADMINISTRATION AND ACCOUNTING SERVICES/
TRANSFER AGENT
PFPC Inc.
CUSTODIAN
Custodial Trust Company
- ----------------------------------------------------
TABLE OF CONTENTS
Page
----
Highlights .................................... 1
Fund Expenses ................................. 2
Financial Highlights .......................... 3
Investment Objectives ......................... 4
Investment Policies and Risk Factors .......... 4
Additional Information About the Funds ........ 10
How to Purchase Shares ........................ 11
Shareholder Services .......................... 14
How to Redeem Shares .......................... 15
Dividends, Distributions and Taxes ............ 19
Performance ................................... 20
Fund Organization and Fees .................... 20
Additional Information ........................ 23
- ----------------------------------------------------
No person has been authorized to give any information or to make any
representations not contained in this Prospectus in connection with the offering
made by this Prospectus, and if given or made, such information or
representations must not be relied upon as having been authorized by the Trust
or the Distributor. This Prospectus does not constitute an offering by the Trust
or by the Distributor in any jurisdiction in which such offering may not
lawfully be made.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE FBR FAMILY OF FUNDS
FBR FINANCIAL SERVICES FUND
FBR SMALL CAP FINANCIAL FUND
FBR SMALL CAP GROWTH/VALUE FUND
JUNE 30, 1997
This Statement of Additional Information is not a Prospectus, but should be read
in conjunction with the Prospectus of The FBR Family of Funds, dated the same
date as the date hereof (the "Prospectus"). This Statement of Additional
Information is incorporated by reference in its entirety into the Prospectus.
Copies of the Prospectus may be obtained by writing to: The FBR Family of Funds,
Potomac Tower, 1001 Nineteenth Street North, Arlington, Virginia 22209, or by
telephoning toll-free 1-888-888-0025.
TABLE OF CONTENTS
INVESTMENT OBJECTIVES AND POLICIES.................................... 2
INVESTMENT LIMITATIONS AND RESTRICTIONS............................... 16
VALUATION OF PORTFOLIO SECURITIES..................................... 18
PERFORMANCE........................................................... 19
ADDITIONAL REDEMPTION INFORMATION..................................... 21
DIVIDENDS AND DISTRIBUTIONS........................................... 22
TAXES ............................................................. 22
TRUSTEES AND OFFICERS................................................. 23
ADVISORY AND OTHER CONTRACTS.......................................... 26
ADDITIONAL INFORMATION................................................ 29
APPENDIX A............................................................ A-1
FINANCIAL STATEMENTS.................................................. B-1
INVESTMENT ADVISER
FBR Fund Advisers, Inc.
DISTRIBUTOR
Friedman, Billings, Ramsey & Co., Inc.
ADMINISTRATOR
Bear Stearns Funds Management Inc.
ADMINISTRATION AND ACCOUNTING SERVICES/TRANSFER AGENT
PFPC Inc.
CUSTODIAN
Custodial Trust Company
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
The FBR Family of Funds (the "Trust") is an open-end management investment
company. The Trust currently consists of four series of units of beneficial
interest ("shares"). The outstanding shares represent interests in the FBR
Financial Services Fund (the "Financial Services Fund"), FBR Small Cap Financial
Fund (the "Small Cap Financial Fund"), the FBR Information Technologies Fund
(the "Information Technologies Fund") and the FBR Small Cap Growth/Value Fund
(the "Growth/Value Fund") (collectively, the "Funds"). This Statement of
Additional Information relates to each fund, except FBR Information Technologies
Fund. Currently, shares of the Information Technologies Fund are not being
offered. Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectus. Capitalized terms
not defined herein are used as defined in the Prospectus. No investment in
shares of the Funds should be made without first reading the Funds' Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
ADDITIONAL FUND DESCRIPTIONS - FINANCIAL SERVICES FUND AND SMALL CAP FINANCIAL
FUND.
The Financial Services Fund and the Small Cap Financial Fund invest primarily
within the investment areas described below.
FINANCIAL SERVICES FUND. The Financial Services Fund invests in companies
providing financial services to consumers and industry. Companies in the
financial services group of industries include: commercial banks, savings and
loan associations, consumer and industrial finance companies, securities
brokerage companies, real estate-related companies, leasing companies and
holding companies for each of the foregoing, and a variety of firms in all
segments of the insurance field such as multi-line, property, casualty, and life
insurance.
The financial services area is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. For
instance, recent business combinations have included insurance, finance, and
securities brokerage under single ownership. Some primarily retail corporations
have expanded into securities and insurance fields. Moreover, the federal laws
generally separating commercial and investment banking are currently being
studied by Congress.
Banks, savings and loan associations, and finance companies are subject to
extensive governmental regulation which may limit both the amounts and types of
loans and other financial commitments they can make and the interest rates and
fees they can charge. The profitability of these groups is largely dependent on
the availability and cost of capital funds, and can fluctuate significantly when
interest rates change. In addition, general economic conditions are important to
the operations of these concerns, with exposure to credit losses resulting from
possible financial difficulties of borrowers potentially having an adverse
effect. Insurance companies are likewise subject to substantial governmental
regulation, predominantly at the state level, and may be subject to severe price
competition.
Commission regulations provide that the Fund may not invest more than 5% of its
assets in the securities of any one company that derives more than 15% of its
revenues from brokerage or investment management activities. These companies as
well as those deriving more than 15% of profits from brokerage and investment
management activities will be considered to be "principally engaged" in the
Fund's business activity.
SMALL CAP FINANCIAL FUND. The Small Cap Financial Fund invests in companies
providing financial services to consumers and industry with an emphasis on those
companies engaged in investing in real
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estate, usually through mortgage and other consumer-related loans. These
companies may also offer other financial services such as discount brokerage
services, insurance products, leasing services, and joint venture financing.
Investments may include mortgage banking companies, government-sponsored
enterprises, real estate investment trusts, consumer finance companies, and
similar entities, as well as savings and loan associations, savings banks,
building and loan associations, cooperative banks, commercial banks, and similar
depository institutions. The Fund may hold securities of U.S. depository
institutions whose customer deposits are insured by the Savings Association
Insurance Fund or the Bank Insurance Fund.
The residential real estate finance industry has changed rapidly over the last
decade and is expected to continue to change. Factors expected to continue
driving change among the smaller capitalization issues include regulatory
changes, consolidation, mutual conversion activity, management changes,
residential loan demand, credit trends, interest rate movements and new business
development.
The Fund will be influenced by, among other things, potential regulatory
changes, interest rate movements, the level of home mortgage demand, and
residential delinquency trends.
ADDITIONAL INFORMATION REGARDING FUND INVESTMENTS.
The following descriptions supplement the investment policies of each Fund set
forth in the Prospectus. Each Fund's investments in the following securities and
other financial instruments are subject to the investment policies and
limitations described in the Prospectus and this Statement of Additional
Information.
SHORT-TERM OBLIGATIONS. With respect to each Fund there may be times when, in
the opinion of the Adviser, adverse market conditions exist, including any
period during which it believes that the return on certain money market type
instruments would be more favorable than that obtainable through a Fund's normal
investment programs. Accordingly, for temporary defensive purposes, each Fund
may hold up to 100% of its total assets in cash and/or short-term obligations.
To the extent that a Fund's assets are so invested, they will not be invested so
as to meet its investment objective. The short-term instruments may include high
grade liquid debt securities such as variable amount master demand notes,
commercial paper, certificates of deposit, bankers' acceptances, repurchase
agreements which mature in less than seven days and obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. Bankers'
acceptances are instruments of the U.S. banks which are drafts or bills of
exchange "accepted" by a bank or trust company as an obligation to pay on
maturity. Money market instruments may carry fixed, variable, or floating
interest rates. A security's credit may be enhanced by a bank, insurance
company, or other entity. Some money market securities employ a trust or other
similar structure to modify the maturity, price characteristics, or quality of
financial assets so that they are eligible investments for money market funds.
If the structure does not perform as intended, adverse tax or investment
consequences may result.
CONVERTIBLE SECURITIES. The Funds may invest in all types of common stocks and
equivalents (such as convertible debt securities and warrants) and preferred
stocks. The Funds may invest in convertible securities which may offer higher
income than the common stocks into which they are convertible. The convertible
securities in which the Funds may invest consist of bonds, notes, debentures and
preferred stocks which may be converted or exchanged at a stated or determinable
exchange ratio into underlying shares of common stock. A Fund may be required to
permit the issuer of a convertible security to redeem the security, convert it
into the underlying common stock or sell it to a third party. Thus, a Fund may
not be able to control whether the issuer of a convertible security chooses to
convert that security. If the issuer
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chooses to do so, this action could have an adverse effect on the Fund's ability
to achieve its investment objectives.
ASSET-BACKED SECURITIES. Asset-backed securities include pools of mortgages,
loans, receivables or other assets. Payment of principal and interest may be
largely dependent upon the cash flows generated by the assets backing the
securities, and, in certain cases, supported by letters of credit, surety bonds,
or other credit enhancements. The value of asset-backed securities may also be
affected by the creditworthiness of the servicing agent for the pool, the
originator of the loans or receivables, or the financial institution(s)
providing the credit support.
STRUCTURED SECURITIES. Structured securities employ a trust or other similar
structure to modify the maturity, price characteristics or quality of financial
assets. For example, structural features can be used to modify the maturity of a
security or interest rate adjustment features can be used to enhance price
stability. If the structure does not perform as intended, adverse tax or
investment consequences may result. Neither the Internal Revenue Service ("IRS")
nor any other regulatory authority has ruled definitively on certain legal
issues presented by structured securities. Future tax or other regulatory
determinations could adversely affect the value, liquidity or tax treatment of
the income received from these securities or the nature and timing of
distributions made by a Fund. The payment of principal and interest on
structured securities may be largely dependent on the cash flows generated by
the underlying financial assets.
VARIABLE OR FLOATING RATE SECURITIES. Variable or floating rate securities
provide for periodic adjustments of the interest rate paid. Variable rate
securities provide for a specific periodic adjustment in the interest rate,
while floating rate securities have interest rates that change whenever there is
a change in a designated benchmark rate. Some variable or floating rate
securities have put features.
SWAP AGREEMENTS. Swap agreements can be individually negotiated and structured
to include exposure to a variety of different types of investments or market
factors. Depending on their structure, swap agreements may increase or decrease
a Fund's exposure to long- or short-term interest rates (in the United States or
abroad), foreign currency values, mortgage securities, corporate borrowing
rates, or other factors such as security prices or inflation rates. Swap
agreements can take many different forms and are known by a variety of names.
The Funds are not limited to any particular form of swap agreement if the
Adviser determines it is consistent with a Fund's investment objective and
policies.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by the
other party. For example, the buyer of an interest rate cap obtains the right to
receive payments to the extent that a specific interest rate exceeds an
agreed-upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an
agreed-upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one type of
investment to another. For example, if a Fund agreed to exchange payments in
dollars for payments in foreign currency, the swap agreement would tend to
decrease the Fund's exposure to U.S. interest rates and increase its exposure to
foreign currency and interest rates. Caps and floors have an effect similar to
buying or writing options. Depending on how they are used, swap agreements may
increase or decrease the overall volatility of a Fund's investments and its
share price.
The most significant factor in the performance of swap agreements is the change
in the specific interest rate, currency, or other factors that determine the
amounts of payments due to and from a Fund. If a swap agreement calls for
payments by a Fund, the Fund must be prepared to make such payments when due. In
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addition, if the counterparty's creditworthiness declined, the value of a swap
agreement would be likely to decline, potentially resulting in losses. Each Fund
expects to be able to eliminate its exposure under swap agreements whether by
assignment or other disposition, or by entering into an offsetting swap
agreement with the same party or a similarly creditworthy party.
Each Fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a Fund enters
into a swap agreement on a net basis, it will segregate assets with a daily
value at least equal to the excess, if any, of the Fund's accrued obligations
under the swap agreement over the accrued amount the Fund is entitled to receive
under the agreement. If a Fund enters into a swap agreement on other than a net
basis, it will segregate assets with a value equal to the full amount of the
Fund's accrued obligations under the agreement.
INDEXED SECURITIES. The Funds may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign-denominated instrument, or their maturity
value may decline when foreign currencies increase, resulting in a security
whose price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the value of a
number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. Government agencies. Indexed securities may be more volatile than the
underlying instruments.
STRIPPED SECURITIES. The Funds may also purchase separately traded interest and
principal component parts of such obligations that are transferable through the
Federal book entry system, known as Separately Traded Registered Interest and
Principal Securities ("STRIPS") and Coupon Under Book Entry Safekeeping
("CUBES"). These instruments are issued by banks and brokerage firms and are
created by depositing U.S. Treasury notes and U.S. Treasury bonds into a special
account at a custodian bank; the custodian holds the interest and principal
payments for the benefit of the registered owner of the certificates or
receipts. The custodian arranges for the issuance of the certificates or
receipts evidencing ownership and maintains the register. Receipts include
Treasury Receipts ("TRs"), Treasury Investment Growth Receipts ("TIGRs") and
Certificates of Accrual on Treasury Securities ("CATS").
STRIPS, CUBES, TRs, TIGRs and CATS are sold as zero coupon securities, which
means that they are sold at a substantial discount and redeemed at face value at
their maturity date without interim cash payments of interest or principal. This
discount is amortized over the life of the security, and such amortization will
constitute the income earned on the security for both accounting and tax
purposes. Because of these features, these securities may be subject to greater
interest rate volatility than interest-
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paying U.S. Treasury obligations. Bonds issued by the Resolution Funding
Corporation (REFCORP) can also be stripped in this fashion. REFCORP Strips are
eligible investments for the Funds.
ZERO COUPON BONDS. The Funds are permitted to purchase zero coupon bonds. Zero
coupon bonds are purchased at a discount from the face amount because the buyer
receives only the right to receive a fixed payment on a certain date in the
future and does not receive any periodic interest payments. The effect of owning
instruments which do not make current interest payments is that a fixed yield is
earned not only on the original investment but also, in effect, on all discount
accretion during the life of the obligations. This implicit reinvestment of
earnings at the same rate eliminates the risk of being unable to reinvest
distributions at a rate as high as the implicit yields on the zero coupon bond,
but at the same time eliminates the holder's ability to reinvest at higher rates
in the future. For this reason, zero coupon bonds are subject to substantially
greater price fluctuations during periods of changing market interest rates than
are comparable securities which pay interest currently, which fluctuation
increases the longer the period of maturity. Although zero coupon bonds do not
pay interest to holders prior to maturity, U.S. Federal income tax law requires
a Fund to recognize as interest income a portion of the bond's discount each
year and this income must then be distributed to shareholders along with other
income earned by the Fund. To the extent that any shareholders in a Fund elect
to receive their dividends in cash rather than reinvest such dividends in
additional shares, cash to make these distributions will have to be provided
from the assets of the Fund or other sources such as proceeds of sales of Fund
shares and/or sales of portfolio securities. In such cases, the Fund will not be
able to purchase additional income producing securities with cash used to make
such distributions and its current income may ultimately be reduced as a result.
REAL ESTATE-RELATED INSTRUMENTS. Real estate-related instruments include real
estate investment trusts, commercial and residential mortgage-backed securities,
and real estate financings. Real estate-related instruments are sensitive to
factors such as real estate values, property taxes, interest rates, cash flow of
underlying real estate assets, overbuilding, and the management skill and
creditworthiness of the issuer. Real estate-related instruments may also be
affected by tax and regulatory requirements, such as those relating to the
environment.
REPURCHASE AGREEMENTS. Under the terms of a repurchase agreement, a Fund
acquires securities from financial institutions or registered broker-dealers,
subject to the seller's agreement to repurchase such securities at a mutually
agreed upon date and price. The seller is required to maintain the value of
collateral held pursuant to the agreement at not less than the repurchase price
(including accrued interest). If the seller were to default on its repurchase
obligation or become insolvent, the Fund would suffer a loss to the extent that
the proceeds from a sale of the underlying portfolio securities were less than
the repurchase price, or to the extent that the disposition of such securities
by the Fund was delayed pending court action. Repurchase agreements are
considered to be loans by the staff of the Commission.
REVERSE REPURCHASE AGREEMENTS. As discussed in the Prospectus, each Fund may
borrow funds for temporary purposes by entering into reverse repurchase
agreements in accordance with the Fund's investment restrictions. Pursuant to
such agreements, a Fund would sell portfolio securities to financial
institutions such as banks and broker-dealers, and agree to repurchase the
securities at the mutually agreed-upon date and price. The Funds intend to enter
into reverse repurchase agreements only to avoid otherwise selling securities
during unfavorable market conditions to meet redemptions. At the time a Fund
enters into a reverse repurchase agreement, it will place in a segregated
custodial account assets consistent with the Fund's investment restrictions
having a value equal to the repurchase price (including accrued interest), and
will subsequently monitor the account to ensure that such equivalent value is
maintained. Such assets will include U.S. Government securities or other liquid,
high-grade debt securities. Reverse repurchase agreements involve the risk that
the market value of the securities sold by a Fund may decline below the
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price at which the Fund is obligated to repurchase the securities. Reverse
repurchase agreements are considered to be borrowing by a Fund under the 1940
Act.
LOWER-RATED DEBT SECURITIES. The Funds may purchase lower-rated debt securities,
commonly referred to as "junk bonds" (those rated below the fourth highest grade
by a nationally recognized statistical ratings organization (NRSRO") and unrated
securities judged by the Adviser to be of equivalent quality), that have poor
protection with respect to the payment of interest and repayment of principal,
or that may be in default. These securities are often considered to be
speculative and involve greater risk of loss or price changes due to changes in
the issuer's capacity to pay. The market prices of lower-rated debt securities
may fluctuate more than those of higher-rated debt securities and may decline
significantly in periods of general economic difficulty, which may follow
periods of rising interest rates.
While the market for high-yield corporate debt securities has been in existence
for many years and has weathered previous economic downturns, the 1980s brought
a dramatic increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructuring. Past experience may not provide an
accurate indication of future performance of the high-yield bond market,
especially during periods of economic recession.
The market for lower-rated debt securities may be thinner and less active than
that for higher-rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, lower-rated
debt securities will be valued in accordance with procedures established by the
Board of Trustees, including the use of outside pricing services. Judgment plays
a greater role in valuing high-yield corporate debt securities than is the case
for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services to value lower-rated debt
securities and the Fund's ability to sell these securities.
Since the risk of default is higher for lower-rated debt securities, the
Adviser's research and credit analysis are an especially important part of
managing securities of this type held by the Funds. In considering investments
for the Funds, the Adviser will attempt to identify those issuers of
high-yielding debt securities whose financial condition is adequate to meet
future obligations, has improved, or is expected to improve in the future. The
Adviser's analysis focuses on relative values based on such factors as interest
or dividend coverage, asset coverage, earnings prospects, and the experience and
managerial strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its right as security holder to seek to protect
the interests of security holders if it determines this to be in the best
interest of the Fund's shareholders.
ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be sold
or disposed of in the ordinary course of business, within seven days, at
approximately the prices at which they are valued. Under the supervision of the
Board of Trustees, the Adviser determines the liquidity of each Fund's
investments and, through reports from the Adviser, the Board of Trustees
monitors investments in illiquid instruments. In determining the liquidity of a
Fund's investments, the Adviser may consider various factors, including (1) the
frequency of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the
nature of the security (including any demand or tender features), and (5) the
nature of the marketplace for trades (including the ability to assign or offset
a Fund's rights and obligations relating to the investment). Investments
currently considered by the Funds to be illiquid include repurchase agreements
not entitling the holder to payment of principal and interest within seven days.
Also, the Adviser may determine some over-the-counter options, restricted
securities and loans and other direct debt instruments, and swap agreements to
be illiquid. In the
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absence of market quotations, illiquid investments are priced at fair value as
determined in good faith by a committee appointed by the Board of Trustees. If
through a change in values, net assets, or other circumstances, a Fund were in a
position where more than 15% of its net assets were invested in illiquid
securities, it would seek to take appropriate steps to protect liquidity.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Loans and other direct debt instruments
are interests in amounts owed by a corporate, governmental, or other borrower to
another party. They may represent amounts owed to lenders or lending syndicates
(loans and loan participation), to suppliers of goods or services (trade claims
or other receivables), or to other parties. Direct debt instruments involve a
risk of loss in case of default or insolvency of the borrower and may offer less
legal protection to the Funds in the event of fraud or misrepresentation. In
addition, loan participations involve a risk of insolvency of the lending bank
or other financial intermediary. Direct debt instruments may also include
standby financing commitments that obligate the Funds to supply additional cash
to the borrower on demand.
FOREIGN INVESTMENT. The Funds may invest in securities issued by foreign
branches of U.S. banks, foreign banks, or other foreign issuers, including
American Depositary Receipts ("ADRs") and securities purchased on foreign
securities exchanges and over-the-counter. Permissible investments include:
Eurodollar Certificates of Deposit ("ECDs") which are U.S. dollar denominated
certificates of deposit issued by branches of foreign and domestic banks located
outside the United States, Yankee Certificates of Deposit ("Yankee CDs") which
are certificates of deposit issued by a U.S. branch of a foreign bank
denominated in U.S. dollars and held in the United States, Eurodollar Time
Deposits ("ETDs") which are U.S. dollar-denominated deposits in a foreign branch
of a U.S. bank or a foreign bank, and Canadian Time Deposits ("CTDs") which are
U.S. dollar-denominated certificates of deposit issued by Canadian offices of
major Canadian Banks. Such investment may subject the Funds to significant
investment risks that are different from, and additional to, those related to
investments in obligations of U.S. domestic issuers or in U.S. securities
markets.
The value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign branches of U.S. banks and foreign banks may be
subject to less stringent reserve requirements than those applicable to domestic
branches of U.S. banks. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks. Foreign
investments may be affected by actions of foreign governments adverse to the
interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social
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instability, military action or unrest, or adverse diplomatic developments.
There is no assurance that the Adviser will be able to anticipate these
potential events or counter their effects.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
The Funds may invest in foreign securities that impose restrictions on transfer
within the U.S. or to U.S. persons. Although securities subject to transfer
restrictions may be marketable abroad, they may be less liquid than foreign
securities of the same class that are not subject to such restrictions.
FOREIGN CURRENCY TRANSACTIONS. Each Fund may conduct foreign currency
transactions on a spot (i.e., cash) basis or by entering into forward contracts
to purchase or sell foreign currencies at a future date and price. A Fund will
convert currencies on a spot basis from time to time, and investors should be
aware of the costs of currency conversion. Although foreign exchange dealers
generally do not charge a fee for conversion, they do realize a profit based on
the difference between the prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one
rate, while offering a lesser rate of exchange should the Fund desire to resell
that currency to the dealer. Forward contracts are generally traded in an
interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. The parties to a forward contract may
agree to offset or terminate the contract before its maturity, or may hold the
contract to maturity and complete the contemplated currency exchange.
Each Fund may use currency forward contracts for any purpose consistent with its
investment objective. The following discussion summarizes the principal currency
management strategies involving forward contracts that could be used by the
Funds. The Funds may also use swap agreements, indexed securities, and options
and futures contracts relating to foreign currencies for the same purposes.
When a Fund agrees to buy or sell a security denominated in a foreign currency,
it may desire to "lock in" the U.S. dollar price of the security. By entering
into a forward contract for the purchase or sale, for a fixed amount of U.S.
dollars, of the amount of foreign currency involved in the underlying security
transaction, a Fund will be able to protect itself against an adverse change in
foreign currency values between the date the security is purchased or sold and
the date on which payment is made or received. This technique is sometimes
referred to as a "settlement hedge" or "transaction hedge." The Funds may also
enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by the
Adviser.
The Funds may also use forward contracts to hedge against a decline in the value
of existing investments denominated in foreign currency. For example, if a Fund
owned securities denominated in pounds sterling, it could enter into a forward
contract to sell pounds sterling in return for U.S. dollars to hedge against
possible declines in the pound's value. Such a hedge, sometimes referred to as a
"position hedge," would tend to offset both positive and negative currency
fluctuations, but would not offset changes in security values caused by other
factors. A Fund could also hedge the position by selling another currency
expected to perform similarly to the pound sterling -- for example, by entering
into a forward contract to sell Deutschemarks or European Currency Units in
return for U.S. dollars. This type of hedge, sometimes referred to as a "proxy
hedge," could offer advantages in terms of cost, yield, or efficiency, but
generally would not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedged securities
are denominated.
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A Fund may enter into forward contracts to shift its investment exposure from
one currency into another. This may include shifting exposure from U.S. dollars
to a foreign currency, or from one foreign currency to another foreign currency.
For example, if a Fund held investments denominated in Deutschemarks, the Fund
could enter into forward contracts to sell Deutschemarks and purchase Swiss
Francs. This type of strategy, sometimes known as a "cross-hedge," will tend to
reduce or eliminate exposure to the currency that is sold, and increase exposure
to the currency that is purchased, much as if the Fund had sold a security
denominated in one currency and purchased an equivalent security denominated in
another. Cross-hedges protect against losses resulting from a decline in the
hedged currency, but will cause a Fund to assume the risk of fluctuations in the
value of the currency it purchases.
Under certain conditions, Commission guidelines require mutual funds to set
aside appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by Commission guidelines, the Funds will
segregate assets to cover currency forward contracts, if any, whose purpose is
essentially speculative. The Funds will not segregate assets to cover forward
contracts entered into for hedging purposes, including settlement hedges,
position hedges, and proxy hedges.
Successful use of currency management strategies will depend on the Adviser's
skill in analyzing and predicting currency values. Currency management
strategies may substantially change a Fund's investment exposure to changes in
currency exchange rates, and could result in losses to the Fund if currencies do
not perform as the Adviser anticipates. For example, if a currency's value rose
at a time when the Adviser had hedged a Fund by selling that currency in
exchange for U.S. dollars, the Fund would be unable to participate in the
currency's appreciation. If the Adviser hedges currency exposure through proxy
hedges, the Fund could realize currency losses from the hedge and the security
position at the same time if the two currencies do not move in tandem.
Similarly, if the Adviser increases a Fund's exposure to a foreign currency, and
that currency's value declines, the Fund will realize a loss. There is no
assurance that the Adviser's use of currency management strategies will be
advantageous to a Fund or that it will hedge at an appropriate time.
FUTURES CONTRACTS. The Funds may enter into futures contracts, options on
futures contracts and stock index futures contracts and options thereon for the
purposes of remaining fully invested and reducing transaction costs. Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a specific security, class of securities, or an index
at a specified future time and at a specified price. A stock index futures
contract is a bilateral agreement pursuant to which two parties agree to take or
make delivery of an amount of cash equal to a specified dollar amount times the
difference between the stock index value at the close of trading of the
contracts and the price at which the futures contract is originally struck.
Futures contracts which are standardized as to maturity date and underlying
financial instrument are traded on national futures exchanges. Futures exchanges
and trading are regulated under the Commodity Exchange Act by the Commodity
Futures Trading Commission ("CFTC"), a U.S. Government agency.
Although futures contracts by their terms call for actual delivery and
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
"purchased") in an identical contract to terminate the position. A futures
contract on a securities index is an agreement obligating either party to pay,
and entitling the other party to receive, while the contract is outstanding,
cash payments based on the level of a specified securities index. The
acquisition of put and call options on futures contracts will, respectively,
give the Funds the right (but not the obligation), for a specified price, to
sell or to purchase the underlying futures contract, upon exercise of the
option, at any time during the option period. Brokerage commissions are incurred
when a futures contract is bought or sold.
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Futures traders are required to make a good faith margin deposit in cash or U.S.
Government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Initial margin deposits on futures contracts are customarily set at
levels much lower than the prices at which the underlying securities are
purchased and sold, typically ranging upward from less than 5% of the value of
the contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. A Fund expects to earn interest
income while its margin deposits are held pending performance on the futures
contract.
When interest rates are expected to rise or market values of portfolio
securities are expected to fall, a Fund can seek, through the sale of futures,
contracts to offset a decline in the value of its portfolio securities. When
interest rates are expected to fall or market values are expected to rise, a
Fund, through the purchase of such contracts, can attempt to secure better rates
or prices for the Fund than might later be available in the market when it
effects anticipated purchases.
A Fund's ability to effectively utilize futures trading depends on several
factors. First, it is possible that there will not be a perfect price
correlation between the futures contracts and their underlying stock index.
Second, it is possible that a lack of liquidity for futures contracts could
exist in the secondary market, resulting in an inability to close a futures
position prior to its maturity date. Third, the purchase of a futures contract
involves the risk that the Fund could lose more than the original margin deposit
required to initiate a futures transaction.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A Fund will only sell futures
contracts to protect securities it owns against price declines or purchase
contracts to protect against an increase in the price of securities it intends
to purchase. A Fund will not enter into futures contract transactions for
purposes other than bona fide hedging purposes to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of the market value of the Fund's total assets. In addition, the Fund will not
enter into futures contracts to the extent that the value of the futures
contracts held would exceed one third of the Fund's total assets. Futures
transactions will be limited to the extent necessary to maintain the Fund's
qualification as a regulated investment company.
The Trust, on behalf of each Fund, has undertaken to restrict its futures
contract trading as follows: first, a Fund will not engage in transactions in
futures contracts for speculative purposes; second, a Fund will not market its
funds to the public as commodity pools or otherwise as vehicles for trading in
the commodities futures or commodity options markets; third, a Fund will
disclose to all prospective shareholders the purpose of and limitations on its
commodity futures trading; fourth, a Fund will submit to the CFTC special calls
for information. Accordingly, registration as a commodities pool operator with
the CFTC is not required.
In addition to the margin restrictions discussed above, transactions in futures
contracts may involve the segregation of funds pursuant to requirements imposed
by the Commission. Under those requirements, where a Fund has a long position in
a futures contract, it may be required to establish a segregated account
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(not with a futures commission merchant or broker, except as may be permitted
under Commission rules) containing cash or certain liquid assets equal to the
purchase price of the contract (less any margin on deposit). For a short
position in futures or forward contracts held by a Fund, those requirements may
mandate the establishment of a segregated account (not with a futures commission
merchant or broker, except as may be permitted under Commission rules) with cash
or certain liquid assets that, when added to the amounts deposited as margin,
equal the market value of the instruments underlying the futures contracts (but
are not less than the price at which the short positions were established).
However, segregation of assets is not required if a Fund "covers" a long
position. For example, instead of segregating assets, a Fund, when holding a
long position in a futures contract, could purchase a put option on the same
futures contract with a strike price as high or higher than the price of the
contract held by the Fund. In addition, where a Fund takes short positions, or
engages in sales of call options, it need not segregate assets if it "covers"
these positions. For example, where the Fund holds a short position in a futures
contract, it may cover by owning the instruments underlying the contract. A Fund
may also cover such a position by holding a call option permitting it to
purchase the same futures contract at a price no higher than the price at which
the short position was established. Where the Fund sells a call option on a
futures contract, it may cover either by entering into a long position in the
same contract at a price no higher than the strike price of the call option or
by owning the instruments underlying the futures contract. A Fund could also
cover this position by holding a separate call option permitting it to purchase
the same futures contract at a price no higher than the strike price of the call
option sold by the Fund.
In addition, the extent to which a Fund may enter into transactions involving
futures contracts may be limited by the Internal Revenue Code's requirements for
qualification as a registered investment company and the Fund's intention to
qualify as such.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain the required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to 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 the ability to effectively hedge them. A Fund will minimize
the risk that it will be unable to close out a futures contract by only entering
into futures contracts which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. Because the deposit
requirements in the futures markets are less onerous than margin requirements in
the securities market, there may be increased participation by speculators in
the futures market which may also cause temporary price distortions. A
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total loss of the margin deposit, before any deduction for the
transaction costs, if the account were then closed out. A 15% decrease would
result in a loss equal to 150% of the original margin deposit if the contract
were closed out. Thus, a purchaser or sale of a futures contract may result in
losses in excess of the amount invested in the contract. However, because the
futures strategies engaged in by a Fund are only for hedging purposes, the
Adviser believes that the Fund is generally not subject to risks of loss
exceeding those that would be undertaken if, instead of the futures contract, it
had invested in the underlying financial instrument and sold it after the
decline.
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Utilization of futures transactions by a Fund involves the risk of imperfect or
no correlation where the securities underlying futures contract have different
maturities than the portfolio securities being hedged. It is also possible that
a Fund could both lose money on futures contracts and also experience a decline
in value of its portfolio securities. There is also the risk of loss by a Fund
of margin deposits in the event of bankruptcy of a broker with whom the Fund has
an open position in a futures contract or related option.
OPTIONS. The Funds may purchase and sell put and call options on their portfolio
securities to enhance investment performance and to protect against changes in
market prices.
COVERED CALL OPTIONS. A Fund may write covered call options on its securities to
realize a greater current return through the receipt of premiums than it would
realize on its securities alone. Such option transactions may also be used as a
limited form of hedging against a decline in the price of securities owned by
the Fund.
A call option gives the holder the right to purchase, and obligates the writer
to sell, a security at the exercise price at any time before the expiration
date. A call option is "covered" if the writer, at all times while obligated as
a writer, either owns the underlying securities (or comparable securities
satisfying the cover requirements of the securities exchanges), or has the right
to acquire such securities through immediate conversion of securities.
In return for the premium received when it writes a covered call option, a Fund
gives up some or all of the opportunity to profit from an increase in the market
price of the securities covering the call option during the life of the option.
The Fund retains the risk of loss should the price of such securities decline.
If the option expires unexercised, the Fund realizes a gain equal to the
premium, which may be offset by a decline in price of the underlying security.
If the option is exercised, the Fund realizes a gain or loss equal to the
difference between the Fund's cost for the underlying security and the proceeds
of sale (exercise price minus commissions) plus the amount of the premium.
A Fund may terminate a call option that it has written before it expires by
entering into a closing purchase transaction. A Fund may enter into closing
purchase transactions in order to free itself to sell the underlying security or
to write another call on the security, realize a profit on a previously written
call option, or protect a security from being called in an unexpected market
rise. Any profits from a closing purchase transaction may be offset by a decline
in the value of the underlying security. Conversely, because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from a closing purchase
transaction is likely to be offset in whole or in part by unrealized
appreciation of the underlying security owned by the Fund.
COVERED PUT OPTIONS. A Fund may write covered put options in order to enhance
its current return. Such options transactions may also be used as a limited form
of hedging against an increase in the price of securities that the Fund plans to
purchase. A put option gives the holder the right to sell, and obligates the
writer to buy, a security at the exercise price at any time before the
expiration date. A put option is "covered" if the writer segregates cash and
high-grade short-term debt obligations or other permissible collateral equal to
the price to be paid if the option is exercised.
In addition to the receipt of premiums and the potential gains from terminating
such options in closing purchase transactions, a Fund also receives interest on
the cash and debt securities maintained to cover the exercise price of the
option. By writing a put option, the Fund assumes the risk that it may be
required to purchase the underlying security for an exercise price higher than
its then current market value, resulting in a potential capital loss unless the
security later appreciates in value.
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A Fund may terminate a put option that it has written before it expires by a
closing purchase transaction. Any loss from this transaction may be partially or
entirely offset by the premium received on the terminated option.
PURCHASING PUT AND CALL OPTIONS. A Fund may also purchase put options to protect
portfolio holdings against a decline in market value. This protection lasts for
the life of the put option because the Fund, as a holder of the option, may sell
the underlying security at the exercise price regardless of any decline in its
market price. In order for a put option to be profitable, the market price of
the underlying security must decline sufficiently below the exercise price to
cover the premium and transaction costs that the Fund must pay. These costs will
reduce any profit the Fund might have realized had it sold the underlying
security instead of buying the put option.
A Fund may purchase call options to hedge against an increase in the price of
securities that the Fund wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. These costs will reduce any profit the Fund might have
realized had it bought the underlying security at the time it purchased the call
option.
A Fund may also purchase put and call options to attempt to enhance its current
return.
OPTIONS ON FOREIGN SECURITIES. The Funds may purchase and sell options on
foreign securities if a Fund's Adviser believes that the investment
characteristics of such options, including the risks of investing in such
options, are consistent with the Fund's investment objectives. It is expected
that risks related to such options will not differ materially from risks related
to options on U.S. securities. However, position limits and other rules of
foreign exchanges may differ from those in the U.S. In addition, options markets
in some countries, many of which are relatively new, may be less liquid than
comparable markets in the U.S.
RISKS INVOLVED IN THE SALE OF OPTIONS. Options transactions involve certain
risks, including the risks that a Fund's Adviser will not forecast interest rate
or market movements correctly, that a Fund may be unable at times to close out
such positions, or that hedging transactions may not accomplish their purpose
because of imperfect market correlations. The successful use of these strategies
depends on the ability of a Fund's Adviser to forecast market and interest rate
movements correctly.
An exchange-listed option may be closed out only on an exchange which provides a
secondary market for an option of the same series. There is no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. If no secondary market were to exist, it would be
impossible to enter into a closing transaction to close out an option position.
As a result, a Fund may be forced to continue to hold, or to purchase at a fixed
price, a security on which it has sold an option at a time when its Adviser
believes it is inadvisable to do so.
Higher than anticipated trading activity or order flow or other unforeseen
events might cause The Options Clearing Corporation or an exchange to institute
special trading procedures or restrictions that might restrict a Fund's use of
options. The exchanges have established limitations on the maximum number of
calls and puts of each class that may be held or written by an investor or group
of investors acting in concert. It is possible that the Trust and other clients
of the Adviser may be considered such a group. These position limits may
restrict the Funds' ability to purchase or sell options on particular
securities.
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Options which are not traded on national securities exchanges may be closed out
only with the other party to the option transaction. For that reason, it may be
more difficult to close out unlisted options than listed options. Furthermore,
unlisted options are not subject to the protection afforded purchasers of listed
options by The Options Clearing Corporation.
Government regulations, particularly the requirements for qualification as a
"regulated investment company" under the Internal Revenue Code, may also
restrict the Funds' use of options.
SPECIAL EXPIRATION PRICE OPTIONS. The Funds may purchase over-the-counter
("OTC") puts and calls with respect to specified securities ("special expiration
price options") pursuant to which the Funds in effect may create a custom index
relating to a particular industry or sector that the Adviser believes will
increase or decrease in value generally as a group. In exchange for a premium,
the counterparty, whose performance is guaranteed by a broker-dealer, agrees to
purchase (or sell) a specified number of shares of a particular stock at a
specified price and further agrees to cancel the option at a specified price
that decreases straight line over the term of the option. Thus, the value of the
special expiration price option is comprised of the market value of the
applicable underlying security relative to the option exercise price and the
value of the remaining premium. However, if the value of the underlying security
increases (or decreases) by a prenegotiated amount, the special expiration price
option is canceled and becomes worthless. A portion of the dividends during the
term of the option are applied to reduce the exercise price if the options are
exercised. Brokerage commissions and other transaction costs will reduce these
Funds' profits if the special expiration price options are exercised. A Fund
will not purchase special expiration price options with respect to more than 25%
of the value of its net assets, and will limit premiums paid for such options in
accordance with state securities laws.
LEAPS. The Growth/Value Fund may purchase certain long-term exchange-traded
equity options called Long-Term Equity Anticipation Securities ("LEAPs"). LEAPs
provide a holder the opportunity to participate in the underlying securities'
appreciation in excess of a fixed dollar amount. The Growth/Value Fund will not
purchase these options with respect to more than 25% of the value of its net
assets.
LEAPs are long-term call options that allow holders the opportunity to
participate in the underlying securities' appreciation in excess of a specified
strike price, without receiving payments equivalent to any cash dividends
declared on the underlying securities. A LEAP holder will be entitled to receive
a specified number of shares of the underlying stock upon payment of the
exercise price, and therefore the LEAP will be exercisable at any time the price
of the underlying stock is above the strike price. However, if at expiration the
price of the underlying stock is at or below the strike price, the LEAP will
expire worthless.
SHORT SALES. Each Fund may seek to hedge investments or realize additional gains
through the use of short sales. Short sales are transactions in which a Fund
sells a security it does not own, in anticipation of a decline in the market
value of that security. To complete such a transaction, the Fund must borrow the
security to make delivery to the buyer. The Fund then is obligated to replace
the security borrowed by purchasing it at the market price at or prior to the
time of replacement. The price at such time may be more or less than the price
at which the security was sold by the Fund. Until the security is replaced, the
Fund is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, the Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker (or by the
Fund's custodian in a special custody account), to the extent necessary to meet
margin requirements, until the short position is closed out. A Fund also will
incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
Fund replaces the borrowed security. The Fund will realize a gain
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if the security declines in price between those dates. The amount of any gain
will be decreased, and the amount of any loss increased, by the amount of the
premium, dividends, interest or expenses the Fund may be required to pay in
connection with a short sale.
SECURITIES LENDING. Each Fund may lend its portfolio securities to
broker-dealers, banks or institutional borrowers of securities. A Fund must
receive a minimum of 100% collateral, plus any interest due in the form of cash
or U.S. Government securities. This collateral must be valued daily and should
the market value of the loaned securities increase, the borrower must furnish
additional collateral to the Fund. During the time portfolio securities are on
loan, the borrower will pay the Fund any dividends or interest paid on such
securities plus any interest negotiated between the parties to the lending
agreement. Loans will be subject to termination by the Fund or the borrower at
any time. While the Fund will not have the right to vote securities on loan, it
intends to terminate the loan and regain the right to vote if that is considered
important with respect to the investment. A Fund will only enter into loan
arrangements with broker-dealers, banks or other institutions which the Adviser
has determined are creditworthy under guidelines established by the Trustees.
Each Fund will limit its securities lending to 33 1/3% of total assets.
INVESTMENT COMPANY SECURITIES. Each Fund may invest up to 5% of its total assets
in the securities of any one investment company, but may not own more than 3% of
the outstanding securities of any one investment company or invest more than 10%
of its total assets in the securities of other investment companies. The Adviser
will waive its investment advisory fees as to all assets invested in other
investment companies. Because such other investment companies employ an
investment adviser, such investment by a Fund will cause shareholders to bear
duplicative fees, such as management fees, to the extent such fees are not
waived by the Adviser.
WHEN-ISSUED SECURITIES. Each Fund may purchase securities on a when-issued or
delayed delivery basis. These transactions are arrangements in which a Fund
purchases securities with payment and delivery scheduled for a future time. When
a Fund agrees to purchase securities on a when-issued basis, the Fund's
custodian must set aside cash or liquid portfolio securities equal to the amount
of that commitment in a separate account, and may be required to subsequently
place additional assets in the separate account to reflect any increase in the
Fund's commitment. Prior to delivery of when-issued securities, their value is
subject to fluctuation and no income accrues until their receipt. A Fund engages
in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with its investment objective and
policies, and not for investment leverage. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction; its
failure to do so may cause the Fund to miss a price or yield considered to be
advantageous.
INVESTMENT LIMITATIONS AND RESTRICTIONS
The following investment restrictions are fundamental with respect to each Fund
and may be changed only by a vote of a majority of the outstanding shares of the
Fund as defined in "Additional Information - Miscellaneous" of this Statement of
Additional Information).
EACH FUND MAY NOT:
1. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent a Fund
from purchasing or selling options and futures contracts or from investing in
securities or other instruments backed by physical commodities).
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2. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business). Investments by a Fund in
securities backed by mortgages on real estate or in marketable securities of
companies engaged in such activities are not hereby precluded.
3. Issue any senior security (as defined in the Investment Company Act of 1940,
as amended (the "1940 Act")), except that (a) a Fund may engage in transactions
that may result in the issuance of senior securities to the extent permitted
under applicable regulations and interpretations of the 1940 Act or an exemptive
order; (b) a Fund may acquire other securities, the acquisition of which may
result in the issuance of a senior security, to the extent permitted under
applicable regulations or interpretations of the 1940 Act; (c) subject to the
restrictions set forth below, a Fund may borrow money as authorized by the 1940
Act.
4. Borrow money, except that (a) a Fund may enter into commitments to purchase
securities in accordance with its investment program, including when issued
securities and reverse repurchase agreements, provided that the total amount of
any such borrowing does not exceed 33 1/3% of the Fund's total assets; and (b) a
Fund may borrow money for temporary or emergency purposes in an amount not
exceeding 5% of the value of its total assets at the time when the loan is made.
Any borrowing representing more than 5% of a Fund's total assets must be repaid
before the Fund may make additional investments.
5. Lend any security or make any other loan if, as a result, more than 33 1/3%
of its total assets would be lent to other parties, but this limitation does not
apply to purchases of publicly issued debt securities or to repurchase
agreements.
6. Underwrite securities issued by others, except to the extent that a Fund may
be considered an underwriter within the meaning of the Securities Act of 1933,
as amended (the "1933 Act") in the disposition of restricted securities.
7. With respect to 75% (50%, with respect to the Growth/Value Fund) of its total
assets, purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as a result, (a) more than 5% of the Fund's total assets would be invested
in the securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
8. (a) With respect to the Financial Services Fund and the Small Cap Financial
Fund, purchase the securities of any issuer if, as a result, less than 25% of a
Fund's total assets would be invested in the securities of issuers principally
engaged in the financial services group of industries; and (b) with respect to
Growth/Value Fund, purchase the securities of an issuer if, as a result, more
than 25% of its total assets would be invested in the securities of companies
whose principal business activities are in the same industry. These limitations
do not apply to securities issued or guaranteed by the U.S. government or any of
its agencies or instrumentalities.
The following restrictions are not fundamental and may be changed without
shareholder approval:
1. No Fund will purchase or retain securities of any issuer if the officers or
Trustees of the Trust or the officers or directors of its investment adviser
owning beneficially more than one half of 1% of the securities of such issuer
together own beneficially more than 5% of such securities.
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2. No Fund will invest more than 10% of its total assets in the securities of
issuers which together with any predecessors have a record of less than three
years of continuous operation.
3. No Fund will invest more than 15% of its net assets in illiquid securities.
Illiquid securities are securities that are not readily marketable or cannot be
disposed of promptly within seven days and in the usual course of business at
approximately the price at which a Fund has valued them. Such securities
include, but are not limited to, time deposits and repurchase agreements with
maturities longer than seven days. Securities that may be resold under Rule
144A, securities offered pursuant to Section 4(2) of, or securities otherwise
subject to restrictions on resale under the 1933 Act ("Restricted Securities"),
shall not be deemed illiquid solely by reason of being unregistered. The Adviser
determines whether a particular security is deemed to be liquid based on the
trading markets for the specific security and other factors.
4. No Fund will purchase securities on margin except for short-term credits
necessary for clearance of portfolio transactions, provided that this
restriction will not be applied to limit the use of options, futures contracts
and related options, in the manner otherwise permitted by the investment
restrictions, policies and investment program of the Fund.
5. Each Fund may invest up to 5% of its total assets in the securities of any
one investment company, but may not own more than 3% of the securities of any
one investment company or invest more than 10% of its total assets in the
securities of other investment companies.
GENERAL. The policies and limitations listed above supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of a Fund's assets that may be invested
in any security or other asset, or sets forth a policy regarding quality
standards, such standard or percentage limitation will be determined immediately
after and as a result of the Fund's acquisition of such security or other asset
except in the case of borrowing (or other activities that may be deemed to
result in the issuance of a "senior security" under the 1940 Act). Accordingly,
any subsequent change in values, net assets, or other circumstances will not be
considered when determining whether the investment complies with the Fund's
investment policies and limitations. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Trustees will consider what actions, if any, are appropriate to
maintain adequate liquidity.
The investment policies of a Fund may be changed without an affirmative vote of
the holders of a majority of the Fund's outstanding voting securities unless (1)
a policy is expressly deemed to be a fundamental policy of the Fund or (2) a
policy is expressly deemed to be changeable only by such majority vote.
VALUATION OF PORTFOLIO SECURITIES
Portfolio securities are valued at the last sale price on the securities
exchange or national securities market on which such securities primarily are
traded. Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued at the average of the
most recent bid and asked prices, except in the case of open short positions
where the asked price is used for valuation purposes. Bid price is used when no
asked price is available. Short-term investments are carried at amortized cost,
which approximates value. Any securities or other assets for which recent market
quotations are not readily available are valued at fair value as determined in
good faith by the Funds' Board of Trustees. Expenses and fees, including the
management fee and distribution and service fees, are accrued daily and taken
into account for the purpose of determining the net asset value of the Funds'
shares.
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Restricted securities, as well as securities or other assets for which market
quotations are not readily available, or are not valued by a pricing service
approved by the Board of Trustees, are valued at fair value as determined in
good faith by the Board of Trustees. The Board of Trustees will review the
method of valuation on a current basis. In making their good faith valuation of
restricted securities, the Trustees generally will take the following factors
into consideration: restricted securities which are, or are convertible into,
securities of the same class of securities for which a public market exists
usually will be valued at market value less the same percentage discount at
which purchased. This discount will be revised periodically by the Board of
Trustees if the Trustees believe that it no longer reflects the value of the
restricted securities. Restricted securities not of the same class as securities
for which a public market exists usually will be valued initially at cost. Any
subsequent adjustment from cost will be based upon considerations deemed
relevant by the Board of Trustees.
NEW YORK STOCK EXCHANGE CLOSINGS. The holidays (as observed) on which the New
York Stock Exchange is closed currently are: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas Day.
PERFORMANCE
From time to time the "standardized yield," "dividend yield," "average annual
total return," "total return," and "total return at net asset value" of an
investment in Fund shares may be advertised. An explanation of how yields and
total returns are calculated and the components of those calculations are set
forth below.
Yield and total return information may be useful to investors in reviewing a
Fund's performance. A Fund's advertisement of its performance must, under
applicable Commission rules, include the average annual total returns for the
Fund for the 1, 5 and 10 year period (or the life of the Fund, if less) as of
the most recently ended calendar quarter. This enables an investor to compare
the Fund's performance to the performance of other funds for the same periods.
However, a number of factors should be considered before using such information
as a basis for comparison with other investments. An investment in a Fund is not
insured; its yield and total return are not guaranteed and normally will
fluctuate on a daily basis. When redeemed, an investor's shares may be worth
more or less than their original cost. Yield and total return for any given past
period are not a prediction or representation by the Trust of future yields or
rates of return on its shares. The yield and total returns of the Fund are
affected by portfolio quality, portfolio maturity, the type of investments the
Fund holds and operating expenses.
STANDARDIZED YIELD. A Fund's "yield" (referred to as "standardized yield") for a
given 30 day period for a class of shares is calculated using the following
formula set forth in rules adopted by the Commission that apply to all funds
that quote yields:
STANDARDIZED YIELD = 2 [(a-b + 1)6 - 1]
---
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense reimbursements).
c = the average daily number of shares of that class outstanding during
the 30-day period that were entitled to receive dividends.
19
<PAGE>
d = the maximum offering price per share of the class on the last
day of the period, adjusted for undistributed net investment income.
The standardized yield for a 30 day period may differ from its yield for any
other period. The Commission formula assumes that the standardized yield for a
30 day period occurs at a constant rate for a six month period and is annualized
at the end of the six month period. This standardized yield is not based on
actual distributions paid by a Fund to shareholders in the 30 day period, but is
a hypothetical yield based upon the net investment income from the Fund's
portfolio investments calculated for that period. The standardized yield may
differ from the "dividend yield," described below.
DIVIDEND YIELD AND DISTRIBUTION RETURNS. From time to time a Fund may quote a
"dividend yield" or a "distribution return." Dividend yield is based on the
share dividends derived from net investment income during a stated period.
Distribution return includes dividends derived from net investment income and
from realized capital gains declared during a stated period. Under those
calculations, the dividends and/or distributions declared during a stated period
of one year or less (for example, 30 days) are added together, and the sum is
divided by the maximum offering price per share of Fund) on the last day of the
period.
DIVIDEND YIELD = DIVIDENDS + NUMBER OF DAYS (ACCRUAL PERIOD) X 365
-------------------
MAX. OFFERING PRICE
(LAST DAY OF PERIOD)
The maximum offering price for shares includes the maximum front-end sales
charge, if any.
From time to time similar yield or distribution return calculations may also be
made using the net asset value (instead of its respective maximum offering
price) at the end of the period.
TOTAL RETURNS. The "average annual total return" is an average annual compounded
rate of return for each year in a specified number of years. It is the rate of
return based on the change in value of a hypothetical initial investment of
$1,000 ("P" in the formula below) held for a number of years ("n") to achieve an
Ending Redeemable Value ("ERV"), according to the following formula:
(ERV)1N-1 = AVERAGE ANNUAL TOTAL RETURN
---
(P)
The cumulative "total return" calculation measures the change in value of a
hypothetical investment of $1,000 over an entire period of years. Its
calculation uses some of the same factors as average annual total return, but it
does not average the rate of return on an annual basis. Total return is
determined as follows:
(ERV)-1 = TOTAL RETURN
---
(P)
From time to time a Fund may also quote an "average annual total return at net
asset value" or a cumulative "total return at net asset value." It is based on
the difference in net asset value per share at the beginning and the end of the
period for a hypothetical investment in that class of shares (without
considering front-end or contingent sales charges) and takes into consideration
the reinvestment of dividends and capital gains distributions.
20
<PAGE>
PERFORMANCE COMPARISONS.
YIELD AND TOTAL RETURN. From time to time, performance
information for a Fund showing its average annual total return and/or yield may
be included in advertisements or in information furnished to present or
prospective shareholders and the ranking of those performance figures relative
to such figures for groups of mutual funds categorized by Lipper Analytical
Services as having the same investment objectives may be included in
advertisements.
Total return and/or yield may also be used to compare the
performance of a Fund against certain widely acknowledged standards or indices
for stock and bond market performance. The Standard & Poor's Composite Index of
500 stocks (the "S&P 500") is a market value-weighted and unmanaged index
showing the changes in the aggregate market value of 500 stocks relative to the
base period 1941-43. The S&P 500 is composed almost entirely of common stocks of
companies listed on the New York Stock Exchange, although the common stocks of a
few companies listed on the American Stock Exchange or traded over-the-counter
are included. The 500 companies represented include 400 industrial, 60
transportation and 40 financial services concerns. The S&P 500 represents about
80% of the market value of all issues traded on the New York Stock Exchange.
The NASDAQ-OTC Price Index (the "NASDAQ Index") is a market
value-weighted and unmanaged index showing the changes in the aggregate market
value of approximately 3,500 stocks relative to the base measure of 100.00 on
February 5, 1971. The NASDAQ Index is composed entirely of common stocks of
companies traded over-the-counter and often through the National Association of
Securities Dealers Automated Quotations ("NASDAQ") system. Only those
over-the-counter stocks having only one market maker or traded on exchanges are
excluded.
The Shearson Lehman Government Bond Index (the "SL Government
Index") is a measure of the market value of all public obligations of the U.S.
Treasury; all publicly issued debt of all agencies of the U.S. Government and
all quasi-federal corporations; and all corporate debt guaranteed by the U.S.
Government. Mortgage backed securities, flower bonds and foreign targeted issues
are not included in the SL Government Index.
The Shearson Lehman Government/Corporate Bond Index (the "SL
Government/Corporate Index") is a measure of the market value of approximately
5,300 bonds with a face value currently in excess of $1.3 trillion. To be
included in the SL Government/Corporate Index, an issue must have amounts
outstanding in excess of $1 million, have at least one year to maturity and be
rated "Baa" or higher ("investment grade") by a nationally recognized
statistical rating agency.
Current yields or performance will fluctuate from time to time
and are not necessarily representative of future results. Accordingly, a Fund's
yield or performance may not provide for comparison with bank deposits or other
investments that pay a fixed return for a stated period of time. Yield and
performance are functions of quality, composition, and maturity, as well as
expenses allocated to the Fund.
21
<PAGE>
ADDITIONAL REDEMPTION INFORMATION
REDEMPTION IN KIND. Although each Fund intends to redeem shares in cash, each
Fund reserves the right under certain circumstances to pay the redemption price
in whole or in part by a distribution of securities from a Fund. To the extent
available, such securities will be readily marketable. Redemption in kind will
be made in conformity with applicable Commission rules, taking such securities
at the same value employed in determining NAV and selecting the securities in a
manner the Trustees determine to be fair and equitable. The Funds have elected
to be governed by Rule 18F-1 of the 1940 Act under which each Fund is obligated
to redeem shares for any one shareholder in cash only up to the lesser of
$250,000 or 1% of a Fund's net asset value during any 90-day period.
SUSPENSION OF REDEMPTIONS. The right of redemption may be suspended or the date
of payment postponed (a) during any period when the New York Stock Exchange is
closed (other than customary weekend and holiday closings), (b) when trading in
the markets a Fund ordinarily utilizes is restricted, or when an emergency
exists as determined by the Commission so that disposal of the Fund's
investments or determination of its net asset value is not reasonably
practicable, or (c) for such other periods as the Commission by order may permit
to protect Fund shareholders.
DIVIDENDS AND DISTRIBUTIONS
Each Fund ordinarily declares and pays dividends from its net investment income.
Each Fund distributes substantially all of its net investment income and net
capital gains, if any, to shareholders within each calendar year as well as on a
fiscal year basis to the extent required for the Fund to qualify for favorable
federal tax treatment.
The amount of distributions may vary from time to time depending on market
conditions and the composition of a Fund's portfolio.
For this purpose, the net income of a Fund, from the time of the immediately
preceding determination thereof, shall consist of all interest income accrued on
the portfolio assets of the Fund, dividend income, if any, income from
securities loans, if any, and realized capital gains and losses on the Fund's
assets, less all expenses and liabilities of the Fund chargeable against income.
Interest income shall include discount earned, including both original issue and
market discount, on discount paper accrued ratably to the date of maturity.
Expenses, including the compensation payable to the Adviser, are accrued each
day. The expenses and liabilities of a Fund shall include those appropriately
allocable to the Fund as well as a share of the general expenses and liabilities
of the Trust in proportion to the Fund's share of the total net assets of the
Trust.
TAXES
It is the policy of each Fund to seek to qualify for the favorable tax treatment
accorded regulated investment companies ("RICs") under Subchapter M of the IRS
Code (the "Code") for so long as such qualification is in the best interests of
its shareholders. By following such policy and distributing its income and gains
currently with respect to each taxable year, each Fund expects to eliminate or
reduce to a nominal amount the federal income and excise taxes to which it may
otherwise be subject.
In order to qualify as a RIC, a Fund must, among other things, (1) derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, and gains from the sale or other disposition of stock or
securities, foreign currencies or other income (including gains from options,
futures
22
<PAGE>
or forward contracts) derived with respect to its business of investing in
stock, securities or currencies, (2) derive less than 30% of its gross income
from the sale or other disposition of stock, securities, options, futures,
forward contracts, and certain foreign currencies (or options, futures, or
forward contracts on foreign currencies) held for less than three months, and
(3) diversify its holdings so that at the end of each quarter of its taxable
year (a) at least 50% of the market value of the Fund's assets is represented by
cash or cash items, U.S. Government securities, securities of other RICs and
other securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities) or of two or more issuers that the Fund controls and that
are engaged in the same, similar, or related trades or businesses. These
requirements may restrict the degree to which a Fund may engage in short-term
trading and concentrate investments. If a Fund qualifies as a RIC, it will not
be subject to federal income tax on the part of its net investment income and
net realized capital gains, if any, that it distributes to shareholders with
respect to each taxable year within the time limits specified in the Code.
A non-deductible excise tax is imposed on RICs that do not distribute in each
calendar year an amount equal to 98% of their ordinary income for the year plus
98% of their capital gain net income for the 1-year period ending on October 31
of such calendar year. The balance of such income must be distributed during the
following calendar year. If distributions during a calendar year are less than
the required amount, the fund is subject to a non-deductible excise tax equal to
4% of the deficiency.
Certain investment and hedging activities of a Fund, including transactions in
options, futures contracts, hedging transactions, forward contracts, straddles,
foreign currencies, and foreign securities, are subject to special tax rules. In
a given case, these rules may accelerate income to a Fund, defer losses to the
Fund, cause adjustments in the holding periods of the Fund's securities, convert
short-term capital losses into long-term capital losses, or otherwise affect the
character of the Fund's income. These rules could therefore affect the amount,
timing and character of distributions to shareholders. The Trust will endeavor
to make any available elections pertaining to such transactions in a manner
believed to be in the best interest of the Fund and its shareholders.
Each Fund will be required in certain cases to withhold and remit to the U.S.
Treasury 31% of taxable dividends paid to any shareholder who has failed to
provide a (or has provided an incorrect) tax identification number, or is
subject to withholding pursuant to a notice from the IRS for failure to properly
include on his or her income tax return payments of interest or dividends. This
"backup withholding" is not an additional tax, and any amounts withheld may be
credited against the shareholder's ultimate U.S. tax liability.
Information set forth in the Prospectus and this Statement of Additional
Information that relates to federal taxation is only a summary of certain key
federal tax considerations generally affecting purchasers of shares of the
Funds. No attempt has been made to present a complete explanation of the federal
tax treatment of a Fund or its shareholders, and this discussion is not intended
as a substitute for careful tax planning. Accordingly, potential purchasers of
shares of a Fund are urged to consult their tax advisers with specific reference
to their own tax circumstances. In addition, the tax discussion in the
Prospectus and this Statement of Additional Information is based on tax law in
effect on the date of the Prospectus and this Statement of Additional
Information; such laws and regulations may be changed by legislative, judicial
or administrative action, sometimes with retroactive effect.
23
<PAGE>
TRUSTEES AND OFFICERS
BOARD OF TRUSTEES.
Overall responsibility for management of the Trust rests with the Trustees, who
are elected by the shareholders of the Trust. The Trust is managed by the
Trustees in accordance with the laws of the State of Delaware. There are
currently five Trustees, three of whom are not "interested persons" of the Trust
within the meaning of that term under the 1940 Act ("Independent Trustee"). The
Trustees, in turn, elect the officers of the Trust to actively supervise its
day-to-day operations.
The Trustees of the Trust, their addresses, ages and their principal occupations
during the past five years are as follows:
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE WITH THE TRUST DURING PAST 5 YEARS
- --------------------- -------------- -------------------
<S> <C> <C>
Eric F. Billings, 44* Chairman, Trustee, Vice-Chairman and Director, FBR Fund
Potomac Tower Chief Financial Officer, Advisers, Inc., Friedman, Billings, Ramsey &
1001 Nineteenth Street North Treasurer and Secretary Co., Inc., Friedman, Billings, Ramsey,
Arlington, Virginia 22209 Investment Management, Inc. and FBR Offshore
Management Inc.
Thomas D. Eckert, 49 Trustee President, Mid-Atlantic Region, Pulte Home
Pulte Home North Corporation.
2100 Reston Parkway, Suite 450
Reston, Virginia 20191
Patrick J. Keeley, 48 Trustee Partner in the law firm of Fulbright &
Fulbright & Jaworski, L.L.P. Jaworski, L.L.P.
801 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
C. Eric Brugel, 34* Trustee, President and Managing Director, Friedman, Billings, Ramsey
Potomac Tower Assistant Secretary & Co., Inc.
1001 Nineteenth Street North
Arlington, VA 22209
Michael A. Willner, 40 Trustee President, Catalyst Advisers, Inc. from
11521 Potomac Road September 1996 to Present; President, Federal
Lorton, VA 22079 Filings, Inc. from July 1986 to July 1995
F. David Fowler, 63 Trustee Dean, The George Washington University School
9450 Newbridge Drive of Business and Public Management; Partner,
Potomac, MD 20854 KPMG Peat Marwick from October 1969 to June
1992.
- ------------------------
<FN>
* Messrs. Billings and Brugel are deemed to be "interested persons" of the Trust under the 1940 Act.
</FN>
</TABLE>
24
<PAGE>
The Board of Trustees presently has an audit committee, a valuation committee,
and a nominating committee. The members of each committee are Messrs. Eckert,
Keeley, Willner and Fowler. The function of the audit committee is to recommend
independent auditors and review and report on accounting and financial matters.
The function of the valuation committee is to determine and monitor the value of
the Funds' assets. The function of the nominating committee is to nominate
persons to serve as disinterested trustees and trustees to serve on committees
of the Board.
REMUNERATION OF TRUSTEES AND CERTAIN EXECUTIVE OFFICERS.
Each Independent Trustee receives an annual retainer of $5,000 and a fee of
$1,000 for each regular meeting and $500 for each committee meeting attended,
plus expenses, and $250 for each telephonic meeting.
The officers of the Trust, their ages, addresses and principal occupations
during the past five years, are as follows:
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE WITH THE TRUST DURING PAST 5 YEARS
- --------------------- -------------- -------------------
<S> <C> <C>
Eric F. Billings, 44 Chairman, Trustee, Vice-Chairman and Director, FBR Fund
Potomac Tower Chief Financial Officer, Advisers, Inc., Friedman, Billings, Ramsey
1001 Nineteenth Street North Treasurer and Secretary & Co., Inc., Friedman, Billings, Ramsey,
Arlington, Virginia 22209 Investment Management, Inc. and FBR
Offshore Management Inc.
C. Eric Brugel, 34 Trustee, President and Managing Director, Friedman, billings,
Potomac Tower Assistant Secretary Ramsey & Co., Inc.
1001 Nineteenth Street North
Arlington, Virginia 22209
Frank J. Maresca, 38 Assistant Treasurer Managing Director of Bear Stearns & Co.,
245 Park Avenue Inc. since September 1994; Associate
New York, NY 10167 Director of Bear Stearns & Co., Inc. from
September 1993 to September 1994;
Executive Vice President of BSFM since
March 1992; Vice President of Bear
Stearns & Co., Inc. from March 1992 to
September 1993; First Vice President of
Mitchell Hutchins Asset Management Inc.
("Mitchell Hutchins") from June 1988 to
March 1992; and Director of Funds
Administration Division of Mitchell
Hutchins from November 1991 to March
1992.
Vincent L. Pereira, 31 Assistant Secretary Associate Director of Bear Stearns & Co.,
245 Park Avenue Inc. since September 1995 and Vice
New York, New York 10167 President of BSFM since May 1993; Vice
President to September 1995; Assistant
Vice President of Mitchell Hutchins from
October 1992 to May 1993; Senior
Relationship Manager of Mitchell
Hutchins from June 1988 to October 1992.
</TABLE>
25
<PAGE>
The mailing address of each of the officers of the Trust is Potomac Tower, 1001
Nineteenth Street North, Arlington, Virginia 22209.
The officers of the Trust receive no compensation directly from the Trust for
performing the duties of their offices.
ADVISORY AND OTHER CONTRACTS
INVESTMENT ADVISER.
FBR Fund Advisers, Inc. is the investment adviser to the Funds. The Adviser
directs the investment of the Funds' assets, subject at all times to the
supervision of the Trust's Board of Trustees. The Adviser continually conducts
investment research and supervision for the Funds and is responsible for the
purchase and sale of the Funds' investments.
The Adviser was organized as a Delaware corporation on September 30, 1996 and is
registered as an investment adviser under the 1940 Act. It is an affiliate of
Friedman, Billings, Ramsey & Co., Inc., Friedman, Billings, Ramsey Investment
Management, Inc. and FBR Offshore Management, Inc. Affiliates of the Adviser
manage approximately $200 million for numerous clients including individuals,
banks and thrift institutions, investment companies, pension and profit sharing
plans and trusts, estates and charitable organizations.
THE INVESTMENT ADVISORY AGREEMENT.
Unless sooner terminated, the Investment Advisory Agreement between the Adviser
and the Trust on behalf of the Funds (the "Investment Advisory Agreement")
provides that it will continue in effect as to each Fund for an initial two-year
term and for consecutive one-year terms thereafter, provided that such
continuance is approved at least annually by the Trustees or by vote of a
majority of the outstanding shares of a Fund (as defined under "Additional
Information"), and, in either case, by a majority of the Trustees who are not
parties to the Investment Advisory Agreement or interested persons (as defined
in the 1940 Act) of any party to the Investment Advisory Agreement, by votes
cast in person at a meeting called for such purpose.
The Investment Advisory Agreement is terminable as to a Fund at any time on 60
days' written notice without penalty by the Trustees, by vote of a majority of
the outstanding shares of the Fund, or by the Adviser. The Investment Advisory
Agreement also terminates automatically in the event of any assignment, as
defined in the 1940 Act.
The Investment Advisory Agreement provides that the Adviser shall not be liable
for any error of judgment or mistake of law or for any loss suffered by a Fund
in connection with the performance of services pursuant to the Investment
Advisory Agreement, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services or a loss resulting from
willful misfeasance, bad faith, or gross negligence on the part of the Adviser
in the performance of its duties, or from reckless disregard by it of its duties
and obligations thereunder.
Under the Investment Advisory Agreement, the Adviser may delegate a portion of
its responsibilities to a sub-adviser. In addition, the Investment Advisory
Agreement provides that the Adviser may render services through its own
employees or the employees of one or more affiliated companies that are
qualified to act as an investment adviser of a Fund and are under common control
with FBR as long as all such persons are functioning as part of an organized
group of persons, managed by authorized officers of the Adviser.
26
<PAGE>
PORTFOLIO TRANSACTIONS.
Pursuant to the Investment Advisory Agreement, the Adviser determines, subject
to the general supervision of the Trustees of the Trust, and in accordance with
each Fund's investment objective and restrictions, which securities are to be
purchased and sold by a Fund, and which brokers are to be eligible to execute
its portfolio transactions. Purchases from underwriters and/or broker-dealers of
portfolio securities include a commission or concession paid by the issuer to
the underwriter and/or broker-dealer and purchases from dealers serving as
market makers may include the spread between the bid and asked price. While the
Adviser generally seeks competitive spreads or commissions, a Fund may not
necessarily pay the lowest spread or commission available on each transaction,
for reasons discussed below.
Allocation of transactions to dealers is determined by the Adviser in its best
judgment and in a manner deemed fair and reasonable to shareholders. The primary
consideration is prompt execution of orders in an effective manner at the most
favorable price. Subject to this consideration, dealers who provide supplemental
investment research to the Adviser may receive orders for transactions by the
Trust. Information so received is in addition to and not in lieu of services
required to be performed by the Adviser and does not reduce the investment
advisory fees payable to the Adviser by a Fund. Such information may be useful
to the Adviser in serving both the Trust and other clients and, conversely, such
supplemental research information obtained by the placement of orders on behalf
of other clients may be useful to the Adviser in carrying out its obligations to
the Trust. The Trustees have authorized the allocation of brokerage to
affiliated broker-dealers on an agency basis to effect portfolio transactions.
The Trustees have adopted procedures incorporating the standards of Rule 17e-1
under the 1940 Act, which require that the commission paid to affiliated
broker-dealers must be "reasonable and fair compared to the commission, fee or
other remuneration received, or to be received, by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time." At times, a Fund may also purchase portfolio securities
directly from dealers acting as principals, underwriters or market makers. As
these transactions are usually conducted on a net basis, no brokerage
commissions are paid by the Fund.
Investment decisions for a Fund are made independently from those made for the
other funds of the Trust or any other investment company or account managed by
the Adviser. Such other funds, investment companies or accounts may also invest
in the same securities in which a Fund invests. When a purchase or sale of the
same security is made at substantially the same time on behalf of a Fund and
another fund, investment company or account, the transaction will be averaged as
to price, and available investments allocated as to amount, in a manner which
the Adviser believes to be equitable to the Fund and such other fund, investment
company or account. In some instances, this investment procedure may affect the
price paid or received by a Fund or the size of the position obtained by the
Fund in an adverse manner relative to the result that would have been obtained
if only the Fund had participated in or been allocated such trades. To the
extent permitted by law, the Adviser may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for the other funds of
the Trust or for other investment companies or accounts in order to obtain best
execution. In making investment recommendations for the Trust, the Adviser will
not inquire or take into consideration whether an issuer of securities proposed
for purchase or sale by the Fund is a customer of the Adviser, its parents or
subsidiaries or affiliates and, in dealing with their commercial customers, the
Adviser, its subsidiaries, and affiliates will not inquire or take into
consideration whether securities of such customers are held by the Trust.
PORTFOLIO TURNOVER.
The portfolio turnover rate is calculated by dividing the lesser of each Fund's
purchases or sales of portfolio securities for the year by the monthly average
value of the portfolio securities. The calculation excludes all securities whose
maturities, at the time of acquisition, were one year or less.
27
<PAGE>
DISTRIBUTOR.
Friedman, Billings, Ramsey & Co., Inc., located at Potomac Tower, 1001
Nineteenth Street North, Arlington, Virginia 22209, serves as the Funds'
principal underwriter and distributor (the "Distributor") of the Funds' shares
pursuant to an agreement which is renewable annually. The Distributor is
entitled to receive payments under the Funds' Distribution and Shareholder
Servicing Plans described below.
ADMINISTRATOR.
Under the terms of an Administration Agreement with the Trust on behalf of the
Funds, Bear Stearns Funds Management Inc. ("BSFM"), a wholly-owned subsidiary of
The Bear Stearns Companies Inc., generally supervises certain operations of the
Funds, subject to the overall authority of the Trust's Board of Trustees in
accordance with Delaware law.
From time to time, BSFM may waive receipt of its fees, which would have the
effect of lowering a Fund's expense ratio and increasing yield to investors at
the time such amounts are waived or assumed, as the case may be. The Funds will
not pay BSFM at a later time for any amounts it may waive.
Under the terms of an Administration and Accounting Services Agreement with the
Trust on behalf of the Funds, PFPC Inc. provides certain administration and
accounting services to the Funds.
CUSTODIAN AND TRANSFER AGENT.
Custodial Trust Company, 101 Carnegie Center, Princeton, New Jersey 08540, is
the Funds' custodian. PFPC Inc., Bellevue Corporate Center, 400 Bellevue
Parkway, Wilmington, Delaware 19809, is the Funds' transfer agent, dividend
disbursing agent and registrar (the "Transfer Agent"). The Transfer Agent also
provides certain administrative services to the Funds. Neither of them has any
part in determining the investment policies of the Funds or which securities are
to be purchased or sold by the Funds.
DISTRIBUTION PLAN.
Under a plan adopted by the Trust's Board of Trustees pursuant to Rule 12b-1
under the 1940 Act (the "Plan"), each Fund pays the Distributor for distributing
Fund shares and for providing personal services to, and/or maintaining accounts
of, Fund shareholders a fee at the annual rate of 0.25% of the average daily net
assets of the Fund. Under the Plan, the Distributor may pay third parties in
respect of these services such amount as it may determine. The fees paid to the
Distributor under the Plan are payable without regard to actual expenses
incurred. The Trust understands that these third parties also may charge fees to
their clients who are beneficial owners of Fund shares in connection with their
client accounts. These fees would be in addition to any amounts which may be
received by them from the Distributor under the Plan.
In approving the Plan in accordance with the requirements of Rule 12b-1 under
the 1940 Act, the Trustees (including the Independent Trustees, being Trustees
who are not "interested persons", as defined by the 1940 Act, of the Trust and
have no direct or indirect financial interest in the operation of the Plan or in
any agreements related to the Plan) considered various factors and determined
that there is a reasonable likelihood that the Plan will benefit the Fund and
its shareholders. The Plan will continue in effect from year to year if
specifically approved annually (a) by the majority of such Fund's outstanding
voting shares or by the Board of Trustees and (b) by the vote of a majority of
the Independent Trustees. While the Plan remains in effect, the Trust's
Principal Financial Officer shall prepare and furnish to the Board of Trustees a
written report setting forth the amounts spent by each Fund under the Plan and
the purposes for which such expenditures were made. The Plan may not be amended
to increase materially the amount to be spent
28
<PAGE>
for distribution without shareholder approval and all material amendments to the
Plan must be approved by the Board of Trustees and by the Independent Trustees
cast in person at a meeting called specifically for that purpose. While the Plan
is in effect, the selection and nomination of the Independent Trustees shall be
made by those Independent Trustees then in office.
INDEPENDENT ACCOUNTANTS.
Arthur Andersen LLP, 8000 Tower Cresent Drive, Vienna, VA 22182, serves as
independent accountants to the Funds.
LEGAL COUNSEL.
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005 is the
counsel to the Trust.
EXPENSES.
Each Fund bears certain expenses relating to its operations; such expenses
include, but are not limited to, the following: taxes, interest, brokerage fees
and commissions, fees of the Trustees, Commission fees, state securities
qualification fees, costs of preparing and printing prospectuses for regulatory
purposes and for distribution to current shareholders, outside auditing and
legal expenses, advisory fees, fees and out-of-pocket expenses of the custodian,
administrators and transfer agent, certain insurance premiums, costs of
maintenance of the Fund's existence, costs of shareholders' reports and
meetings, and any extraordinary expenses incurred in the Fund's operation.
ADDITIONAL INFORMATION
DESCRIPTION OF SHARES.
The Trust is a Delaware business trust. The Delaware Trust Instrument authorizes
the Trustees to issue an unlimited number of shares, which are units of
beneficial interest, without par value. The Trust presently is authorized to
issue four series of shares, which represent interests in the FBR Small Cap
Financial Fund, the FBR Financial Services Fund, the FBR Information
Technologies Fund and the FBR Growth/Value Fund. The Trust's Trust Instrument
authorizes the Trustees to divide or redivide any unissued shares of the Trust
into one or more additional series by setting or changing in any one or more
aspects their respective preferences, conversion or other rights, voting power,
restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption.
Shares have no subscription or preemptive rights and only such conversion or
exchange rights as the Trustees may grant in their discretion. When issued for
payment as described in the Prospectus and this Statement of Additional
Information, the Trust's shares will be fully paid and non-assessable. In the
event of a liquidation or dissolution of the Trust, shares of a Fund are
entitled to receive the assets available for distribution belonging to the Fund,
and a proportionate distribution, based upon the relative asset values of the
respective funds of the Trust, of any general assets not belonging to any
particular fund which are available for distribution.
Shares of the Trust are entitled to one vote per share (with proportional voting
for fractional shares) on such matters as shareholders are entitled to vote. On
any matter submitted to a vote of the shareholders, all shares are voted
separately by individual series (funds), and whenever the Trustees determine
that the matter affects only certain series, may be submitted for a vote by only
such series, except (1) when required by the 1940 Act, shares are voted in the
aggregate and not by individual series; and (2) when the Trustees
29
<PAGE>
have determined that the matter affects the interests of more than one series
and that voting by shareholders of all series would be consistent with the 1940
Act, then the shareholders of all such series shall be entitled to vote thereon
(either by individual series or by shares voted in the aggregate, as the
Trustees in their discretion may determine). The Trustees may also determine
that a matter affects only the interests of one or more classes of a series, in
which case (or if required under the 1940 Act) such matter shall be voted on by
such class or classes. There will normally be no meetings of shareholders for
the purpose of electing Trustees unless and until such time as less than a
majority of the Trustees have been elected by the shareholders, at which time
the Trustees then in office will call a shareholders' meeting for the election
of Trustees. In addition, Trustees may be removed from office by a vote of the
holders of at least two-thirds of the outstanding shares of the Trust. A meeting
shall be held for such purpose upon the written request of the holders of not
less than 10% of the outstanding shares. Upon written request by ten or more
shareholders meeting the qualifications of Section 16(c) of the 1940 Act, (i.e.,
persons who have been shareholders for at least six months, and who hold shares
having a net asset value of at least $25,000 or constituting 1% of the
outstanding shares) stating that such shareholders wish to communicate with the
other shareholders for the purpose of obtaining the signatures necessary to
demand a meeting to consider removal of a Trustee, the Trust will provide a list
of shareholders or disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, the Trustees shall continue
to hold office and may appoint their successors.
Rule 18f-2 under the 1940 Act provides that any matter required to be submitted
to the holders of the outstanding voting securities of an investment company
such as the Trust shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each fund of
the Trust affected by the matter. For purposes of determining whether the
approval of a majority of the outstanding shares of a Fund will be required in
connection with a matter, a Fund will not be deemed to be affected by a matter
unless it is clear that the interests of each fund in the matter are identical,
or that the matter does not affect any interest of the fund. Under Rule 18f-2,
the approval of an investment advisory agreement or any change in investment
policy would be effectively acted upon with respect to a fund only if approved
by a majority of the outstanding shares of such fund. However, Rule 18f- also
provides that the ratification of independent public accountants, the approval
of principal underwriting contracts, and the election of Trustees may be
effectively acted upon by shareholders of the Trust voting without regard to
series.
SHAREHOLDER AND TRUSTEE LIABILITY.
The Delaware Business Trust Act provides that a shareholder of a Delaware
business trust shall be entitled to the same limitation of personal liability
extended to shareholders of Delaware corporations, and the Delaware Trust
Instrument provides that shareholders of the Trust shall not be liable for the
obligations of the Trust. The Delaware Trust Instrument also provides for
indemnification out of the trust property of any shareholder held personally
liable solely by reason of his or her being or having been a shareholder. The
Delaware Trust Instrument also 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 shall satisfy any judgment thereon. Thus, the risk
of a shareholder incurring financial loss on account of shareholder liability is
considered to be extremely remote.
The Delaware Trust Instrument states further that no Trustee, officer, or agent
of the Trust shall be personally liable in connection with the administration or
preservation of the assets of a Fund or the conduct of the Trust's business; nor
shall any Trustee, officer, or agent be personally liable to any person for any
action or failure to act except for his own bad faith, willful misfeasance,
gross negligence, or reckless disregard of his duties. The Declaration of Trust
also provides that all persons having any claim against the Trustees or the
Trust shall look solely to the assets of the Trust for payment.
30
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of June 20, 1997, the following persons held of record 5% or more of the
outstanding shares of the Funds. Financial Services Fund: FMT Co. Custodian IRA
Rollover Account (for the benefit of its customers), 64 Eisenhower Drive,
Middletown, N.Y. 10940 owned 60,698 shares (6.3%); Endeavour Capital Partners
LP, 555 Madison Avenue, New York, N.Y. 10022 owned 75,301 shares (7.8%); and
Charles Schwab & Co. (for the benefit of its customers), 101 Montgomery Street,
San Francisco, Ca. 94104 owned 100,865 shares (10.4%). Small Cap Financial Fund:
The Northern Trust Co. (for the benefit of its customers), P.O. Box 92956,
Chicago, Ill. 60675 owned 43,087 shares (6.0%); FMT Co. Custodian IRA Rollover
Account (for the benefit of its customers), 64 Eisenhower Drive, Middletown,
N.Y. 10940 owned 60,863 shares (8.4%); and Charter Michigan Bancorp Inc., 13606
Michigan Avenue, Dearborn, MI 48126 owned 39,463 shares (5.5%). Growth/Value
Fund: Bear Stearns Securities Corp., 1 Metrotech Center North, Brooklyn, N.Y.
11201 owned 24,310 shares (13.3%); and Charles Schwab & Co., Inc. (for the
benefit of its customers), 101 Montgomery Street, San Francisco, Ca. 94104 owned
18,645 shares (10.2%).
MISCELLANEOUS.
As used in the Prospectus and in this Statement of Additional Information,
"assets belonging to a fund" means the consideration received by the Trust upon
the issuance or sale of shares of a fund, together with all income, earnings,
profits, and proceeds derived from the investment thereof, including any
proceeds from the sale, exchange, or liquidation of such investments, and any
funds or payments derived from any reinvestment of such proceeds and any general
assets of the Trust, which general liabilities and expenses are not readily
identified as belonging to a particular fund that are allocated to that fund by
the Trustees. The Trustees may allocate such general assets in any manner they
deem fair and equitable. It is anticipated that the factor that will be used by
the Trustees in making allocations of general assets to a particular fund of the
Trust will be the relative net asset value of each respective fund at the time
of allocation. Assets belonging to a particular fund are charged with the direct
liabilities and expenses in respect of that fund, and with a share of the
general liabilities and expenses of each of the funds not readily identified as
belonging to a particular fund, which are allocated to each fund in accordance
with its proportionate share of the net asset values of the Trust at the time of
allocation. The timing of allocations of general assets and general liabilities
and expenses of the Trust to a particular fund will be determined by the
Trustees and will be in accordance with generally accepted accounting
principles. Determinations by the Trustees as to the timing of the allocation of
general liabilities and expenses and as to the timing and allocable portion of
any general assets with respect to a particular fund are conclusive.
As used in the Prospectus and in this Statement of Additional Information, a
"vote of a majority of the outstanding shares" of a Fund means the affirmative
vote of the lesser of (a) 67% or more of the shares of the Fund present at a
meeting at which the holders of more than 50% of the outstanding shares of the
Fund are represented in person or by proxy, or (b) more than 50% of the
outstanding shares of the Fund.
The Trust is registered with the Commission as an open-end management investment
company. Such registration does not involve supervision by the Commission of the
management or policies of the Trust.
The Prospectus and this Statement of Additional Information omit certain of the
information contained in the Registration Statement filed with the Commission.
Copies of such information may be obtained from the Commission upon payment of
the prescribed fee.
THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL INFORMATION ARE NOT AN OFFERING
OF THE SECURITIES HEREIN DESCRIBED IN ANY STATE IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. NO SALESMAN, DEALER,
31
<PAGE>
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION
OTHER THAN THOSE CONTAINED IN THE PROSPECTUS AND THIS STATEMENT OF ADDITIONAL
INFORMATION.
32
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITY RATINGS.
The nationally recognized statistical rating organizations (individually, an
"NRSRO") that may be utilized by the Adviser with regard to portfolio
investments for the Fund include Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), Duff & Phelps, Inc. ("Duff"), Fitch
Investors Service, Inc. ("Fitch"), IBCA Limited and its affiliate, IBCA Inc.
(collectively, "IBCA"), and Thompson BankWatch, Inc. ("Thompson"). Set forth
below is a description of the relevant ratings of each such NRSRO. The NRSROs
that may be utilized by the Adviser and the description of each NRSRO's ratings
is as of the date of this Statement of Additional Information, and may
subsequently change.
LONG-TERM DEBT RATINGS (may be assigned, for example, to corporate and municipal
bonds).
Description of the five highest long-term debt ratings by Moody's (Moody's
applies numerical modifiers (E.G., 1, 2, and 3) in each rating category to
indicate the security's ranking within the category):
Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or 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 which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risk appear somewhat larger than in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, I.E.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements, I.E.,
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times in the future. Uncertainty of
position characterizes bonds in this class.
Description of the five highest long-term debt ratings by S&P (S&P may apply a
plus (+) or minus (-) to a particular rating classification to show relative
standing within that classification):
AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
A-1
<PAGE>
AA. Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the higher rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated BB is regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposure to adverse conditions.
Description of the three highest long-term debt ratings by Duff:
AAA. Highest credit quality. The risk factors are negligible
being only slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-. High credit quality protection factors are strong Risk is
modest but may vary slightly from time to time because of economic
conditions.
A+, A, A-. Protection factors are average but adequate. However, risk
factors are more variable and greater in periods of economic stress.
Description of the three highest long-term debt ratings by Fitch (plus or minus
signs are used with a rating symbol to indicate the relative position of the
credit within the rating category):
AAA. Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA. Bonds considered to be investment grade and of very high credit
quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA." Because
bonds rated in the "AAA" and "AA" categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these
issues is generally rated "[-]+."
A. Bonds considered to be investment grade and of high credit quality.
The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
IBCA's description of its three highest long-term debt ratings:
AAA. Obligations for which there is the lowest expectation of
investment risk. Capacity for timely repayment of principal and
interest is substantial. Adverse changes in business, economic or
financial conditions are unlikely to increase investment risk
significantly.
A-2
<PAGE>
AA. Obligations for which there is a very low expectation of investment
risk. Capacity for timely repayment of principal and interest is
substantial. Adverse changes in business, economic, or financial
conditions may increase investment risk albeit not very significantly.
A. Obligations for which there is a low expectation of investment risk.
Capacity for timely repayment of principal and interest is strong,
although adverse changes in business, economic or financial conditions
may lead to increased investment risk.
SHORT-TERM DEBT RATINGS (may be assigned, for example, to commercial paper,
master demand notes, bank instruments, and letters of credit)
Moody's description of its three highest short-term debt ratings:
Prime-1. Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of senior short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by many of the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Prime-2. Issuers rated Prime-2 (or supporting institutions) have a strong
capacity for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3. Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
S&P's description of its three highest short-term debt ratings:
A-1. This designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to have extremely
strong safety characteristics are denoted with a plus sign (+).
A-2. Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as
for issues designated "A-1."
A-3
<PAGE>
A-3. Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher
designations.
Duff's description of its five highest short-term debt ratings (Duff
incorporates gradations of "1+" (one plus) and "1-" (one minus) to assist
investors in recognizing quality differences within the highest rating
category):
Duff 1+. Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
Duff 1. Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection factors. Risk
factors are minor.
Duff 1-. High certainty of timely payment. Liquidity factors are strong
and supported by good fundamental protection factors. Risk factors are
very small.
Duff 2. Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.
Duff 3. Satisfactory liquidity and other protection factors qualify
issue as to investment grade.
Risk factors are larger and subject to more variation. Nevertheless, timely
payment is expected.
Fitch's description of its four highest short-term debt ratings:
F-1+. Exceptionally Strong Credit Quality. Issues assigned this rating
are regarded as having the strongest degree of assurance for timely
payment.
F-1. Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin of
safety is not as great as for issues assigned F-1+ or F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate, however, near-term adverse changes could cause
these securities to be rated below investment grade.
IBCA's description of its three highest short-term debt ratings:
A+. Obligations supported by the highest capacity for timely repayment.
A1. Obligations supported by a very strong capacity for timely
repayment.
A2. Obligations supported by a strong capacity for timely repayment,
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.
A-4
<PAGE>
SHORT-TERM DEBT RATINGS. Thompson BankWatch, Inc. ("TBW") ratings are based upon
a qualitative and quantitative analysis of all segments of the organization
including, where applicable, holding company and operating subsidiaries.
TBW Ratings do not constitute a recommendation to buy or sell securities of any
of these companies. Further, TBW does not suggest specific investment criteria
for individual clients. The TBW Short-Term Ratings apply to commercial paper,
other senior short-term obligations and deposit obligations of the entities to
which the rating has been assigned. The TBW Short-Term Ratings apply only to
unsecured instruments that have a maturity of one year or less. The TBW
Short-Term Ratings specifically assess the likelihood of an untimely payment of
principal or interest.
TBW-1. The highest category; indicates a very high degree of likelihood that
principal and interest will be paid on a timely basis.
TBW-2. The second highest category; while the degree of safety regarding timely
repayment of principal and interest is strong, the relative degree of safety is
not as high as for issues rated "TBW-1."
TBW-3. The lowest investment grade category; indicates that while more
susceptible to adverse developments (both internal and external) than
obligations with higher ratings, capacity to service principal and interest in a
timely fashion is considered adequate.
TBW-4. The lowest rating category; this rating is regarded as non-investment
grade and, therefore, speculative.
DEFINITIONS OF CERTAIN MONEY MARKET INSTRUMENTS.
Commercial Paper. Commercial paper consists of unsecured promissory notes issued
by corporations. Issues of commercial paper normally have maturities of less
than nine months and fixed rates of return.
Certificates of Deposit. Certificates of Deposit are negotiable certificates
issued against funds deposited in a commercial bank or a savings and loan
association for a definite period of time and earning a specified return.
Bankers' Acceptances. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
U.S. Treasury Obligations. U.S. Treasury Obligations are obligations issued or
guaranteed as to payment of principal and interest by the full faith and credit
of the U.S. Government. These obligations may include Treasury bills, notes and
bonds, and issues of agencies and instrumentalities of the U.S. Government,
provided such obligations are guaranteed as to payment of principal and interest
by the full faith and credit of the U.S. Government.
U.S. Government Agency and Instrumentality Obligations. Obligations issued by
agencies and instrumentalities of the U.S. Government include such agencies and
instrumentalities as the Government National Mortgage Association, the
Export-Import Bank of the United States, the Tennessee Valley Authority, the
Farmers Home Administration, the Federal Home Loan Banks, the Federal
Intermediate Credit Banks, the Federal Farm Credit Banks, the Federal Land
Banks, the Federal Housing Administration, the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, and the Student Loan
Marketing Association. Some of these obligations, such as those of the
A-5
<PAGE>
Government National Mortgage Association are supported by the full faith and
credit of the U.S. Treasury; others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
Treasury; others, such as those of the Federal National Mortgage Association,
are supported by the discretionary authority of the U.S. Government to purchase
the agency's obligations; still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
No assurance can be given that the U.S. Government would provide financial
support to U.S. Government-sponsored instrumentalities if it is not obligated to
do so by law. A Fund will invest in the obligations of such instrumentalities
only when the investment adviser believes that the credit risk with respect to
the instrumentality is minimal.
A-6
<PAGE>
FINANCIAL STATEMENTS
The financial statements (unaudited) contained in the Funds'
semi-annual report to shareholders dated April 30, 1997 are incorporated herein
by reference.
STATEMENT OF ASSETS AND LIABILITIES
December 16, 1996
<TABLE>
<CAPTION>
Assets: FBR Financial FBR Small Cap FBR Small Cap
Services Fund Financial Fund Growth/Value Fund
------------- -------------- -----------------
<S> <C> <C> <C>
Cash in Bank........................................ $33,333 $33,333 $33,334
Deferred organization expenses (Note 3)............. 71,667 71,667 71,666
---------- ---------- ----------
Total Assets................................................ 105,000 105,000 105,000
---------- ---------- ----------
Liabilities --Organization expenses payable 71,667 71,667 71,666
---------- ---------- ----------
Net Assets (as to each Fund, equivalent to $12.00 per share on $33,333 $33,333 $33,334
========== ========== ==========
2,778 units of beneficial interest (no par value)
outstanding with an indefinite number of authorized
shares of beneficial interest) (Notes 1 and 2)......
Net Asset Value and Redemption Price
per share of beneficial interest (Note 4)................... $12.00 $12.00 $12.00
========== ========== ==========
<FN>
- -----------------------------
(1) The FBR Family of Funds (the "Trust") is a registered open-end
management investment company organized under the laws of Delaware on
April 30, 1996. The Trust currently has four separate portfolios
registered under the Investment Company Act of 1940, as amended, of
which the three portfolios indicated above are expected to commence
operations on or about January 2, 1997. To date, the Trust has not had
any transactions other than those relating to organizational matters
and the sale of 2,778 shares of beneficial interest each in FBR
Financial Services Fund, FBR Small Cap Financial Fund and FBR Small Cap
Growth/Value Fund (collectively, the "Funds") to Friedman, Billings,
Ramsey and Co., Inc. (the "Distributor").
(2) FBR Fund Advisers, Inc. will serve as investment adviser (the
"Adviser") to the Funds. The Adviser, an affiliate of Friedman,
Billings, Ramsey & Co., Inc., is entitled to receive annual advisory
fees, which are paid monthly, of 0.90% of the average daily net assets
of each of the Funds. The Adviser may periodically waive all or a
portion of its advisory fee with respect to the Funds.
The Trust has entered into a Distribution Agreement with the
Distributor on behalf of each of the Funds. Certain officers and/or
Trustees of the Fund are officers and/or directors of the Distributor.
(3) Deferred organization expenses will be amortized over a period from the
date each of the Funds commence operations not exceeding sixty months.
In the event that the Funds' initial shareholder or any transferee of
the Funds' initial shareholder redeems any of its original shares prior
to the end of the sixty month period, the proceeds of the redemption
payable in respect of such shares shall be reduced by the pro rata
share (based on the proportionate share of original shares outstanding
at the time of redemption) of the unamortized deferred organization
expenses as of the date of such redemption. In the event that the Funds
are liquidated prior to the end of the sixty month period, the Funds'
initial shareholder or the transferee of the Funds' initial shareholder
shall bear the unamortized deferred organization expenses.
(4) Shares held 90 days or less may be subject to a 1.00% redemption fee
(expressed as a percentage of redemption amount).
</FN>
</TABLE>
B-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Trustees of
The FBR Family of Funds:
We have audited the accompanying statements of assets and liabilities of the FBR
Financial Services Fund, the FBR Small Cap Financial Fund, and the FBR Small Cap
Growth/Value Fund each of which is a series of The FBR Family of Funds (a
Delaware business trust, the "Trust") as of December 16, 1996. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of the FBR
Financial Services Fund, the FBR Small Cap Financial Fund, and the FBR Small Cap
Growth/Value Fund as of December 16, 1996, in conformity with generally accepted
accounting principles.
/s/Arthur Andersen LLP
Washington, D. C.
December 17, 1996
B-2
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements:
In Part A:
Financial Highlights.
In Part B:
Statement of Assets and Liabilities as of
December 16, 1996
Report of Independent Public Accountants
Incorporated by reference to the Registrant's
semi-annual report dated April 30, 1997 (unaudited):
Investment Portfolio
Statement of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
In Part C:
None.
(b) Exhibits:
1(a) Certificate of Trust.1
1(b) Delaware Trust Instrument dated April 30, 1996.1
2 Bylaws.1
3 None.
4 None.
5 Form of Investment Advisory Agreement between the
Registrant and FBR Fund Advisers, Inc.2
6(a) Form of Distribution Agreement between the Registrant
and Friedman, Billings, Ramsey & Co., Inc.2
6(b) Form of Selected Dealer Agreement.2
7 None.
<PAGE>
8(a) Form of Custodian Agreement between the Registrant
and Custodial Trust Company.2
8(b) Form of Sub-Custodian Agreement between Custodial
Trust Company and Citibank N.A.2
9(a) Form of Administration Agreement between the
Registrant and Bear Stearns Funds Management Inc.2
9(b) Form of Administration and Accounting Services
Agreement between the Registrant and PFPC Inc.2
9(c) Form of Transfer Agency Services Agreement between
the Registrant and PFPC Inc.2
10(a) Opinion of Kramer, Levin, Naftalis & Frankel.2
10(b) Opinion of Morris, Nichols, Arsht & Tunnell.2
11(a) Consent of Dechert Price & Rhoads.
11(b) Consent of Arthur Andersen LLP.
12 Unaudited financial statements for the period ended
April 30, 1997.
13 Investment Letters.2
14 None.
15(a) Form of Rule 12b-1 Distribution Plan.2
16 Forms of performance computation. 1
17 Financial Data Schedules.
18 None.
19 Powers of Attorney
1 Incorporated by reference to the Registrant's Initial
Registration Statement on Form N-1A as filed on June 11, 1996.
2 Incorporated by reference to Pre-Effective Amendment No. 2 to the
Registration Statement as filed on December 20, 1996.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
<PAGE>
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Title of Class; Shares of Number of Record Holders
beneficial interest As of June 20, 1997
------------------------
Financial Services Fund 1096
Small Cap Financial Fund 669
Small Cap Growth/Value Fund 340
Information Technologies Fund 1
ITEM 27. INDEMNIFICATION
Article X, Section 10.02 of the Registrant's Delaware Trust
Instrument, filed as Exhibit 2 hereto, provides for the
indemnification of Registrant's Trustees and officers, as
follows:
"SECTION 10.02 INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in Subsection
10.02(b):
(i) every person who is, or has been, a Trustee or officer of the
Trust (hereinafter referred to as a "Covered Person") shall be indemnified by
the Trust to the fullest extent permitted by law against liability and against
all expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise
by virtue of his being or having been a Trustee or officer and against amounts
paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal or other,
including appeals), actual or threatened while in office or thereafter, and the
words "liability" and "expenses" shall include, without limitation, attorneys'
fees, costs, judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Covered Person:
(i) who shall have been adjudicated by a court or body before which
the proceeding was brought (A) to be liable to the Trust or its Shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office or (B) not to have acted in
good faith in the reasonable belief that his action was in the best interest of
the Trust; or
(ii) in the event of a settlement, unless there has been a
determination that such Trustee or officer did not engage in willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office, (A) by the court or other body approving
the settlement; (B) by at least a majority of those Trustees who are neither
Interested Persons of the Trust nor are parties to the matter based upon a
review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by written opinion of independent legal counsel based upon a review of
readily available facts (as opposed to a full trial-type inquiry).
<PAGE>
(c) The rights of indemnification herein provided may be insured against by
policies maintained by the Trust, shall be severable, shall not be exclusive of
or affect any other rights to which any Covered Person may now or hereafter be
entitled, shall continue as to a person who has ceased to be a Covered Person
and shall inure to the benefit of the heirs, executors and administrators of
such a person. Nothing contained herein shall affect any rights to
indemnification to which Trust personnel, other than Covered Persons, and other
persons may be entitled by contract or otherwise under law.
(d) Expenses in connection with the preparation and presentation of a
defense to any claim, action, suit or proceeding of the character described in
Subsection (a) of this Section 10.02 may be paid by the Trust or Series from
time to time prior to final disposition thereof upon receipt of an undertaking
by or on behalf of such Covered Person that such amount will be paid over by him
to the Trust or Series if it is ultimately determined that he is not entitled to
indemnification under this Section 10.02; provided, however, that either (i)
such Covered Person shall have provided appropriate security for such
undertaking, (ii) the Trust is insured against losses arising out of any such
advance payments or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a trial-type inquiry or full
investigation), that there is reason to believe that such Covered Person will be
found entitled to indemnification under this Section 10.02."
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers, and controlling persons or
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Investment Company
Act of 1940, as amended, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer, or controlling
person of 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, 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 of 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
Describe any other business, profession, vocation or
employment of a substantial nature in which each investment adviser of the
Registrant, and each director, officer or partner of any such investment
adviser, is or has been, at any time during the past two fiscal years, engaged
for his own account or in the capacity of director, officer, employee, partner,
or trustee.
FBR Fund Advisers, Inc. provides advisory services to the
Registrant and its series. The directors and officers of FBR Fund Advisers, Inc.
have held the following positions of a substantial nature:
<PAGE>
<TABLE>
<CAPTION>
NAME POSITION WITH ADVISER OTHER BUSINESS
- ---- --------------------- --------------
<S> <C> <C>
Eric F. Billings President Vice Chairman and Chief Operating
Officer - Friedman, Billings, Ramsey
& Co. Inc., Friedman, Billings,
Ramsey Investment Management, Inc.
and FBR Offshore Management, Inc.
W. Russell Ramsey Secretary and Treasurer President and Secretary- Friedman,
Billings, Ramsey & Co. Inc.,
Friedman, Billings, Ramsey Investment
Management, Inc. and FBR Offshore
Management, Inc.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b) Friedman, Billings, Ramsey & Co., Inc. serves as
underwriter to the Funds. The following
information is provided with respect to each
director, officer or partner of the underwriter:
Name and principal Positions and offices Positions and offices
business address1 with Underwriter with Registrant
------------------ --------------------- ---------------------
Emanuel J. Friedman Chairman, Chief Executive Officer, Treasurer None
and Assistant Secretary
Eric F. Billings Vice Chairman and Chief Operating Officer Trustee, Treasurer and
Secretary
W. Russell Ramsey President and Secretary None
Eric Y. Generous Chief Financial Officer and Executive Vice None
President
Nicholas Nichols Compliance Officer and Senior Vice President None
Karen K. Edwards Managing Director - None
Investment Banking
Howard M. Giller Managing Director - None
Investment Banking
<FN>
- ---------------------------------
1 The address of each person is Potomac Tower, 1001 Nineteenth Street,
Arlington, Virginia 22209
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Name and principal Positions and offices Positions and offices
business address1 with Underwriter with Registrant
------------------ --------------------- ---------------------
<S> <C> <C>
Robert H. Hartheimer Managing Director - None
Investment Banking
James R. Kleeblatt Managing Director - Syndicate None
James D. Locke Managing Director - Real Estate None
James C. Neuhauser Managing Director None
Investment Banking
Suzanne N. Richardson Managing Director - None
Investment Banking
Carl C. Shade Controller None
William R. Swanson Managing Director - Real Estate None
J. Rock Tonkel, Jr. Managing Director - None
Investment Banking
</TABLE>
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The majority of the accounts, books and other documents required to
be maintained by Section 31(a) of the Investment Company Act of 1940 (the "1940
Act") and the Rules thereunder are maintained at the offices of PFPC (the
Transfer Agent) and Bear Stearns Funds Management Inc. (the Administrator). The
records required to be maintained under Rule 31a-1(b)(1) with respect to
journals of receipts and deliveries of securities and receipts and disbursements
of cash are maintained at the offices of the Registrant's custodian, as listed
under "Advisory & Other Contracts" in Part B to this Registration Statement.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
Registrant undertakes that, if requested to do so by the holders of
at least 10% of the Registrant's outstanding shares, a shareholder meeting will
be called for the purpose of voting upon the removal of a director or directors
and that communications with other shareholders will be assisted as provided by
Section 16(c) of the 1940 Act.
<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 the
requirements for effectiveness of this amendment to the Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this amendment to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Arlington, and the State
of Virginia on this day of June, 1997.
THE FBR FAMILY OF FUNDS
By: /s/ C. Eric Brugel
As required by the Securities Act of 1933, this amendment to the
Registration Statement has been signed by the following persons in the
capacities indicated on the 24th day of June, 1997.
/s/ C. Eric Brugel Trustee and President
(Chief Executive Officer)
/s/ Eric F. Billings Chairman, Trustee
Chief Financial Officer and Treasurer
/s/ Thomas D. Eckert Trustee
/s/ Patrick J. Keeley Trustee
/s/ F. David Fowler Trustee
/s/ Michael A. Willner Trustee
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
EXHIBITS
FILED
WITH
POST-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON
FORM N-1A
THE FBR FAMILY OF FUNDS
<PAGE>
EXHIBIT LIST
EXHIBIT NUMBER NAME OF EXHIBIT
11(a) Consent of Dechert Price & Rhoads
11(b) Consent of Arthur Andersen LLP
17 Financial Data Schedules
19 Powers of Attorney
DECHERT PRICE & RHOADS
1500 K STREET, N.W.
WASHINGTON, D.C. 20005
June 26, 1997
The FBR Family of Funds
Potomac Tower
1001 Nineteenth Street North
Arlington, VA 22209
Re: The FBR Family of Funds
Gentlemen:
We hereby consent to the reference to our firm as counsel to
The FBR Family of Funds in this amendment to the Registration Statement on Form
N-1A.
Very truly yours,
/s/ Dechert Price & Rhoads
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated December 17, 1996 included in this Regristration Statement (File No.
333-05675) relating to our audit of the FBR Financial Services Fund, the FBR
Small Cap Financial Fund, and the FBR Small Cap Growth/Value Fund financial
statements as of December 16, 1996, each of which is a series of the FBR Family
of Funds.
ARTHUR ANDERSEN LLP
Washington, D.C.,
June 27, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being the
President and a duly elected Trustee of The FBR Family of Funds (the "Fund"),
constitutes and appoints Allan S. Mostoff, Paul F. Roye, William J. Kotapish and
Robert S. Smith, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign the Fund's registration
statement and any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and conforming all that said
attorneys-in-fact and agents, or any of them, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: June 18, 1997 /s/ C. Eric Brugel
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being the
Treasurer and a duly elected Trustee of The FBR Family of Funds (the "Fund"),
constitutes and appoints Allan S. Mostoff, Paul F. Roye, William J. Kotapish and
Robert S. Smith, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution and resubstitution for him in his name,
place and stead, in any and all capacities, to sign the Fund's registration
statement and any and all amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and conforming all that said
attorneys-in-fact and agents, or any of them, or his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Dated: June 18, 1997 /s/ Eric F. Billings
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of The FBR Family of Funds (the "Fund"), constitutes and
appoints Allan S. Mostoff, Paul F. Roye, William J. Kotapish and Robert S.
Smith, and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution for him in his name, place and
stead, in any and all capacities, to sign the Fund's registration statement and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and conforming all that said attorneys-in-fact and
agents, or any of them, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Dated: June 18, 1997 /s/ Thomas D. Eckert
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of The FBR Family of Funds (the "Fund"), constitutes and
appoints Allan S. Mostoff, Paul F. Roye, William J. Kotapish and Robert S.
Smith, and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution for him in his name, place and
stead, in any and all capacities, to sign the Fund's registration statement and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and conforming all that said attorneys-in-fact and
agents, or any of them, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Dated: June 18, 1997 /s/ Patrick J. Keeley
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of The FBR Family of Funds (the "Fund"), constitutes and
appoints Allan S. Mostoff, Paul F. Roye, William J. Kotapish and Robert S.
Smith, and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution for him in his name, place and
stead, in any and all capacities, to sign the Fund's registration statement and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and conforming all that said attorneys-in-fact and
agents, or any of them, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Dated: June 18, 1997 /s/ F. David Fowler
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned, being a duly
elected Trustee of The FBR Family of Funds (the "Fund"), constitutes and
appoints Allan S. Mostoff, Paul F. Roye, William J. Kotapish and Robert S.
Smith, and each of them, his true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution for him in his name, place and
stead, in any and all capacities, to sign the Fund's registration statement and
any and all amendments thereto, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and conforming all that said attorneys-in-fact and
agents, or any of them, or his or her substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Dated: June 18, 1997 /s/ Michael A. Willner
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015712
<NAME> THE FBR FAMILY OF FUNDS
<SERIES>
<NUMBER> 01
<NAME> FBR FINANCIAL SERVICES FUND
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 8344114
<INVESTMENTS-AT-VALUE> 8295653
<RECEIVABLES> 148323
<ASSETS-OTHER> 67964
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8511940
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 106933
<TOTAL-LIABILITIES> 106933
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8539569
<SHARES-COMMON-STOCK> 662660
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 14251
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (100352)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (48461)
<NET-ASSETS> 8405007
<DIVIDEND-INCOME> 29436
<INTEREST-INCOME> 7187
<OTHER-INCOME> 0
<EXPENSES-NET> 22372
<NET-INVESTMENT-INCOME> 14251
<REALIZED-GAINS-CURRENT> (100352)
<APPREC-INCREASE-CURRENT> (48461)
<NET-CHANGE-FROM-OPS> (134562)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 724279
<NUMBER-OF-SHARES-REDEEMED> 64396
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8405007
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 12203
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 64167
<AVERAGE-NET-ASSETS> 4194082
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> .66
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.68
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015712
<NAME> THE FBR FAMILY OF FUNDS
<SERIES>
<NUMBER> 02
<NAME> FBR SMALL CAP FINANCIAL FUND
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 7121601
<INVESTMENTS-AT-VALUE> 7125356
<RECEIVABLES> 149754
<ASSETS-OTHER> 67963
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7343073
<PAYABLE-FOR-SECURITIES> 179706
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 108856
<TOTAL-LIABILITIES> 288562
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7037038
<SHARES-COMMON-STOCK> 553556
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 9671
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4047
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3755
<NET-ASSETS> 7054511
<DIVIDEND-INCOME> 20836
<INTEREST-INCOME> 7030
<OTHER-INCOME> 0
<EXPENSES-NET> 18195
<NET-INVESTMENT-INCOME> 9671
<REALIZED-GAINS-CURRENT> 4047
<APPREC-INCREASE-CURRENT> 3755
<NET-CHANGE-FROM-OPS> 17473
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 555207
<NUMBER-OF-SHARES-REDEEMED> 4429
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7021178
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9924
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 62478
<AVERAGE-NET-ASSETS> 3411103
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> .02
<PER-SHARE-GAIN-APPREC> .72
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.74
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0001015712
<NAME> THE FBR FAMILY OF FUNDS
<SERIES>
<NUMBER> 03
<NAME> FBR SMALL CAP GROWTH/VALUE FUND
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> APR-30-1997
<INVESTMENTS-AT-COST> 1753191
<INVESTMENTS-AT-VALUE> 1720385
<RECEIVABLES> 46057
<ASSETS-OTHER> 67963
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1834405
<PAYABLE-FOR-SECURITIES> 33675
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 104230
<TOTAL-LIABILITIES> 137905
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1754783
<SHARES-COMMON-STOCK> 145061
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (508)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (24969)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (32806)
<NET-ASSETS> 1696500
<DIVIDEND-INCOME> 2091
<INTEREST-INCOME> 2739
<OTHER-INCOME> 0
<EXPENSES-NET> 5338
<NET-INVESTMENT-INCOME> (508)
<REALIZED-GAINS-CURRENT> (24969)
<APPREC-INCREASE-CURRENT> (32806)
<NET-CHANGE-FROM-OPS> (58283)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 147464
<NUMBER-OF-SHARES-REDEEMED> 5181
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1663166
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2912
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 48139
<AVERAGE-NET-ASSETS> 1001157
<PER-SHARE-NAV-BEGIN> 12.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> (.30)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.70
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>