Purisima Funds
Prospectus
December 7, 1999
The Purisima Total Return Fund
The Purisima Pure American Fund
The Purisima Pure Foreign Fund
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
Investment Objectives 2
Main Investment Strategies 3
Principal Investment Risks 4
Performance 5
Fees & Expenses 6
About the Adviser 7
Pricing of Fund Shares 7
Shareholder Transactions 7
How to Purchase & Redeem Shares 8
Shareholder Reports & Information 10
Dividends & Distributions 11
Rule 12b-1 Fees 11
Other Important Risk Disclosures 11
Financial Highlights 13
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INVESTMENT OBJECTIVES
* PURISIMA TOTAL RETURN FUND: seeks a high total return by investing in a
portfolio allocated between domestic and foreign common stocks, fixed-income
securities, money market instruments and other equity-type securities. The
Funds' investments in different types of securities may vary significantly.
* PURISIMA PURE AMERICAN FUND: seeks a high total return by investing largely
in securities of issuers domiciled in the United States. The Fund may
emphasize investments in common stocks and other equity-type securities, or
securities acquired primarily to produce income.
* PURISIMA PURE FOREIGN FUND: seeks a high total return by investing largely in
securities of issuers domiciled outside the United States. The Fund may
emphasize investments in common stocks and other equity-type securities, or
securities acquired primarily to produce income.
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MAIN INVESTMENT STRATEGIES
* DOMESTIC STOCK SELECTION STRATEGY FOR THE TOTAL RETURN FUND AND PURE AMERICAN
FUND: Style selection is a high priority and the Adviser evaluates various
criteria such as large-capitalization stocks versus small-capitalization
stocks, and growth versus value stocks.
The Adviser believes that a significant portion of the return on an investment
in a stock is derived from a weighted exposure to the market's styles. Style is
defined as the combination of market capitalization size (i.e., big, mid, and
small cap) and valuation (low/"value" or high/"growth"). The resulting six
styles are:
M
A
R Big Cap Value Big Cap Growth
K Mid Cap Value Mid Cap Growth
E Small Cap Value Small Cap Growth
T
C VALUATION
A
P
The Adviser believes that, for extended periods, the market favors certain
styles over others. This favoritism rotates, with all styles leading (and
lagging) at various times. The Adviser also believes that this selection is more
important in achieving investment returns than individual stock or manager
selection. The Adviser's domestic strategy attempts to identify which style the
investment cycle will favor and then seeks to purchase superior stocks within
it.
* FOREIGN STOCK SELECTION STRATEGY FOR THE TOTAL RETURN FUND AND PURE FOREIGN
FUND: Like its domestic stock selection strategy, the Adviser uses style
selection to make investment decisions for these Funds. Country selection
also is a high priority and the Adviser generally evaluates countries on a
contrarian basis by avoiding those considered to be too popular or
"overbought" by investors. After eliminating or reducing the Funds' exposure
to those countries, the Adviser tries to identify foreign nations with strong
underlying economic fundamentals. Once these markets are isolated, the
Adviser searches for top tier companies within them. The foreign portfolio is
constructed by favoring stocks from countries with positive economic factors.
The Adviser believes this top-down approach adds value simply by avoiding
risk.
* DEFENSIVE STRATEGY FOR ALL THREE FUNDS: If the Adviser anticipates the
potential for poor prospects in the U.S. and/or foreign stock markets, the
Funds may adopt a defensive strategy by investing substantially in
fixed-income securities, or money market instruments, or employing index put
options and other derivative hedging techniques.
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PRINCIPAL INVESTMENT RISKS
The value of any investment in the Funds will change with market conditions and
investors may lose money. Market conditions can cause securities to lose money
rapidly and unpredictably.
* GENERAL RISKS.
STOCKS: The risk of losses is often higher for funds holding stocks than
those investing only in fixed-income securities. The Purisima Funds are not
appropriate for all investors.
FIXED-INCOME SECURITIES: The Funds may invest in fixed-income securities
deemed or rated, at the time of purchase, within the four highest rating
categories (by Moody's, S&P or other nationally recognized securities ratings
organizations). After purchase, a security might fall from the four highest
rating categories and the Funds may choose to hold it for as long as the
Adviser believes prudent. Generally, when interest rates rise, the value of a
fixed-income security will fall.
* STYLE RISKS: The Adviser may misjudge investment styles and invest the Funds'
assets in styles that will not perform as well as other styles or as well as
the general market.
* ALLOCATION RISKS: Although the Funds primarily invest in common stocks, based
on the Adviser's assessment of economic and market conditions, a Fund can
invest all of its assets in fixed-income securities. There is the risk the
Adviser's allocation could cause the Fund not to meet its objective.
* RISKS OF FOREIGN INVESTING FOR THE TOTAL RETURN AND PURE FOREIGN FUNDS. The
Total Return and Pure Foreign Fund may purchase foreign securities, including
equity-type securities and fixed-income securities. These securities may
involve additional risks, including the possibility of political, economic or
social instability in the foreign country a security is issued in might
significantly lower its valuations. Foreign issuers are also not subject to
the same reporting and regulatory requirements found in the United States.
Also, changes in the value of foreign currencies versus the U.S. dollar can
impact the value of a Funds' foreign investments. For example, a decline in
the value of a foreign currency will reduce the value of foreign investments
denominated in that currency.
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PERFORMANCE
The chart below shows the risk of investing in the Total Return Fund by
illustrating differences in its performance for each full calendar year. Of
course, past performance is not predictive of future results.
1997 1998
---- ----
22.61% 29.48%
Total Return Fund's highest & lowest quarterly returns during the two years
ended 12/31/98
Total Return Fund versus MSCI World Index(1)
----------------- ------ -------------------
Highest 24.83% Qtr ended 12/31/98 21.11%
Lowest -13.96% Qtr ended 9/30/98 -11.99%
The Total Return Fund's year-to-date return as of September 30, 1999 was 6.94%.
Comparative Returns
Average Annual Total Returns for the periods ended December 31, 1998
Total Return Fund versus MSCI World Index(1)
----------------- ------ -------------------
Since Inception Since
1 Yr (10/28/96) 1 Yr (10/28/96)
---- ---------- ---- ----------
29.48% 24.24% 24.33% 20.39%
(1) Morgan Stanley Capital International World Index - This is an unmanaged
capitalization-weighted stock index that includes all major world stock
markets.
As of December 31, 1998, the Pure American and Pure Foreign Funds did not have
performance for a full year. The Pure American Fund will compare its performance
to the S&P 500 Index and the Pure Foreign Fund will compare its performance to
the Morgan Stanley EAFE Index.
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FEES AND EXPENSES
SHAREHOLDER FEES(1) (fees paid directly from your investment)
Total Return Fund American Fund Foreign Fund
----------------- ------------- ------------
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering price) None None None
Maximum deferred sales charge
(load) (as a percentage of
the lower of original purchase
price or redemption proceeds) None None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from fund assets)
Total Return Fund American Fund Foreign Fund
----------------- ------------- ------------
Management Fees 1.00% 1.50%(2) 1.50%(2)
Distribution 12b-1 Fees 0.25% None None
Other Expenses 0.57% None None
---- ---- ----
Total Annual Fund Operating
Expenses 1.82% 1.50% 1.50%
Fee Reduction and/or Expense
Reimbursement (0.32%)(3) None None
---- ---- ----
Net Expenses 1.50% 1.50% 1.50%
---- ---- ----
EXAMPLE: This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example assumes
that:
* You invest $10,000 in the Fund for the period indicated
* You redeem all your shares at the end of those periods
* Your investment has a 5% return each year
* The Fund's operating expenses remain the same
ALTHOUGH YOUR ACTUAL COSTS COULD BE HIGHER OR LOWER, BASED ON THESE ASSUMPTIONS
YOUR COSTS WOULD BE:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Total Return Fund $153 $474 $818 $1,791
Pure American Fund $153 $474 $818 $1,791
Pure Foreing Fund $153 $474 $818 $1,791
(1) A fee of $9.00 is charged for each wire redemption.
(2) The Management Fee for the Pure American and Pure Foreign Funds compensates
the Manager for advisory services and other ordinary operating expenses of
the Funds, for which the Adviser is responsible.
(3) The Adviser is contractually obligated to limit the Total Return Fund's
expenses to 1.50%. The contract has a rolling 10-year term.
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ABOUT THE ADVISER
Fisher Investments, Inc., 13100 Skyline Blvd., Woodside, California, 94062-4547,
is the Funds' investment adviser. The Adviser supervises and manages the
investment portfolio of the Funds, and subject to such policies as the trustees
may determine, directs the purchase or sale of investment securities in the
day-to-day management of the Funds' investment portfolios. As of December 1999
the Advisor managed over $4.5 billion for large corporations, pension plans,
endowments, foundations, governmental agencies and individuals. Kenneth L.
Fisher, the founder, Chairman and Chief Executive Officer of the Adviser,
controls the Adviser.
Mr. Fisher serves as the Funds' portfolio manager and as such is primarily
responsible for the day-to-day management of the Funds' portfolio. He has served
as portfolio manager of the Total Return Fund, Pure American Fund and Pure
Foreign Fund, since their respective inception dates. Mr. Fisher has over 20
years of investment management experience. Mr. Fisher began Fisher Investments
as a sole proprietorship in 1978 and incorporated the company under the name
Fisher Investments, Inc. in 1986.
Mr. Fisher is primarily known to the public through his writing. He has written
the Portfolio Strategy column in FORBES magazine since 1984. His writings
include three books, "Super Stocks," a tutorial on fundamental stock research
published in 1984, "The Wall Street Waltz," a financial overview and historical
lessons through 90 visualizations published in 1987, and "100 Minds that Made
the Market," a set of 100 cameo biographies of pioneers of American finance
published in 1993. His writings have been published widely and he has been
interviewed by numerous financial publications and programs. The Funds may refer
to this information in their marketing materials.
PRICING OF FUND SHARES
The price you pay when buying a Fund's shares, and the price you receive when
selling (redeeming) a Fund's shares, is the net asset value of the shares next
determined after receipt and acceptance of a complete purchase or redemption
request. The per share net asset value is determined by dividing the total value
of its net assets (meaning its assets minus its liabilities) by the total number
of shares outstanding at that time. The net asset value is determined as of the
close of regular trading on the New York Stock Exchange on each day it is open
for trading.
SHAREHOLDER TRANSACTIONS
Minimum Initial Minimum Additional
Type of Account Investment Investments
- --------------- ---------- -----------
Individual, Joint or
Gift to Minors Account $25,000 $1,000
Automatic Investment Plan $25,000 $ 100
IRA or Roth IRA $ 2,000 $ 100
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HOW TO PURCHASE & REDEEM SHARES
HOW TO OPEN YOUR ACCOUNT BY MAIL.
* Complete the Purchase Application which accompanies this Prospectus or obtain
a Purchase Application by calling 1-800-841-0199.
* Your completed Purchase Application should be mailed directly to:
The Purisima Funds
c/o Fisher Investments
13100 Skyline Blvd.
Woodside, CA 94062
* To purchase shares by overnight or express mail, please use the following
street address:
The Purisima Funds
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202
All applications must be accompanied by payment in the form of a check made
payable to "The Purisima Funds." All purchases must be made in U.S. dollars and
checks must be drawn on U.S. banks. No cash, credit cards or third-party checks
will be accepted. When a purchase is made by check and a redemption or exchange
is made shortly thereafter, the Funds will delay the mailing of a redemption
check until the purchase check clears, which may take as long as 15 days. If
you contemplate needing access to your investment shortly after purchase, you
should purchase the shares by wire as discussed below.
HOW TO OPEN YOUR ACCOUNT BY WIRE.
* To ensure proper credit to your account, please call the Funds at
1-800-841-2858 for instructions prior to wiring funds.
* Funds should be wired through the Federal Reserve System as follows:
Star Bank, n.a.
A.B.A. Number 042000013
For credit to The Purisima Funds
Account Number 4864-84413
For further credit to:
(The Purisima __________ Fund)
(investor account number)
(name or account registration)
* You must promptly complete a Purchase Application and mail it to the Funds at
the following address: The Purisima Funds, P.O. Box 5354, Cincinnati, Ohio
45201-5354.
* Payment of redemption proceeds may be delayed and taxes may be withheld until
the Funds receive a properly completed and executed Purchase Application.
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PURCHASING SHARES THROUGH AN AUTOMATIC INVESTMENT PLAN
* Under an Automatic Investment Plan, your designated bank or other financial
institution debits a preauthorized amount on your account each month and
applies the amount to the purchase of Fund shares.*
* You may adopt the Plan at the time an account is opened by completing the
appropriate section of the Purchase Application.
* To establish the Plan after an account is opened, an application may be
obtained by calling the Funds.
* You will receive a statement on a quarterly basis showing the purchases made
under the Plan.
* Redeeming all funds from your account will discontinue your Plan privileges
unless otherwise specified.
* The Funds require 10 business days after the receipt of your request to
initiate the Plan to verify your account information. Generally, the Plan
will begin on the next transaction date scheduled by the Funds for the Plan
following this 10 business day period. The Plan can be implemented with any
financial institution that is a member of the Automated Clearing House.
EXCHANGING SHARES
* Shareholders may exchange ($500 minimum per transaction) all or a portion of
their shares in a Fund for shares of other Funds or for shares in the
Countrywide Money Market Fund (the "Money Market Fund")+.
* The value to be exchanged and the price of the shares being purchased will be
the net asset value next determined by the Funds after receipt and acceptance
of complete instructions for the exchange by the Funds or their agent or
subagent.
AUTOMATIC EXCHANGE PLAN
* You may make automatic monthly exchanges from the Money Market Fund+ to a
Fund account ($100 minimum per transaction), but you must meet the Fund's
minimum initial investment requirements before this Plan is established.
* You may adopt the Plan at the time an account is opened by completing the
appropriate section of the Purchase Application, or you may obtain an
application to establish the Automatic Exchange Plan after an account is open
by calling the Funds.
+ The Money Market Fund is not affiliated with the Trust. You must obtain a
copy of the Money Market Fund prospectus by calling 1-800-841-2858, and you
are advised to read it carefully, before authorizing any investment in shares
of the Money Market Fund.
REDEMPTIONS BY MAIL
* To redeem shares by mail, simply send an unconditional written request to the
Funds specifying the number of shares or dollar amount to be redeemed, the
name of the Fund, the name(s) on the account registration and the account
number. A request for redemption must be signed exactly as the shares are
registered.
* If the amount requested is greater than $25,000, or the proceeds are to be
sent to a person other than the record holder or to a location other than the
address of record, each signature must be signature guaranteed (see
Definition of Signature Guarantee).
* Additional documentation is required for redeeming shares in corporate
accounts or the redemption of shares held by persons acting pursuant to a
Power of Attorney. In case of any questions, contact the Funds in advance.
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TELEPHONE REDEMPTIONS
* Shares may be redeemed for accounts with telephone redemption privileges, in
amounts of $500 or more and up to $25,000, by calling the Funds.
* Proceeds redeemed by telephone will be mailed to your address, or wired or
transmitted by electronic funds transfer to your preauthorized bank account
as shown on the records of the Fund.
* A redemption request in excess of $25,000 must be made following the
procedures of redemption by mail.
* In order to arrange for telephone redemptions for an account where these
privileges were not selected or to change the bank account or address
designated to receive redemption proceeds, you must send a written request to
the Funds. The request must be signed by each registered holder of the
account with the signatures guaranteed (see Definition of Signature
Guarantee).
SYSTEMATIC WITHDRAWAL PLANS
* The Fund offers a Systematic Withdrawal Plan, which allows you to designate
that a fixed amount (limited to those shareholders with a balance of $100,000
or greater upon commencement of participation in the Plan) be distributed to
you at regular intervals.
* The required redemption ($500 minimum per transaction) takes place on the
last business day of the month, but if the day you designate falls on a
Saturday, Sunday or legal holiday, the distribution will be made on the prior
business day.
* An application for participation in the Systematic Withdrawal Plan may be
obtained by calling the Funds, and any changes made to distribution
information must be made in writing and signed by each registered holder of
the account with signatures guaranteed.
DEFINITION OF SIGNATURE GUARANTEE
Signature guarantees are provided by a commercial bank or trust company in the
United States, a member firm of the NASD or other eligible guarantor
institution. A notary public is not an acceptable guarantor. Guarantees must be
signed by an authorized signatory of the bank, trust company, or member firm,
and "Signature Guaranteed" must appear with the signature.
SHAREHOLDER REPORTS & INFORMATION
The Funds will provide statements and reports to keep you current regarding the
status of your investment account. After each transaction that affects the
account balance or account registration, you will receive a confirmation
statement (except for Automatic Investment Plan transactions, which generate
quarterly confirmations of all automatic transactions). All shareholders also
receive quarterly account statements. Financial reports are provided to
shareholders on a semi-annual basis.
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DIVIDENDS & DISTRIBUTIONS
The Funds intend to pay dividends from net investment income, if any, annually
and distribute substantially all net realized capital gains, if any, at least
annually. The Funds may make additional distributions if necessary to avoid
imposition of a 4% excise tax imposed on net income or other tax on
undistributed income and capital gains. You may elect to reinvest all income
dividends and capital gains distributions in shares of a Fund or recieve in cash
as designated on the Purchase Application. You may change your election at any
time by sending written notification to the Funds.
The election is effective for distributions with a dividend record date on or
after the date the Funds receive notice of the election. Shares will be
purchased at the net asset value in effect on the business day after the
dividend record date and will be credited to your account on such date.
Dividends and capital gains distributions, if any, will reduce the net asset
value of the Funds by the amount of the dividend or capital gains distribution,
so that a purchase of Fund shares shortly before the record date for a
distribution may result in the receipt of taxable income that, in essence,
represents a return of capital. Reinvested dividends and distributions receive
the same tax treatment as those paid in cash.
RULE 12b-1 FEES
The Total Return Fund has adopted a Distribution Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940. Under that Plan, the Total Return Fund
is authorized to pay the Adviser, as Distribution Coordinator, a fee for the
sale and distribution of its shares. The maximum annual amount of the fee
authorized is 0.25% of the Fund's average daily net assets. Because these fees
are paid out of the Total Return Fund's assets on an on-going basis, over time
these fees will increase the cost of your investment and may cost you more than
paying other types of sales charges. The Pure American Fund and Pure Foreign
Fund do not have a Rule 12b-1 Plan and therefore do not pay any 12b-1 fees.
OTHER IMPORTANT RISK DISCLOSURES
EQUITY SECURITIES. The term equity-like securities, as used in this prospectus,
includes, but is not limited to: common stock, preferred stock, convertible
securities, warrants, rights and depository receipts. Each Fund will limit its
investments in warrants and rights to no more than 5% of its net assets, valued
at the lower of cost or market. Warrants and rights acquired by a Fund in units
or attached to securities are not subject to these restrictions.
FOREIGN SECURITIES. The Total Return Fund and Foreign Fund may invest without
limitation in securities of foreign issuers through sponsored and unsponsored
Depositary Receipts, and may invest up to 5% (25% for the Foreign Fund) of their
net assets at the time of purchase directly in the securities of foreign
issuers. Foreign fixed-income securities that may be purchased by the Funds
include debt obligations issued or guaranteed by foreign governments, their
subdivisions, agencies or instrumentalities or central banks, securities of
banks and other business entities; securities indexed in or denominated in
foreign currencies or by supranational entities that have been constituted by
the governments of several countries to promote economic development, such as
the The World Bank and The Asian Development Bank. Foreign investment in certain
foreign government debt is restricted or controlled to varying degrees, and the
Funds make no guarantee to payment of principal or interest of any fixed-income
security. Dividends and interest payable on a Fund's foreign portfolio
securities may be subject to foreign withholding taxes, which may reduce the net
return to shareholders.
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FIXED-INCOME SECURITIES. The Funds are not limited as to the maturity of their
fixed-income investments. Debt securities are subject to the risk of the
issuer's inability to meet principal and interest payments on the obligations
(credit risk), and may also be subject to price volatility due to such factors
as interest rate sensitivity, market perception of the creditworthiness of the
issuer and general market liquidity (market risk). The market value of all debt
obligations is affected by changes in prevailing interest rates. The market
value of such instruments generally reacts inversely to interest rate changes.
If prevailing interest rates decline, the market value of debt obligations
generally increases. If prevailing interest rates increase, the market value of
debt obligations generally decreases. In general, the longer the maturity of a
debt obligation, the greater its sensitivity to changes in interest rates. The
Foreign Fund will invest in U.S. government or domestic fixed-income securities
only for temporary or defensive purposes.
MONEY MARKET INSTRUMENTS. Money market instruments are short-term, high-quality
(rated in the top two categories by S&P, Moody's or other nationally recognized
securities rating organizations) denominated in U.S. dollars or other freely
convertible currency, including, but not limited to, short-term obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities,
U.S. finance company obligations, corporate commercial paper, obligations of
banks and repurchase agreements.
RISKS OF DERIVATIVES. The Funds may use derivative securities, including
options, to avoid losses or earn extra income. Securities are considered
derivatives, when their value is determined or 'derived' from the performance of
underlying assets, interest rates or indices that the security does not actually
represent ownership in. The price movements of derivatives may be more volatile
than those of other securities, and their use often involves greater than
ordinary investment risk. The Funds anticipate using derivatives principally in
an attempt to avoid losses, but there is no guarantee such attempts will be
successful.
Among the derivatives the Funds may purchase are options. The Funds can write
options on up to 25% of the value of its net assets (measured at the time an
option is written) and no Fund will purchase put and call options where the
aggregate premiums on its outstanding options exceed 5% of its net assets at the
time of purchase. Any unlisted options purchased are not subject to the
protections afforded purchasers of listed options issued by the Options Clearing
Corporation, which performs the obligations of its members if they default.
PORTFOLIO TURNOVER. A Fund may sell a given security, regardless of how long it
has been held in the portfolio, and whether the sale is at a gain or loss. High
portfolio turnover in any year will result in the payment by the Fund of
above-average transaction costs and could result in the payment by shareholders
of above-average amounts of taxes on realized investment gains.
YEAR 2000 RISK: Many computer systems were created without the ability to
process calendar dates after 12/31/99. Year 2000 risk refers to the problems
that could result if these systems are not updated to handle post-1999 dates.
The Funds believe that all the systems important to their operations will
continue working and processing post-1999 dates in the future, but there can be
no assurance that the steps taken by the Funds (and their service providers)
will be sufficient. Additionally, Year 2000 problems or merely the perception of
possible Year 2000 problems could reduce the market value of securities in the
Funds' portfolio.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Funds'
financial performance for the past year. Certain information reflects financial
results for a single Fund share. The total returns in the tables represent the
rate that an investor would have earned, or lost, on an investment in the Funds,
assuming reinvestment of all dividends and distributions. This information has
been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report, along with the Funds' financial statements, are included in the annual
report, which is available upon request. The calculations are based on average
number of shares outstanding for the period.
TOTAL RETURN FUND
For the For the From 10/28/96+
Year Ended Year Ended through
8/31/99 8/31/98 8/31/97
------- ------- -------
Net asset value, beginning of period $12.47 $11.87 $10.00
------ ------ ------
Income from investment operations
Net investment income (loss) (0.01) 0.02 0.02
Net realized and unrealized gains
on investments 5.00 0.60 1.85
------ ------ ------
Total from investment operations 4.99 0.62 1.87
------ ------ ------
Less distributions:
Dividends from net investment income -- (0.02) --
Net asset value, end of period $17.46 $12.47 $11.87
====== ====== ======
Total return 40.05% 5.26% 18.70%**
Net assets at end of period in
thousands $53,199 $21,479 $4,236
Ratio of expenses to average net assets:
Before expense reimbursement 1.82% 2.71% 20.97%*
After expense reimbursement 1.50% 1.50% 1.50%*
Ratio of net investment income (loss)
to average net assets 0.00%# 0.28%# 0.56%#
Portfolio turnover rate 12.72% 15.89% 1.35%**
* Annualized.
** Not annualized.
+ Commencement of operations.
# Net of expense reimbursement.
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The calculations are based on average number of shares outstanding for the
period.
Pure American Pure Foreign
Fund Fund
From 9/29/98+ From 9/29/98+
through through
8/31/99 8/31/99
------- -------
Net asset value, beginning of period $10.00 $10.00
------ ------
Income from investment operations
Net investment income (loss) (0.02) 0.04
Net realized and unrealized gains on investments 3.02 3.48
Total from investment operations 3.00 3.52
------ ------
Net asset value, end of period $13.00 $13.52
====== ======
Total return 30.00%** 35.20%**
Net assets at end of period in thousands $1,502 $ 291
Ratio of expenses to average net assets:
Before expense reimbursement 1.50%* 1.50%*
After expense reimbursement n/a n/a
Ratio of net investment income (loss)
to average net assets (0.34)%* 0.65%*
Portfolio turnover rate 29.73%** 7.19%**
* Annualized.
** Not annualized.
+ Commencement of operations.
# Net of expense reimbursement.
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THE PURISIMA FUNDS
For investors who want more information about the Funds, the following documents
are available free upon request:
Annual/Semi-Annual Reports: Additional information about the Funds' investments
is available in the Funds annual and semi-annual reports to shareholders. In the
Funds' annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Funds' performance during
its last fiscal year.
Statement of Additional Information (SAI): The SAI provides more detailed
information about the Funds and is incorporated by reference into this
Prospectus.
You can get free copies of the Funds' annual and semi-annual reports and the
SAI, request other information and discuss your questions about the Funds by
contacting the Funds at:
The Purisima Funds
c/o Fisher Investments
13100 Skyline Blvd.
Woodside, California 94062
Telephone: 1-800-841-0199
You can review and copy information about the Fund, including the Funds' reports
and SAI, at the Public Reference Room of the Securities and Exchange Commission
in Washington, D.C. You can obtain information on the operation of the Public
Reference Room by calling 1-202-942-8090. You can get copies of such
information:
* Free of charge from the Commission's Internet website at http://www.sec.gov.
* For a fee, by writing to the Public Reference Room of the Commission,
Washington, DC 20549-6009, or
* For a fee, by electronic request at the folloiwng e-mail address:
[email protected].
(The Purisima Funds' SEC Investment Company Act file number is 811-07737)
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THE PURISIMA TOTAL RETURN FUND
THE PURISIMA PURE AMERICAN FUND
THE PURISIMA PURE FOREIGN FUND
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information dated December 7, 1999, is meant
to be read in conjunction with the Prospectus dated December 7, 1999 for the
funds named above (collectively, the "Funds") and is incorporated by reference
in its entirety into the Prospectus. Because this Statement of Additional
Information is not itself a prospectus, no investment in shares of the Funds
should be made solely upon the information contained herein. Copies of the
Prospectus for the Funds may be obtained by writing the Fund, P.O. Box 5354,
Cincinnati, Ohio, 45201-5354, or calling 1-800-871-2665. Capitalized terms used
but not defined in this SAI have the same meanings as in the Prospectus.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR IN
THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUNDS OR THE DISTRIBUTOR. THE PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING BY THE FUNDS IN ANY JURISDICTION IN WHICH SUCH OFFERING
MAY NOT LAWFULLY BE MADE.
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TABLE OF CONTENTS
Page
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ADDITIONAL INVESTMENT INFORMATION.......................................... 3
INVESTMENT RESTRICTIONS.................................................... 12
ADDITIONAL TRUST INFORMATION............................................... 14
DISTRIBUTION OF SHARES..................................................... 19
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................... 20
TAXES ..................................................................... 21
DESCRIPTION OF SHARES...................................................... 24
INDIVIDUAL RETIREMENT ACCOUNTS............................................. 27
PERFORMANCE INFORMATION.................................................... 27
OTHER INFORMATION.......................................................... 30
FINANCIAL STATEMENTS....................................................... 31
APPENDIX A................................................................. 32
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ADDITIONAL INVESTMENT INFORMATION
This Statement of Additional Information relates to the following three
series or mutual funds of The Purisima Funds, a Delaware business trust (the
"Trust"):
The Purisima Total Return Fund (the "Total Return Fund"),
The Purisima Pure American Fund (the "American Fund"),
The Purisima Pure Foreign Fund (the "Foreign Fund")
The investment objective of each Fund is to produce a high level of total
return. Because of the risks inherent in all investments, there can be no
assurance that any Fund will meet its objective. No Fund is intended by itself
to constitute a balanced investment program.
Unless specifically designated as a "fundamental" policy (which may be
changed only with the approval by a majority of a Fund's outstanding shares, as
defined in the Investment Company Act of 1940), all investment policies
described below may be changed by the Funds' Board of Trustees without
shareholder approval.
SMALLER CAPITALIZATION COMPANIES. The Funds may invest a substantial
portion of their assets in companies with modest capitalization, as well as
start-up companies. While the Adviser believes that small- and medium-sized
companies as well as start-up companies can at times provide greater growth
potential than larger, more mature companies, investing in the securities of
these companies also involves greater risk, potential price volatility and cost.
These companies often involve higher risks because they lack the management
experience, financial resources, product diversification, markets, distribution
channels and competitive strengths of larger companies. In addition, in many
instances, the frequency and volume of their trading is substantially less than
is typical of larger companies. Therefore, the securities of smaller companies
as well as start-up companies may be subject to wider price fluctuations. The
spreads between the bid and asked prices of the securities of these companies in
the U.S. over-the-counter and other markets typically are larger than the
spreads for more actively traded securities. As a result, a Fund could incur a
loss if it determined to sell such a security shortly after its acquisition.
When making large sales, a Fund may have to sell portfolio holdings at discounts
from quoted prices or may have to make a series of small sales over an extended
period of time due to the trading volume of smaller company securities.
Investors should be aware that, based on the foregoing factors, to the
extent a Fund invests a significant portion of its assets in the securities of
smaller companies, an investment in the Fund may be subject to greater price
fluctuations than if it invested primarily in larger, more established
companies.
UNITED STATES GOVERNMENT OBLIGATIONS. The Funds may invest in Treasury
securities which differ only in their interest rates, maturities and times of
issuance. Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds generally
have initial maturities of greater than ten years.
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Obligations issued or guaranteed by U.S. Government agencies and
instrumentalities are supported by any of the following: (a) the full faith and
credit of the U.S. Treasury (for example, Ginnie Mae Certificates); (b) the
right of the issuer to borrow from the Treasury (such as obligations of the
Federal Home Loan Banks); (c) the discretionary authority of the U.S. Government
to purchase certain obligations of the agency or instrumentality (such as those
issued by Fannie Mae); and (d) only the credit of the agency or instrumentality
itself (such as those issued by the Student Loan Marketing Association). While
the U.S. Government provides financial support to such U.S. Government-sponsored
agencies or instrumentalities, no assurance can be given that it will always do
so because it is not so obligated.
MONEY MARKET INSTRUMENTS. The Funds may invest in a variety of money market
instruments for temporary defensive purposes, pending investment in other types
of securities, to meet anticipated redemption requests and/or to retain the
flexibility to respond promptly to changes in market and economic conditions.
Commercial paper represents short-term unsecured promissory notes issued in
bearer form by banks or bank holding companies, corporations and finance
companies. Certificates of deposit are generally negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning, in effect, that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Fixed time deposits are bank obligations payable at a stated maturity date and
bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand
by the investor, but may also be subject to early withdrawal penalties that vary
depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial
interest in a fixed time deposit to a third party, although there is no market
for such deposits. Bank notes and bankers' acceptances rank junior to deposit
liabilities of the bank and pari passu with other senior, unsecured obligations
of the bank. Bank notes are classified as "other borrowings" on a bank's balance
sheet, while deposit notes and certificates of deposit are classified as
deposits. Bank notes are not insured by the Federal Deposit Insurance
Corporation or any other insurer. Deposit notes are insured by the Federal
Deposit Insurance Corporation only to the extent of $100,000 per depositor per
bank.
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REPURCHASE AGREEMENTS. The Funds may agree to purchase portfolio securities
from financial institutions subject to the seller's agreement to repurchase them
at a mutually agreed upon date and price ("repurchase agreements"). Although the
securities subject to a repurchase agreement may bear maturities exceeding one
year, settlement for the repurchase agreement will never be more than one year
after a Fund's acquisition of the securities and normally will be within a
shorter period of time. Securities subject to repurchase agreements are held
either by the Funds' custodian or subcustodian (if any), or in the Federal
Reserve/Treasury Book-Entry System. The seller under a repurchase agreement will
be required to maintain the value of the securities subject to the agreement in
an amount exceeding the repurchase price (including accrued interest).
Repurchase agreements may be considered loans to the seller, collateralized by
the underlying securities. The risk to a Fund is limited by the ability of the
seller to pay the agreed upon sum on the repurchase date; in the event of
default, the repurchase agreement provides that the Fund is entitled to sell the
underlying collateral. If the value of the collateral declines after the
agreement is entered into, however, and if the seller defaults under a
repurchase agreement when the value of the underlying collateral is less than
the repurchase price, the Fund could incur a loss of both principal and
interest. The Adviser monitors the value of the collateral at the time the
agreement is entered into and at all times during the term of the repurchase
agreement in an effort to determine that the value of the collateral always
equals or exceeds the agreed-upon repurchase price to be paid to the Fund.
FIXED-INCOME SECURITIES. In order to reduce the risk of non-payment of
principal or interest on these securities, fixed-income securities purchased by
the Funds will be limited to investment grade fixed-income securities.
Investment grade securities are those securities which, at the time of purchase,
are rated within the four highest rating categories by Moody's Investors
Service, Inc. ("Moody's") (Baa or higher), Standard & Poor's Corporation ("S&P")
(BBB or higher), or other nationally recognized securities rating organizations,
or securities which are unrated but deemed by the Adviser to be comparable in
quality to instruments that are so rated. Obligations rated in the lowest of the
top four ratings, though considered investment grade, are considered to have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher rated securities. Subsequent
to its purchase by a Fund, a rated security may cease to be rated or its rating
may be reduced below the minimum rating required for purchase by the Fund. The
Adviser will consider such an event in determining whether the Fund should
continue to hold the security, but such an event will not require the Fund to
dispose of the security.
ASSET-BACKED SECURITIES. Each Fund may purchase up to 5% of its net assets
in asset-backed securities, which are securities backed by mortgages,
installment contracts, credit card receivables or other assets. Asset-backed
securities represent interests in "pools" of assets in which payments of both
interest and principal on the securities are made monthly, thus in effect
"passing through" monthly payments made by the individual borrowers on the
assets that underlie the securities, net of any fees paid to the issuer or
guarantor of the securities. The average life of asset-backed securities varies
with the maturities of the underlying instruments, and the average life of a
mortgage-backed instrument, in particular, is likely to be substantially less
than the original maturity of the mortgage pools underlying the securities as a
result of mortgage pre-payments. For this and other reasons, an asset-backed
security's stated maturity may be shortened, and the security's total return may
be difficult to predict precisely. Asset-backed securities acquired by the Funds
may include collateralized mortgage obligations ("CMOs") issued by private
companies.
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The Funds may acquire several types of mortgage-backed securities,
including guaranteed mortgage pass-through certificates, which provide the
holder with a pro rata interest in the underlying mortgages, and CMOs, which
provide the holder with a specified interest in the cash flow of a pool of
underlying mortgages. Issuers of CMOs ordinarily elect to be taxed as
pass-through entities known as real estate mortgage investment conduits
("REMICs"). CMOs are issued in multiple classes, each with a specified fixed or
floating interest rate and a final distribution date. The relative payment
rights of the various CMO classes may be structured in a variety of ways. The
Funds will not purchase "residual" CMO interests, which normally exhibit greater
price volatility.
There are a number of important differences among the agencies and
instrumentalities of the U.S. government that issue mortgage-related securities
and among the securities that they issue. Mortgage-related securities guaranteed
by the GNMA include GNMA Mortgage Pass-Through Certificates (also known as
"Ginnie Maes"), which are guaranteed as to the timely payment of principal and
interest by GNMA and backed by the full faith and credit of the United States.
GNMA is a wholly-owned U.S. government corporation within the Department of
Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-backed securities issued by the FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as "Fannie Maes"),
which are solely the obligations of the FNMA and are not backed by or entitled
to the full faith and credit of the United States, but are supported by the
discretionary authority of the U.S. Treasury to provide certain credit support.
FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of the principal
and interest by FNMA. Mortgage-related securities issued by the FHLMC include
FHLMC Mortgage Participation Certificates (also known as "Freddie Macs" or
"PCS"). FHLMC is a corporate instrumentality of the United States, created
pursuant to an Act of Congress, which is owned entirely by Federal Home Loan
Banks. Freddie Macs are not guaranteed and do not constitute a debt or
obligation of the United States or any Federal Home Loan Bank. Freddie Macs
entitle the holder to timely payment of interest, which is guaranteed by FHLMC.
FHLMC guarantees either ultimate collection or timely payment of all principal
payments on the underlying mortgage loans. When FHLMC does not guarantee timely
payment of principal, FHLMC may remit the amount due on account of its guarantee
of ultimate payment of principal at any time after default on an underlying
mortgage, but in no event later than one year after it becomes payable.
Non-mortgage asset-backed securities involve certain risks that are not
presented by mortgage-backed securities. Primarily, these securities do not have
the benefit of the same security interest in the underlying collateral. Credit
card receivables are generally unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, many of which
have given debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issuers of automobile receivables
permit the servicers to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is a risk that
the purchaser would acquire an interest superior to that of the holders of the
related automobile receivables. In addition, because of the large number of
vehicles involved in a typical issuance and technical requirements under state
laws, the trustee for the holders of the automobile receivables may not have an
effective security interest in all of the obligations backing such receivables.
Therefore, there is a possibility that recoveries on repossessed collateral may
not, in some cases, be able to support payments on these securities.
The yield characteristics of asset-backed securities differ from
traditional debt securities. A major difference is that the principal amount of
the obligations may be prepaid at any time because the underlying assets (I.E.,
loans) generally may be prepaid at any time. As a result, if an asset-backed
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security is purchased at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if an asset-backed security is purchased at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
decrease, yield to maturity. In calculating the average weighted maturity of a
Fund, the maturity of asset-backed securities will be based on estimates of
average life.
Prepayments on asset-backed securities generally increase with falling
interest rates and decrease with rising interest rates; furthermore, prepayment
rates are influenced by a variety of economic and social factors. In general,
the collateral supporting non-mortgage asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. Like other fixed income securities, when interest rates rise, the
value of an asset-backed security generally will decline; however, when interest
rates decline, the value of an asset-backed security with prepayment features
may not increase as much as that of other fixed income securities.
ZERO-COUPON, STEP-COUPON AND PAY-IN-KIND SECURITIES. The Funds may invest
in zero-coupon, step-coupon, and pay-in-kind securities. These securities are
debt securities that do not make regular interest payments. Zero-coupon and
step-coupon securities are sold at a deep discount to their face value.
Pay-in-kind securities pay interest through the issuance of additional
securities. Because these securities do not pay current income, the price of
these securities can be volatile when interest rates fluctuate. While these
securities do not pay current cash income, federal income tax law requires the
holders of taxable zero-coupon, step-coupon, and certain pay-in-kind securities
to report as interest each year the portion of the original issue discount (or
deemed discount) on such securities accruing that year. In order to qualify as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), a Fund may be required to distribute a portion of such
discount and may be required to dispose of other portfolio securities, which may
occur in periods of adverse market prices, in order to generate cash to meet
these distribution requirements.
YIELDS AND RATINGS. The yields on certain obligations, including the money
market instruments in which the Funds may invest, are dependent on a variety of
factors, including general economic conditions, conditions in the particular
market for the obligation, financial condition of the issuer, size of the
offering, maturity of the obligation and ratings of the issue. The ratings of
S&P, Moody's, and other rating agencies represent their respective opinions as
to the quality of the obligations they undertake to rate. Ratings, however, are
general and are not absolute standards of quality. Consequently, obligations
with the same rating, maturity and interest rate may have different market
prices.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities (I.E., securities that cannot be disposed of within seven
days in the normal course of business at approximately the amount at which the
Fund has valued the securities). The Board of Trustees or its delegate has the
ultimate authority to determine which securities are liquid or illiquid for
purposes of this limitation. Certain securities exempt from registration or
issued in transactions exempt from registration ("restricted securities") under
the Securities Act of 1933, as amended ("Securities Act"), that may be resold
pursuant to Rule 144A or Regulation S under the Securities Act, may be
considered liquid. The Trustees have delegated to the Adviser the day-to-day
determination of the liquidity of a security, although it has retained oversight
and ultimate responsibility for such determinations. Certain securities are
deemed illiquid by the Securities and Exchange Commission including repurchase
agreements maturing in greater than seven days and options not listed on a
securities exchange or not issued by the Options Clearing Corporation. These
securities will be treated as illiquid and subject to each Fund's limitation on
illiquid securities.
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Restricted securities may be sold in privately negotiated or other exempt
transactions, qualified non-U.S. transactions, such as under Regulation S, or in
a public offering with respect to which a registration statement is in effect
under the Securities Act. Where registration is required, a Fund may be
obligated to pay all or part of the registration expenses and a considerable
time may elapse between the decision to sell and the sale date. If, during such
period, adverse market conditions were to develop, a Fund might obtain a less
favorable price than prevailed when it decided to sell. Restricted securities
will be priced at fair value as determined in good faith by the Trustees.
If through the appreciation of illiquid securities or the depreciation of
liquid securities, more than 15% of the value of a Fund's net assets are
invested in illiquid assets, including restricted securities which are not
readily marketable, the Fund will take such steps as it deems advisable, if any,
to reduce the percentage of such securities to 15% or less of the value of its
net assets.
WARRANTS. The Funds may purchase warrants and similar rights, which are
privileges issued by a corporation enabling the owners to subscribe to and
purchase a specified number of shares of the corporation at a specified price
during a specific period of time. The purchase of warrants involves the risk
that a Fund could lose the purchase price of a warrant if the right to subscribe
to additional shares is not exercised prior to the warrant's expiration. Also,
the purchase of warrants involves the risk that the effective price paid for the
warrant added to the subscription price of the related security may exceed the
value of the subscribed security's market price such as when there is no
movement in the level of the underlying security. No Fund will invest more than
5% of its net assets, taken at market value, in warrants. Warrants attached to
other securities acquired by a Fund are not subject to this restriction.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY
TRANSACTIONS. The Funds may purchase securities on a when-issued basis or
purchase or sell securities on a forward commitment (sometimes called
delayed-delivery) basis. These transactions involve a commitment by the Fund to
purchase or sell securities at a future date. The price of the underlying
securities and the date when the securities will be delivered and paid for (the
settlement date) are fixed when the transaction is negotiated. When-issued
purchases and forward commitment transactions are normally negotiated directly
with the other party. The Funds will purchase securities on a when-issued basis
or sell securities on a forward commitment basis only with the intention of
completing the transaction and actually purchasing or selling the securities. If
deemed advisable as a matter of investment strategy, however, a Fund may dispose
of or renegotiate a commitment after entering into it. A Fund also may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date.
When a Fund purchases securities on a when-issued, delayed-delivery or
forward commitment basis, the Fund's custodian or subcustodian will designate
liquid assets having a value (determined daily) at least equal to the amount of
the Fund's purchase commitments.
HEDGING STRATEGIES. The Funds may use various options transactions for the
purpose of hedging or earning additional income. There can be no assurance that
such efforts will succeed. The Funds may write (I.E., sell) call and put
options, and buy put or call options. These options may relate to particular
securities or stock or bond indexes and may or may not be listed on a securities
exchange and may or may not be issued by the Options Clearing Corporation. No
Fund will purchase put and call options where the aggregate premiums on its
outstanding options exceed 5% of its net assets at the time of purchase, and
will not write options on more than 25% of the value of its net assets (measured
at the time an option is written).
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Hedging instruments on securities generally are used to hedge against price
movements in one or more particular securities positions that a Fund owns or
intends to acquire. Hedging instruments on stock indices, in contrast, generally
are used to hedge against price movements in broad equity market sectors in
which a Fund has invested or expects to invest. The use of hedging instruments
is subject to applicable regulations of the Securities and Exchange Commission,
the several options exchanges upon which they are traded and various state
regulatory authorities. In addition, a Fund's ability to use hedging instruments
may be limited by tax considerations.
GENERAL. The Funds may purchase and write (I.E., sell) put and call
options. Such options may relate to particular securities or securities indices,
and may or may not be listed on a domestic or foreign securities exchange and
may or may not be issued by the Options Clearing Corporation. Options trading is
a highly specialized activity that entails greater than ordinary investment
risk. Options may be more volatile than the underlying instruments, and
therefore, on a percentage basis, an investment in options may be subject to
greater fluctuation than an investment in the underlying instruments themselves.
A call option for a particular security gives the purchaser of the option
the right to buy, and the writer (seller) the obligation to sell, the underlying
security at the stated exercise price at any time (or, in some cases, on certain
specified dates) prior to the expiration of the option, regardless of the market
price of the security. A put option for a particular security gives the
purchaser the right to sell the security at the stated exercise price at any
time prior to the expiration date of the option, regardless of the market price
of the security. The premium paid to the writer represents consideration for
undertaking the obligation under the option contract.
Securities index options are put options and call options on various
securities indexes. In most respects, they are identical to listed options on
common stocks or bonds. The primary difference between securities options and
index options occurs when index options are exercised. In the case of securities
options, the underlying security, is delivered. However, upon the exercise of an
index option, settlement does not occur by delivery of the securities comprising
the index. The option holder who exercises the index option receives an amount
of cash if the closing level of the securities index upon which the option is
based is greater than, in the case of a call, or less than, in the case of a
put, the exercise price of the option. This amount of cash is equal to the
difference between the closing price of the securities index and the exercise
price of the option expressed in dollars times a specified multiple. A
securities index fluctuates with changes in the market value of the stocks
included in the index. For example, some stock index options are based on a
broad market index, such as the Standard & Poor's 500 or the Value Line
Composite Index, or a narrower market index, such as the Standard & Poor's 100.
Indexes may also be based on an industry or market segment, such as the AMEX Oil
and Gas Index or the Computer and Business Equipment Index. Options on
securities indexes are currently traded on the following exchanges: the Chicago
Board Options Exchange, the New York Stock Exchange, the American Stock
Exchange, the Pacific Stock Exchange, and the Philadelphia Stock Exchange.
A Fund's obligation to sell an instrument subject to a call option written
by it, or to purchase an instrument subject to a put option written by it, may
be terminated prior to the expiration date of the option by the Fund's execution
of a closing purchase transaction, which is effected by purchasing on an
exchange an option of the same series (I.E., same underlying instrument,
exercise price and expiration date) as the option previously written. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying instrument from being called, to
permit the sale of the underlying instrument or to permit the writing of a new
option containing different terms on such underlying instrument. The cost of
such a liquidation purchase plus transaction costs may be greater than the
premium received upon the original option, in which event a Fund will have
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incurred a loss in the transaction. There is no assurance that a liquid
secondary market will exist for any particular option. An option writer, unable
to effect a closing purchase transaction, will not be able to sell the
underlying instrument or liquidate the assets held as collateral until the
option expires or the optioned instrument is delivered upon exercise with the
result that the writer in such circumstances will be subject to the risk of
market decline or appreciation in the instrument during such period.
If an option purchased by a Fund expires unexercised, the Fund realizes a
loss equal to the premium paid. If a Fund enters into a closing sale transaction
on an option purchased by it, the Fund will realize a gain if the premium
received by the Fund on the closing transaction is more than the premium paid to
purchase the option, or a loss if it is less. If an option written by a Fund
expires on the stipulated expiration date or if a Fund enters into a closing
purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold).
If an option written by a Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
CERTAIN RISKS REGARDING OPTIONS. There are a number of special risks
associated with transactions in options. For example, there are significant
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction to not
achieve its objectives. In addition, a liquid secondary market for particular
options, whether traded over-the-counter or on an exchange, may be absent for
various reasons, including: there may be insufficient trading interest in
certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options or underlying securities or currencies; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more exchanges could, for economic or
other reasons, decide or be compelled to discontinue the trading of options (or
a particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by the Options Clearing
Corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
Successful use by a Fund of options on stock indexes will be subject to the
ability of the Adviser to correctly predict movements in the directions of the
stock market. This requires different skills and techniques than predicting
changes in the prices of individual securities. In addition, a Fund's ability to
effectively hedge all or a portion of the securities in its portfolio, in
anticipation of or during a market decline, through transactions in put options
on stock indexes, depends on the degree to which price movements in the
underlying index correlate with the price movements of the securities held by
the Fund. Because the Funds' securities will not duplicate the components of an
index, the correlation will not be perfect. Consequently, a Fund will bear the
risk that the prices of its securities being hedged will not move in the same
amount as the prices of its put options on the stock indexes. It is also
possible that there may be a negative correlation between the index and a Fund's
securities which would result in a loss on both such securities and the options
on securities indexes acquired by the Fund.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the options markets. The purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. The purchase of securities
index options involves the risk that the premium and transaction costs paid by a
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Fund in purchasing an option will be lost as a result of unanticipated movements
in prices of the securities comprising the securities index on which the option
is based.
There is no assurance that a liquid secondary market on an options exchange
will exist for any particular option, or at any particular time, and for some
options no secondary market on an exchange or elsewhere may exist. If a Fund is
unable to close out a call option on securities that it has written before the
option is exercised, the Fund may be required to purchase the optioned
securities in order to satisfy its obligation under the option to deliver such
securities. If a Fund is unable to effect a closing sale transaction with
respect to options on securities that it has purchased, it would have to
exercise the option in order to realize any profit and would incur transaction
costs upon the purchase and sale of the underlying securities.
COVER FOR OPTIONS POSITIONS. Transactions using options (other than options
that a Fund has purchased) expose a Fund to an obligation to another party. No
Fund will enter into any such transactions unless it owns either (1) an
offsetting ("covered") position in securities or other options or (2) cash,
receivables and short-term debt securities with a value sufficient at all times
to cover its potential obligations not covered as provided in (1) above. The
Funds will comply with Securities and Exchange Commission guidelines regarding
cover for these instruments and, if the guidelines so require, designate liquid
assets with their Custodian in the prescribed amount. Under current SEC
guidelines, a Fund will segregate assets to cover transactions in which the Fund
writes or sells options.
Assets used as cover or held in a segregated account cannot be sold while
the position in the corresponding option is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a Fund's
assets to cover or in segregated accounts could impede portfolio management or
the Fund's ability to meet redemption requests or other current obligations.
INVESTMENT COMPANIES. Each Fund intends to limit its investments in
securities issued by other investment companies so that, as determined
immediately after a purchase of such securities is made: (a) not more than 5% of
the value of the Fund's total assets will be invested in the securities of any
one investment company; (b) not more than 10% of the value of its total assets
will be invested in the aggregate in securities of investment companies as a
group; and (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund or by the Trust as a whole.
CALCULATION OF PORTFOLIO TURNOVER RATE. The portfolio turnover rate for
each Fund is calculated by dividing the lesser of purchases or sales of
portfolio investments for the reporting period by the monthly average value of
the portfolio investments owned during the reporting period. The calculation
excludes all securities, including options, whose maturities or expiration dates
at the time of acquisition are one year or less. Portfolio turnover may vary
greatly from year to year as well as within a particular year, and may be
affected by cash requirements for redemption of shares and by requirements which
enable a Fund to receive favorable tax treatment. The Funds are not restricted
by policy with regard to portfolio turnover and will make changes in its
investment portfolio from time to time as business and economic conditions as
well as market prices may dictate. It is anticipated the portfolio turnover rate
for each Fund will generally not exceed 100%. However, this should not be
considered as a limiting factor.
11
<PAGE>
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions consistent with its
investment objective. The following restrictions supplement those set forth in
the Prospectus. Unless otherwise noted, whenever an investment restriction
states a maximum percentage of a Fund's assets that may be invested in any
security or other asset, such percentage restriction will be determined
immediately after and as a result of the Fund's acquisition of such security or
other asset. Accordingly, any subsequent change in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with a Fund's investment limitations except with respect to the Fund's
restrictions on borrowings as set forth in fundamental restriction 7 below.
No Fund's fundamental restrictions can be changed without the approval of
the holders of the lesser of: (i) 67% of the Fund's shares present or
represented at a shareholders meeting at which the holders of more than 50% of
such shares are present or represented; or (ii) more than 50% of the outstanding
shares of the Fund.
THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT RESTRICTIONS.
No Fund may:
1. Issue senior securities, except as permitted under the Investment
Company Act of 1940 (the "1940 Act"); provided, however, the Fund may
engage in transactions involving options, futures and options on
futures contracts.
2. Lend money or securities (except by purchasing debt securities or
entering into repurchase agreements or lending portfolio securities).
3. With respect to 75% of its total assets, purchase (a) the securities
of any issuer (except securities of the U.S. government or any agency
or instrumentality thereof), if such purchase would cause more than 5%
of the value of the Fund's total assets to be invested in securities
of any one issuer or (b) the securities of any issuer if such purchase
would cause the Fund to own more than 10% of the outstanding voting
securities of any one issuer.
4. Purchase the securities of any issuer if, as a result, 25% or more of
the value of its total assets, determined at the time an investment is
made, exclusive of U.S. government securities, are in securities
issued by companies primarily engaged in the same industry.
5. Act as an underwriter or distributor of securities other than shares
of the Fund except to the extent that the Fund's participation as part
of a group in bidding or by bidding alone, for the purchase of
permissible investments directly from an issuer or selling
shareholders for the Fund's own portfolio may be deemed to be an
underwriting, and except to the extent that the Fund may be deemed an
underwriter under the Securities Act by virtue of disposing of
portfolio securities.
6. Purchase or sell real estate (but this shall not prevent the Fund from
investing in securities that are backed by real estate or issued by
companies that invest or deal in real estate or in participation
interests in pools of real estate mortgage loans exclusive of
investments in real estate limited partnerships).
12
<PAGE>
7. Borrow money, except that the Fund may borrow money from a bank for
temporary or emergency purposes (not for leveraging) in an amount not
exceeding 33-1/3% of the value of its total assets (including the
amount borrowed) less liabilities (other than borrowings). Any
borrowings that exceed 33-1/3% of the Fund's total assets by reason of
a decline in net asset value will be reduced within three business
days to the extent necessary to comply with the 33-1/3% limitation.
Transactions involving options, futures and options on futures, will
not be deemed to be borrowings if properly covered by designated
liquid assets where appropriate.
8. Purchase or sell physical commodities or commodities contracts unless
acquired as a result of ownership of securities or other instruments
(but this shall not prevent the Fund from engaging in transactions
involving foreign currencies, futures contracts, options on futures
contracts or options, or from investing in securities or other
instruments backed by physical commodities).
THE FOLLOWING INVESTMENT RESTRICTIONS ARE NOT FUNDAMENTAL, AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
No Fund may:
1. Purchase securities of other investment companies except to the extent
permitted by the 1940 Act and the rules and regulations thereunder.
2. Make investments for the purpose of exercising control or management
of any company except that the Fund or its agent may vote portfolio
securities in their discretion.
3. Acquire illiquid securities if, as a result of such investments, more
than 15% of the Fund's net assets (taken at market value at the time
of each investment) would be invested in illiquid securities.
4. Purchase securities on margin (except to obtain such short-term
credits as are necessary for the clearance of purchases and sales of
securities) or participate in a joint trading account; provided,
however, the Fund may (i) purchase or sell futures contracts and
options thereon, (ii) make initial and variation margin payments in
connection with purchases or sales of futures contracts or options on
futures contracts, (iii) write or invest in put or call options on
securities and indexes, and (iv) engage in foreign currency
transactions. (The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Adviser to save brokerage costs or average prices
among them is not deemed to result in a joint securities trading
account.)
5. Borrow money except for temporary bank borrowings (not in excess of 5%
of the value of its total assets) for emergency or extraordinary
purposes, or engage in reverse repurchase agreements, or pledge any of
its assets except to secure borrowings and only to an extent not
greater than 10% of the value of the Fund's net assets; provided,
however, the Fund may engage in transactions involving options. The
Fund will not purchase any security while borrowings representing more
than 5% of its total assets are outstanding.
13
<PAGE>
In determining industry classification with respect to the Funds, the
Adviser intends to use the industry classification titles in the Standard
Industrial Classification Manual.
A guarantee of a security is not deemed to be a security issued by the
guarantor when the value of all securities issued and guaranteed by the
guarantor, and owned by a Fund, does not exceed 10% of the value of the Fund's
total assets.
ADDITIONAL TRUST INFORMATION
TRUSTEES AND OFFICERS. Information regarding the Board of Trustees and
officers of the Trust, including their principal business occupations during at
least the last five years, is set forth below. Each Trustee who is an
"interested person" of the Trust or the Adviser as defined in the 1940 Act, is
indicated by an asterisk. Except where otherwise indicated, each of the
individuals below has served in his or her present capacity with the Trust since
July 1996. The address of each of the officers and Trustees is c/o The Purisima
Funds, 13100 Skyline Blvd., Woodside, CA 94062-4547.
<TABLE>
<CAPTION>
Year Position(s) Held
Name Born with Trust Other Principal Occupation(s) During Past Five Years
- ---- ---- ---------------- ----------------------------------------------------
<S> <C> <C> <C>
Kenneth L. Fisher* 1950 President and Chief Executive Officer and majority shareholder of the
Trustee Adviser, and has served in such capacities since the
incorporation of the Adviser in 1986. Prior thereto, he
was the founder of Fisher Investments, a sole
proprietorship which commenced operations in 1978.
Sherrilyn A. Fisher 1949 Assistant Senior Vice President and Corporate Secretary of the
Secretary Adviser. Ms. Fisher has been employed by the Adviser
since 1984.
Pierson E. Clair III 1948 Trustee President and Chief Operating Officer of Brown & Haley
since 1998 (fine confectioners); Vice President of
Blummer Chocolate Company from 1980 to 1997, where he had
been employed since 1970. Director of Signature Foods,
Inc.
Bryan F. Morse 1952 Trustee Sole proprietor of Bryan F. Morse, RIA, a registered
investment adviser since 1990.
Grover T. Wickersham 1949 Trustee Attorney in private practice in Palo Alto, California.
Prior to entering private practice in June of 1981, served
as a Branch Chief of the Los Angeles Regional Office of the
U.S. Securities and Exchange Commission.
</TABLE>
- ----------
* "Interested person" of the Trust, as defined in the 1940 Act.
14
<PAGE>
The Trustees of the Trust who are officers of the Adviser receive no
remuneration from the Trust. Each of the other Trustees is paid a fee of $500
for each meeting attended and is reimbursed for the expenses of attending
meetings. The table below sets forth the compensation of the Trustees for the
fiscal year ended August 31, 1999. Mr. Fisher did not receive any Trustees fees.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Pension or Retirement Total
Aggregate Benefits Accrued As Estimated Annual Compensation from
Compensation Part of Benefits Company
Name from Company Company Expenses Upon Retirement Paid to Trustees
- ---- ------------ ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Mr. Fisher* $ 0 $0 $0 $ 0
Mr. Clair $2,000 $0 $0 $2,000
Mr. Morse $2,000 $0 $0 $2,000
Mr. Wickersham $2,000 $0 $0 $2,000
</TABLE>
PRINCIPAL SHAREHOLDERS. As of December 3, 1999, the officers and trustees
of the Trust owned, as a group, 1.18% of the Total Return Fund's outstanding
securities, 32.03% of the Pure American Fund's outstanding securities, and
29.51% of the Pure Foreign Fund's outstanding securities. To the best knowledge
of the Trust's officers, no shareholders owned 5% or more of the outstanding
shares of the Total Return Fund as of December 3, 1999. On December 3, 1999, the
following shareholders owned of record and beneficially, more than 5% of the
Pure American Fund and Pure Foreign Fund's outstanding shares. An asterisk (*)
denotes an account affiliated with the Fund's investment adviser, officers or
trustees:
PURE AMERICAN FUND PURE FOREIGN FUND
------------------ -----------------
% of % of
Name Shares Name Shares
- ------------------------------------ -------------------------------------
Kenneth Fisher* Kenneth Fisher*
Woodside, CA 94062 32.03% Woodside, CA 94062 29.51%
Roger Cain
Beth Cain Canada, Inc.
Garrett Park, MC 20896 15.24% Montreal, Canada 19.46%
Michael S. Posner
Judith D. Posner Gerald B. Mcleod
Sunnyvale, CA 94087 11.77% Spring Branch, TX 78070 10.73%
Kurt Stahel Arthur Samuel
Williamsport, PA 17703 5.52% Palm Desert, CA 92260 7.04%
Baton Rouge Surgical Group
Baton Rouge, LA 70809 6.27%
Martin Fink
Cliffside Park, NJ 07010 5.90%
Newman Revocable Trust
Walnut Creek, CA 94595 5.49%
15
<PAGE>
SERVICES PROVIDED TO THE FUNDS.
INVESTMENT ADVISER. The investment adviser to the Funds is Fisher
Investments, Inc. (the "Adviser"). Mr. Kenneth L. Fisher is the founder,
Chairman and Chief Executive Officer of the Adviser and is a majority
shareholder of the Adviser. As such, he controls the Adviser.
ADVISORY SERVICES FOR THE TOTAL RETURN FUND. Pursuant to the Investment
Management Agreement entered into between the Trust on behalf of the Total
Return Fund and the Adviser (the "Investment Management Agreement"), the Adviser
determines the composition of the Fund's portfolio, the nature and timing of the
changes to the Fund's portfolio, and the manner of implementing such changes
("Management Services"). Included as part of these Management Services the
Adviser also (a) provides the Total Return Fund with investment advice, research
and related services for the investment of its assets, subject to such
directions as it may receive from the Board of Trustees; (b) pays all of the
Trust's executive officers' salaries and executive expenses (if any); (c) pays
all expenses incurred in performing its investment advisory duties under the
Investment Management Agreement; and (d) furnishes the Fund with office space
and certain administrative services. The services of the Adviser or any
affiliate thereof are not deemed to be exclusive and the Adviser or any
affiliate thereof may provide similar services to other series of the Trust,
other investment companies and other clients, and may engage in other
activities. The Total Return Fund may reimburse the Adviser (on a cost recovery
basis only) for any services performed for the Fund by the Adviser outside of
its duties under the Investment Management Agreement.
The Investment Management Agreement is dated as of October 25, 1996, as
amended April 16, 1998. The Investment Management Agreement has an initial term
of two years from the Fund's commencement of operations and thereafter is
required to be approved annually by the Board of Trustees of the Trust or by
vote of a majority of the Fund's outstanding voting securities (as defined in
the 1940 Act). Each annual renewal must also be approved by the vote of a
majority of the Trustees who are not parties to the Investment Management
Agreement or interested persons of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Investment Management
Agreement was initially approved by the vote of a majority of the Trustees who
are not parties to the Investment Management Agreement or interested persons of
any such party on September 26, 1996 and by the initial shareholder of the Total
Return Fund on September 26, 1996. The Investment Management Agreement is
terminable with respect to the Fund without penalty on 60-days' written notice
by the Trustees, by vote of a majority of the Fund's outstanding voting
securities, or by the Adviser, and will terminate automatically if it is
assigned (as defined in the 1940 Act).
The Adviser is a party to an Operating Expenses Agreement with the Trust
and has agreed to reimburse the Fund to the extent aggregate annual operating
expenses exceed 1.50% per year. That agreement has a renewable rolling 10-year
term. Reimbursement of expenses in excess of the applicable limitation will be
paid to the Fund by reducing the Adviser's fee, subject to later adjustment. The
Adviser may from time to time voluntarily absorb expenses for the Fund in
addition to the reimbursement of expenses in excess of the foregoing.
The Investment Management Agreement permits the Adviser to seek
reimbursement of any reductions made to its management fee and payments made to
limit expenses which are the responsibility of the Fund within the three-year
period following such reduction, subject to approval by the Board of Trustees
and the Fund's ability to effect such reimbursement and remain in compliance
with applicable expense limitations. Any such management fee or expense
reimbursement will be accounted for as a contingent liability of the Fund and is
described in the notes to the financial statements of the Fund until such time
16
<PAGE>
as it appears that the Fund will be able to and is likely to effect such
reimbursement. At such time as it appears probable that the Fund is able to
effect such reimbursement, the amount of reimbursement that the Fund is able to
effect will be accrued as an expense of the Fund for that current period.
The organizational expenses of the Total Return Fund were advanced by the
Adviser and were reimbursed by the Fund. For the fiscal year ended August 31,
1999, the Advisory fees were $377,917 of which the Adviser waived $122,777. For
the fiscal year ended August 31, 1998, the Adviser waived its advisory fee of
$128,907 and reimbursed the Total Return Fund expenses in the amount of $28,375,
and for the fiscal year ended August 31, 1997, the Adviser waived its advisory
fee of $9,327 and reimbursed the Total Return Fund expenses in the amount of
$173,958.
The Investment Management Agreement provides that the Adviser shall not be
liable to the Total Return Fund or its shareholders for any error of judgment or
mistake of law or for anything other than willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties.
ADMINISTRATOR. Investment Company Administration, L.L.C. serves as the
Total Return Fund's Administrator. Pursuant to an administration agreement with
the Trust on behalf of the Fund, the Administrator supervises the overall
administration of the Trust and the Fund including, among other
responsibilities, the preparation and filing of all documents required for
compliance by the Trust or the Fund with applicable laws and regulations,
arranging for the maintenance of books and records of the Trust and the Fund,
and supervision of other organizations that provide services to the Fund.
Certain junior officers of the Trust and the Fund may be provided by the
Administrator. The Trust has agreed to pay the Administrator an annual fee equal
to 0.10% of the first $200 million of average daily net assets of the Fund,
0.05% of the next $300 million of such net assets, and 0.03% thereafter, subject
to a minimum annual fee of $40,000. For the fiscal year ended August 31, 1999,
the Administrator was paid $43,018.
CUSTODIAN, TRANSFER AGENT AND DIVIDEND PAYING AGENT. UMB Bank, N.A. (the
"Custodian") serves as the custodian and Countrywide Fund Services, Inc. (the
"Transfer Agent") serves as the transfer and dividend paying agent for the Total
Return Fund. Under the terms of the respective agreements, the Custodian is
responsible for the receipt and delivery of the Fund's securities and cash, and
Countrywide Fund Services, Inc. is responsible for processing purchase and
redemption requests for Fund shares as well as the recordkeeping of ownership of
the Fund's shares, payment of dividends as declared by the Trustees and the
issuance of confirmations of transactions and annual statements to shareholders.
The Custodian and the Transfer Agent do not exercise any supervisory functions
over the management of the Trust or the Fund or the purchase and sale of
securities.
MANAGEMENT SERVICES FOR THE AMERICAN FUND AND THE FOREIGN FUND. The Trust,
on behalf of the American Fund and the Foreign Fund, has entered into a
Comprehensive Management Agreement with the Adviser, dated September 29, 1998
(the "Comprehensive Management Agreement"). The fee payable to the Adviser by
each of these Funds under the Comprehensive Agreement is the only fee or expense
payable by the Fund for the ordinary services described below:
(a) The Adviser provides these Funds with all Management Services as
described above for the Total Return Fund.
(b) The Adviser provides these Funds with all administrative services,
primarily by retaining the Administrator to perform the same administrative
services for these Funds as the Administrator performs for the Total Return
Fund.
17
<PAGE>
(c) The Adviser provides these Funds with custody and transfer agency
services by retaining the Custodian and Transfer Agent to perform the same
services for these Funds as they perform for the Total Return Fund.
As compensation for its services, these Funds pay to the Adviser a monthly
management fee at the annual rate specified in the Prospectus.
The Comprehensive Management Agreement is dated as of September 29, 1998.
The Comprehensive Management Agreement has an initial term of two years from the
Funds' commencement of operations and thereafter is required to be approved
annually by the Board of Trustees of the Trust or by vote of a majority of the
Fund's outstanding voting securities (as defined in the 1940 Act). Each annual
renewal must also be approved by the vote of a majority of the Trustees who are
not parties to the Comprehensive Management Agreement or interested persons of
any such party, cast in person at a meeting called for the purpose of voting on
such approval. The Comprehensive Management Agreement was initially approved by
the vote of a majority of the Trustees who are not parties to the Investment
Management Agreement or interested persons of any such party on July 16, 1998
and by the initial shareholder of each Fund on September 29, 1998. The
Comprehensive Management Agreement is terminable with respect to a Fund without
penalty on 60-days' written notice by the Trustees, by vote of a majority of the
Fund's outstanding voting securities, or by the Adviser, and will terminate
automatically if it is assigned (as defined in the 1940 Act).
Because the fee paid to the Adviser under the Comprehensive Management
Agreement covers all services and operating expenses ordinarily incurred by a
Fund (other than brokerage commissions, dealer mark-ups, taxes, interest and
extraordinary items), the Adviser has not separately agreed to reimburse or
limit Fund expenses. The contractual fee paid to the Adviser effectively limits
Fund operating expenses. Under the Investment Management Agreement for the Total
Return Fund, the Adviser may recoup prior reductions or expense reimbursements
for three years if the Total Return Fund's expenses fall below the applicable
expense cap. The Comprehensive Management Agreement contains no provision for
the Adviser to recoup these amounts. Instead, the Adviser would continue to
receive its specified fee even if actual total fund operating expenses would be
less than the contractual rate. The Adviser may potentially earn greater profits
under the Comprehensive Management Agreement if assets of the Funds grow
sufficiently large to reduce actual operating expenses to less than the
Adviser's comprehensive fee. The Board of Trustees will consider the level of
profitability of the comprehensive fee in its decision to renew the
Comprehensive Management Agreement.
As with the Investment Management Agreement, the Adviser's services to
these Funds is not exclusive and the Adviser may provide similar services to
other investment companies and clients.
The Comprehensive Management Agreement provides that the Adviser shall not
be liable to these Funds or their shareholders for any error of judgment or
mistake of law or for anything other than willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations or duties.
Pure American Pure Foreign
Fiscal Year Ended August 31, 1999 Fund Fund
--------------------------------- ---- ----
Management Fee $9,268 $2,018
Waived Fees N/A N/A
18
<PAGE>
LEGAL COUNSEL. The validity of the shares offered by the Prospectus has
been passed on by Paul, Hastings, Janofsky & Walker LLP, 345 California Street,
San Francisco, California 94104.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP are the independent
accountants for the Funds. They are responsible for performing an audit of the
Funds' year-end financial statements as well as providing accounting and tax
advice to the management of the Trust. The financial statements incorporated by
reference in this Statement of Additional Information from the Annual Report
have been so included in reliance on the report of PricewaterhouseCoopers LLP
given on the authority of that firm as experts in auditing and accounting.
DISTRIBUTION OF SHARES
DISTRIBUTION AGREEMENT. First Fund Distributors, Inc. (the "Distributor")
an affiliate of the Administrator, serves as distributor of the Funds pursuant
to a Distribution Agreement with the Trust on behalf of each Fund (the
"Distribution Agreement"). Shares may also be sold by authorized dealers who
have entered into dealer agreements with the Distributor or the Trust. The
Distribution Agreement is dated as of July 10, 1997. The Agreement has been
renewed through July 10, 1999 and thereafter is required to be approved annually
by the Board of Trustees of the Trust or by vote of a majority each Fund's
outstanding voting securities (as defined in the 1940 Act). Each annual renewal
must also be approved by the vote of a majority of the Trustees who are not
parties to the Distribution Agreement or interested persons of any such party,
case in person at a meeting called for the purpose of voting on such approval.
The Agreement was approved by the vote of a majority of the Trustees who are not
parties to the Agreement or interested persons of any such party on July 16,
1998. The Agreement is terminable without penalty on 60-days' written notice by
the Trustees, by vote of a majority of a Fund's outstanding voting securities,
or by the Distributor, and will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
SERVICE AND DISTRIBUTION PLAN (RULE 12B-1 PLAN). As set forth in the
Prospectus, the Trust has adopted a Service and Distribution Plan (the "Plan")
pursuant to Rule 12b-1 under the 1940 Act. The Plan authorizes payments by the
Total Return Fund in connection with the distribution of its shares at an annual
rate, as determined from time to time by the Board of Trustees, of up to 0.25%
of the Fund's average daily net assets. The Plan does not apply to the American
Fund or the Foreign Fund. The Adviser would make any payments for distribution
of shares of these Funds out of the Adviser's own resources.
For the fiscal years ending August 31, 1999, 1998, and 1997, the Total
Return Fund paid $94,451, $32,227 and $2,332, respectively, in distribution
expenses to the Adviser, as distribution coordinator, for advertising, printing
and mailing of prospectuses to other than current shareholders and compensation
to sales personnel, pursuant to the Plan. The distribution fees during the
fiscal year ended August 31, 1999, were used to pay compensation to sales
personnel of $59,848, advertising and marketing related activities of $23,505
and for printing and mailing of prospectus to other than current shareholders of
$11,098.
The Plan was adopted in anticipation that the Fund would benefit from the
Plan through increased sales of shares of the Fund, thereby ultimately reducing
the Fund's expense ratio and providing an asset size that allows the Adviser
greater flexibility in management. The 12b-1 Plan provides that it shall
continue in effect from year to year provided that a majority of the Board of
Trustees of the Trust, including a majority of the Rule 12b-1 Trustees, vote
19
<PAGE>
annually to continue the 12b-1 Plan. The Plan may be terminated at any time by a
vote of the Rule 12b-1 Trustees or by a vote of a majority of the outstanding
shares. Any change in the Plan that would materially increase the distribution
expenses of the Fund provided for in the Plan requires approval of the
shareholders and the Board of Trustees, including the Rule 12b-1 Trustees.
While the Plan is in effect, the selection and nomination of Trustees who
are not interested persons of the Trust will be committed to the discretion of
the Trustees of the Trust who are not interested persons of the Trust. The Board
of Trustees must review the amount and purposes of expenditures pursuant to the
Plan quarterly as reported to it by the officers of the Trust. All distribution
fees paid by the Total Return Fund under the 12b-1 Plan will be paid in
accordance with Rule 2830 of the Conduct Rules of the National Association of
Securities Dealers Regulation, Inc., as such Rules may change from time to time.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees, the Adviser is
primarily responsible for arranging the execution of the Funds' portfolio
transactions and the allocation of brokerage activities. In arranging such
transactions, the Adviser will seek to obtain best execution for the Funds,
taking into account such factors as price, size of order, difficulty of
execution, operational facilities of the firm involved, the firm's risk in
positioning a block of securities and research, market and statistical
information provided by such firm. While the Adviser generally seeks reasonable
competitive commission rates, the Funds will not necessarily always receive the
lowest commission available.
The Funds have no obligation to deal with any broker or group of brokers in
executing transactions in portfolio securities. Brokers who provide supplemental
research, market and statistical information to the Adviser may receive orders
for transactions by the Funds. The term "research, market and statistical
information" includes advice as to the value of securities, the advisability of
purchasing or selling securities, the availability of securities or purchasers
or sellers of securities, and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio
strategy, and the performance of accounts. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Adviser under the Investment Management Agreement and the expenses of the
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information. Such information may be useful to the Adviser in
providing services to clients other than the Funds, and not all such information
may be used by the Adviser in connection with the Funds. Conversely, such
information provided to the Adviser by brokers and dealers through whom other
clients of the Adviser in the future may effect securities transactions may be
useful to the Adviser in providing services to the Funds. To the extent the
Adviser receives valuable research, market and statistical information from a
broker-dealer, the Adviser intends to direct orders for Fund transactions to
that broker-dealer, subject to the foregoing policies, regulatory constraints,
and the ability of that broker-dealer to provide competitive prices and
commission rates. In accordance with the rules of the National Association of
Securities Dealers, Inc., the Funds may also direct brokerage to broker-dealers
who facilitate sales of the Funds' shares, subject to also obtaining best
execution as described above from such broker-dealer.
A portion of the securities in which the Funds may invest are traded in the
over-the-counter markets, and the Funds intend to deal directly with the dealers
who make markets in the securities involved, except as limited by applicable law
and in certain circumstances where better prices and execution are available
elsewhere. Securities traded through market makers may include markups or
markdowns, which are generally not determinable. Under the 1940 Act, persons
affiliated with the Funds are prohibited from dealing with the Funds as
principal in the purchase and sale of securities except after application for
20
<PAGE>
and receipt of an exemptive order from the Securities and Exchange Commission.
The 1940 Act restricts transactions involving the Funds and their "affiliates,"
including, among others, the Trust's Trustees, officers, and employees and the
Adviser, and any affiliates of such affiliates. Affiliated persons of the Funds
are permitted to serve as its broker in over-the-counter transactions conducted
on an agency basis only.
Investment decisions for the Funds are made independently from those of
accounts advised by the Adviser or its affiliates. However, the same security
may be held in the portfolios of more than one account. When two or more
accounts advised by the Adviser simultaneously engage in the purchase or sale of
the same security, the prices and amounts will be equitably allocated among each
account. In some cases, this procedure may adversely affect the price or
quantity of the security available to a particular account. In other cases,
however, an account's ability to participate in large volume transactions may
produce better executions and prices.
Total brokerage commissions paid by the Total Return Fund for the year
ended August 31, 1999 totaled $32,831, of which $30,975 (94%) was paid to firms
which provided research or other services to the Adviser. Total brokerage
commissions paid by the Total Return Fund for the year ended August 31, 1998
totaled $20,175, of which $14,319 (71%) was paid to firms which provided
research or other services to the Adviser. Total brokerage commissions paid by
the Total Return Fund for the period October 28, 1996 (inception) to August 31,
1997 totaled $2,341, of which $1,856 (79%) was paid to firms that provided
research or other services to the Adviser.
Total brokerage commissions paid by the Pure American Fund from its
inception date of September 29, 1998 through August 31, 1999 totaled $1,001, of
which $855 (85%) was paid to firms which provided research or other services to
the Adviser. Total brokerage commissions paid by the Pure Foreign Fund from its
inception date of September 29, 1998 through August 31, 1999 totaled $303, of
which $269 (89%) was paid to firms which provided research or other services to
the Adviser.
TAXES
GENERAL. Each Fund believes that it has qualified (or will qualify) for tax
treatment as regulated investment company ("RIC") under Subchapter M of the Code
for its fiscal year, and intends to be able to continue to so qualify. In order
to do so, a Fund must distribute to its shareholders for each taxable year at
least 90% of its investment company taxable income (consisting generally of net
investment income, net short-term capital gain and net gains from certain
foreign currency transactions) and must meet several additional requirements:
(1) the Fund must derive at least 90% of its gross income each taxable year from
dividends, interest, payments with respect to securities loans, and gains from
the sale or other disposition of securities or foreign currencies, or other
income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies; (2) at
the close of each quarter of the Fund's taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items (including
receivables), U.S. government securities, securities of other RICs, and other
securities, with these other securities limited, with respect to any one issuer,
to an amount that does not exceed 5% of the value of the Fund's total assets and
that does not represent more than 10% of the issuer's outstanding voting
securities; and (3) at the close of each quarter of the Fund's taxable year, not
more than 25% of the value of its total assets may be invested in securities
(other than U.S. government securities or the securities of other RICs) of any
one issuer.
Dividends and other distributions declared by the Funds in, and payable to
shareholders of record as of a date in, October, November or December of any
year will be deemed to have been paid by the Funds and received by the
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shareholders on December 31 of that year if the distributions are paid by the
Funds during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
The Funds may invest in securities of foreign issuers, forward contracts
and options. These investments involve complex rules to determine the character
and timing of recognition of income received in connection therewith by the
Funds.
Any gain or loss realized by a Fund upon the expiration or sale of options
held by it generally will be capital gain or loss. Expiration of a call option
written by a Fund will result in short-term capital gain. Any security, option,
or other position entered into or held by a Fund that substantially diminishes
its risk of loss from any other position held by the Fund may constitute a
"straddle" for federal income tax purposes. In general, straddles are subject to
certain rules that may affect the amount, character and timing of a Fund's gains
and losses with respect to straddle positions by requiring, among other things,
that the loss realized on disposition of one position of a straddle be deferred
until gain is realized on disposition of the offsetting position; the Fund's
holding period in certain straddle positions not begin until the straddle is
terminated (possibly resulting in the gain being treated as short-term capital
gain rather than long-term capital gain); and that losses recognized with
respect to certain straddle positions, which would otherwise constitute
short-term capital losses, be treated as long-term capital losses. Different
elections are available to a Fund that may mitigate the effects of the straddle
rules.
Certain options (including options on a broad-based index, such as the
Standard & Poor's 500 index) and forward contracts that are subject to Section
1256 of the Code ("Section 1256 Contracts") and that are held by a Fund at the
end of its taxable year generally will be required to be "marked to market" for
federal income tax purposes, that is, deemed to have been sold at market value.
Sixty percent of any net gain or loss recognized on these deemed sales and 60%
of any net gain or loss realized from any actual sales of Section 1256 Contracts
will be treated as long-term capital gain or loss, and the balance will be
treated as short-term gain or loss.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by the Fund. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency-denominated
payables and receivables and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60/40 rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of the Fund's
gain or loss on the sale or other disposition of securities of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than
capital gain or loss.
A portion of the dividends from a Fund's investment company taxable income
(whether paid in cash or reinvested in additional Fund shares) may be eligible
for the dividends-received deduction allowed to corporations. The eligible
portion may not exceed the aggregate dividends received by the Fund from U.S.
corporations. However, that portion of dividends received by a corporate
shareholder and deducted by it pursuant to the dividends-received deduction may
be subject to the alternative minimum tax. In addition, availability of the
deduction is subject to certain holding period and debt-financing limitations.
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All or a portion of a loss realized upon the sale or redemption of shares
of a Fund may be disallowed to the extent shares of the Fund are purchased
(including shares acquired by means of reinvested dividends) within 30 days
before or after such redemption. Investors also should be aware that if shares
are purchased shortly before the record date for any distribution, the
shareholder will pay full price for the shares and receive some portion of the
price back as a taxable dividend or capital gain distribution.
A Fund will be subject to a nondeductible 4% excise tax on net income to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on October 31 of that year, plus certain other amounts.
FOREIGN TAXES. Dividends and interest received by a Fund may be subject to
income, withholding, or other taxes imposed by foreign countries that would
reduce the yield on the Fund's portfolio securities. Tax conventions between
certain countries and the United States may reduce or eliminate these foreign
taxes, however, and many foreign countries do not impose taxes on capital gains
in respect of investments by foreign investors. If more than 50% of the value of
a Fund's total assets at the close of its taxable year consists of securities of
foreign corporations, the Fund will be eligible to, and may, file an election
with the Internal Revenue Service that will enable its shareholders, in effect,
to receive the benefit of the foreign tax credit with respect to any foreign
income taxes paid by it. Pursuant to the election, a Fund will treat those taxes
as dividends paid to its shareholders and each shareholder will be required to
(1) include in gross income, and treat as paid by him or her, his or her
proportionate share of those taxes, (2) treat his or her share of those taxes
and of any dividend paid by the Fund that represents income from foreign sources
as his or her own income from those sources, and (3) either deduct the taxes
deemed paid by him or her in computing his taxable income or, alternatively, use
the foregoing information in calculating the foreign tax credit against his or
her federal income tax. A Fund will report to its shareholders shortly after
each taxable year their respective shares of the Fund's income from sources
within, and taxes paid to, foreign countries if it makes this election.
PASSIVE FOREIGN INVESTMENT COMPANIES. If a Fund acquires stock in certain
non-U.S. corporations that receive at least 75% of their annual gross income
from passive sources (such as sources that produce interest, dividends, rental,
royalty or capital gain income) or hold at least 50% of their assets in such
passive sources ("passive foreign investment companies"), the Fund could be
subject to federal income tax and additional interest charges on "excess
distributions" received from such companies or gains from the sale of stock in
such companies, even if all income or gain actually received by the Fund is
timely distributed to its shareholders. The Fund would not be able to pass
through to its shareholders any credit or deduction for such tax. In some cases,
elections may be available that would ameliorate these adverse tax consequences,
but such elections would require the Fund to include certain amounts as income
or gain (subject to the distribution requirements described above) without a
concurrent receipt of cash and could result in the conversion of capital gain to
ordinary income. A Fund may limit its investments in passive foreign investment
companies or dispose of such investments if potential adverse tax consequences
are deemed material in particular situations. Because it is not always possible
to identify a foreign issuer as a passive foreign investment company in advance
of making the investment, a Fund may incur the tax in some instances.
NON-U.S. SHAREHOLDERS. Distributions of net investment income by the Fund
to a shareholder who, as to the United States, is a nonresident alien
individual, nonresident alien fiduciary of a trust or estate, foreign
corporation, or foreign partnership ("foreign shareholder") will be subject to
U.S. withholding tax at a rate of 30% (or lower treaty rate). Withholding will
not apply if a dividend paid by a Fund to a foreign shareholder is "effectively
connected with the conduct of a U.S. trade or business" and the foreign
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shareholder provides the Fund with the certification required by the IRS to that
effect, in which case the reporting and withholding requirements applicable to
domestic taxpayers will apply. Distributions of net capital gain to a foreign
shareholder generally are not subject to withholding.
The foregoing is a general and abbreviated summary of certain U.S. federal
income tax considerations affecting the Funds and their shareholders and is
based on current provisions of the Code and applicable Treasury Regulations,
which are subject to change (possibly on a retroactive basis). Investors are
urged to consult their own tax advisers for more detailed information and for
information regarding any foreign, state and local taxes applicable to
distributions received from the Funds.
The foregoing discussion and the related discussion in the Prospectus has
been prepared by the management of the Funds, and does not purport to be a
complete description of all tax implications of an investment in the Funds.
Paul, Hastings, Janofsky & Walker LLP, legal counsel to the Funds, has expressed
no opinion in respect thereof. Shareholders should consult their own advisers
concerning the application of federal, state and local tax to their particular
situations.
DESCRIPTION OF SHARES
The Trust Agreement permits the Board of Trustees to issue an unlimited
number of full and fractional shares of beneficial interest of one or more
separate series or classes representing interests in different investment
portfolios. The Trust may hereafter create series in addition to the Funds.
Under the terms of the Trust Agreement, each share of a Fund has a par value of
$0.01, represents a proportionate interest in the Fund with each other share of
its class and is entitled to such dividends and distributions out of the income
belonging to the Fund as are declared by the Trustees. Upon any liquidation of a
Fund, shareholders are entitled to share in the net assets of the Fund available
for distribution. Shares do not have any preemptive or conversion rights. The
right of redemption is described in the Prospectus. Pursuant to the terms of the
1940 Act, the right of a shareholder to redeem shares and the date of payment by
a Fund may be suspended for more than seven days (a) for any period during which
the New York Stock Exchange is closed, other than the customary weekends or
holidays, or trading in the markets the Fund normally utilizes is closed or is
restricted as determined by the Securities and Exchange Commission, (b) during
any emergency, as determined by the Securities and Exchange Commission, as a
result of which it is not reasonably practicable for the Fund to dispose of
instruments owned by it or fairly to determine the value of its net assets, or
(c) for such other period as the Securities and Exchange Commission may by order
permit for the protection of the shareholders of the Fund. The Trust may also
suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions. In addition, the Trust reserves
the right to adopt, by action of the Trustees, a policy pursuant to which it
may, without shareholder approval, redeem all of a shareholder's shares (a) if
such shares have an aggregate value below a designated amount, (b) to the extent
that such shareholder owns shares equal to or in excess of a percentage of the
outstanding shares determined from time to time by the Trustees, (c) to the
extent that such shareholder owns shares equal to or in excess of a percentage,
determined from time to time by the Trustees, of the outstanding shares of the
Trust, or (d) if the Trustees determine that it is not practical, efficient or
advisable to continue the operation of a Fund and that any applicable
requirements of the 1940 Act have been met. Shares when issued as described in
the Prospectus are validly issued, fully paid and nonassessable.
If additional funds are created, the proceeds received by each fund for
each issue or sale of its shares, and all net investment income, realized and
unrealized gain and proceeds thereof, subject only to the rights of creditors,
will be specifically allocated to and constitute the underlying assets of that
fund. The underlying assets of each fund will be segregated on the books of
accounts, and will be charged with the liabilities in respect to that fund and
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with a share of the general liabilities of the Trust. Expenses with respect to
the portfolios of the Trust will normally be allocated in proportion to the net
asset value of the respective portfolios except where allocations of direct
expenses can otherwise be fairly made.
Rule 18f-2 under the 1940 Act provides that any matter required by the
provisions of the 1940 Act or applicable state law, or otherwise, to be
submitted to the holders of the outstanding voting securities of an investment
company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each investment portfolio affected by such matter. Rule 18f-2 further provides
that an investment portfolio shall be deemed to be affected by a matter unless
the interest of each investment portfolio in the matter are substantially
identical or the matter does not affect any interest of the investment
portfolio. Under the Rule, the approval of an investment advisory agreement, a
distribution plan subject to Rule 12b-1 under the 1940 Act or any change in a
fundamental investment policy would be effectively acted upon with respect to an
investment portfolio only if approved by a majority of the outstanding shares of
such investment portfolio. However, Rule 18f-2 also provides that the
ratification of the appointment of independent accountants, the approval of the
principal underwriting contracts and the election of Trustees may be effectively
acted upon by shareholders of the Trust voting together in the aggregate without
regard to a particular investment portfolio.
The term "majority of the outstanding shares" of either the Trust or a
particular fund or investment portfolio means the vote of the lesser of (i) 67%
or more of the shares of the Trust or such fund or portfolio present at a
meeting, if the holders of more than 50% of the outstanding shares of the Trust
or such fund or portfolio are present or represented by proxy, or (ii) more than
50% of the outstanding shares of the Trust or such fund or portfolio.
As a general matter, the Trust does not hold annual or other meetings of
shareholders. This is because the Trust Agreement provides for shareholders
voting only for the election or removal of one or more Trustees, if a meeting is
called for that purpose, and for certain other designated matters. Each Trustee
serves until the next meeting of shareholders, if any, called for the purpose of
considering the election or reelection of such Trustee or of a successor to such
Trustee, and until the election and qualification of his successor, if any,
elected at such meeting, or until such Trustee sooner dies, resigns, retires or
is removed by the holders of two-thirds of the shares.
Under Delaware law, shareholders of the Trust are not generally personally
liable for obligations of the Trust. The Delaware Business Trust Act provides
that a shareholder of a Delaware business trust shall be entitled to the same
limitation of liability extended to shareholders of private for-profit
corporations. However, no similar statutory or other authority limiting business
trust shareholder liability exists in many states. As a result, to the extent
that a Delaware business trust or a shareholder is subject to the jurisdiction
of courts in such other states, the courts may not apply Delaware law and may
thereby subject the Trust's shareholders to liability. To guard against this
risk, the Trust Agreement (i) contains an express disclaimer of shareholder
liability for acts or obligations of the Trust and will require that notice of
such disclaimer be given in each agreement, obligation and instrument entered
into or executed by the Trust or its Trustees and (ii) provides for
indemnification out of the property of the Trust of any shareholder held
personally liable for the obligations of the Trust. Thus, the risk of a Trust
shareholder incurring financial loss beyond his or her investment because of
shareholder liability is limited to circumstances in which all of the following
factors are present: (1) a court refused to apply Delaware law; (2) the
liability arose under tort law or, if not, no contractual limitation of
liability was in effect; and (3) the Trust itself would be unable to meet its
obligations.
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The Trust Agreement provides that each Trustee of the Trust will be liable
for his or her own willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustees
("disabling conduct"), and for nothing else, and will not be liable for errors
of judgment or mistakes of fact or law. The Trust Agreement provides further
that the Trust will indemnify Trustees and officers of the Trust against
liabilities and expenses incurred in connection with litigation and other
proceedings in which they may be involved (or with which they may be threatened)
by reason of their positions with the Trust, except that no Trustee or officer
will be indemnified against any liability to the Trust or its shareholders to
which he would otherwise be subject by reason of disabling conduct.
The Trust Agreement provides that each shareholder, by virtue of becoming
such, will be held to have expressly assented and agreed to the terms of the
Trust Agreement and to have become a party thereto.
The Trust Agreement also contains procedures for the removal of Trustees by
its shareholders. At any meeting of shareholders, duly called and at which a
quorum is present, the shareholders may, by the affirmative vote of the holders
of two-thirds of the votes entitled to be cast thereon, remove any Trustee or
Trustees from office and may elect a successor or successors to fill any
resulting vacancies for unexpired terms of removed Trustees.
Upon the written request of the holders of shares entitled to not less than
ten percent (10%) of all the votes entitled to be cast at such meeting, the
Secretary of the Trust shall promptly call a special meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee. Whenever ten
or more shareholders of record who have been such for at least six months
preceding the date of application, and who hold in the aggregate either shares
having a net asset value of at least $25,000 or at least one percent (1%) of the
total outstanding shares, whichever is less, shall apply to the Trust's
Secretary in writing, stating that they wish to communicate with other
shareholders with a view to obtaining signatures to submit a request for a
meeting as described above and accompanied by a form of communication and
request which they wish to transmit, the Secretary shall within five business
days after such application either: (1) afford to such applicants access to a
list of the names and addresses of all shareholders as recorded on the books of
the Trust; or (2) inform such applicants as to the approximate number of
shareholders of record and the approximate cost of mailing to them the proposed
communication and form of request.
If the Secretary elects to follow the course specified in clause (2) of the
last sentence of the preceding paragraph, the Secretary, upon the written
request of such applicants, accompanied by a tender of the material to be mailed
and of the reasonable expenses of mailing, shall, with reasonable promptness,
mail such material to all shareholders of record at their addresses as recorded
on the books unless within five business days after such tender the Secretary
shall mail to such applicants and file with the Securities and Exchange
Commission, together with a copy of the material to be mailed, a written
statement signed by at least a majority of the Board of Trustees to the effect
that in their opinion either such material contains untrue statements of fact or
omits to state facts necessary to make the statements contained therein not
misleading, or would be in violation of applicable law, and specifying the basis
of such opinion.
After opportunity for hearing upon the objections specified in the written
statement so filed, the Securities and Exchange Commission may, and if demanded
by the Board of Trustees or by such applicants shall, enter an order either
sustaining one or more of such objections or refusing to sustain any of them. If
the Securities and Exchange Commission shall enter an order refusing to sustain
any of such objections, or if, after the entry of an order sustaining one or
more of such objections, the Securities and Exchange Commission shall find,
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after notice and opportunity for hearing, that all objections so sustained have
been met, and shall enter an order so declaring, the Secretary shall mail copies
of such material of all shareholders with reasonable promptness after the entry
of such order and the renewal of such tender.
INDIVIDUAL RETIREMENT ACCOUNTS
Individuals who receive compensation or earned income, even if they are
active participants in a qualified retirement plan (or certain similar
retirement plans), may establish their own tax-sheltered Individual Retirement
Account ("IRA"). The Funds offer a prototype IRA plan which may be adopted by
individuals for rollovers from existing IRAs or retirement plans. There is
currently no charge for establishing an IRA account, although there is an annual
maintenance fee. Earnings on amounts held in an IRA are not taxed until
withdrawn.
A description of applicable service fees and certain limitations on
contributions and withdrawals, as well as application forms, are available from
the transfer agent upon request at 1-800-841-2858. The IRA documents contain a
disclosure statement which the Internal Revenue Service requires to be furnished
to individuals who are considering adopting an IRA. Because a retirement program
involves commitments covering future years, it is important that the investment
objective of the Fund be consistent with the participant's retirement
objectives. Premature withdrawals from a retirement plan will result in adverse
tax consequences. Consultation with a competent financial and tax adviser
regarding the foregoing retirement plans is recommended.
PERFORMANCE INFORMATION
The Funds may from time to time advertise performance data such as "average
annual total return" and "total return." To facilitate the comparability of
historical performance data from one mutual fund to another, the SEC has
developed guidelines for the calculation of average annual total return.
The average annual total return for a Fund for a specific period is found
by first taking a hypothetical $1,000 investment ("initial investment") in the
Fund's shares on the first day of the period and computing the "redeemable
value" of that investment at the end of the period. The redeemable value is then
divided by the initial investment, and this quotient is taken to the Nth root (N
representing the number of years in the period) and 1 is subtracted from the
result, which is then expressed as a percentage. The calculation assumes that
all income and capital gains dividends paid by the Fund have been reinvested at
net asset value on the reinvestment dates during the period. This calculation
can be expressed as follows:
n
P(1 + T) = ERV
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at the
beginning of the period.
P = hypothetical initial payment of $1,000.
N = period covered by the computation, expressed in terms of years.
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Total return performance for a specific period is calculated by first
taking an investment ("initial investment") in a Fund's shares on the first day
of the period and computing the "ending value" of that investment at the end of
the period. The total return percentage is then determined by subtracting the
initial investment from the ending value and dividing the remainder by the
initial investment and expressing the result as a percentage. The calculation
assumes that all income and capital gains dividends paid by a Fund have been
reinvested at net asset value on the reinvestment dates during the period. Total
return may also be shown as the increased dollar value of the investment over
the period or as a cumulative total return which represents the change in value
of an investment over a stated period and may be quoted as a percentage or as a
dollar amount.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value is determined
by assuming complete redemption of the hypothetical investment and the deduction
of all nonrecurring charges at the end of the period covered by the
computations.
A Fund's performance figures will be based upon historical results and will
not necessarily be indicative of future performance. A Fund's returns and net
asset value will fluctuate and the net asset value of shares when sold may be
more or less than their original cost. Any additional fees charged by a dealer
or other financial services firm would reduce the returns described in this
section. The Funds' average annual return for the relevant periods is shown
below:
Inception*
Year ended through
Fund August 31, 1999 August 31, 1999
- ---- --------------- ---------------
Total Return Fund 40.05% 21.77%
American Fund N/A 30.00%
Foreign Fund N/A 35.20%
- ----------
* Inception for the Total Return Fund was October 28, 1996. Inception for the
American Fund and the Foreign Fund was September 29, 1998.
From time to time, in marketing and other literature, a Fund's performance
may be compared to the performance of other mutual funds in general or to the
performance of particular types of mutual funds with similar investment goals,
as tracked by independent organizations. Among these organizations, Lipper
Analytical Services, Inc. ("Lipper"), a widely used independent research firm
which ranks mutual funds by overall performance, investment objective and
assets, may be cited. Lipper performance figures are based on changes in net
asset value, with all income and capital gains dividends reinvested. Such
calculations do not include the effect of any sales charges imposed by other
funds. A Fund will be compared to Lipper's appropriate fund category, that is,
by fund objective and portfolio holdings.
A Fund's performance may also be compared to the performance of other
mutual funds by Morningstar, Inc., which rates funds on the basis of historical
risk and total return. Morningstar's ratings range from five stars (highest) to
one star (lowest) and represent Morningstar's assessment of the historical risk
level and total return of a fund as a weighted average for 3, 5, and 10 year
periods. Ratings are not absolute or necessarily predictive of future
performance.
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Evaluations of Fund performance made by independent sources may also be
used in advertisements concerning the Funds, including reprints of or selections
from editorials or articles about a Fund. Sources for Fund performance and
articles about the Funds may include publications such as Money, Forbes,
Kiplinger's, Financial World, Business Week, U.S. News and World Report, the
Wall Street Journal, Barron's and a variety of investment newsletters.
A Fund may compare its performance to a wide variety of indices and
measures of inflation including the Standard & Poor's Index of 500 Stocks and
the NASDAQ Over-the-Counter Composite Index. There are differences and
similarities between the investments that a Fund may purchase for its portfolios
and the investments measured by these indices.
Occasionally statistics may be used to specify a Fund's volatility or risk.
Measures of volatility or risk are generally used to compare a Fund's net asset
value or performance relative to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market as
represented by the Standard & Poor's 500 Stock Index. A beta of more than 1.00
indicates volatility greater than the market, and a beta of less than 1.00
indicates volatility less than the market. Another measure of volatility or risk
is standard deviation. Standard deviation is used to measure variability of net
asset value or total return around an average, over a specified period of time.
The premise is that greater volatility connotes greater risk undertaken in
achieving performance.
Marketing and other Trust literature may include a description of the
potential risks and rewards associated with an investment in the Funds. The
description may include a "risk/return spectrum" which compares a Fund to other
funds or broad categories of funds, such as money market, bond or equity funds,
in terms of potential risks and returns. Risk/return spectrums also may depict
funds that invest in both domestic and foreign securities or a combination of
bond and equity securities. Money market funds are designed to maintain a
constant $1.00 share price and have a fluctuating yield. Share price, yield and
total return of a bond fund will fluctuate. The share price and return of an
equity fund also will fluctuate. The description may also compare a fund to bank
products, such as certificates of deposit. Unlike mutual funds, certificates of
deposit are insured up to $100,000 by the U.S. government and offer a fixed rate
of return.
The Funds may include discussions or illustrations of the potential
investment goals of a prospective investor, investment management techniques,
policies or investment suitability of the Funds, economic conditions, the
effects of inflation and historical performance of various asset classes,
including but not limited to, stocks, bonds and Treasury bills. From time to
time advertisements or communications to investors may summarize the substance
of information contained in shareholder reports (including the investment
composition of the Funds), as well as the views of the Adviser as to current
market, economic, trade and interest rate investment strategies and related
matters believed to be of relevance to the Funds. In addition, advertisements or
shareholder communications may include a discussion of certain attributes or
benefits to be derived by an investment in the Funds. Such advertisements or
communications may include symbols, headlines or other material which highlight
or summarize the information discussed in more detail.
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OTHER INFORMATION
As set forth in the Prospectus, the net asset value of each Fund will be
determined as of the close of trading on each day the New York Stock Exchange is
open for trading. The New York Stock Exchange is open for trading Monday through
Friday except New Year's Day, Martin Luther King Jr.'s Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. Additionally, if any of the aforementioned holidays falls on a
Saturday, the New York Stock Exchange will not be open for trading on the
preceding Friday, and when any such holiday falls on a Sunday, the New York
Stock Exchange will not be open for trading on the following Monday unless
unusual business conditions exist, such as the ending of a monthly or the yearly
accounting period.
Shares of the Funds may be exchanged for shares of the Countrywide Money
Market Fund as provided in the Prospectus. Countrywide Fund Services, Inc., the
Funds' transfer agent, receives a service fee from the Money Market Fund at the
annual rate of 0.25 of 1% of the average daily net asset value of the shares of
the Fund exchanged into the Money Market Fund.
The Automatic Investing Plan permits an investor to use "Dollar Cost
Averaging" in making investments. Instead of trying to time market performance,
a fixed dollar amount is invested in shares of a Fund at predetermined
intervals. This may help investors reduce their average cost per share because
the agreed upon fixed investment amount allows more shares to be purchased
during periods of lower share prices and fewer shares during periods of higher
share prices. In order to be effective, Dollar Cost Averaging should usually be
followed on a sustained, consistent basis. Investors should be aware, however,
that shares bought using Dollar Cost Averaging are purchased without regard to
their price on the day of investment or to market trends. Dollar Cost Averaging
does not assure a profit and does not protect against losses in a declining
market. In addition, while investors may find Dollar Cost Averaging to be
beneficial, it will not prevent a loss if an investor ultimately redeems his
shares at a price which is lower than their purchase price. An investor may want
to consider his or her financial ability to continue purchases through periods
of low price levels.
It is possible that conditions may exist in the future which would, in the
opinion of the Board of Trustees, make it undesirable for a Fund to pay for
redemptions in cash. In such cases the Board may authorize payment to be made in
portfolio securities of the Fund. However, each Fund has obligated itself under
the 1940 Act to redeem for cash all shares presented for redemption by any one
shareholder up to $250,000 (or 1% of the Fund's net assets if that is less) in
any 90-day period. Securities delivered in payment of redemptions are valued at
the same value assigned to them in computing the net asset value per share.
Shareholders receiving such securities generally will incur brokerage costs when
selling such securities.
Payment for shares of a Fund may, in the discretion of the Adviser, be made
in the form of securities that are permissible investments for the Fund as
described in the Prospectus. For further information about this form of payment,
contact the Transfer Agent. In connection with an in-kind securities payment, a
Fund will require, among other things, that the securities be valued on the day
of purchase in accordance with the pricing methods used by the Fund and that the
Fund receive satisfactory assurances that it will have good and marketable title
to the securities received by it; that the securities be in proper form for
transfer to the Fund; and that adequate information be provided concerning
certain tax matters relating to the securities. Payment for shares of a Fund in
the form of securities will generally be treated as a taxable sale of such
securities by the shareholder.
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FINANCIAL STATEMENTS
The Funds' annual report to shareholders for its fiscal year ended August
31, 1999 is a separate document supplied with this SAI, the financial
statements, accompanying notes and report of PricewaterhouseCoopers LLP,
independent accountants, appearing in such annual report are incorporated by
reference in this SAI and are so incorporated by reference in reliance upon such
report at PricewaterhouseCoopers LLP given upon the authority of such firm as
experts in accounting and auditing..
Copies of the Report are available, upon request and without charge, by
calling the Funds at (800) 841-2858, or by writing to the following address: The
Purisima Funds, 13100 Skyline Blvd., Woodside, CA 94062-4547.
The Prospectus and this Statement of Additional Information do not contain
all the information included in the Registration Statement filed with the
Securities and Exchange Commission under the Securities Act with respect to the
securities offered by the Fund's Prospectus. Certain portions of the
Registration Statement have been omitted from the Prospectus and this Statement
of Additional Information, pursuant to the rules and regulations of the
Securities and Exchange Commission. The Registration Statement including the
exhibits filed therewith may be examined at the office of the Securities and
Exchange Commission in Washington, D.C.
Statements contained in the Prospectus or in this Statement of Additional
Information as to the contents of any contract or other documents referred to
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this Statement of Additional Information
form a part, each such statement being qualified in all respects by such
reference.
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APPENDIX A
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The following summarizes the rating categories used by Standard &
Poor's for commercial paper in which the Fund may invest:
"A-1" - Issue's degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics are denoted
"A-1+."
"A-2" - Issue's capacity for timely payment is satisfactory. However, the
relative degree of safety is not as high as for issues designated "A-1."
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 9 months. The following summarizes the rating categories used by
Moody's for commercial paper in which the Funds may invest:
"Prime-1" - Issuer or related supporting institutions are considered to
have a superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
capacities: leading market positions in well-established industries; high rates
of return on funds employed; conservative capitalization structures with
moderate reliance on debt and ample asset protection; broad margins in earning
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
"Prime-2" - Issuer or related supporting institutions are considered to
have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
The three rating categories of Duff & Phelps for investment grade
commercial paper are "Duff 1," "Duff 2" and "Duff 3." Duff & Phelps employs
three designations, "Duff 1+," "Duff 1" and "Duff 1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper in which the Fund may invest:
"Duff 1+" - Debt possesses highest certainty of timely payment. Short-term
liquidity, including internal operating factors and/or access to alternative
sources of funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.
"Duff 1" - Debt possesses very high certainty of timely payment. Liquidity
factors are excellent and supported by good fundamental protection factors. Risk
factors are minor.
"Duff 1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
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"Duff 2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding need may
enlarge total financing requirements, access to capital markets is good.
Fitch short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years. The highest rating
category of Fitch for short-term obligations is "F-1." Fitch employs two
designations, "F-1+" and "F-1," within the highest category. The following
summarizes the rating categories used by Fitch for short-term obligations in
which the Funds may invest:
"F-1+" - Securities possess exceptionally strong credit quality. Issues
assigned this rating are regarded as having the strongest degree of assurance
for timely payment.
"F-1" - Securities possess very strong credit quality. Issues assigned this
rating reflect an assurance of timely payment only slightly less in degree than
issues rated "F-1+."
Fitch may also use the symbol "LOC" with its short-term ratings to indicate that
the rating is based upon a letter of credit issued by a commercial bank.
Thomson BankWatch short-term ratings assess the likelihood of an untimely
or incomplete payment of principal or interest of unsubordinated instruments
having a maturity of one year or less which are issued by a bank holding company
or an entity within the holding company structure. The following summarizes the
ratings used by Thomson BankWatch in which the Fund may invest:
"TBW-1" - This designation represents Thomson BankWatch's highest rating
category and indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
"TBW-2" - this designation indicates that while the degree of safety
regarding timely payment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated "TBW-1."
IBCA assesses the investment quality of unsecured debt with an original
maturity of less than one year which is issued by bank holding companies and
their principal bank subsidiaries. The following summarizes the rating
categories used by IBCA for short-term debt ratings in which the Fund may
invest:
"A1" - Obligations are supported by the highest capacity for timely
repayment. Where issues possess a particularly strong credit feature, a rating
of A1+ is assigned.
"A2" - Obligations are supported by a good capacity for timely repayment.
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CORPORATE LONG-TERM INVESTMENT GRADE DEBT RATINGS
STANDARD & POOR'S INVESTMENT GRADE DEBT RATINGS
A Standard & Poor's corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees. The debt rating is not a recommendation to
purchase, sell, or hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of default - capacity and willingness of the obligor as to
the timely payment of interest and repayment of principal in
accordance with the terms of the obligation.
2. Nature of and provisions of the obligation.
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
AAA - Debt rated `AAA' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated `AA' has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A - Debt rated `A' has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
BBB - Debt rated `BBB' is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
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MOODY'S LONG-TERM INVESTMENT GRADE DEBT RATINGS
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated `Aa' are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than in Aaa securities.
A - Bonds which are rated `A' possess many favorable investment attributes
and are to be considered as upper-medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment some time in the future.
Baa - Bonds which are rated `Baa' are considered as medium-grade
obligations (I.E, they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
FITCH INVESTORS SERVICE, INC. INVESTMENT GRADE BOND RATINGS
Fitch investment grade bond ratings provide a guide to investors in
determining the credit risk associated with a particular security. The ratings
represent Fitch's assessment of the issuer's ability to meet the obligations of
a specific debt issue or class of debt in a timely manner.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that may be provided by
insurance policies or financial guaranties unless otherwise indicated.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories do not fully reflect small
differences in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any security.
Ratings do not comment on the adequacy of market price, the suitability of any
security for a particular investor, or the tax-exempt nature of taxability of
payments made in respect of any security.
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Fitch ratings are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources Fitch believes to be
reliable. Fitch does not audit or verify the truth or accuracy of such
information. Ratings may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for other reasons.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as
strong as bonds rated `AAA.' Because bonds rated in the
`AAA' and `AA' categories are not significantly vulnerable
to foreseeable future developments, short-term debt of the
issuers is generally rated `F-1+.'
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse
changes in economic conditions and circumstances, however,
are more likely to have adverse impact on these bonds, and
therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
The rating takes into consideration special features of the issue, its
relationship to other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any guarantor,
as well as the economic and political environment that might affect the issuer's
future financial strength.
Bonds that have the same rating are of similar but not necessarily
identical credit quality since the rating categories cannot fully reflect the
differences in the degrees of credit risk. Moreover, the character of the risk
factor varies from industry to industry and between corporate, health care and
municipal obligations.
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DUFF & PHELPS, INC. LONG-TERM INVESTMENT GRADE DEBT RATINGS
These ratings represent a summary opinion of the issuer's long-term
fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
Each rating also takes into account the legal form of the security (e.g.,
first mortgage bonds, subordinated debt, preferred stock, etc.). The extent of
rating dispersion among the various classes of securities is determined by
several factors including relative weightings of the different security classes
in the capital structure, the overall credit strength of the issuer, and the
nature of covenant protection. Review of indenture restrictions is important to
the analysis of a company's operating and financial constraints.
The Credit Rating Committee formally reviews all ratings once per quarter
(more frequently, if necessary). Ratings of `BBB-' and higher fall within the
definition of investment grade securities, as defined by bank and insurance
supervisory authorities.
Rating
Scale Definition
- ------ ----------
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong. Risk is modest,
AA but may vary slightly from time to time because of economic
AA- conditions.
A+ Protection factors are average but adequate. However, risk factors
A are more variable and greater in periods of economic areas.
A-
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