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PROSPECTUS
November 11, 1996
PROFIT FUNDS INVESTMENT TRUST
2 Wisconsin Circle, Suite 700
Chevy Chase, Maryland 20815
(301) 951-9173
PROFIT LOMAX VALUE FUND
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The Profit Lomax Value Fund (the "Fund"), a separate series of Profit Funds
Investment Trust (the "Trust"), seeks to provide investors with a high long-term
total return, consistent with the preservation of capital and maintenance of
liquidity, by investing primarily in the common stock of established, larger
capitalization companies (i.e. companies having a market capitalization
---
exceeding $1 billion). Dividend income is only an incidental consideration to
the Fund's investment objective.
Investor Resources Group, Inc. (the "Manager") serves as the investment
manager to the Fund. The Edgar Lomax Company ("Edgar Lomax") manages the Fund's
investments under the supervision of the Manager.
The name "PROFIT" is derived from the name of the founder and principal
shareholder of the Manager, Eugene A. Profit, and is not intended as an
indication of the investment objective and policies of the Fund nor of any
series of the Trust.
This Prospectus sets forth concisely the information about the Fund that
you should know before investing. Please retain this Prospectus for future
reference. A Statement of Additional Information dated November 11, 1996 has
been filed with the Securities and Exchange Commission and is hereby
incorporated by reference in its entirety. A copy of the Statement of Additional
Information may be obtained at no charge by calling the toll-free number listed
below.
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For Information or Assistance in Opening An Account, Please Call:
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Nationwide (Toll-Free) . . . . . . . . . . . . (888) 744-2337
_____________________________________________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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EXPENSE INFORMATION
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<TABLE>
Shareholder Transaction Expenses
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<S> <C>
Sales Load Imposed on Purchases . . . . . . . . . None
Sales Load Imposed on Reinvested Dividends. . . . None
Redemption Fee. . . . . . . . . . . . . . . . . . None*
</TABLE>
* Shareholders may be required to pay a wire transfer fee charged by their
receiving bank in the case of redemptions made by wire. See "How to Redeem
Shares."
Annual Fund Operating Expenses (as a percentage of average net assets)
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<TABLE>
<S> <C>
Management Fees . . . . . . . . . . . . . . . 1.25%
12b-1 Fees. . . . . . . . . . . . . . . . . . 0.25%/(A)/
Other Expenses. . . . . . . . . . . . . . . . 0.45%/(B)/
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Total Fund Operating Expenses 1.95%/(B)/
=====
</TABLE>
/(A)/ The Fund incurs 12b-1 fees of up to .25% per annum. As a result,
long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales loads permitted by the National Association of
Securities Dealers, Inc.
/(B)/ The Manager has voluntarily agreed to reimburse the Fund for expenses
incurred to the extent necessary to enable the Fund to maintain total Fund
operating expenses at a maximum level of 1.95%. Absent such reimbursement,
other Expenses for the current fiscal year would be 1.70% based on an
expected Fund net average size of $10 million, and Total Fund Operating
Expenses would be 3.2%, also based on an expected Fund net average size of
$10 million.
The purpose of this table is to assist the investor in understanding the various
costs and expenses that an investor in the Fund will bear directly or
indirectly. The percentages expressing annual fund operating expenses are based
on estimated amounts for the current fiscal year. The Example below should not
be considered a representation of
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past or future expenses and actual expenses may be greater or less than those
shown.
Example
You would pay the following
expenses on a $1,000
investment, assuming
(1) 5% annual return and
(2) redemption at the end
of each time period: 1 Year $20
3 Years 61
INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND RISK CONSIDERATIONS
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The investment objective of the Fund is to seek a high long-term total
return, consistent with the preservation of capital and maintenance of
liquidity, by investing primarily in the common stock of established, larger
capitalization companies (i.e. companies having a market capitalization
----
exceeding $1 billion). At least 65% of the Fund's total assets will be invested
in equity securities, which include common stock, preferred stock and bonds
convertible into common stock, and warrants and rights for the purchase of
common stock. Dividend income is only an incidental consideration to the Fund's
investment objective. The Fund is not intended to be a complete investment
program for any investor, and there is no assurance that its investment
objective can be achieved.
The Fund's investment objective may be changed by the Board of Trustees
without shareholder approval, but only after notification has been given to
shareholders and after this Prospectus has been revised accordingly. If there
is a change in the Fund's investment objective, shareholders should consider
whether the Fund remains an appropriate investment in light of their then
current financial position and needs. Unless otherwise indicated, all
investment practices and limitations of the Fund are nonfundamental policies
which may be changed by the Board of Trustees without shareholder approval.
Neither the Manager nor Edgar Lomax has previously provided investment advisory
services to a registered investment company.
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The Fund's investment strategy is designed to fully participate in rising
equity markets while limiting, as much as possible, the downside volatility
which can accompany equity investing. Edgar Lomax uses a disciplined, value-
oriented process in order to select stocks generally having the following
characteristics:
- low price/earnings ratios
- strong balance sheet ratios
- high and/or stable dividend yields
- low price/book ratios
The Fund will invest primarily in the common stocks of established, larger
capitalization companies (i.e. companies having a market capitalization
----
exceeding $1 billion). Edgar Lomax believes these stocks enjoy low expectations
from investors in general and are undervalued. As a result, in Edgar Lomax's
opinion, average "earnings" performance by such companies can result in superior
stock performance, and disappointing "earnings" should result in minimal
negative stock performance.
Investments in common stock and other types of equity securities (such as
preferred stock, convertible securities and warrants) are subject to inherent
market risks and fluctuations in value due to earnings, economic conditions and
other factors beyond the control of Edgar Lomax. As a result, the return and
net asset value of the Fund will fluctuate.
The Fund will invest primarily in domestic securities, although it may
invest in foreign companies through the purchase of sponsored American
Depository Receipts (certificates of ownership issued by an American bank or
trust company as a convenience to investors in lieu of the underlying shares
which it holds in custody) or other securities of foreign issuers that are
publicly traded in the United States. When selecting foreign investments, Edgar
Lomax will seek to invest in securities that have investment characteristics and
qualities comparable to the kinds of domestic securities in which the Fund
invests. Foreign investments may be subject to special risks, including future
political and economic developments and the possibility of seizure or
nationalization of companies, imposition of withholding taxes on income,
establishment of exchange controls or adoption of other restrictions that might
affect an investment adversely.
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The Fund expects to invest primarily in securities currently paying
dividends, although it may buy securities that are not paying dividends but
offer prospects for growth of capital or future income. Although the Fund
invests primarily in common stock, the Fund may also invest in securities
convertible into common stock (such as convertible bonds, convertible preferred
stock and warrants). The Fund may invest in convertible preferred stock and
convertible bonds which are rated at the time of purchase in the four highest
rating categories assigned by Moody's Investors Service, Inc. (Aaa, Aa, A or
Baa) or Standard & Poor's Ratings Group (AAA, AA, A or BBB) or unrated
securities determined by Edgar Lomax to be of comparable quality. Preferred
stock and bonds rated Baa or BBB have speculative characteristics, and changes
in economic conditions or other circumstances are more likely to lead to a
weakened capacity to pay principal and interest or to pay the preferred stock
obligations than is the case with higher grade securities. Subsequent to its
purchase by the Fund, a security's rating may be reduced below Baa or BBB and
Edgar Lomax will sell such security, subject to market conditions and Edgar
Lomax's assessment of the most opportune time for sale. The Fund does not intend
to hold more than 5% of its net assets in securities rated Baa (or BBB) or
lower, or, if unrated, which Edgar Lomax determines to be of comparable quality.
When Edgar Lomax believes substantial price risks exist for common stocks
and securities convertible into common stock because of uncertainties in the
investment outlook or when in the judgment of Edgar Lomax it is otherwise
warranted in selling to manage the Fund's portfolio, the Fund may temporarily
hold for defensive purposes all or a portion of its assets in short-term
obligations such as bank debt instruments (certificates of deposit, bankers'
acceptances and time deposits), commercial paper, shares of money market
investment companies, U.S. Government obligations having a maturity of less than
one year or repurchase agreements. Investments in commercial paper for
temporary defensive purposes will be limited to commercial paper rated A-2 or
better by Standard & Poor's Ratings Group or Prime-2 or better by Moody's
Investors Services, Inc. The Fund may invest up to 10% of its total assets in
shares of money market investment companies. Investments by the Fund in shares
of money market investment companies may result in duplication of advisory,
administrative and distribution fees. The Fund will not invest more than 5% of
its total assets in securities of any single investment company and will not
purchase more than 3% of the outstanding voting securities of any investment
company.
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The Fund may also engage in the following investment techniques, each of
which may involve certain risks:
Repurchase Agreements. Repurchase agreements are transactions by which the
Fund purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. The Fund intends to enter into repurchase
agreements only with its Custodian, banks having assets in excess of $10
billion, and broker-dealers who are recognized as primary dealers in U.S.
Government obligations by the Federal Reserve Bank of New York. Such agreements
will be collateralized by U.S. Government obligations or other liquid high-grade
debt obligations which will be held in safekeeping in the customer-only account
of the Fund's Custodian at the Federal Reserve Bank or in the Federal reserve
Book Entry System, and will be maintained at a value that equals or exceeds the
value of the repurchase agreement. The Fund will not enter into a repurchase
agreement not terminable within seven days if, as a result thereof, more than
15% of the value of the net assets of the Fund will be invested in such
securities and other illiquid securities.
Warrants and Rights. Warrants are options to purchase equity securities at
a specified price and are valid for a specific time period. Rights are similar
to warrants, but normally have a shorter duration and are distributed by the
issuer to its shareholders. The Fund may purchase warrants and rights, provided
that the Fund does not invest more than 5% of its net assets at the time of
purchase in warrants and rights other than those that have been acquired in
units or attached to other securities. Of such 5%, no more than 2% of the
Fund's assets at the time of purchase may be invested in warrants which are not
listed on either the New York Stock Exchange or the American Stock Exchange.
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Lending Portfolio Securities. The Fund may, from time to time, lend
securities on a short-term basis (i.e., for up to seven days) to banks, brokers
and dealers and receive as collateral cash, U.S. Government obligations or
irrevocable bank letters of credit (or any combination thereof), which
collateral will be required to be maintained at all times in an amount equal to
at least 100% of the current value of the loaned securities plus accrued
interest. Although the Fund has the ability to make loans of all of its
portfolio securities, it is the present intention of the Fund, which may be
changed without shareholder approval, that such loans will not be made with
respect to the Fund if as a result the aggregate of all outstanding loans
exceeds one-third of the value of the Fund's total assets. Securities lending
will afford the Fund the opportunity to earn additional income because the Fund
will continue to be entitled to the interest payable on the loaned securities
and also will either receive as income all or a portion of the interest on the
investment of any cash loan collateral or, in the case of collateral other than
cash, a fee negotiated with the borrower. Such loans will be terminable at any
time. Loans of securities involve risks of delay in receiving additional
collateral or in recovering the securities lent or even loss of rights in the
collateral in the event of the insolvency of the borrower of the securities. The
Fund will have the right to regain record ownership of loaned securities in
order to exercise beneficial rights. The Fund may pay reasonable fees in
connection with arranging such loans.
Borrowing and Pledging. The Fund may borrow money from banks, provided
that immediately after such borrowing, there is an asset coverage of at least
300% for all borrowings of the Fund. The Fund may pledge assets in connection
with borrowings but will not pledge more than one-third of its total assets.
Borrowing magnifies the potential for gain or loss on the portfolio securities
of the Fund and, therefore, if employed, increases the possibility of
fluctuation in the Fund's net asset value. This is the speculative factor known
as leverage. The Fund's policies on borrowing and pledging are fundamental
policies which may not be changed without the affirmative vote of a majority of
its outstanding shares. It is the Fund's present intention, which may be
changed by the Board of Trustees without
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shareholder approval, to borrow only for emergency or extraordinary purposes and
not for leverage.
Portfolio Turnover. The Fund does not intend to use short-term trading as a
primary means of achieving its investment objective. However, the Fund's rate of
portfolio turnover will depend upon market and other conditions, and it will not
be a limiting factor when portfolio changes are deemed necessary or appropriate
by Edgar Lomax. Although the annual portfolio turnover rate of the Fund cannot
be accurately predicted, it is not expected to exceed 50%, but may be either
higher or lower. High turnover may require the payment of correspondingly
greater commission expenses and transaction costs and increases the possibility
that the Fund will not qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code. (See discussion under "Taxes")
HOW TO PURCHASE SHARES
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Your initial investment in the Fund ordinarily must be at least $2,500
($1,000 for tax-deferred retirement plans). The Fund may, in the Manager's sole
discretion, accept certain accounts with less than the stated minimum initial
investment. Shares of the Fund are sold on a continuous basis at the net asset
value next determined after receipt of a purchase order by the Fund. Purchase
orders received by dealers prior to 4:00 p.m., Eastern time, on any business day
and transmitted to the Fund's transfer agent, State Street Bank and Trust
Company ("State Street"), by 5:00 p.m., Eastern time, that day are confirmed at
the net asset value determined as of the close of the regular session of trading
on the New York Stock Exchange on that day. It is the responsibility of dealers
to transmit properly completed orders so that they will be received by State
Street by 5:00 p.m., Eastern time. Dealers may charge a fee for effecting
purchase orders. Direct purchase orders received by State Street by 4:00 p.m.,
Eastern time, are confirmed at that day's net asset value. Direct investments
received by State Street after 4:00 p.m.,
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Eastern time, and orders received from dealers after 5:00 p.m., Eastern time,
are confirmed at the net asset value next determined on the following business
day.
You may open an account and make an initial investment in the Fund by
sending a check and a signed completed account application form to State Street
Bank and Trust Company, P.O. Box 8020, Boston, Massachusetts 02266-8020, or to
the Fund, 2 Wisconsin Circle, Suite 700, Chevy Chase, Maryland 20815. Checks
should be made payable to the "Profit Lomax Value Fund" and should be in U.S.
dollars. Third party checks, credit cards, credit card checks and cash will not
be accepted. An account application is included with this Prospectus.
The Fund will mail you confirmations of all purchases or redemptions of
Fund shares. Certificates representing shares are not issued. The Fund
reserves the rights to limit the amount of investments and to refuse to sell to
any person.
Investors should be aware that the Fund's account application contains
provisions in favor of the Fund, State Street, and certain of their affiliates,
excluding such entities from certain liabilities (including, among others,
losses resulting from unauthorized shareholder transactions) relating to the
various services made available to investors.
Should an order to purchase shares be canceled because your check does not
clear, you will be responsible for any resulting losses or fees incurred by the
Fund or State Street in the transaction.
You may also open an account and make an initial investment in the Fund by
wire. Please telephone State Street (Nationwide call toll-free 888-744-2337) for
instructions before wiring funds. You should be prepared to give the name in
which the account is to be established, the address, telephone number and
taxpayer identification number for the account, and the name of the bank which
will wire the money. The wiring bank generally will be a member of the Federal
Reserve Banking System or have a relationship with a bank that is. This bank
will normally charge you a fee for handling the transaction.
Federal funds should be wired to
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State Street Bank and Trust Company
ABA #01100028
For Credit to DDA Account #9905-201-1
Profit Lomax Value Fund
For further credit to Account #(insert your account number, name and control
number assigned by State Street).
As long as you have read the Prospectus, you may establish most new
accounts by wire. When new accounts are established in this manner, the
distribution options will be set to reinvestment of such distribution and your
social security or tax identification number ("TIN") will not be certified until
a signed application is received by BFDS. Completed applications should be
forwarded immediately to BFDS or to the Fund. With the purchase application,
the shareholder may specify other distribution options (i.e., other than
----
reinvest) and may add any special features offered by the Fund. Should any
dividend distributions or redemptions be paid before the TIN is certified, they
will be subject to 31% Federal tax withholding.
Your investment in the Fund will be made at the net asset value next
determined after your wire is received together with the account information
indicated above. If the Fund does not receive timely and complete account
information, there may be a delay in the investment of your money and any
accrual of dividends.
You may purchase additional shares of the Fund by mail or by bank wire.
Checks should be sent to State Street Bank and Trust Company, P.O. Box 8020,
Boston, Massachusetts 02266-8020, or to the Fund, 2 Wisconsin Circle, Suite 700,
Chevy Chase, Maryland 20815. Checks should be made payable or endorsed to the
"Profit Lomax Value Fund." Bank wires should be sent as outlined above. Each
additional purchase request must contain the name of your account and your
account number to permit proper crediting. While there is no minimum amount
required for
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subsequent investments, the Fund reserves the right to impose such
a requirement.
SHAREHOLDER SERVICES
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The Fund provides special services to shareholders in connection with
certain purchase and redemption plans. You should contact the Fund or State
Street Bank and Trust Company (Nationwide call toll-free 888-744-2337) for
additional information about the shareholder services described below.
Tax-Deferred Retirement Plans
-----------------------------
Shares of the Fund are available for purchase in connection with the
following tax-deferred retirement plans:
-- Keogh Plans for self-employed individuals
-- Individual retirement account (IRA) plans for individuals and their
non-employed spouses
-- Qualified pension and profit-sharing plans for employees, including
those profit-sharing plans with a 401(k) provision
-- 403(b)(7) custodial accounts for employees of public school systems,
hospitals, colleges and other non-profit organizations meeting certain
requirements of the Internal Revenue Code
Direct Deposit Plans
--------------------
Shares of the Fund may be purchased through direct deposit plans
offered by certain employers and government agencies. These plans enable a
shareholder to have all or a portion of his or her payroll or social security
checks transferred automatically to purchase shares of the Fund.
Automatic Investment Plan
-------------------------
You may make automatic monthly investments in the Fund from your bank,
savings and loan or other depository institution account. The minimum initial
investment under this plan is $500 and subsequent investments must be $50. State
Street pays the costs
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associated with these transfers, but reserves the right, upon thirty days'
written notice, to assess reasonable charges for this service. Your depository
institution may impose its own charge for debiting your account, which would
reduce your return from an investment in the Fund.
HOW TO REDEEM SHARES
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You may redeem shares of the Fund on each day that the Fund is open
for business by sending a written request to the Fund. The request must state
the number of shares or the dollar amount to be redeemed and your account
number. The request must be signed exactly as your name appears on the Fund's
account records. If the shares to be redeemed have a value of $25,000 or more,
your signature must be guaranteed by any eligible guarantor institution,
including banks, brokers and dealers, municipal securities brokers and dealers,
government securities brokers and dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations.
Redemption requests may direct that the proceeds be wired directly to
your existing account in any commercial bank or brokerage firm in the United
States. If your instructions request a redemption by wire, you may be charged a
processing fee by your bank. In the event that wire transfer of funds is
impossible or impractical, the redemption proceeds will be sent by mail to the
designated account.
You may also redeem shares by placing a wire redemption request through a
securities broker or dealer. Broker-dealers that are unaffiliated with the Trust
or the Fund's Manager or Adviser may charge you a fee for this service. You will
receive the net asset value per share next determined after receipt by the Fund
or State Street of your wire redemption request. It is the responsibility of
broker-dealers to properly transmit wire redemption orders to State Street.
Payment will be made within three business days after tender is made to the Fund
or State Street in proper form, provided that payment in redemption of shares
purchased by check will be effected only after the check has been collected,
which
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may take up to fifteen days from the purchase date. To eliminate this delay, you
may purchase shares of the Fund by certified check or wire.
At the discretion of the Fund or State Street, corporate investors and
other associations may be required to furnish an appropriate certification
authorizing redemptions to ensure proper authorization. The Fund reserves the
right to require you to close your account if at any time the value of your
shares is less than $2,500 (based on actual amounts invested, unaffected by
market fluctuations), or $1,000 in the case of tax-deferred retirement plans, or
such other minimum amount as the Fund may determine from time to time. After
notification to you of the Fund's intention to close your account, you will be
given sixty days to increase the value of your account to the minimum
amount.
The Fund reserves the right to suspend your right of redemption or to
postpone the date of payment for more than three business days under unusual
circumstances as determined by the Securities and Exchange Commission.
Automatic Withdrawal Plan
-------------------------
If the shares in your account have a value of at least $5,000, you may
elect to receive, or may designate another person to receive, monthly or
quarterly payments in a specified amount of not less than $50 each. There is no
charge for this service.
DIVIDENDS AND DISTRIBUTIONS
- ---------------------------
The Fund expects to distribute substantially all of its net investment
income, if any, on an annual basis. The Fund expects to distribute any net
realized long-term capital gains at least once each year. Management will
determine the timing and frequency of the distributions of any net realized
short-term capital gains.
Distributions are paid according to one of the following options:
Share Option - income distributions and capital gains distributions
reinvested in additional shares.
Income Option - income distributions and short-term capital gains
distributions paid in cash; long-term capital gains
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distributions reinvested in additional shares.
Cash Option - income distributions and capital gains distributions
paid in cash.
You should indicate your choice of option on your application. If no
option is specified on your application, distributions will automatically be
reinvested in additional shares. All distributions will be based on the net
asset value in effect on the payable date.
If you select the Income Option or the Cash Option and the U.S. Postal
Service cannot deliver your checks or if your checks remain uncashed for six
months, your dividends may be reinvested in your account at the then current net
asset value and your account will be converted to the Share Option.
TAXES
- -----
The Fund intends to qualify for the special tax treatment afforded a
"regulated investment company" under Subchapter M of the Internal Revenue Code
so that it does not pay federal taxes on income and capital gains distributed to
shareholders. The Fund intends to distribute substantially all of its net
investment income and any realized capital gains to its shareholders.
Distributions of net investment income and net realized short-term capital
gains, if any, are taxable to investors as ordinary income. Dividends
distributed by the Fund from net investment income may be eligible, in whole or
in part, for the dividends received deduction available to corporations.
Distributions of net realized long-term capital gains are taxable as long-term
capital gains regardless of how long you have held your Fund shares. Redemptions
of shares of the Fund are taxable events on which a shareholder may realize a
gain or loss.
The Fund will mail to each of its shareholders a statement indicating the
amount and federal income tax status of all distributions made during the year.
In addition to federal taxes, shareholders of the Fund may be subject to state
and local taxes on distributions. Shareholders should consult their tax
advisors about the tax effect of distributions and withdrawals from the Fund and
the use of the Automatic Withdrawal Plan. The tax consequences described in
this section apply whether distributions are taken in cash or reinvested in
additional shares. See "Taxes" in the Statement of Additional Information for
further information.
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OPERATION OF THE FUND
- ---------------------
The Fund is a diversified series of Profit Funds Investment Trust, an
open-end management investment company organized as a Massachusetts business
trust on June 14, 1996. The Fund commenced operations on the date of the
Prospectus and has no prior operating history. The Board of Trustees supervises
the business activities of the Fund. Like other mutual funds, the Fund retains
various organizations to perform specialized services for the Fund.
The Fund has retained Investor Resources Group, Inc. (the "Manager"), 2
Wisconsin Circle, Suite 700, Chevy Chase, Maryland 20815, to provide general
investment supervisory services to the Fund and to manage the Fund's business
affairs. The Manager, which was incorporated in the State of Delaware on
February 16, 1996, has not previously served as investment manager to a
registered investment company.
The Fund pays the Manager a fee at the annual rate of 1.25% of the
average value of the Fund's daily net assets.
The Manager currently intends to reimburse the Fund for expenses incurred
to the extent necessary to enable the Fund to maintain total operating expenses
at a maximum level of 1.95% per annum of the Fund's average daily net assets.
There is no assurance, however, that such reimbursement will be made in the
current or future fiscal years, and expenses of the Fund may therefore exceed
[1.95%] of its average daily net assets.
Eugene A. Profit is the controlling shareholder of the Manager. As of the
date of this Prospectus, the Manager is the sole shareholder of the Fund.
The Edgar Lomax Company ("Edgar Lomax"), 6564 Loisdale Court, Suite 310,
Springfield, Virginia 22150 has been retained by the Manager to serve as
subadviser to the Fund. Edgar Lomax was organized in 1986 and specializes in
the management of institutional portfolios. For its services, the Manager pays
Edgar Lomax a fee at the annual rate of .50% of the average value of the Fund's
daily net assets.
Randall R. Eley, the President, Chief Investment Officer and controlling
shareholder of Edgar Lomax, is primarily responsible for managing the Fund's
portfolio. Mr. Eley founded Edgar Lomax in 1986.
In addition to the management fee, the Fund is responsible for the
payment of all operating expenses,
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including organizational expenses, fees and expenses in connection with
membership in investment company organizations, brokerage fees and commissions,
legal, auditing and accounting expenses, expenses of registering shares under
federal and state securities laws, expenses related to the distribution of the
Fund's shares (see "Distribution Plan"), insurance expenses, taxes or
governmental fees, fees and expenses of the Fund's administrator, custodian and
transfer agent, fees and expenses of members of the Board of Trustees who are
not affiliated persons of the Fund, the cost of preparing and distributing
prospectuses, statements, reports and other documents to shareholders, expenses
of shareholders' meetings and proxy solicitations, and such extraordinary or
non-recurring expenses as may arise, including litigation to which the Fund
may be a party and indemnification of the Fund's officers and Trustees with
respect thereto.
The Fund has entered into an Administration Agreement with SEI Fund
Resources ("SEI" or "Administrator"), 680 E. Swedesford Road, Wayne,
Pennsylvania 19087-1658, under which SEI provides administrative and accounting
services to the Fund. As Administrator, SEI supplies executive, administrative
and regulatory services, supervises the preparation of tax returns, and
coordinates the preparation of reports to shareholders and reports to and
filings with the Securities and Exchange Commission and state securities
authorities. SEI also provides fund accounting and related portfolio accounting
services to the Fund. For providing these services, the Fund pays SEI a fee
equal on an annual basis to the greater of (i) 0.15% of the average daily net
assets on the first $50 million of the Trust, 0.125% of the average daily net
assets
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on the next $50 million, and 0.10% of the average daily net assets on all assets
over $100 million, or (ii) $65,000.
The Fund has retained State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02110-3875 as its Transfer Agent. Boston
Financial Data Services, Inc., Two Heritage Drive, Quincy, Massachusetts 02171
serves as the Fund's dividend disbursing agent and shareholder service agent.
BFDS is a subsidiary of State Street Bank and Trust Company.
Consistent with the Conduct Rules of the National Association of
Securities Dealers, Inc., and subject to its objective of seeking best execution
of portfolio transactions, Edgar Lomax may give consideration to sales of shares
of the Fund as a factor in the selection of brokers and dealers to execute
portfolio transactions of the Fund. Consistent with its obligations to seek best
execution for the Fund, Edgar Lomax may also consider such factors as price
(including the applicable brokerage commission or dealer spread), execution
capability, financial responsibility, responsiveness, and brokerage and research
services provided when selecting brokers and dealers to execute portfolio
transactions of the Fund. Subject to the requirements of the Investment Company
Act of 1940 and procedures adopted by the Board of Trustees, the Fund may
execute portfolio transactions through any broker or dealer and pay brokerage
commissions to a broker (i) which is an affiliated person of the Fund, or (ii)
which is an affiliated person of such person, or (iii) an affiliated person of
which is an affiliated person of the Fund, the Manager or Edgar Lomax.
Shares of the Fund have equal voting rights and liquidation rights. When
matters are submitted to shareholders for a vote, each shareholder is entitled
to one vote for each full share owned and fractional votes for fractional shares
owned. The Fund does not normally hold annual meetings of shareholders. The
Trustees will promptly call and give notice of a meeting of shareholders for
the purpose of voting upon removal of any Trustee when requested to do so in
writing by shareholders holding 10% or more of the Fund's outstanding shares.
The Fund will comply with the provisions of Section 16(c) of the Investment
Company Act of 1940 in order to facilitate communications among shareholders.
DISTRIBUTION PLAN
- -----------------
Pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Fund
has adopted a plan of distribution (the "Plan") under which the Fund may
directly incur or reimburse the Manager for certain distribution-related
expenses, including the following: payments to securities dealers and others who
are engaged in the sale of shares of the Fund and who may be advising investors
regarding the purchase, sale or retention of such shares; expenses of
maintaining personnel who engage in or support distribution of shares or who
render shareholder support
18
<PAGE>
services not otherwise provided by the Manager; expenses of formulating and
implementing marketing and promotional activities, including direct mail
promotions and mass media advertising; expenses of preparing, printing and
distributing sales literature and prospectuses and statements of additional
information and reports for recipients other than existing shareholders of the
Fund; expenses of obtaining such information, analyses and reports with respect
to marketing and promotional activities as the Fund may, from time to time, deem
advisable; and, any other expenses related to the distribution of the Fund's
shares.
The annual limitation for payment of expenses pursuant to the Plan is
0.25% of the Fund's average daily net assets. Unreimbursed expenditures will not
be carried over from year to year. In the event the Plan is terminated by the
Fund in accordance with its terms, the Fund will not be required to make any
payments for expenses incurred by the Manager after the date the Plan
terminates.
Pursuant to the Plan, the Fund may also make payments to banks or other
financial institutions that provide shareholder services and administer
shareholder accounts. The Glass-Steagall Act prohibits banks from engaging in
the business of underwriting, selling or distributing securities. Although the
scope of this prohibition under the Glass-Steagall Act has not been clearly
defined by the courts or appropriate regulatory agencies, management of the Fund
believes that the Glass-Steagall Act should not preclude a bank from providing
such services. However, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state law. If a
bank were prohibited from continuing to perform all or a part of such services,
management of the Fund believes that there would be no material impact on the
Fund or its shareholders. Banks may charge their customers fees for offering
these services to the extent permitted by regulatory authorities, and the
overall return to those shareholders availing themselves of the bank services
will be lower than to those shareholders who do not. The Fund may from time to
time purchase securities issued by banks which provide such services. In
selecting investments for the Fund, however, no preference will be shown for
such securities.
CALCULATION OF SHARE PRICE
- --------------------------
On each day that the Fund is open for business, the share price (net
asset value) of the Fund's shares is determined as of the close of the regular
session of trading on the New York Stock Exchange, currently 4:00 p.m., Eastern
time. The Fund is open for business on each day the New
19
<PAGE>
York Stock Exchange is open for business and on any other day when there is
sufficient trading in the Fund's investments that its net asset value might be
materially affected. The net asset value per share of the Fund is calculated by
dividing the sum of the value of the securities held by the Fund plus cash or
other assets minus all liabilities (including estimated accrued expenses) by the
total number of shares outstanding of the Fund, rounded to the nearest cent.
Portfolio securities are valued as follows: (i) securities which are
traded on stock exchanges or are quoted by NASDAQ are valued at the last
reported sale price as of the close of the regular session of trading on the New
York Stock Exchange on the day the securities are being valued, or, if not
traded on a particular day, at the closing bid price, (ii) securities traded in
the over-the-counter market, and which are not quoted by NASDAQ, are valued at
the last sale price (or, if the last sale price is not readily available, at the
last bid price as quoted by brokers that make markets in the securities) as of
the close of the regular session of trading on the New York Stock Exchange on
the day the securities are being valued, (iii) securities which are traded both
in the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market, and (iv) securities (and other
assets) for which market quotations are not readily available are valued at
their fair value as determined in good faith in accordance with procedures
established by the Board of Trustees. The net asset value per share of the Fund
will fluctuate with the value of the securities it holds.
PERFORMANCE INFORMATION
- -----------------------
From time to time, the Fund may advertise its "average annual total
return." Average annual total return figures are based on historical earnings
and are not intended to indicate future performance.
The "average annual total return" of the Fund refers to the average
annual compounded rates of return over the most recent 1, 5 and 10 year periods
or, where the Fund has not been in operation for such period, over the life of
the Fund (which periods will be stated in the advertisement) that would equate
an initial amount invested at the beginning of a stated period to the ending
redeemable value of the investment. The calculation of "average annual total
return" assumes the reinvestment of all dividends and distributions. The Fund
may also advertise total return (a "nonstandardized quotation") which is
calculated differently from "average annual total return". A nonstandardized
quotation of total return may be a cumulative return which
20
<PAGE>
measures the percentage change in the value of an account between the beginning
and end of a period, assuming no activity in the account other than reinvestment
of dividends and capital gains distributions. A nonstandardized quotation of
total return may also indicate average annual compounded rates of return over
periods other than those specified for "average annual total return." A
nonstandardized quotation of total return will always be accompanied by the
Fund's "average annual total return" as described above.
From time to time the Fund may advertise its performance rankings as
published by recognized independent mutual fund statistical services such as
Lipper Analytical Services, Inc.("Lipper"), or by publications of general
interest such as Forbes, Money, The Wall Street Journal, Business Week,
------ ----- ----------------------- -------------
Barron's, Fortune or Morningstar Mutual Fund Values. The Fund may also compare
- -------- ------- ------------------------------
its performance to that of other selected mutual funds, averages of the other
mutual funds within its category as determined by Lipper, or recognized
indicators such as the Dow Jones Industrial Average and the Standard & Poor's
500 Stock Index. In connection with a ranking, the Fund may provide additional
information, such as the particular category of funds to which the ranking
relates, the number of funds in the category, the criteria upon which the
ranking is based, and the effect of fee waivers and/or expense reimbursements,
if any. The Fund may also present its performance and other investment
characteristics, such as volatility or a temporary defensive posture, in light
of Edgar Lomax's view of current or past market conditions or historical trends.
Prior Performance of Edgar Lomax. The investment performance of Edgar
Lomax illustrated below represents, from January 1, 1994 to the end of the third
quarter of 1996 the performance for all of Edgar Lomax's portfolios with a
market value of $1 million or more (the "Portfolios") which were managed with
investment objectives, policies and strategies substantially similar to those
employed by Edgar Lomax in managing the Fund. The performance results of
Portfolios having a market value of $1 million or more were selected for
inclusion in the figures presented below because, in the opinion of the Manager
and Edgar Lomax, such Portfolios will be comparable to the Fund's expected
average asset size during its early months of operation and, therefore, will be
relevant to a potential investor in the Fund. All rates of return included below
are net of management fees and brokerage commissions (including commissions paid
in connection with any brokerage "wrap fee" account) and assume reinvestment of
dividends and income.
While the Fund employs investment objectives and policies that are
substantially similar to those employed by Edgar Lomax in managing the
Portfolios, the Fund may be subject to certain
21
<PAGE>
restrictions on its investment activities to which Edgar Lomax was not
previously subject and which may affect Fund performance. For example, unlike
the Portfolios, the Fund is subject to diversification requirements imposed by
the Investment Company Act of 1940 and the Internal Revenue Code of 1986
(including the rules and regulations issued thereunder), and requirements on
distributing income to shareholders. The Fund is also subject to other
investment restrictions imposed by the Investment Company Act. Operating
expenses are incurred by the Fund which were not incurred by Edgar Lomax in
managing the Portfolios. It is not intended that the following performance data
be relied upon by investors as an indication of future performance of the Fund.
22
<PAGE>
<TABLE>
<CAPTION>
Periodic Rates of Return
S&P
Period Total Return* 500 Index
- ------ ------------- ---------
<S> <C> <C>
December 31, 1994 3.38% 1.30%
Year Ended
December 31, 1995 45.74% 37.53%
January 1 -
September 30, 1996** 14.08% 13.49%
October 1, 1990 through
September 30, 1996
- -----------------------
Annualized Return 21.77% 18.13%
Cumulative Return 71.88% 58.12%
</TABLE>
* The performance results shown have been computed and presented in
accordance with guidelines promulgated by the Association for Investment
Management and Research. The results reflect the total return on
discretionary accounts for which Edgar Lomax served as investment adviser
during the periods shown, less investment advisory fees (and brokerage
commissions, including commissions that were paid in connection with a wrap
fee brokerage account).
** Not Annualized
23
<PAGE>
For information or Assistance in Opening an Account
Please call: Nationwide (Toll-Free)...(888) 744-2337
PROFIT FUNDS INVESTMENT TRUST
2 Wisconsin Circle, Suite 700
Chevy Chase, Maryland 20815
Board of Trustees
Eugene A. Profit
Joseph A. Quash, M.D.
Raymond S. McGaugh
Robert M. Milanicz
Ronald R. Davenport, Jr.
Larry E. Jennings, Jr.
Investment Manager
INVESTOR RESOURCES GROUP, INC.
2 Wisconsin Circle, Suite 700
Chevy Chase, Maryland 20815
(301) 951-9173
Investment Adviser
THE EDGAR LOMAX COMPANY
6564 Loisdale Court, Suite 310
Springfield, Virginia 22150
Transfer Agent
STATE STREET BANK AND TRUST COMPANY
P.O. Box 8020
Boston, Massachusetts 02266-8020
Shareholder Service
-------------------
Nationwide: (Toll-Free) 888-744-2337
TABLE OF CONTENTS
Expense Information.............................................2
Investment Objective, Investment Policies and
Risk Considerations...........................................3
How to Purchase Shares..........................................6
Shareholder Services............................................7
How to Redeem Shares............................................8
Dividends and Distributions.....................................9
Taxes...........................................................10
Operation of the Fund...........................................10
Distribution Plan...............................................12
Calculation of Share Price......................................13
Performance Information.........................................13
____________________________________________________________ _____
24
<PAGE>
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offering contained in this Prospectus, and if given or made, such
information or representations must not be relied upon as being authorized by
the Fund. This Prospectus does not constitute an offer by the Fund to sell
shares in any State to any person to whom it is unlawful for the Fund to make
such offer in such State.
25
<PAGE>
PROFIT FUNDS INVESTMENT TRUST
STATEMENT OF ADDITIONAL INFORMATION
November 11, 1996
Profit Lomax Value Fund
Profit Lomax Institutional Equity Fund
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
PAGE
----
<S> <C>
The Trust. . . . . . . . . . . . . . . . . . . . . . . . . .
Definitions, Policies and Risk Considerations. . . . . . . .
Quality Ratings of Corporate Bonds and Preferred Stock . . .
Investment Limitations . . . . . . . . . . . . . . . . . . .
Trustees and Officers . . . . . . . . . . . . . . . . . . .
The Investment Manager . . . . . . . . . . . . . . . . . . .
The Investment Adviser . . . . . . . . . . . . . . . . . . .
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Distribution Plan . . . . . . . . . . . . . . . . . . . . .
Administrator . . . . . . . . . . . . . . . . . . . . . . .
Transfer Agent, Dividend Disbursing Agent,
Shareholder Servicing Agent . . . . . . . . . . . . . . .
Custodian . . . . . . . . . . . . . . . . . . . . . . . . .
Auditors . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Counsel . . . . . . . . . . . . . . . . . . . . . . .
Securities Transactions . . . . . . . . . . . . . . . . .
Portfolio Turnover . . . . . . . . . . . . . . . . . . .
Calcuation of Share Price . . . . . . . . . . . . . . .
Taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption in Kind . . . . . . . . . . . . . . . . . . .
Historical Performance Information . . . . . . . . . . .
Statements of Assets and Liabilities . . . . . . . . .
</TABLE>
This Statement of Additional Information supplements the Prospectuses
offering of shares of the Profit Lomax Value Fund and the Profit Lomax
Instititutional Equity Fund. Each Fund is a series of the Profit Funds
Investment Trust, a registered open-end management investment company (the
"Trust"). The Statement of Additional Information, which is incorporated by
reference in its entirety into the Prospectuses, should be read only in
conjunction with the Prospectuses for the Funds, dated November 11, 1996, as
they may from time to time be revised.
Because this Statement of Additional Information is not a prospectus, no
investment in shares of any Fund should be made solely on the basis of the
information contained herein. It should be read in conjunction with the
Prospectus of the applicable Fund to which it relates. A copy of a Fund's
Prospectus may be obtained by writing the Fund at 2 Wisconsin Circle, Suite 700,
Chevy Chase, Maryland 20815, or by calling the Fund toll-free at 888-744-2337.
Capitalized terms used but not defined herein have the same meaning as in the
Prospectuses.
<PAGE>
The name "PROFIT" is derived from Eugene A. Profit, the founder and
principal shareholder of Investor Resources Group, Inc., the Manager of the
Trust. "PROFIT" is not intended to be an indication of the investment objective
and policies of any series or Funds of the Trust.
<PAGE>
THE TRUST
---------
Profit Funds Investment Trust (the "Trust") was organized as a
Massachusetts business trust on June 14, 1996. The Trust currently offers only
the Profit Lomax Value Fund, a series of the Trust, to investors, but may in the
future offer the Profit Lomax Institutional Equity Fund and other series. (Each
series of the Trust is referred to individually as a "Fund" and collectively as
the "Funds"). Each Fund has its own investment objective and policies.
Each share of a Fund represents an equal proportionate interest in the
assets and liabilities belonging to that Fund with each other share of that Fund
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. The shares do not have cumulative
voting rights or any preemptive or conversion rights, and the Trustees have the
authority from time to time to divide or combine the shares of any Fund into a
greater or lesser number of shares of that Fund so long as the proportionate
beneficial interest in the assets belonging to that Fund and the rights of
shares of any other Fund are in no way affected. In case of any liquidation of
a Fund, the holders of shares of the Fund being liquidated will be entitled to
receive as a class a distribution out of the assets, net of the liabilities,
belonging to that Fund. Expenses attributable to any Fund are borne by that
Fund. Any general expenses of the Trust not readily identifiable as belonging
to a particular Fund are allocated by or under the direction of the Trustees in
such manner as the Trustees determine to be fair and equitable. Generally, the
Trustees allocate such expenses on the basis of relative net assets or number of
shareholders. No shareholder is liable to further calls or to assessment by the
Trust without his express consent.
Under Massachusetts law, under certain circumstances, shareholders of a
Massachusetts business trust could be deemed to have the same type of personal
liability for the obligations of the Trust as does a partner of a partnership.
However, numerous investment companies registered under the Investment Company
Act of 1940 have been formed as Massachusetts business trusts and the Trust is
not aware of any instance where such result has occurred. In addition, the
Agreement and Declaration of Trust disclaims shareholder liability for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or the Trustees. The
<PAGE>
Agreement and Declaration of Trust also provides for the indemnification out of
the Trust property for all losses and expenses of any shareholder held
personally liable for the obligations of the Trust. Moreover, it provides that
the Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. As a result, and particularly because the Trust assets are readily
marketable and ordinarily substantially exceed liabilities, management believes
that the risk of shareholder liability is slight and limited to circumstances in
which the Trust itself would be unable to meet its obligations. Management
believes that, in view of the above, the risk of personal liability is remote.
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
- ---------------------------------------------
A more detailed discussion of some of the terms used and investment
policies described in the Prospectuses (see "Investment Objective, Investment
Policies and Risk Considerations") appears below:
Majority. As used in the Prospectuses and this Statement of
--------
Additional Information, the term "majority" of the outstanding shares of the
Trust (or of either Fund) means the lesser of (1) 67% or more of the outstanding
shares of the Trust (or the applicable Fund) present at a meeting, if the
holders of more than 50% of the outstanding shares of the Trust (or the
applicable Fund) are present or represented at such meeting or (2) more than 50%
of the outstanding shares of the Trust (or the applicable Fund).
Commercial Paper. Commercial paper consists of short-term
----------------
(usually from one to two hundred seventy days) unsecured promissory notes issued
by corporations in order to finance their current operations. Each Fund will
only invest in commercial paper rated in one of the two highest categories by
either Moody's Investors Service, Inc. (Prime-1 or Prime-2) or Standard & Poor's
Ratings Group (A-1 or A-2) or, if unrated, which Edgar Lomax determines to be of
equivalent quality in accordance with guidelines established by the Board of
Trustees. Certain notes may have floating or variable rates. Variable and
floating rate notes with a demand notice period exceeding seven days will be
subject to each Fund's restriction on illiquid investments (see "Investment
Limitations") unless, in the judgment of the Adviser, pursuant to guidelines
established by the Board of Trustees, such note is considered to be liquid.
<PAGE>
The rating of Prime-1 is the highest commercial paper rating assigned by
Moody's Investors Service, Inc. Among the factors considered by Moody's in
assigning ratings are the following: valuation of the management of the issuer;
economic evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; evaluation of the
issuer's products in relation to competition and customer acceptance; liquidity;
amount and quality of long-term debt; trend of earnings over a period of 10
years; and the financial strength of the parent company and the relationships
which exist with the issuer. These factors are all considered in determining
whether the commercial paper is rated Prime-1 or Prime-2. Commercial paper rated
A-1 (highest quality) by Standard & Poor's Ratings Group has the following
characteristics: liquidity ratios are adequate to meet cash requirements; long-
term senior debt is rated "A" or better, although in some cases "BBB" credits
may be allowed; the issuer has access to at least two additional channels of
borrowing; basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances; typically, the issuer's industry is well established
and the issuer has a strong position within the industry; and, the reliability
and quality of management are unquestioned. The relative strength or weakness of
the above factors determines whether the issuer's commercial paper is rated A-1
or A-2.
Bank Debt Instruments. Bank debt instruments in which the Funds may
---------------------
invest consist of certificates of deposit, bankers' acceptances and time
deposits issued by national banks and state banks, trust companies and mutual
savings banks, or banks or institutions the accounts of which are insured by the
Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation. Certificates of deposit are negotiable certificates evidencing the
indebtedness of a commercial bank to repay funds deposited with it for a
definite period of time (usually from fourteen days to one year) at a stated or
variable interest rate. Bankers' acceptances are credit instruments evidencing
the obligation of a bank to pay a draft which has been drawn on it by a
customer, which instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. Time deposits
are non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Each Fund will not
<PAGE>
invest in time deposits maturing in more than seven days if, as a result
thereof, more than 15% of the value of its net assets would be invested in such
securities and other illiquid securities.
U.S. Government Obligations. "U.S. Government obligations" include
---------------------------
securities which are issued or guaranteed by the United States Treasury, by
various agencies of the United States Government, and by various
instrumentalities which have been established or sponsored by the United States
Government. U.S. Treasury obligations are backed by the "full faith and credit"
of the United States Government. U.S. Treasury obligations include Treasury
bills, Treasury notes and Treasury bonds.
Agencies and instrumentalities established by the United States Government
include the Federal Home Loan Banks, the Federal Land Bank, the Government
National Mortgage Association, the Federal National Mortgage Association, the
Federal Home Loan Mortgage Corporation, the Student Loan Marketing Association,
the Small Business Administration, the Bank for Cooperatives, the Federal
Intermediate Credit Bank, the Federal Financing Bank, the Federal Farm Credit
Banks, the Federal Agricultural Mortgage Corporation, the Financing Corporation
of America and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the United States Government while
others are supported only by the credit of the agency or instrumentality, which
may include the right of the issuer to borrow from the United States Treasury.
U.S. Government obligations are subject to price fluctuations based upon changes
in the level of interest rates, which will generally result in all those
securities changing in price in the same way, i.e. all those securities
experiencing appreciation when interest rates decline and depreciation when
interest rates rise.
Repurchase Agreements. Each Fund may enter into repurchase
agreements only with its Custodian, with banks having assets in excess of $10
billion and broker-dealers who are recognized as primary dealers in U.S.
Government obligations by the Federal Reserve Bank of New
<PAGE>
York. A Fund will not enter into a repurchase agreement not terminable within
seven days if, as a result thereof, more than 15% of the value of its net assets
will be invested in such securities and other illiquid securities.
Although the securities subject to a repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase will never be more
than one year after the Fund's acquisition of the securities and normally will
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the securities, and will not be
related to the coupon rate of the purchased security. At the time a Fund enters
into a repurchase agreement, the value of the underlying security, including
accrued interest, will equal or exceed the value of the repurchase agreement,
and, in the case of a repurchase agreement exceeding one day, the seller will
agree that the value of the underlying security, including accrued interest,
will at all times equal or exceed the value of the repurchase agreement. The
collateral securing the seller's obligation must be of a credit quality at least
equal to a Fund's investment criteria for portfolio securities and will be held
by the Custodian or in the Federal Reserve Book Entry System.
For purposes of the Investment Company Act of 1940, a repurchase agreement
is deemed to be a loan from a Fund to the seller subject to the repurchase
agreement and is therefore subject to that Fund's investment restriction
applicable to loans. It is not clear whether a court would consider the
securities purchased by a Fund subject to a repurchase agreement as being owned
by that Fund or as being collateral for a loan by the Fund to the seller. In
the event of the commencement of bankruptcy or insolvency proceedings with
respect to the seller of the securities before repurchase of the security under
a repurchase agreement, a Fund may encounter delay and incur costs before being
able to sell the security. Delays may involve loss of interest or decline in
price of the security. If a court characterized the transaction as a loan and a
Fund has not perfected a security interest in the security, that Fund may be
required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, a Fund would be at
the risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt obligation purchased for a Fund, the
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case, the seller. Apart
from the risk of bankruptcy or insolvency proceedings,
<PAGE>
there is also the risk that the seller may fail to repurchase the security, in
which case a Fund may incur a loss if the proceeds to that Fund of the sale of
the security to a third party are less than the repurchase price. However, if
the market value of the securities subject to the repurchase agreement becomes
less than the repurchase price (including interest), the Fund involved will
direct the seller of the security to deliver additional securities so that the
market value of all securities subject to the repurchase agreement will equal or
exceed the repurchase price. It is possible that a Fund will be unsuccessful in
seeking to enforce the seller's contractual obligation to deliver additional
securities.
Loans of Portfolio Securities. Each Fund may lend its portfolio
-----------------------------
securities subject to the restrictions stated in its Prospectus. Under
applicable regulatory requirements (which are subject to change), the loan
collateral must, on each business day, at least equal the value of the loaned
securities. To be acceptable as collateral, letters of credit must obligate a
bank to pay amounts demanded by a Fund if the demand meets the terms of the
letter. Such terms and the issuing bank must be satisfactory to the Fund. The
Funds receive amounts equal to the dividends or interest on loaned securities
and also receive one or more of (a) negotiated loan fees, (b) interest on
securities used as collateral, or (c) interest on short-term debt securities
purchased with such collateral; either type of interest may be shared with the
borrower. The Funds may also pay fees to placing brokers as well as custodian
and administrative fees in connection with loans. Fees may only be paid to a
placing broker provided that the Trustees determine that the fee paid to the
placing broker is reasonable and based solely upon services rendered, that the
Trustees separately consider the propriety of any fee shared by the placing
broker with the borrower, and that the fees are not used to compensate the
Adviser or any affiliated person of the Trust or an affiliated person of the
Adviser. The terms of the Funds' loans must meet applicable tests under the
Internal Revenue Code and permit the Funds to reacquire loaned securities on
five days' notice or in time to vote on any important matter.
Foreign Securities. Subject to each Fund's investment policies and
------------------
quality and maturity standards, the Funds may invest in the securities (payable
in U.S. dollars) of foreign issuers. Investments in foreign securities may
include investments in sponsored American Depository Receipts ("ADRs"), which
are receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADRs, in registered form, are
designed for use in U.S. securities markets.
Investment in foreign securities, including ADRs, involves risks
that are different in some respects from an investment in a fund which invests
only in securities of U.S. domestic issuers. Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange control
<PAGE>
regulations. There may be less publicly available information about a foreign
company than about a U.S. company and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. There may be less governmental
supervision of securities markets, brokers and issuers of securities than in
this U.S. Securities of some foreign companies are less liquid or more volatile
than securities of U.S. companies and foreign brokerage commissions and
custodian fees are generally higher than in the United States. Settlement
practices may include delays and may differ from those customary in United
States markets. Investments in foreign securities may also be subject to other
risks different from those affecting U.S. investments, including local political
or economic developments, expropriation or nationalization of assets,
restrictions on foreign investment and repatriation of capital, imposition of
withholding taxes on dividend or interest payments, currency blockage (which
would prevent cash from being brought back to the United States), and difficulty
in enforcing legal rights outside the United States.
Convertible Securities. The Funds may invest in covertible securities:
----------------------
i.e., preferred stock or preferred bonds which may be exchanged for, converted
- ----
into, or exercised to acquire a predetermined number of shares of an issuer's
common stock at the option of the holder during a specified period of time.
Convertible securities are senior to common stock in a corporation's capital
structure, but are usually subordinated to similar nonconvertible securities.
While providing a fixed income stream (generally higher in yield than the income
that may be derived from a common stock but lower than that afforded by a
similar nonconvertible security), a convertible security also affords an
investor the opportunity, through its coversion feature, to participate in the
capital appreciation attendant upon a market price advance in the covertible
security's underlying common stock.
In general, the market value of a convertible security is at least the
higher of its "investment value" (i.e., its value as a fixed-income security) or
----
its "conversion value" (i.e., its value upon conversion into its underlying
----
common stock). As a fixed-income security, a convertible security tends to
increase in market value when interest rates decline and tends to decrease in
value when interest rates rise. However, the price of a convertible security
tends to increase as the market value of the underlying stock rises, whereas it
tends to decrease as the market value of the underlying stock declines. While
no securities investment is without some risk, investments in convertible
securities generally entail less risk than investments in the common stock of
the same issuer.
<PAGE>
Investment in Lower-Rated Debt Securities. The Funds may invest in debt
-----------------------------------------
securities rated below investment grade by a nationally-recognized rating agency
(e.g., rated below Baa by Moody's Investors Services, Inc. ("Moody's") or BBB by
----
Standard & Poor's Ratings Group ("S&P") or in unrated debt securities which, in
the judgment of Edgar Lomax, possess similar credit characteristics as debt
securities rated below investment grade (commonly known as "junk bonds").
Investment in junk bonds involves substantial risk. Securities rated Ba or
lower by Moody's or BB or lower by S&P are considered by those rating agencies
to be predominantly speculative with respect to the capacity to pay interest and
repay principal in accordance with the terms of the security, and generally
involve greater volatility of price than securities in higher rating categories.
More specifically, junk bonds may be issued by less creditworthy companies or by
larger, highly leveraged companies and are frequently issued in corporate
restructurings such as mergers and leveraged buyouts. Such securities are
particularly vulnerable to adverse changes in the issuer's industry and in
general economic conditions. Junk bonds frequently are junior obligations of
their issuers, so that in the event of the issuer's bankruptcy, claims of the
holders of junk bonds will be satisfied only after satisfaction of the claims of
senior security holders. While the junk bonds in which the Funds may invest do
not include securities which, at the time of investment, are in default or the
issuers of which are in bankruptcy, there can be no assurance that such events
will not occur after the Funds purchase a particular security, in which case the
Funds may experience losses and incur costs.
Junk bonds tend to be more volatile than higher rated fixed income
securities, so that adverse economic events may have a greater impact on the
prices of junk bonds than on higher rated fixed income securities. Like higher
rated fixed income securities, junk bonds are generally purchased and sold
through dealers who make a market in such securities for their own accounts.
However, there are fewer dealers in the junk bond market, which may be less
liquid than the market for higher rated fixed income securities even under
normal economic conditions. In addition, there may be significant disparities
in the prices quoted for junk bonds by various dealers. Adverse economic
conditions or investor perceptions may impair the liquidity of this market and
may cause prices the Funds receive for its junk bond holdings to be reduced, or
the Funds may experience difficulty in liquidating a portion of its portfolio.
Under such conditions, judgment may play a greater role in valuing certain of
the portfolio securities held by a Fund than in the case of securities trading
in a more liquid market.
<PAGE>
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS
-------------------------------------------------------
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group for corporate bonds in which the Funds may invest are as follows:
Moody's Investors Service, Inc.
-------------------------------
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 edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa - Bonds 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 risks appear somewhat larger than in Aaa
securities.
A - Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but elements
may be present which suggest a susceptibility to impairment sometime in the
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 rated Ba are judged to have speculative elements; the
bonds' future cannot be considered to be well assured. Often the protection of
interest and principal payments may be very moderate and thus not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments of or
maintenance of other terms of the contract over any long period of time may be
small.
Caa - Bonds rated Caa are of poor standing. Such issues may in
default or there may be present elements of danger with respect to principal or
interest.
Ca - Bonds rated Ca represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C - Bonds rated C are the lowest class of bonds, and issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Standard & Poor's Ratings Group
-------------------------------
AAA - Bonds rated AAA have the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA - Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the highest rated issues only in small degree.
<PAGE>
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
BB, B, CCC, CC, C and D - Bonds rated in each of these categories are
regarded, on balance, as predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal in accordance with the terms or the
obligation. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions. Bonds are rated D when the issue is in
payment default, or the obligor has filed for bankruptcy.
The ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Group for preferred stocks in which the Fund may invest are as follows:
Moody's Investors Service, Inc.
-------------------------------
aaa - An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa - An issue which is rated aa is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a - An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa - An issue which is rated baa is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
ba - An issue rated ba is considered to have speculative elements and its
future cannot be considered well assured. Earnings and asset protection may be
very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b - An issue rated b generally lacks the characteristics of a desirable
investment. Assurance of dividend payments and maintenance of other terms of the
issue over any long period of time may be small.
caa - An issue rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
ca - An issue rated ca is speculative to a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payments.
c - An issue rated c is in the lowest rated class of preferred stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category. The modifier 2 indicates a mid-range
ranking. the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Standard & Poor's Ratings Group
-------------------------------
AAA - This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA - A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
<PAGE>
A - An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the diverse
effects of changes in circumstances and economic conditions.
BBB - An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B and CCC - An issue rated in any of these categories is regarded, on
balance, as predominately speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation,
and CCC the highest degree of sepeculation. While such issues will likely
have some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C - An issue rated C is a non-paying issue of preferred stock.
D - An issue rated D is a non-paying issue with the issuer in default on
debt instruments.
NR - An issue designated NR indicates that no rating has been requested,
that there is insufficient information on which to base a rating, or that S&P
does not rate a particular type of obligation as a matter of policy.
To provide more detailed indications of preferred stock quality, the
ratings from AA to CCC may be modified by the addition of a plus (+) or minus
(-) sign to show relative standing within the major rating catagories.
INVESTMENT LIMITATIONS
- ----------------------
The Trust has adopted certain fundamental investment limitations designed
to reduce the risk of an investment in the Funds. These limitations may not be
changed without the affirmative vote of a majority of the outstanding shares of
that Fund.
The limitations applicable to each Fund are:
1. Borrowing Money. The Fund will not borrow money, except from a bank,
---------------
provided that immediately after such borrowing there is asset coverage of 300%
for all borrowings of the Fund.
2. Pledging. The Fund will not mortgage, pledge, hypothecate or in any
--------
manner transfer, as security for indebtedness, any security owned or held by the
Fund except as may be necessary in connection with borrowings described in
limitation (1) above. The Fund will not mortgage, pledge or hypothecate more
than one-third of its assets in connection with borrowings.
3. Margin Purchases. The Fund will not purchase any securities on
----------------
"margin" (except such short-term credits as are necessary for the clearance of
transactions).
4. Short Sales. The Fund will not make short sales of securities, or
-----------
maintain a short position, other than short sales "against the box." In
addition, the Fund will not write put or call options.
5. Commodities. The Fund will not purchase or sell commodities or
-----------
commodity contracts, including futures.
<PAGE>
6. Mineral Leases. The Fund will not purchase oil, gas or other mineral
--------------
leases, rights or royalty contracts.
7. Underwriting. The Fund will not act as underwriter of securities
------------
issued by other persons. This limitation is not applicable to the extent that,
in connection with the disposition of portfolio securities, the Fund may be
deemed an underwriter under certain federal securities laws.
8. Illiquid Investments. The Fund will not purchase securities for which
--------------------
no readily available market exists or engage in a repurchase agreement maturing
in more than seven days if, as a result thereof, more than 15% of the value of
the net assets of the Fund would be invested in such securities.
9. Real Estate. The Fund will not purchase, hold or deal in real estate
-----------
or real estate mortgage loans, including real estate limited partnership
interests, except that the Fund may purchase (a) securities of companies (other
than limited partnerships) which deal in real estate or (b) securities which are
secured by interests in real estate or by interests in mortgage loans including
securities secured by mortgage-backed securities.
10. Loans. The Fund will not make loans to other persons, except (a) by
-----
loaning portfolio securities, or (b) by engaging in repurchase agreements. For
purposes of this limitation, the term "loans" shall not include the purchase of
marketable bonds, debentures, commercial paper or corporate notes, and similar
marketable evidences of indebtedness which are part of an issue for the public.
11. Investing for Control. The Fund will not invest in companies for the
---------------------
purpose of exercising control or management.
12. Other Investment Companies. The Fund will not invest more than 10% of
--------------------------
its total assets in securities of other investment companies. The Fund will not
invest more than 5% of its total assets in the securities of any single
investment company. The Fund will not hold more than 3% of the outstanding
voting stock of any single investment company.
13. Securities Owned by Affiliates. The Fund will not purchase or retain
------------------------------
the securities of any issuers if those officers and Trustees of the Trust or
officers, directors, or principals of Investor Resources Group, Inc. (the
"Manager") or its Adviser, owning individually more than one-half of 1% of the
securities of such issuer, own in the aggregate more than 5% of the securities
of such issuer.
14. Industry Concentration. The Fund will not invest more than 25% of its
----------------------
total assets in any particular industry.
<PAGE>
15. Senior Securities. The Fund will not issue or sell any senior
-----------------
security as defined by the Investment Company Act of 1940 except in so far as
any borrowing that the Fund may engage in may be deemed to be an issuance of a
senior security.
With respect to the percentages adopted by the Trust as maximum limitations
on a Fund's investment policies and restrictions, an excess above the fixed
percentage (except for the percentage limitations relative to the borrowing of
money and the holding of illiquid securities) will not be a violation of the
policy or restriction unless the excess results immediately and directly from
the acquisition of any security or the action taken.
The Trust does not intend to pledge, mortgage or hypothecate the assets of
the Funds. The Trust does not intend to make short sales of securities "against
the box" as described above in investment limitation 4. The Trust does not
intend to purchase securities which are secured by interests in real estate or
by interests in mortgage loans, including securities serviced by mortgage-backed
securities, as described above in investment limitation 9. The statements of
intention in this paragraph reflect nonfundamental policies which may be changed
by the Board of Trustees without shareholder approval.
TRUSTEES AND OFFICERS
- ---------------------
The trustees and officers of the Trust, their ages, and their principal
occupations during the past five years are set forth below. Each Trustee who is
an "interested person" of the Trust, as defined by the Investment Company Act of
1940, is indicated by a single asterisk.
Trustees of the Trust
EUGENE A. PROFIT* (31) -- President and Chief Executive Officer, Investor
Resources Group, Inc. (February, 1996 to Present). Investment Executive, Legg
Mason Wood Walker (1994-1996). Marketing Director, Crossroads Group,
Parsippany, New Jersey (1993-1994). Owner, Cravings Bakery (1991-1993).
Player, National Football League (1986-1991). His address is 2 Wisconsin
Circle, Suite 700, Chevy Chase, Maryland 20815.
<PAGE>
JOSEPH A. QUASH, M.D.* (56) -- Cardiologist, Capital Cardiology Group,
Washington, D.C. (1976 to Present). His address is 8005 Split Oak Drive,
Bethesda, Maryland 20815.
RAYMOND S. McGAUGH* (42) -- Vice President of Finance and General Counsel, The
Edgar Lomax Company (1995 to Present). Principal, Albert, Bates, Whitehead &
McGaugh, P.C., Chicago, Illinois (1992-1995). Associate, Bell, Boyd & Lloyd,
Chicago, Illinois (1990-1992). His address is 6564 Loisdale Court, Suite 310,
Springfield, Virginia 22150.
ROBERT M. MILANICZ (47) -- Comptroller, American Psychiatric Association,
Washington, D.C. (1978 to Present). His address is 1400 K Street, N.W.,
Washington, D.C. 20005.
RONALD R. DAVENPORT, Jr. (33) -- General Counsel, Sheridan Broadcasting Corp.
(1993 to Present). Manager of Affiliate Relations, American Urban Radio
Networks (1993 to Present). Attorney, Board of Governors of the Federal Reserve
System (1988-1993). His address is 301 E.94th Street, Apt. 5D, New York, NY
10128.
LARRY E. JENNINGS, Jr. (33) -- Managing Director and Chief Executive Officer,
Carnegie Morgan Energy Co., Baltimore, Maryland (November 1994 to Present).
Managing Director, Legg Mason Wood Walker (May 1987 to November 1994).
Officers of the Trust
EUGENE A. PROFIT (31) -- President, Chief Executive Officer and Secretary of the
Trust.
STEPHEN G. MEYER** (31) -- Treasurer of the Trust. Controller, Funds
Accounting, SEI Corporation, Wayne, Pennsylvania (1992 to Present). Senior
Associate, Coopers & Lybrand (1990-1992).
BARBARA A. NUGENT** (40) -- Vice President and Assistant Secretary of the Trust.
Vice President, Legal, SEI Corporation, Wayne, Pennsylvania (1996 to Present).
Associate, Drinker, Biddle & Reath (1994-1996). Assistant Vice
President/Administration, Delaware Service Company (prior to 1994).
TODD CIPPERMAN** (30) -- Vice President and Assistant Secretary of the Trust.
Vice President and Assistant Secretary, SEI Corporation (November 1995 to
Present). Associate, Dewey
<PAGE>
Ballantine (1994 to May 1995). Associate, Winston & Strawn (prior to 1994).
JOSEPH LYDON** (37) -- Vice President and Assistant Secretary of the Trust.
Director of Business Administration, SEI Fund Resources, a division of SEI
Corporation (November 1995 to Present). Vice President, Fund Group, Vice
President of the Adviser, Dreman Value Management, L.P., and President of Dreman
Financial Services, Inc. (1989 to April 1995).
SANDRA K. ORLOW** (43) -- Vice President and Assistant Secretary of the Trust.
Vice President and Assistant Secretary, SEI Fund Resources and SEI Financial
Services, Inc. (1983 to Present).
KEVIN P. ROBINS** (35) -- Vice President and Assistant Secretary of the Trust.
Senior Vice President and General Counsel, SEI Corporation and SEI Financial
Services, Inc. (1994 to Present). Vice President and Assistant Secretary, SEI
Fund Resources and SEI Financial Services, Inc. (1992 to 1994). Associate,
Morgan, Lewis & Bockius LLP (before 1992).
KATHRYN L. STANTON** (38) -- Vice President and Assistant Secretary of the
Trust. Vice President and Assistant Secretary, SEI Fund Resources and SEI
Financial Services, Inc. (1994 to Present). Associate, Morgan, Lewis & Bockius
LLP (before 1994).
MARC CAHN** (39) -- Vice President and Assistant Secretary of the Trust.
Attorney, SEI Corporation (1996 to Present). Associate General Counsel,
Barclays Bank PLC (1994 to 1996). ERISA Counsel, First Fidelity Bancorporation
(prior to 1994).
** The address of each person designated by a double asterisk is 680 E.
Swedesford Road, Wayne, Pennsylvania 19087-1658.
The following table sets forth the aggregate compensation to be paid by the
Trust for the fiscal year ending September 30, 1997, to the Trustees who are not
affiliated persons of the Trust or of the Manager or Adviser:
<TABLE>
<CAPTION>
Pension or
Retirement
Aggregate Benefits Total
Compensation Accrued as Estimated Annual Compensation
Name of from Part of Fund Benefits upon from
Trustee Registrant* Expenses Retirement Registrant
- ------- ------------ ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Robert Milanicz $4,000 None N/A $4,000
R. Davenport $4,000 None N/A $4,000
L. Jennings $4,000 None N/A $4,000
</TABLE>
* Each Trustee that is not affiliated with the Trust or the Manager or
Adviser receives a fee equal to $1,000 for each regularly scheduled and special
meeting of the Trust attended. Such Trustees are also reimbursed for all of out-
of-pocket expenses incurred in attending such meetings.
THE INVESTMENT MANAGER
- ----------------------
Investor Resources Group, Inc. (the "Manager") performs management,
statistical, portfolio adviser selection and other services for the Trust
pursuant to an Investment Management Agreement. The Manager was formed in
February, 1996 as a Delaware corporation for the purpose of providing investment
advice and distribution services to the Trust and to other registered investment
companies.
Under the terms of the Investment Management Agreement,
the Manager manages the Funds' investments. The Profit Lomax Value Fund pays
the Manager a fee computed and accrued daily and paid monthly at an annual rate
of 1.25% of its average daily net assets. The Profit Lomax Institutional Equity
Fund pays the
<PAGE>
Manager a fee computed and accrued daily and paid monthly at an annual rate of
1.25% of its average daily net assets.
The Funds are responsible for the payment of all expenses incurred in
connection with the organization, registration of shares and operations of the
Funds, including such extraordinary or non-recurring expenses as may arise, such
as litigation to which the Trust may be a party. The Funds are obligated
to indemnify the Trust's officers and Trustees with respect to such
litigation, except in instances of willful misfeasance, bad faith, gross
negligence or reckless disregard by such officers and Trustees in the
performance of their duties. The Manager bears promotional expenses in
connection with the distribution of the Funds' shares to the extent that such
expenses are not assumed by the Funds under their plan of distribution (see
below). The compensation and expenses of any officer, Trustee or employee of
the Trust who is an officer, director or employee of the Manager are paid by the
Manager.
By its terms, the Trust's Investment Management Agreement will remain in
force until October 25, 1998 and from year to year thereafter, subject to annual
approval by (a) the Board of Trustees or (b) a vote of the majority of a Fund's
outstanding voting securities; provided that in either event continuance is also
approved by a majority of the Trustees who are not interested persons of the
Trust, by a vote cast in person at a meeting called for the purpose of voting
for such approval. The Trust's management agreement may be terminated at any
time with respect to either Fund, on sixty days' written notice, without the
payment of any penalty, by the Board of Trustees, by a vote of the majority of
the Fund's outstanding voting securities, or by the Manager. The management
agreement automatically terminates in the event of its assignment, as defined by
the Investment Company Act of 1940 and the rules thereunder.
The Manager will reimburse a Fund, up to the amount of its fee for such
Fund for any fiscal year, to the extent that the expenses of such Fund for
any fiscal year exceed the applicable expense limitations imposed by state
securities administrators, as such limitations may be lowered or raised from
time to time. The most restrictive limitation is presently 2.5% of the first
$30 million of average daily net assets, 2% of the next $70 million of average
daily net assets and 1.5% of average daily net assets in excess of $100
million. If any such reimbursement is required, the payment of the advisory fee
at the end of any month will be reduced or postponed or, if necessary, a refund
will be made to the Fund at the end of such month. Certain expenses such as
brokerage commissions, if any, taxes, interest, extraordinary items and such
other expenses as may be permitted by state securities administrators are
excluded from such limitations. If the expenses of a Fund approach the
applicable limitation in any state, the Trust will consider the various actions
that are available to it, including suspension of sales to residents of that
state.
<PAGE>
The name "Profit" is a property right of the Manager. The Manager may use
the name "Profit" in other connections and for other purposes, including in the
name of other investment companies. The Trust has agreed to discontinue any use
of the name "Profit" if the Manager ceases to be employed as the Fund's
investment manager.
THE INVESTMENT ADVISER
- ----------------------
The Edgar Lomax Company (the "Adviser") has been retained by the Manager to
serve as the subadviser to the Funds pursuant to an Investment Advisory
Agreement. The Adviser, which was established in 1986, provides investment
management services to institutions, and currently has approximately $350
million under mangement.
Under the terms of the Investment Advisory Agreement, the Adviser selects
the portfolio securities for investment by each Fund, purchases and sells
securities of each Fund and places orders for the execution of such portfolio
transactions, subject to the general supervision of the Board of Trustees and
the Manager. The Adviser receives a fee computed and accrued daily and paid
monthly at an annual rate of .50% of the value of the daily net assets of the
Profit Lomax Value Fund and .37% of the Profit Lomax Institutional Equity Fund.
The services provided by the Adviser are paid for wholly by the Manager. The
compensation of any officer, director or employee of the Adviser who is
rendering services to the Funds is paid by the Adviser.
The employment of the Adviser will remain in force until October 25, 1998
and from year to year thereafter, subject to annual approval by (a) the Board of
Trustees or (b) a vote of the majority of a Fund's outstanding voting
securities; provided that in either event continuance is also approved by a
majority of the Trustees who are not "interested persons" of the Trust, by a
vote cast in person at a meeting called for the purpose of voting such approval.
The employment of the Adviser may be terminated at any time with respect to
either Fund, on sixty days' written notice, without the payment of any penalty,
by the Board of Trustees, by a vote of the majority of the Fund's outstanding
voting securities, by the Manager, or by the Adviser. The agreement with the
Adviser automatically terminates in the event of its assignment, as defined by
the Investment Company Act of 1940 and the rules thereunder.
The name "Lomax" is a property right of the Adviser. The Adviser may use
the name "Lomax" in other connections and for other purposes, including in the
name of other investment companies. The Trust has agreed to discontinue any use
of the name "Lomax" if the Adviser ceases to be employed as the Fund's
investment adviser.
DISTRIBUTION PLAN
- -----------------
The Profit Lomax Value Fund (the "Value Fund") has adopted a plan of
distribution (the "Plan") pursuant to Rule 12b-1 under the Investment Company
Act of 1940 which permits the Value Fund to pay for expenses incurred in the
distribution and promotion of the Value Fund's shares.
<PAGE>
Under the terms of the Plan, the Value Fund may pay directly for various
expenses incurred in connection with the distribution of shares of the Fund,
including direct mail promotions and television, radio, newspaper, magazine and
other mass media advertising, or in connection with shareholder support services
which the Value Fund may reasonably request and which are not otherwise provided
by the Fund's transfer agent. Alternatively, the Value Fund may, under the terms
of the Plan, reimburse the Manager for the foregoing expenses incurred on behalf
of the Fund. Unreimbursed expenses will not be carried over from year to year,
nor will the Fund have any obligation to pay for unreimbursed expenses upon
termination of the Plan.
The continuance of the Plan must be specifically approved at least annually
by a vote of the Trust's Board of Trustees and by a vote of the Trustees who are
not interested persons of the Trust and have no direct or indirect financial
interest in the Plan (the "Independent Trustees") at a meeting called for the
purpose of voting on such continuance. The Plan may be terminated at any time
by a vote of a majority of the Independent Trustees or by a vote of the holders
of a majority of the outstanding shares of the Value Fund. In the event the Plan
is terminated in accordance with its terms, the Value Fund will not be required
to make any payments for expenses incurred by the Adviser after the termination
date. The Plan may not be amended to increase materially the amount to be spent
for distribution without shareholder approval. All material amendments to the
Plan must be approved by a vote of the Trust's Board of Trustees and by a vote
of the Independent Trustees.
In approving the Plan, the Trustees determined, in the exercise of their
business judgment and in light of their fiduciary duties as Trustees, that there
is a reasonable likelihood that the Plan will benefit the Value Fund and its
shareholders. The Board of Trustees believes that expenditure of the Value
Fund's assets for distribution expenses under the Plan should assist in the
growth of the Value Fund which will benefit the Value Fund and its shareholders
through increased economies of scale, greater investment flexibility, greater
portfolio diversification and less chance of disruption of planned investment
strategies. The Plan will be renewed only if the Trustees make a similar
determination for each subsequent year of
<PAGE>
the Plan. There can be no assurance that the benefits anticipated from the
expenditure of the Value Fund's assets for distribution will be realized. While
the Plan is in effect, all amounts spent by the Value Fund pursuant to the Plan
and the purposes for which such expenditures were made must be reported
quarterly to the Board of Trustees for its review. In addition, the selection
and nomination of those Trustees who are not "interested persons" of the Trust
are committed to the discretion of the Independent Trustees during such
period.
As a principal of the Manager, Eugene A. Profit may be deemed to have a
financial interest in the operation of the Plan.
ADMINISTRATOR
- -------------
SEI Fund Resources ("SEI" a " Administrator"), 680 E. Swedesford Road,
Wayne, Pennsylvania 19087, serves as Administrator to the Trust pursuant to an
Administration Agreement. As Administrator, SEI supplies non-investment related
statistical and research data, internal regulatory compliance services and
executive and administrative services. SEI supervises the preparation of tax
returns, reports to shareholders of the Funds, reports to and filings with the
Securities and Exchange Commission and state securities commissions, and
materials for meetings of the Board of Trustees. SEI also provides accounting
services for the Trust.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT, SHAREHOLDER SERVICING AGENT
- ----------------------------------------------------------------------
State Street Bank and Trust Company ("State Street"), 225 Franklin Street,
Boston, Massachusetts 02110 serves as Transfer Agent to the Trust pursuant
to a Transfer Agency and Service Agreement. Boston Financial Data Services
("BFDS"), Inc., Two Heritage Drive, Quincy, Massachusetts 02171 serves as
dividend disbursing agent and shareholder servicing agent for the Trust. BFDS is
a subsidiary of State Street Bank and Trust Company. In their respective roles,
State Street and BFDS maintain the records of each shareholder's account, answer
shareholders' inquiries concerning their accounts, process purchases and
redemptions of the Funds' shares, act as dividend and distribution disbursing
agent and perform other shareholder service functions.
CUSTODIAN
- ---------
CoreStates Bank, N.A., 530 Walnut Street, Philadelphia, Pennsylvania 19101-
7618, serves as custodian to the Trust pursuant to a Custodian Agreement. As
custodian, CoreStates Bank acts as each Fund's depository, safekeeps its
portfolio securities, collects all income and other payments with
<PAGE>
respect thereto, disburses funds as instructed and maintains records in
connection with its duties.
AUDITORS
- --------
Coopers & Lybrand L.L.P., 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103-2962 serves as independent certified public accountants to
the Trust.
LEGAL COUNSEL
- -------------
Paul, Hastings, Janofsky & Walker LLP, 1299 Pennsylvania Avenue, N.W.,
Tenth Floor, Washington, D.C. 20004 serves as counsel to the Trust. Goodwin,
Procter & Hoar LLP, 53 State Street, 24th Floor, Boston, Massachusetts 02109
serves as special Massachusetts counsel to the Trust.
SECURITIES TRANSACTIONS
- -----------------------
Decisions to buy and sell securities for the Funds and the placing of the
Funds' securities transactions and negotiation of commission rates where
applicable are made by the Adviser and are subject to review by the Board of
Trustees of the Trust. In the purchase and sale of portfolio securities, the
Adviser seeks best execution for the Funds, taking into account such factors as
price (including the applicable brokerage commission or dealer spread), the
execution capability, financial responsibility and responsiveness of the broker
or dealer and the brokerage and research services provided by the broker or
dealer. The Adviser generally seeks favorable prices and commission rates that
are reasonable in relation to the benefits received.
The Adviser is specifically authorized to select brokers who also provide
brokerage and research services to the Funds and/or other accounts over which
the Adviser exercises investment discretion and to pay such brokers a commission
in excess of the commission another broker would charge if the Adviser
determines in good faith that the commission is reasonable in relation to the
value of the brokerage and research services provided. The determination may be
viewed in terms of a particular transaction or the Adviser's overall
responsibilities with respect to the Funds and to accounts over which it
exercises investment discretion.
Research services include securities and economic analyses, reports on
issuers' financial conditions and future business prospects, newsletters and
opinions relating to interest trends, general advice on the relative merits of
possible investment securities for the Funds and statistical services and
information with respect to the availability of securities or purchasers or
sellers of securities. Although this information
<PAGE>
is useful to the Funds and the Adviser, it is not possible to place a dollar
value on it. Research services furnished by brokers through whom the Funds
effect securities transactions may be used by the Adviser in servicing all of
its accounts and not all such services may be used by the Adviser in connection
with the Funds.
The Adviser may aggregate purchase and sale orders for the Funds and its
other clients if it believes such aggregation is consistent with its duty to
seek best execution for the Funds and its other clients. The Adviser will not
favor any advisory account over any other account, and each account that
participates in an aggregated order will participate at the average share price
for all transactions of the Adviser in that security on a given business day,
with all transaction costs shared on a pro rata basis.
Code of Ethics. The Trust, the Manager and the Adviser have each adopted a
Code of Ethics under Rule 17j-1 of the Investment Company Act of 1940. The Code
significantly restricts the personal investing activities of all employees of
the Manager and the Adviser and, as described below, imposes additional, more
onerous, restrictions on investment personnel of each. The Code requires that
all employees of both the Manager and the Adviser preclear any personal
securities transactions (with limited exceptions, such as U.S. Government
obligations). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to the
proposed investment. In addition, no employee may purchase or sell any security
which, at that time, is being purchased or sold (as the case may be), or to the
knowledge of the employee is being considered for purchase or sale, by either
Fund. The substantive restrictions applicable to investment personnel of the
Manager and the Adviser include a ban on acquiring any securities in an initial
public offering. Furthermore, the Code provides for trading "blackout periods"
which prohibit trading by investment personnel of the Manager and Adviser within
periods of trading by either Fund in the same (or equivalent) security.
PORTFOLIO TURNOVER
- ------------------
A Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. A 100% turnover rate would occur if all of a Fund's portfolio securities
were replaced once within a one year period. The Adviser anticipates that the
portfolio turnover rate for each Fund normally will not exceed 50%.
<PAGE>
Generally, each Fund intends to invest for long-term purposes. However,
the rate of portfolio turnover will depend upon market and other conditions, and
it will not be a limiting factor when the Adviser believes that portfolio
changes are appropriate.
CALCULATION OF SHARE PRICE
- --------------------------
The share price (net asset value) of the shares of each Fund is determined
as of the close of the regular session of trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time) on each day the Trust is open for business.
The Trust is open for business on every day except Saturdays, Sundays and the
following holidays: New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. The Trust may also be
open for business on other days in which there is sufficient trading in either
Fund's portfolio securities that its net asset value might be materially
affected.
TAXES
- -----
Each Fund intends to qualify annually for the special tax treatment
afforded a "regulated investment company" under Subchapter M of the Internal
Revenue Code so that it does not pay federal taxes on income and capital gains
distributed to shareholders. To so qualify a Fund must, among other things, (i)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities or foreign currency, or certain other
income (including but not limited to gains from options, futures and forward
contracts) derived with respect to its business of investing in stock,
securities or currencies; (ii) derive less than 30% of its gross income in each
taxable year from the sale or other disposition of the following assets held for
less than three months: (a) stock or securities, (b) options, futures or forward
contracts not directly related to its principal business of investing in stock
or securities; and (iii) diversify its holdings so that at the end of each
quarter of its taxable year the following two conditions are met: (a) at least
50% of the value of the Fund's total assets is represented by cash, U.S.
Government securities, securities of other regulated investment companies and
other securities (for this purpose such other securities will qualify only if
the Fund's investment is limited in respect to any issuer to an amount not
greater than 5% of the Fund's assets and 10% of the outstanding voting
securities of such issuer) and (b) not more than 25% of the value of the Fund's
assets is invested in securities of any one issuer (other than U.S. Government
<PAGE>
securities or securities of other regulated investment companies).
A Fund's net realized capital gains from securities transactions will be
distributed only after reducing such gains by the amount of any available
capital loss carryforwards. Capital losses may be carried forward to offset any
capital gains for eight years, after which any undeducted capital loss remaining
is lost as a deduction.
A federal excise tax at the rate of 4% will be imposed on the excess, if
any, of a Fund's "required distribution" over actual distributions in any
calendar year. Generally, the "required distribution" is 98% of a Fund's
ordinary income for the calendar year plus 98% of its net capital gains
recognized during the one year period ending on October 31 of the calendar year
plus undistributed amounts from prior years. The Funds intend to make
distributions sufficient to avoid imposition of the excise tax.
The Trust is required to withhold and remit to the U.S. Treasury a portion
(currently 31%) of dividend income on any account unless the shareholder
provides a taxpayer identification number and certifies that such number is
correct and that the shareholder is not subject to backup withholding or
demonstrates an exemption from withholding.
REDEMPTION IN KIND
- ------------------
Under unusual circumstances, when the Board of Trustees deems it in the
best interests of a Fund's shareholders, the Fund may make payment for shares
repurchased or redeemed in whole or in part in securities of the Fund taken at
current value. If any such redemption in kind is to be made, each Fund intends
to make an election pursuant to Rule 18f-1 under the Investment Company Act of
1940. This election will require each Fund to redeem shares solely in cash up
to the lesser of $250,000 or 1% of the net asset value of the Fund during any
90 day period for any one shareholder. Should payment be made in securities, the
redeeming shareholder will generally incur brokerage costs in converting such
securities to cash. Portfolio securities which are issued in an in-kind
redemption will be readily marketable.
HISTORICAL PERFORMANCE INFORMATION
- ----------------------------------
From time to time, each Fund may advertise average annual total return.
Average annual total return quotations will be computed by finding the average
annual compounded rates of return over 1, 5 and 10 year periods that would
equate the initial amount invested to the ending redeemable value, according to
the following formula:
P (1 + T)/n/ = ERV
<PAGE>
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 and 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
The calculation of average annual total return assumes the reinvestment of
all dividends and distributions. If a Fund has been in existence less than one,
five or ten years, the time period since the date of the initial public offering
of shares will be substituted for the periods stated. Each Fund may also
advertise total return (a "nonstandardized quotation") which is calculated
differently from average annual total return. A nonstandardized quotation of
total return may be a cumulative return which measures the percentage change in
the value of an account between the beginning and end of a period, assuming no
activity in the account other than reinvestment of dividends and capital gains
distributions. A nonstandardized quotation may also indicate average annual
compounded rates of return over periods other than those specified for average
annual total return. A nonstandardized quotation of total return will always be
accompanied by a Fund's average annual total return as described above.
The performance quotations described above are based on historical earnings
and are not intended to indicate future performance.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding each Fund may discuss
various measures of Fund performance, including current performance ratings
and/or rankings appearing in financial magazines, newspapers and publications
which track mutual fund performance. Advertisements may also compare
performance (using the calculation methods set forth in the Prospectus) to
performance as reported by other investments, indices and averages. When
advertising current ratings or rankings, the Funds may use the following
publications or indices to discuss or compare Fund performance:
Lipper Mutual Fund Performance Analysis measures total return and average
current yield for the mutual fund industry and ranks individual mutual fund
performance over specified time periods assuming reinvestment of all
distributions, exclusive of sales loads. The Funds may provide comparative
performance information appearing in the Lipper growth funds category. In
addition, the Funds may use comparative performance information of relevant
indices, including the S&P 500 Index and the Dow Jones Industrial Average. The
S&P 500 Index is an unmanaged index of 500 stocks, the purpose of which is to
portray the pattern of common stock price movement. The Dow Jones Industrial
Average is a measurement of general market price
<PAGE>
movement for 30 widely held stocks listed on the New York Stock Exchange.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Fund's portfolio, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate its
performance.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------
The Statement of Assets and Liabilities for the Profit Lomax Value
Fund, as of October 25, 1996, which has been audited by Coopers & Lybrand, LLP,
is attached to this Statement of Additional Information.
REGISTRATION STATEMENT
- ----------------------
The Trust's Prospectuses and this Statement of Additional Information
do not contain all of the information set forth in the Trust's Registration
Statement and related forms as filed with the Securities and Exchange
Commission. The registration statement and related forms may be inspected at
the Public Reference Room of the Commission, 450 Fifth Street, N.W., Room 1024,
Washington D.C. 20549, and copies thereof may be obtained from the Commission at
prescribed rates.
<PAGE>
Profit Funds Investment Trust
Profit Lomax Value Fund
Statement of Assets and Liabilities
October 25, 1996
Report of Independent Accountants
To the Shareholders and Board of Trustees of the Profit Funds Investment Trust:
We have audited the Statement of Assets and Liabilities of the Profit Lomax
Value Fund as of October 25, 1996. This financial statement is the
responsibility of the Trust's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting amounts and disclosures in the financial statement. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statement referred to above represents fairly, in
all material respects, the financial position of the Profit Lomax Value Fund as
of October 25, 1996 in conformity with generally accepted accounting
principles.
Coopers & Lybrand, L.L.P.
2400 Blaven Penn Center
Philadelphia, Pennsylvania
October 29,1996
<PAGE>
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the financial position of the Profit Lomax Value Fund as
of October 25, 1996 in conformity with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
October 29, 1996
Profit Funds Investment Trust
Profit Lomax Value Fund
Statement of Assets and Liabilities
October 25, 1996
Assets:
Cash $100,000
Deferred Organizational Costs 65,000
--------
Total Assets 165,000
Liabilities:
Organizational Costs Payable 65,000
--------
Net Assets:
Portfolio shares of the Fund (unlimited
authorization - no par value) based on
10,000 outstanding shares of beneficial
interest $100,000
Net Asset Value, Offering and Redemption Price
Per Share $ 10.00
The accompanying notes are an integral part of the financial statement.
Notes to the Financial Statements
October 25, 1996
1. Organization:
The Profit Funds Investment Trust (the "Trust") was organized as a Massachusetts
business trust under a Declaration of Trust dated June 14, 1996. The Trust is
registered under the Investment Company Act of 1940, as amended, as a
diversified open-end
<PAGE>
management investment Trust with two funds: the Profit Lomax Value Fund, and the
Profit Lomax Institutional Equity Fund. Currently the Trust is only offering
shares of the Profit Lomax Value Fund (the "Fund") to investors, but may in the
future offer shares of the Profit Lomax Institutional Equity Fund and other
funds. The statement presented in this report pertain exclusively to the Profit
Lomax Value Fund.
2. Significant Accounting Policies:
The following is a summary of significant accounting policies followed by the
Trust. These policies are in conformity with generally accepted accounting
principles. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statement, and reported amounts of revenues and expenses during the reporting
period. Actual amounts could differ from these estimates.
Security Valuation - Equity securities that are traded on a national securities
exchange (or reported on the NASDAQ national market system) will be stated at
the last quoted sales price--if readily available for such equity
securities--on each business day. If there is no such reported sale, these
securities, and unlisted securities for which market quotations are readily
available, will be valued at the most recently quoted bid price.
Debt obligations exceeding 60 days to maturity for which market quotations are
readily available will be valued at the most recently quoted bid price. Debt
obligations with 60 days or less until maturity may be valued either at the most
recently quoted bid price or at their amortized cost.
Federal Income Taxes - It is the Fund's intention to qualify as a regulated
investment Trust by complying with the appropriate provisions of the Internal
Revenue Code of 1986, as amended. Accordingly, no provisions for Federal income
or excise taxes will be required.
Security Transactions and Investment Income - Security transactions will be
accounted for on the trade date of the security purchase or sale. Dividend
income will be recognized on ex-dividend date, and interest income will be
recognized on an accrual basis and includes, where applicable, the pro rata
amortization of premium or accretion of discount. The cost used in determining
net realized capital gains and losses on the sale of securities will be those of
the specific securities sold, adjusted for the accretion and amortization of
purchase discounts and premiums during the applicable holding period. Purchase
discounts and premiums on securities held by the Fund will be accreted and
amortized to maturity using the scientific
<PAGE>
interest method, which approximates the effective interest method.
Net Asset Value Per Share - The net asset value per share of the Fund will be
calculated each business day. In general, it will be computed by dividing the
assets of the Fund, less its liabilities, by the number of shares outstanding.
The maximum offering price of the Fund will be equal to its net asset value.
Other- Distributions from net investment income and net realized capital gains
for the Fund will be declared and paid to shareholders at least once per year.
3. Administration and Transfer Agent Agreements
The Trust and SEI Fund Resources (the "Administrator") are parties to an
administration agreement (the "Administration Agreement") under which the
Administrator will provide administration services in exchange for an annual fee
equal to the greater of (1) 0.15% of the average daily net assets up to $50
million, 0.125% of the average daily net assets on the next $50 million, and
0.10% of the average daily net assets for over $100 million or (2) $65,000.
The Trust and Boston Financial Data Services ("BFDS"), a subsidiary of State
Street Bank and Trust Company, are parties to a Transfer Agency servicing
agreement under which BFDS will provide transfer agency services to the Trust.
4. Investment Advisory Agreement
The Trust and Investor Resources Group, Inc. (the "Adviser") are parties to an
investment advisory agreement (the "Advisory Agreement") under which the Adviser
is entitled to receive a fee from the Fund, computed daily and paid monthly, at
an annual rate of 1.25% of the average daily net assets of the Fund. The Adviser
and the Edgar Lomax Company have entered into an investment sub-advisory
agreement (the "Sub-Advisory Agreement") under which the Sub-Adviser is entitled
to a fee from the Adviser, computed daily and paid monthly, at an annual rate
of 0.50% of the average daily net assets of the Fund. The Adviser has
voluntarily agreed to waive a portion of its fee and contribute amounts in
excess of its fee to enable the Fund to maintain an expense ratio of 1.95%.
These waivers and contributions are voluntary and may be terminated at any time.
5. Organizational Costs and Transactions with Affiliates
The organizational costs of the Fund have, or will be, been paid by the
Administrator. The Administrator will be reimbursed by the Fund for these costs
after the Fund's commencement of operations. The Fund will capitalize these
organizational costs and amortize
<PAGE>
them, upon commencement of operations, on a straight line basis over a maximum
of sixty months. In the event any of the initial shares of the Fund are redeemed
by any holder thereof during the period that the Fund is amortizing its
organizational costs, the redemption proceeds payable to the holder thereof will
be reduced by the unamortized organizational costs in the same ratio as the
number of initial shares being redeemed bears to the number of initial shares
outstanding at the time of redemption.
Certain officers of the Trust are also officers of the Administrator. Such
officers are paid no fees by the Trust for serving as officers of the Trust.
