The Heritage West Dividend Capture Income Fund (the "Fund") is a mutual fund
with the investment objective of seeking a high rate of current income. The Fund
attempts to achieve its objective by investing primarily in preferred stocks.
See "Investment Objective and Policies." There can be no assurance that the Fund
will achieve its investment objective.
This prospectus concisely sets forth basic information about the Fund that
prospective investors should know before investing. It should be read and
retained for future reference. The Fund is a separate series of Advisors Series
Trust (the "Trust"), an open-end registered management investment company. A
Statement of Additional Information (the "SAI") dated June 17, 1998 has been
filed with the Securities and Exchange Commission and is incorporated herein by
reference. This SAI is available without charge upon request to the Fund at the
address given above. The SEC maintains an internet site (http://www.sec.gov)
that contains the SAI, other material incorporated by reference and other
information about companies that file electronically with the SEC.
These securities have not been approved or disapproved by the Securities and
Exchange Commission nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary
is a criminal offense.
7373 North Scottsdale Road
Suite D-201
Scottsdale, AZ 85253
(800) 596-1213
Shareholder Services and
Fund Literature
(800) 788-0329
Prospectus
June 17, 1998
Table of Contents
Expense Table 2
Investment Objective and Policies 3
Management of the Fund 6
Investor Guide 8
Services Available to Shareholders 12
How to Redeem Your Shares 13
Distributions and Taxes 15
General Information 16
Expense Table
Expenses are one of several factors to consider when investing in the Fund.
There are two types of expenses involved: shareholder transaction expenses, such
as sales loads, and annual operating expenses, such as investment advisory fees.
Shares will be redeemed at net asset value per share.
Shareholder transaction expenses.
Maximum Sales Load Imposed on
Purchases (As a percentage of offering price) 2.00%
Maximum Sales Load on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees (1) 1.00%
<PAGE>
Annual operating expenses (as a percentage of average net assets).
Investment Advisory Fee 1.00%
Other Expenses (net of fee waivers and
expense reinbursements) (2) 1.00%
Total Fund Operating Expenses (3) 2.00%
(1) A 1.00% redemption fee, payable to the Fund, will be assessed on shares
purchased and held for less than 1 year. See "How to Redeem Your Shares" in this
prospectus.
(2) Other Expenses are estimated for the first fiscal year of the Fund.
(3) Total Operating Expenses are not expected to exceed 2.00% of average net
assets annually, but in the event that they do, the Advisor has agreed to reduce
its fees and/or pay other expenses of the Fund to ensure that the Fund's
expenses will not exceed 2.00%. If the Advisor did not limit the Fund's
expenses, it is expected that "Other Expenses" in the above table could be 1.45%
and "Total Operating Expenses" could be 2.45%. If the Advisor does waive any of
its fees, the Fund may reimburse the Advisor in future years. See "Management of
the Fund."
Example.
This table illustrates the net transaction and operating expenses that would be
incurred by an investment in the Fund over different time periods assuming a
$1,000 investment, a 5% annual return, and redemption at the end of each time
period.
1 Year 3 Years
With redemption $50 $81
Without redemption $40 $81
The Example shown above should not be considered a representation of past or
future expenses and actual expenses may be greater or less than those shown. In
addition, federal regulations require the Example to assume a 5% annual return,
but the Fund's actual return may be higher or lower. See "Management of the
Fund."
Investment Objective and Policies
What is the Fund's investment objective?
The investment objective of the Fund is to achieve a high rate of current
income. Heritage West Advisors, LLC (the "Advisor") attempts to achieve this
objective by buying and selling preferred stocks for the Fund's portfolio in
order to realize a high level of dividend income. There can be no assurance that
the Fund will achieve its objective.
What is preferred stock?
Like common stock, preferred stock represents a part of the equity ownership of
a corporation or trust. Preferred stock derives its name from the fact that it
has preference and priority over common stock in dividends, in liquidation or in
other matters. Preferred stocks typically make predetermined fixed dividend
payments and thus share many of the same characteristics of bonds, which
typically make predetermined fixed interest payments. The rights of the holder
of preferred stock, however, are subordinate to those of bondholders.
The preferred stock dividend cycle.
Preferred stocks typically declare and pay dividends quarterly (occasionally
monthly). Because shares change hands daily, the issuing corporations or
<PAGE>
trusts set a date known as the "record date" to establish a roster of recipients
who are entitled to the next dividend payment. The securities markets then set
an "ex-dividend" date (usually two business days) prior to the record date;
purchasers of preferred stock on the ex-dividend date will not, under normal
circumstances, receive the current dividend when it is paid. In order to
maintain an orderly market, securities markets adjust the price of shares
downward by the amount of the dividend on the ex-dividend date. The effect of
this action is to create no particular advantage to earning the dividend on one
day, versus paying less for the stock by the amount of the dividend on the next
day.
What is the Advisor's strategy?
The Advisor's strategy is to exploit inefficiencies in the preferred stock
market by trading around ex-dividend dates using a proprietary computer system
and associated data. The Fund invests primarily in those preferred stocks which
have historically made regular dividend payments. Substantially all of these
preferred stocks are traded on a national securities exchange. The Advisor seeks
to purchase preferred stocks (including convertible preferred stocks) that are
priced advantageously relative to their expected current dividend and to sell
preferred stocks after the dividend has been earned (or is fully reflected in
the stocks' market price) so as to "capture" either a dividend as income or as a
short-term capital gain. In deciding when to purchase and sell specific
preferred stocks, the Advisor may seek to take advantage of other market
anomalies that will generate additional trading returns for the Fund. By owning
a preferred stock only during the portion of its dividend cycle in which the
dividend is captured, the Fund may capture additional dividends during the year
from other preferred stocks with different dividend cycles. The Advisor seeks to
minimize credit risk by evaluating the financial condition of each issuer prior
to purchasing its preferred stock and by holding a diversified portfolio of
preferred stocks. However, stocks are selected primarily for their
immediate-term trading characteristics and dividend capture potential.
By trading preferred stocks around their dividend cycle, the Advisor believes it
can obtain a higher return, even after trading costs are factored in, than an
investor would obtain from simply buying and holding preferred stocks. The
Advisor will seek to keep the Fund fully invested at all times.
Ratings.
Most preferred stocks are rated by rating agencies, such as Standard & Poor's
Corporation ("S&P") and Moody's Investors Service ("Moody's"). These ratings
reflect the agencies' assessment of the capacity and willingness of an issuer to
pay preferred stock dividends and any applicable sinking fund obligations. The
Fund will not invest in a preferred stock rated lower than "B" by S&P or "b" by
Moody's, or in a stock which is not rated by S&P or Moody's unless the stock is
considered by the Advisor to be comparable in quality to a stock rated "B" or
"b" or better by S&P or Moody's. More information about ratings is included in
the SAI and in the section below.
What risks are associated with the Advisor's strategy?
There is, of course, no assurance that the Fund's objective will be achieved or
that the Advisor's strategy will be successful. Among the risks associated with
the Advisor's strategy are interest rate and credit risk. If interest rates
increase, the value of fixed income securities, including preferred stocks, will
tend to decrease. Conversely, if interest rates decrease, the value of preferred
stocks will tend to increase. In addition, if the credit rating issued by S&P or
Moody's for a particular stock were to be lowered during the time a preferred
stock is in the Fund's portfolio, the preferred
<PAGE>
stock would likely decline in value.
The Fund may invest in preferred stocks which are below investment grade. These
securities usually offer higher yields than higher rated securities but are also
subject to more risk than higher rated securities. Lower rated or unrated
securities are more likely to react to developments affecting market and credit
risks than are higher rated securities, which react primarily to movements in
interest rates. In the past, economic downturns or increases in interest rates
have caused a higher incidence of default by issuers of lower-rated securities.
In some cases, such preferred stocks may be highly speculative, and may have
poor prospects for reaching investment grade. To the extent an issuer defaults
during the time the Fund owns its preferred stock, the Fund may incur additional
expenses in order to enforce its rights or to participate in a restructuring of
the preferred stock. In addition, the prices of lower-rated securities generally
tend to be more volatile and the market less liquid than those of higher-rated
securities. Consequently, the Fund may at times experience difficulty in
liquidating its investments at the desired times and prices.
As noted in the following paragraph, the Fund will have a high turnover rate. If
the Advisor is unable to obtain low transaction costs for the Fund, this high
turnover rate will lower the Fund's return to investors.
The Fund is authorized to borrow money for leverage. There are risks associated
with the use of leverage, including the risk that returns to investors might be
reduced. These risks are described in more detail under "Borrowing money."
Brokerage transactions and portfolio turnover.
The Fund will have a high rate of portfolio turnover each year as a result of
its strategy of buying and selling preferred stocks to capture dividends; the
turnover rate is not expected to exceed 800%. A high rate of turnover increases
the portfolio brokerage costs incurred by the Fund and will generate taxable
income if the Advisor's strategy is successful. The Advisor intends to execute
portfolio transactions primarily through brokers from which it is able to obtain
reduced commission rates, including its affiliated broker-dealer, in order to
minimize trading costs. The Advisor may also consider other factors in
determining which brokers or dealers to use for the Fund's portfolio
transactions, which are more fully discussed in the SAI. Provided the Fund
receives prompt execution at competitive prices, the Advisor may also consider
the sale of Fund shares as a factor in selecting broker-dealers for the Fund's
portfolio transactions.
What does the Fund use for cash reserves?
For temporary defensive purposes, the Advisor may invest up to 100% of the
Fund's total assets in high quality, short-term debt securities and money market
instruments. These short-term debt securities and money market instruments
include commercial paper, certificates of deposit, bankers' acceptances, U.S.
Government securities, money market funds and repurchase agreements.
Other investments and investment techniques.
The Fund may borrow money, as described herein. More information about this
technique is contained in the SAI. In addition, the Fund may invest in futures
on indices and options on equities and indices, although it does not expect to
invest more than 5% of its total net assets in options or futures.
<PAGE>
Borrowing money.
The Fund is authorized to borrow money from time to time for temporary,
extraordinary or emergency purposes or for clearance of transactions in amounts
up to one-third of the value of its total assets at the time of such borrowing.
The use of borrowing by the Fund involves special risk considerations.
Substantially all of the Fund's assets fluctuate in value, while the interest
obligation resulting from borrowing will be fixed by the terms of the Fund's
agreement with its lender. The net asset value per share of the Fund will tend
to increase more when its portfolio securities increase in value and to decrease
more when its portfolio assets decrease in value than would otherwise be the
case if the Fund did not borrow money. In addition, interest costs on borrowings
may fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds.
Investment restrictions.
The Fund has adopted certain investment restrictions, which are described fully
in the SAI. Like the Fund's investment objective, certain of these restrictions
are fundamental and may be changed only by a majority vote of the Fund's
outstanding shares. As a fundamental policy, the Fund is a diversified fund.
Management of the Fund
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund.
The Advisor and Distributor.
Heritage West Advisors, LLC, 7373 North Scottsdale Road, Suite D-201,
Scottsdale, AZ 85253, is the Fund's Advisor and has provided, together with its
predecessor organizations, asset management services using its dividend capture
strategy since 1994. The Advisor was established and is controlled by Craig O.
Jolly, who is principally responsible for the management of the Fund's
portfolio. Mr. Jolly has not previously managed a mutual fund. Heritage West
Securities, Inc., an affiliate of the Advisor, is the Fund's Distributor. Since
its founding in 1992, Mr. Jolly has been President and controlling stockholder.
The Advisor provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Advisor a monthly management fee
based upon the average daily net assets of the Fund at the annual rate of 1.00%.
The Administrator.
Investment Company Administration Corporation (the "Administrator") prepares
various federal and state regulatory filings, reports and returns for the Fund,
prepares reports and materials to be supplied to the trustees, monitors the
activities of the Fund's custodian, shareholder servicing agent and accountants,
and coordinates the preparation and payment of Fund expenses and reviews the
Fund's expense accruals. For its services, the Administrator receives a monthly
fee from the Fund at the annual rate of 0.20% of average daily net assets,
subject to a $30,000 annual minimum.
Other operating expenses.
The Fund is responsible for its own operating expenses. The Advisor has
<PAGE>
agreed to reduce fees payable to it by the Fund and to pay Fund operating
expenses to the extent necessary to limit the Fund's aggregate annual operating
expenses to the limit set forth in the Expense Table (the "expense cap"). Any
such reductions made by the Advisor in its fees or payment of expenses which are
the Fund's obligation are subject to reimbursement by the Fund to the Advisor,
if so requested by the Advisor, in the first, second or third fiscal year next
succeeding the fiscal year of the reduction or absorption if the aggregate
amount actually paid by the Fund toward the operating expenses for such fiscal
year (taking into account the reimbursement) does not exceed the applicable
limitation on Fund expenses. With respect to the reimbursement of a particular
fee reduction or expense payment, a reimbursement to the Advisor is permitted
only within the three year period following the year in which the Advisor
reduced the subject fee or paid the subject expense. Any such reimbursement is
also contingent upon Board of Trustees review and approval at the time the
reimbursement is made. Such reimbursement may be paid prior to the Fund's
payment of current expenses if so requested by the Advisor even if that practice
may require the Advisor to waive, reduce or absorb current Fund expenses.
Investor Guide
How to purchase shares of the Fund.
There are several ways to purchase shares of the Fund. An Application Form,
which accompanies this Prospectus, is used if you send money directly to the
Fund by mail or by wire. If you have questions about how to invest, or about how
to complete the Application Form, please call an account representative at (800)
788-0329.
You may send money to the Fund by mail.
If you wish to invest by mail, simply complete the Application Form and mail it
with a check (made payable to The Heritage West Dividend Capture Income Fund) to
the Fund's Custodian at the following address:
The Heritage West
Dividend Capture Income Fund
P.O. Box 641265
Cincinnati, OH 45264-1265
If you wish to send your Application Form and check via an overnight delivery
service (such as FedEx), delivery cannot be made to a post office box. In that
case, you should use the following address:
The Heritage West
Dividend Capture Income Fund
c/o Star Bank, N. A.
Mutual Fund Custody Department
425 Walnut Street, M.L. 6118,
Sixth Floor
Cincinnati, OH 45202
You may wire money to the Fund.
Before sending a wire, you should call the Fund's Shareholder Servicing Agent at
(800) 788-0329 between 9:00 a.m. and 5:00 p.m., Eastern time, on a day when the
New York Stock Exchange ("NYSE") is open for trading, in order to receive an
account number. It is important to call and receive this account number, because
if your wire is sent without it or without the name of the Fund, there may be a
delay in investing the money you wire. You should then ask your bank to wire
money to:
<PAGE>
Star Bank, N. A. Cinti/Trust
ABA# 0420-0001-3
Attn: The Heritage West Dividend Capture Income Fund
for credit to The Heritage West Dividend Capture Income Fund
DDA # 488920661
for further credit to [your name and account number] Your bank may charge you a
fee for sending a wire to the Fund.
You may purchase shares through an investment broker or dealer.
You may be able to invest in shares of the Fund through an investment broker or
dealer, if the broker-dealer has made arrangements with the Distributor. A
broker or dealer may charge you a fee for placing your order, but you can avoid
paying such a fee by sending an Application Form and payment directly to the
Fund. The broker-dealer may also hold the shares you purchase in its omnibus
account rather than in your name in the records of the Fund's transfer agent.
The Fund may reimburse the broker-dealer for maintaining records of your account
as well as for other services provided to you.
Your broker or dealer is responsible for sending your money to the Fund promptly
after placing the order to purchase shares, and the Fund may cancel the order if
payment is not received from the broker-dealer promptly.
Minimum investments.
The minimum initial investment in the Fund is $5,000. The minimum subsequent
investment is $500. However, if you are investing in an Individual Retirement
Account ("IRA"), or you are starting an Automatic Investment Plan (see below),
the minimum initial and subsequent investments are $2,000 and $250,
respectively.
Subsequent investments.
You may purchase additional shares of the Fund by sending a check, with the stub
from an account statement, to the Fund at the address above. Please write your
account number on the check. (If you do not have a stub from an account
statement, you can write your name, address and account number on a separate
piece of paper and enclose it with your check.) If you want to send additional
money for investment by wire, it is important for you to call the Fund's
Shareholder Servicing Agent at (800) 788-0329. You may also make additional
purchases through a broker-dealer, as described above.
What is the price you pay for each share of the Fund?
When you invest in the Fund, you pay the "offering price" of a share. The
offering price of shares is the net asset value per share plus a sales charge
that is based on the amount purchased, as described in the table shown on the
following page:
Sales Charge as percent of: Portion of sales
offering net asset charge retained
Amount of Purchase price value by dealers
Less than $250,000 2.00% 2.04% 1.80%
$250,000 but less than $500,000 1.50% 1.52% 1.35%
$500,000 but less than $1,000,000 1.00% 1.01% 0.90%
$1,000,000 or more 0.50% 0.51% 0.90%*
*The Advisor will pay selling dealers an additional amount from the Advisor's
own resources as supplemental distribution assistance. To the extent that the
investment remains with the Fund, the Advisor will pay a total of 0.40% on the
<PAGE>
amount of the purchase on a quarterly basis over the immediate 12 month period
following date of the initial purchase.
Letter of Intent - An investor may qualify for an immediate reduced sales charge
on purchases by completing the Letter of Intent section on the Application Form.
The investor will state an intention to purchase, during the next 13 months a
specified amount of shares which, if made at one time, would qualify for a
reduced sales charge.
Rights of Accumulation - The reduced sales charges applicable to purchases apply
on a cumulative basis over any period of time. Thus the value of all shares of
the Fund owned by an investor (including the investor's own account, IRA
account, or other account), taken at current net asset value, can be combined
with a current purchase of shares to determine the rate of sales charge
applicable to the current purchase in order to receive the cumulative quantity
reduction. When opening a new account, the fact that the investor currently
holds shares of the Fund must be indicated on the Application Form in order to
receive the cumulative quantity discount. For subsequent purchases, the Fund's
Shareholder Servicing Agent ((800) 788-0329) should be notified of current Fund
holdings prior to the purchase of additional shares.
Purchases at Net Asset Value - Shares of the Fund may be purchased at net asset
value by (i) officers, Trustees, directors and full time employees of the Trust,
the Advisor, the Administrator and affiliates of those companies, or by their
family members; (ii) registered representatives and employees of firms which
have selling agreements with the Distributor; (iii) investment advisors,
financial planners or other intermediaries who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; (iv) clients of such investment
advisors, financial planners or other intermediaries who place trades for their
own accounts if the accounts are linked to the master account of such investment
advisor, financial planner or other intermediary on the books and records of the
broker or agent; and (v) by such other investors who are determined to have
acquired shares under circumstances not involving any sales expense to the Fund
or Distributor. The Distributor has the right to decide whether a purchase may
be made at net asset value.
If an investment is made at net asset value that meets any of the above
referenced requirements, the Advisor may pay supplemental distribution
assistance of up to 0.90%, out of its own resources, to any dealer who has
executed a selling agreement with the Distributor through which the purchase is
made. Additionally, the Advisor, at its discretion, may pay a "finders fee" of
up to 0.90% to any person who has assisted the Advisor or Distributor in
securing additional investments in the Fund. To the extent that the investment
remains with the Fund, this fee will generally be split and paid on a quarterly
basis over the immediate 24 month period following the initial purchase. The
Fund's net asset value per share is calculated by dividing the value of the
Fund's total assets, less its liabilities, by the number of its shares
outstanding. In calculating the net asset value, portfolio securities are valued
using current market values, if available. Securities for which market
quotations are not readily available are valued at fair values determined in
good faith by or under the supervision of the Board of Trustees of the Trust.
The fair value of short-term obligations with remaining maturities of 60 days or
less is their amortized cost. The net asset value is calculated at the close of
regular trading of the NYSE, currently 4:00 p.m., Eastern time.
When is money invested in the Fund?
Any money received for investment in the Fund from an investor, whether sent by
check or by wire, is invested at the offering price of the Fund which is
<PAGE>
next calculated after the money is received (assuming the check or wire
correctly identifies the Fund and account). Orders received from broker-dealers
are invested at the offering price next calculated after the order is received.
It is the responsibility of the broker-dealer to place your order promptly. A
check or wire received after the NYSE closes is invested as of the next
calculation of the Fund's offering price.
Other information.
All investments must be made in U.S. dollars and checks must be drawn on U.S.
banks. Third party checks will not be accepted. A charge may be imposed if a
check used to make an investment does not clear. The Fund and the Distributor
reserve the right to reject any investment, in whole or in part. Federal tax law
requires that investors provide a certified taxpayer identification number and
other certifications on opening an account in order to avoid backup withholding
of taxes. See the Application Form for more information about backup
withholding. The Fund is not required to issue share certificates; all shares
are normally held in non-certificated form on the books of the Fund for the
account of the shareholder. The Fund, under certain circumstances, may accept
investments of securities appropriate for the Fund's portfolio in lieu of cash.
Prior to making such a purchase, you should call the Advisor to determine if
such an investment may be made. The Advisor may, at its own expense, pay third
parties for assistance in gathering assets for the Fund.
Services Available to Shareholders
Retirement plans.
You may obtain a prototype IRA plan from the Fund. Shares of the Fund are also
eligible investments for other types of retirement plans.
Automatic investing by check.
You may make regular monthly investments in the Fund using the Automatic
Investment Plan. A check is automatically drawn on your personal checking
account each month for a predetermined amount (but not less than $250), as if
you had written it directly. Upon receipt of the withdrawn funds, the Fund
automatically invests the money in additional shares of the Fund at the current
offering price. Applications for this service are available from the Fund's
Shareholder Servicing Agent. There is no charge by the Fund for this service.
The Fund may terminate or modify this privilege at any time, and shareholders
may terminate their participation by notifying the Shareholder Servicing Agent
in writing, sufficiently in advance of the next withdrawal.
Automatic withdrawals.
The Fund offers a Systematic Withdrawal Program whereby shareholders may request
that a check drawn in a predetermined amount be sent to them each month or
calendar quarter. To start this Program, your account must have Fund shares with
a value of at least $10,000. The minimum amount that may be withdrawn each month
or quarter is $50. This Program may be terminated or modified by a shareholder
or the Fund at any time without charge or penalty. A withdrawal under the
Systematic Withdrawal Program involves a redemption of shares of the Fund and
may result in a gain or loss for federal income tax purposes. In addition, if
the amount withdrawn exceeds the dividends credited to your account, the account
ultimately may be depleted.
How to Redeem Your Shares
You have the right to redeem all or any portion of your shares of the Fund at
their net asset value on each day the NYSE is open for trading. You will be
charged a 1.00% redemption fee, payable to the Fund, on shares redeemed within
one year of the purchase date. The fee will be applied on a first-in, first-out
basis.
<PAGE>
Redemption in writing.
You may redeem your shares by simply sending a written request to the Fund. You
should give your account number and state whether you want all or part of your
shares redeemed. The letter should be signed by all of the shareholders whose
names appear in the account registration. You should send your redemption
request to:
The Heritage West Dividend Capture Income Fund
c/o American Data Services, Inc.
P. O. Box 5536
150 Motor Parkway, Suite 109 Hauppauge, NY 11788-0132
Signature guarantee.
If the value of the shares you wish to redeem exceeds $5,000, the signatures on
the redemption request must be guaranteed by an "eligible guarantor
institution." These institutions include banks, broker-dealers, credit unions
and savings institutions. A broker-dealer guaranteeing a signature must be a
member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program. A notary public is not an
acceptable guarantor.
Redemption by telephone.
If you complete the Redemption by Telephone portion of the Fund's Application
Form, you may redeem shares on any business day the NYSE is open by calling the
Fund's Shareholder Servicing Agent at (800) 788-0329 before 4:00 p.m. Eastern
time. Redemption proceeds will be mailed or wired, at your direction, on the
next business day to the bank account you designated on the Application Form.
The minimum amount that may be wired is $1,000 (wire charges, if any, will be
deducted from redemption proceeds). Telephone redemptions cannot be made for IRA
accounts. By establishing telephone redemption privileges, you authorize the
Fund and its Shareholder Servicing Agent to act upon the instruction of any
person who makes the telephone call to redeem shares from your account and
transfer the proceeds to the bank account designated in the Application Form.
The Fund and the Shareholder Servicing Agent will use procedures to confirm that
redemption instructions received by telephone are genuine, including recording
of telephone instructions and requiring a form of personal identification before
acting on these instructions. If these normal identification procedures are
followed, neither the Fund nor the Shareholder Servicing Agent will be liable
for any loss, liability, or cost which results from acting upon instructions of
a person believed to be a shareholder with respect to the telephone redemption
privilege. The Fund may change, modify, or terminate these privileges at any
time upon at least 60 days notice to shareholders.
You may request telephone redemption privileges after your account is opened;
however, the authorization form will require a separate signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity.
What price is used for a redemption?
The redemption price is the net asset value of the Fund's shares less the
redemption fee (if applicable), next determined after shares are validly
tendered for redemption. All signatures of account holders must be included in
the request, and a signature guarantee, if required, must also be included for
the request to be valid.
When are redemption payments made?
<PAGE>
As noted above, redemption payments for telephone redemptions are sent on the
day after the telephone call is received. Payments for redemptions sent in
writing are normally made promptly, but no later than seven days after the
receipt of a request that meets requirements described above. However, the Fund
may suspend the right of redemption under certain extraordinary circumstances in
accordance with rules of the Securities and Exchange Commission.
If shares were purchased by wire, they cannot be redeemed until the day after
the Application Form is received. If shares were purchased by check and then
redeemed shortly after the check is received, the Fund may delay sending the
redemption proceeds until it has been notified that the check used to purchase
the shares has been collected, a process which may take up to 15 days. This
delay may be avoided by investing by wire or by using a certified or official
bank check to make the purchase.
Repurchases from dealers.
The Fund may accept orders to repurchase shares from an investment dealer on
behalf of a dealer's customers. The net asset value for a repurchase is the net
asset value next calculated after receipt of the order from the dealer. The
dealer is responsible for forwarding any documents required in connection with a
redemption, including a signature guarantee, promptly, and the Fund may cancel
the order if these documents are not received promptly.
Other information about redemptions.
A redemption may result in recognition of a gain or loss for federal income tax
purposes. Due to the relatively high cost of maintaining smaller accounts, the
shares in your account (unless it is a retirement plan or Uniform Gifts or
Transfers to Minors Act account) may be redeemed by the Fund if, due to
redemptions you have made, the total value of your account is reduced to less
than $500. If the Fund determines to make such an involuntary redemption, you
will first be notified that the value of your account is less than $500, and you
will be allowed 30 days to make an additional investment to bring the value of
your account to at least $500 before the Fund takes any action.
Distributions and Taxes
Dividends and distributions.
Dividends from net investment income, if any, are normally declared and paid by
the Fund monthly. Capital gains distributions, if any, are normally made in
December, but the Fund may make an additional payment of dividends or
distributions if it deems it desirable at any other time during any year.
Dividends are automatically paid in cash, and capital gain distributions are
automatically reinvested in additional shares of the Fund at their net asset
value per share, unless you have previously requested otherwise on the Fund's
Application Form or in writing to the Shareholder Servicing Agent. Alternative
distribution options include (i) having all dividends and distributions paid in
cash, and (ii) having all dividends and distributions reinvested.
Any dividend or distribution paid by the Fund has the effect of reducing the net
asset value per share on the record date by the amount of the dividend or
distribution. You should note that a dividend or distribution paid on shares
purchased shortly before that dividend or distribution was declared will be
subject to income taxes even though the dividend or distribution represents, in
substance, a partial return of capital to you.
<PAGE>
Taxes.
The Fund intends to qualify and elect to be treated as a regulated investment
company under Subchapter M of the Code. As long as the Fund continues to
qualify, and as long as the Fund distributes all of its income each year to the
shareholders, the Fund will not be subject to any federal income or excise
taxes. Distributions made by the Fund will be taxable to shareholders whether
received in shares (through dividend reinvestment) or in cash.
Distributions derived from net investment income, including net short-term
capital gains, are taxable to shareholders as ordinary income. On the
"ex-dividend date" for a stock held by the Fund, the price of the stock normally
declines in the amount of the dividend. The Fund's strategy of buying and
selling stocks to capture dividends, which results in high portfolio turnover,
is intended to generate high current income. Such income may be realized either
in the form of dividends or short-term capital gains. A portion of dividends may
qualify for the dividends-received deduction for corporations, but the Advisor
will not necessarily attempt to maximize this deduction in the management of the
Fund's portfolio.
Distributions designated as capital gains dividends are taxable as capital gains
regardless of the length of time shares of the Fund have been held. Although
distributions are generally taxable when received, certain distributions made in
January are taxable as if received the prior December. You will be informed
annually of the amount and nature of the Fund's distributions. Additional
information about taxes is set forth in the Statement of Additional Information.
You should consult your own advisors concerning federal, state and local
taxation of distributions from the Fund.
General Information
The Trust.
The Trust was organized as a Delaware business trust on October 3, 1996. The
Agreement and Declaration of Trust permits the Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, par value
$0.01 per share, which may be issued in any number of series. The Board of
Trustees may, from time to time, issue other series, the assets and liabilities
of which will be separate and distinct from any other series. The Board may also
authorize the issuance of additional classes of shares for an existing series.
Shareholder rights.
Shares issued by the Fund have no preemptive, conversion, or subscription
rights. Shareholders have equal and exclusive rights as to dividends and
distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Investment
Advisory Agreement); all series of the Trust vote as a single class on matters
affecting all series jointly or the Trust as a whole (e.g., election or removal
of Trustees). Voting rights are not cumulative, so that the holders of more than
50% of the shares voting in any election of Trustees can, if they so choose,
elect all of the Trustees. While the Trust is not required and does not intend
to hold annual meetings of shareholders, such meetings may be called by the
Trustees at their discretion, or upon demand by the holders of 10% or more of
the outstanding shares of the Trust for the purpose of electing or removing
Trustees.
Year 2000 risk.
Like other business organizations around the world, the Fund could be
<PAGE>
adversely affected if the computer systems used by its investment advisor,
Heritage West Advisors, LLC, and other service providers do not properly process
and calculate information related to dates beginning January 1, 2000. This is
commonly known as the "Year 2000 Issue." The Fund's advisor has taken steps that
it believes are reasonably designed to address the Year 2000 Issue with respect
to its own computer systems and the Fund has obtained assurances from the Fund's
other service providers that they are taking comparable steps. However, there
can be no assurance that these actions will be sufficient to avoid any adverse
impact on the Fund.
Performance information.
From time to time, the Fund may publish its total return in advertisements and
communications to investors. Total return information will include the Fund's
average annual compounded rate of return over the most recent four calendar
quarters and over the period from the Fund's inception of operations. The Fund
may also advertise aggregate and average total return information over different
periods of time. The Fund's total return will be based upon the value of the
shares acquired through a hypothetical $1,000 investment at the beginning of the
specified period and the net asset value of those shares at the end of the
period, assuming reinvestment of all distributions. Total return figures will
reflect all recurring charges against Fund income. You should note that the
investment results of the Fund will fluctuate over time, and any presentation of
the Fund's total return for any prior period should not be considered as a
representation of what an investor's total return may be in any future period.
Shareholder inquiries.
Shareholder inquiries should be directed to the Fund's Shareholder Servicing
Agent at (800) 788-0329.
<PAGE>
THE HERITAGE WEST DIVIDEND CAPTURE INCOME FUND
Statement of Additional Information
Dated June 17, 1998
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated June 17, 1998, as may be amended
from time to time, of The Heritage West Dividend Capture Income Fund (the
"Fund"), a series of Advisors Series Trust (the "Trust"). Heritage West
Advisors, LLC, (the "Advisor") is the Advisor to the Fund. A copy of the
prospectus may be obtained from the Fund at 7373 North Scottsdale Road, Suite
D-201, Scottsdale, AZ 85253; telephone (800) 596-1213.
TABLE OF CONTENTS
Cross-reference to sections
Page in the prospectus
Investment Objective and Policies ...B-2 The Fund at a Glance; The Fund in
Detail
Management ..........................B-13 Management of the Fund
Portfolio Transactions and Brokerage B-16 Management of the Fund
Net Asset Value .....................B-17 Investor Guide
Taxation ............................B-17 Distributions and Taxes
Dividends and Distributions .........B-19 Distributions and Taxes
Performance Information .............B-19 General Information
General Information .................B-20 General Information
Appendix ............................B-21 Not applicable
E:\AST\SAI\SAI0698.her.wpd
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is to achieve a high rate of
current income. There is no assurance that the Fund will achieve its objective.
The discussion below supplements information contained in the prospectus as to
investment policies of the Fund.
Preferred Stock
In addition to the information about preferred stock contained in the
prospectus, preferred stock usually has preference in dividends, and holders of
preferred stock generally are entitled to receive a specified dividend
(expressed either in dollars per share or as a percentage of the par value of
the stock) before dividends may be distributed to common stockholders. Preferred
stock may be either cumulative or noncumulative. A cumulative dividend
preference means that if a dividend is omitted, it must be declared and paid
before a dividend can be paid to holders of common stock.
While a preference with respect to dividends is the most common
privilege of preferred stock, there are other preferences which may also by
applicable to an issue. These include a preference on liquidation and in voting.
Preferred stocks are also frequently convertible into the issuer's common stock,
and they may be redeemed after a certain date at the option of the corporation.
There are also variations in dividend preferences, including the possibility, in
some cases, of participation in earnings.
Convertible Securities and Warrants
The Fund may invest in convertible preferred stocks and warrants. A
convertible preferred stock may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
gives an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the issuing company depending upon a
market price advance in the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible preferred stock, warrants do not pay a fixed dividend.
Investments in warrants involve certain risks, including the possible lack of a
liquid market for resale of the warrants, potential price fluctuations as a
result of speculation or other factors, and failure of the price of the
underlying security to reach or have reasonable prospects of reaching a level at
which the warrant can be prudently exercised (in which event the warrant may
expire without being exercised, resulting in a loss of the Fund's entire
investment therein).
Risks of Investing in Lower-Rated Preferred Stocks
As set forth in the prospectus, the Fund may invest a portion of its
net assets in preferred stocks which may be rated below "baa" by Moody's or
"BBB" by S&P or below investment grade by other recognized rating agencies, or
in unrated securities of comparable quality under certain circumstances. These
preferred stocks are subject to greater market fluctuations and risk of loss of
income and principal than higher rated stocks for a variety of reasons,
including the following:
Sensitivity to Interest Rate and Economic Changes. The economy and
interest rates affect lower rated securities differently from other securities.
For example, the prices of lower rated securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic changes or individual corporate developments.
Also, during an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which would
adversely affect their ability to service their obligations, to meet projected
business goals, and to obtain additional financing. Periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of lower rated preferred stocks and the Fund's asset values.
B-2
<PAGE>
Liquidity and Valuation. To the extent that there is no established
retail secondary market, there may be thin trading of lower rated preferred
stocks, and this may impact the Advisor's ability to value these preferred
stocks and the Fund's assets and hinder the Fund's ability to dispose of these
stocks. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower rated
preferred stocks, especially in a thinly traded market.
Credit Ratings. Credit ratings primarily evaluate the likelihood of
payment of dividends, not the market value risk of preferred stocks. Also, since
credit rating agencies may fail to timely change the credit ratings to reflect
subsequent events, the Advisor must monitor the issuers of lower rated preferred
stocks in the Fund's portfolio to determine if the issuers will have sufficient
cash flow and profits to meet dividends, and to assure the stocks' liquidity so
the Fund can meet redemption requests. The Fund will dispose of a portfolio
security in an orderly manner when its rating has been downgraded below C.
Short-Term Investments
The Fund may invest in any of the following securities and instruments:
Bank Certificates or Deposit, Bankers' Acceptances and Time Deposits.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are 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.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that the
Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its prospectus, the Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
Savings Association Obligations. The Fund may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
B-3
<PAGE>
Commercial Paper, Short-Term Notes and Other Corporate Obligations. The
Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Advisor to be of
comparable quality. These rating symbols are described in the Appendix.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
Government Obligations
The Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
The Fund may invest in sovereign debt obligations of foreign countries.
A sovereign debtor's willingness or ability to repay principal and interest in a
timely manner may be affected by a number of factors, including its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which it may be
subject. Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to meet
such conditions could result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debt in a timely manner.
Foreign Investments
The Fund may invest in securities of foreign issuers, provided that
they are publicly traded in the United States and denominated in U.S. dollars.
Depositary Receipts. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), which are receipts typically issued in connection
with a U.S. or foreign bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation.
Risks of Investing in Foreign Securities. Investments in foreign
securities involve certain inherent risks, including the following:
B-4
<PAGE>
Political and Economic Factors. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
Taxes. The interest and dividends payable on certain of the Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.
Options on Securities
Purchasing Put and Call Options. The Fund may purchase covered "put"
and "call" options with respect to securities which are otherwise eligible for
purchase by the Fund and with respect to various stock indices subject to
certain restrictions.
If the Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Advisor perceives significant short-term risk but
substantial long-term appreciation for the underlying security. The put option
acts as an insurance policy, as it protects against significant downward price
movement while it allows full participation in any upward movement. If the Fund
is holding a security which it feels has strong fundamentals, but for some
reason may be weak in the near term, the Fund may purchase a put option on such
security, thereby giving itself the right to sell such security at a certain
strike price throughout the term of the option. Consequently, the Fund will
exercise the put only if the price of such security falls below the strike price
of the put. The difference between the put's strike price and the market price
of the underlying security on the date the Fund exercises the put, less
transaction costs, will be the amount by which the Fund will be able to hedge
against a decline in the underlying security. If during the period of the option
the market price for the underlying security remains at or above the put's
strike price, the put will expire worthless, representing a loss of the price
the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put may be sold.
If the Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If the call option has been
purchased to hedge a short position of the Fund in the underlying security and
the price of the underlying security thereafter falls, the profit the Fund
realizes on the cover of the short position in the security will be reduced by
the premium paid for the call option less any amount for which such option may
be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which the
Advisor believes there is an active secondary market to facilitate closing
transactions.
Writing Call Options. The Fund may write covered call options. A call
option is "covered" if the Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held
B-5
<PAGE>
in a segregated account by the Custodian). The writer of a call option receives
a premium and gives the purchaser the right to buy the security underlying the
option at the exercise price. The writer has the obligation upon exercise of the
option to deliver the underlying security against payment of the exercise price
during the option period. If the writer of an exchange-traded option wishes to
terminate his obligation, he may effect a "closing purchase transaction." This
is accomplished by buying an option of the same series as the option previously
written. A writer may not effect a closing purchase transaction after it has
been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. Also, effecting
a closing transaction will permit the cash or proceeds from the concurrent sale
of any securities subject to the option to be used for other investments of the
Fund. If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
The Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option. The Fund will realize a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing transaction
are less than the premium paid to purchase the option. However, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss to the Fund resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Fund.
Stock Index Options. The Fund may also purchase put and call options
with respect to the S&P 500 and other stock indices. Such options may be
purchased as a hedge against changes resulting from market conditions in the
values of securities which are held in the Fund's portfolio or which it intends
to purchase or sell, or when they are economically appropriate for the reduction
of risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create
certain risks that are not present with stock options generally. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether the Fund will realize a gain or
loss on the purchase or sale of an option on an index depends upon movements in
the level of stock prices in the stock market generally rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on a stock index would be subject to a Manager's ability to predict
correctly movements in the direction of the stock market generally. This
requires different skills and techniques than predicting changes in the price of
individual stocks.
Index prices may be distorted if trading of certain stocks included in
the index is interrupted. Trading of index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this were to occur, the Fund would not be able
to close out options which it had purchased, and if restrictions on exercise
were imposed, the Fund might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the policy of the Fund to
purchase put or call options only with respect to an index which a Manager
believes includes a sufficient number of stocks to minimize the likelihood of a
trading halt in the index.
Risks Of Investing in Options. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
than the underlying securities and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying securities themselves. There are also significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objective. In addition, a liquid secondary market for particular options may
be absent for reasons which include the following: 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 of underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or clearing corporation may not at all times be adequate to handle
current trading volume; or one or more exchanges could, for economic or other
reasons, decide
B-6
<PAGE>
or be compelled at some future date 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 a clearing corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which the Fund may enter into options transactions may be limited by
the Internal Revenue Code of 1986 (the "Code") requirements for qualification of
the Fund as a regulated investment company. See "Dividends and Distributions"
and "Taxation."
Dealer Options. The Fund will engage in transactions involving dealer
options as well as exchange-traded options. Certain additional risks are
specific to dealer options. While the Fund might look to a clearing corporation
to exercise exchange-traded options, if the Fund were to purchase a dealer
option it would need to rely on the dealer from which it purchased the option to
perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, the Fund may generally be able to realize
the value of a dealer option it has purchased only by exercising or reselling
the option to the dealer who issued it. Similarly, when the Fund writes a dealer
option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will at any time be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Unless the Fund, as a
covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair the Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities.
The Fund may treat the cover used for written dealer options as liquid if the
dealer agrees that the Fund may repurchase the dealer option it has written for
a maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
Accordingly, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the Commission changes its position on the
liquidity of dealer options, the Fund will change its treatment of such
instruments accordingly.
Spread Transactions. The Fund may purchase covered spread options from
securities dealers. These covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put securities that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to the Fund, in addition to the risks of
dealer options described above, is the cost of the premium paid as well as any
transaction costs. The purchase of spread options will be used to protect the
Fund against adverse changes in prevailing credit quality spreads, i.e., the
yield spread between high quality and lower quality securities. This protection
is provided only during the life of the spread options.
Futures Contracts and Related Options
The Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates. The
Fund will trade in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). The Fund will
B-7
<PAGE>
segregate liquid assets in a separate account with its Custodian when required
to do so by CFTC guidelines in order to cover its obligation in connection with
futures and options transactions.
No price is paid or received by the Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund will
be required to deposit in a segregated account with its Custodian an amount of
cash or U.S. Treasury bills equal to approximately 5% of the contract amount.
This amount is known as initial margin. The margin requirements for foreign
futures contracts may be different.
The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying stock index fluctuates, to
reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when the
Fund has purchased a stock index futures contract and the price of the
underlying stock index has risen, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when the Fund has purchased a stock index futures
contract and the price of the underlying stock index has declined, the position
will be less valuable and the Fund will be required to make a variation margin
payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract A final determination
of variation margin is made on closing the position. Additional cash is paid by
or released to the Fund, which realizes a loss or a gain.
In addition to amounts segregated or paid as initial and variation
margin, the Fund must segregate liquid assets with its custodian equal to the
market value of the futures contracts, in order to comply with Commission
requirements intended to ensure that the Fund's use of futures is unleveraged.
The requirements for margin payments and segregated accounts apply to both
domestic and foreign futures contracts.
Stock Index Futures Contracts. The Fund may invest in futures contracts
on stock indices. Currently, stock index futures contracts can be purchased or
sold with respect to, among others, the S&P 500 Stock Price Index on the Chicago
Mercantile Exchange, the Major Market Index on the Chicago Board of Trade, the
New York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index on the Kansas City Board of Trade.
Interest Rate or Financial Futures Contracts. The Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established in
the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures contract by the Fund
would create an obligation by the Fund, as seller, to deliver the specific type
of financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by the Fund would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the
B-8
<PAGE>
price in the offsetting purchase, the Fund is paid the difference and thus
realizes a gain. If the offsetting purchase price exceeds the sale price, the
Fund pays the difference and realizes a loss. Similarly, the closing out of a
futures contract purchase is effected by the Fund's entering into a futures
contract sale. If the offsetting sale price exceeds the purchase price, the Fund
realizes a gain, and if the purchase price exceeds the offsetting sale price,
the Fund realizes a loss.
The Fund will deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; GNMA modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and 90-day
commercial paper. The Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments.
Risks of Transactions in Futures Contracts. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract,
the Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Advisor believes that over time the value
of a diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Advisor may still not result in a
successful hedging transaction over a very short time frame.
B-9
<PAGE>
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund may
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by the Fund is also subject to the Advisor's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which the Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
Options on Futures Contracts. As described above, the Fund may purchase options
on the futures contracts they can purchase or sell. A futures option gives the
holder, in return for the premium paid, the right to buy (call) from or sell
(put) to the writer of the option a futures contract at a specified price at any
time during the period of the option. Upon exercise, the writer of the option is
obligated to pay the difference between the cash value of the futures contract
and the exercise price. Like the buyer or seller of a futures contract, the
holder or writer of an option has the right to terminate its position prior to
the scheduled expiration of the option by selling, or purchasing an option of
the same series, at which time the person entering into the closing transaction
will realize a gain or loss. There is no guarantee that such closing
transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is limited to the premium paid for the options (plus
transaction costs).
Restrictions on the Use or Futures Contracts and Related Options. The
Fund will not engage in transactions in futures contracts or related options for
speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase and where the transactions are economically appropriate to
the reduction of risks inherent in the ongoing management of the
B-10
<PAGE>
Fund. The Fund may not purchase or sell futures or purchase related options if,
immediately thereafter, more than 33% of its net assets would be hedged. The
Fund also may not purchase or sell futures or purchase related options if
immediately thereafter, the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for such options would exceed 5% of
the market value of the Fund's net assets.
These restrictions, which are derived from current federal regulations
regarding the use of options and futures by mutual funds, are not "fundamental
restrictions" and may be changed by the Trustees of the Trust if applicable law
permits such a change and the change is consistent with the overall investment
objective and policies of the Fund.
Repurchase Agreements
The Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor, subject to the seller's agreement to repurchase and
the Fund's agreement to resell such securities at a mutually agreed upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio security). Securities subject
to repurchase agreements will be held by the Custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund will
suffer a loss to the extent that the proceeds from a sale of the underlying
securities are less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans under the 1940 Act.
When-Issued Securities, Forward Commitments and Delayed Settlements
The Fund may purchase securities on a "when-issued," forward commitment
or delayed settlement basis. In this event, the Custodian will set aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the Custodian will set aside portfolio securities to satisfy
a purchase commitment. In such a case, the Fund may be required subsequently to
place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash.
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the Fund will set aside cash or liquid portfolio securities to satisfy
its purchase commitments in the manner described, the Fund's liquidity and the
ability of the Advisor to manage it may be affected in the event the Fund's
forward commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 15% of the value of its net assets.
The Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When the Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
Illiquid Securities
The Fund may not invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. The Advisor will monitor the amount
B-11
<PAGE>
of illiquid securities in the Fund's portfolio, under the supervision of the
Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees may determine that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
Risks of Investing in Small Companies
The Fund may purchase securities of companies with market
capitalization as low as $25 million. Additional risks of such investments
include the markets on which such securities are frequently traded. In many
instances the securities of smaller companies are traded only over-the-counter
or on a regional securities exchange, and the frequency and volume of their
trading is substantially less than is typical of larger companies. Therefore,
the securities of smaller companies may be subject to greater and more abrupt
price fluctuations. When making large sales, the 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, an investment in the Fund may be subject to greater price fluctuations
than an investment in a fund that invests exclusively in larger, more
established companies. The Advisor's research efforts may also play a greater
role in selecting securities for the Fund than in a fund that invests in larger,
more established companies.
Investment Restrictions
The Trust (on behalf of the Fund) has adopted the following
restrictions as fundamental policies, which may not be changed without the
favorable vote of the holders of a "majority," as defined in the 1940 Act, of
the outstanding voting securities of the Fund. Under the 1940 Act, the "vote of
the holders of a majority of the outstanding voting securities" means the vote
of the holders of the lesser of (i) 67% of the shares of the Fund represented at
a meeting at which the holders of more than 50% of its outstanding shares are
represented or (ii) more than 50% of the outstanding shares of the Fund.
As a matter of fundamental policy, the Fund is diversified. The Fund's
investment objective is also fundamental.
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except
that (i) the Fund may borrow from banks in amounts not exceeding one-third of
its total assets (not including the amount borrowed); and (ii) this restriction
shall not prohibit the Fund from engaging in options transactions or short
sales;
B-12
<PAGE>
2. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of transactions and except that the Fund may
borrow money from banks to purchase securities;
3. Act as underwriter (except to the extent the Fund may be deemed to
be an underwriter in connection with the sale of securities in its investment
portfolio);
4. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities);
5. Purchase or sell real estate or interests in real estate (although
the Fund may purchase and sell securities which are secured by real estate and
securities of companies which invest or deal in real estate);
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell futures contracts on securities indices and
options and foreign currency contracts in accordance with any rules of the
Commodity Futures Trading Commission;
7. Make loans of money (except for purchases of debt securities
consistent with the investment policies of the Fund and except for repurchase
agreements); or
8. Make investments for the purpose of exercising control or
management.
The Fund observes the following restrictions as a matter of operating
but not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
The Fund may not:
1. Invest in the securities of other investment companies or purchase
any other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal law;
2. Invest more than 15% of its assets in securities which are
restricted as to disposition or otherwise are illiquid or have no readily
available market (except for securities which are determined by the Board of
Trustees to be liquid); or
3. Invest in futures contracts on securities indices and options or
foreign currency contracts.
MANAGEMENT
The overall management of the business and affairs of the Trust is
vested with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day to day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their ages and positions with
the Trust, their business addresses and principal occupations during the past
five years are:
<TABLE>
<CAPTION>
Name, address and age Position Principal Occupation During Past Five Years
<S> <C> <C>
Walter E. Auch, Sr. (76) Trustee Director, Geotech Communications, Inc., Nicholas-Applegate
6001 N. 62d Place Investment Trust, Brinson Funds (since 1994), Smith Barney Trak
Paradise Valley, AZ 85253 Fund, Pimco Advisors L.P., Banyan Realty Trust, Banyan Land
Fund II and Legend Properties.
Eric M. Banhazl (40)* Trustee, Senior Vice President, Investment Company Administration
2025 E. Financial Way President and Corporation; Vice President, First Fund Distributors; President,
Glendora, CA 91740 Treasurer RNC Mutual Fund Group; Treasurer, Guiness Flight Investment
Funds, Inc. and Professionally Managed Portfolios.
Donald E. O'Connor (61) Trustee Retired; formerly Executive Vice President and Chief Operating
1700 Taylor Avenue Officer of ICI Mutual Insurance Company (until January, 1997), Vice
B-13
<PAGE>
Fort Washington MD, 20744 President, Operations, Investment Company Institute (until June,
1993).
George T. Wofford III (58) Trustee Vice President, Information Services, Federal
Home Loan Bank of 305 Glendora Circle San Francisco (since March, 1993);
formerly Director of Management Danville, CA 94526 Information Services,
Morrison & Foerster (law firm).
Steven J. Paggioli (47) Vice Executive Vice President, Robert H. Wadsworth & Associates, Inc.
479 W. 22d Street President and Investment Company Administration Corporation; Vice President
New York, NY 10011 First Fund Distributors, Inc.; President and Trustee, Professionally
Managed Portfolios; Director, Managers Funds, Inc.
Robert H. Wadsworth (58) Vice President, Robert H. Wadsworth & Associates, Inc., Investment
4455 E. Camelback Road President Company Administration Corporation and First Fund Distributors,
Suite 261E Inc.; Vice President, Professionally Managed Portfolios; President,
Phoenix, AZ 85018 Guinness Flight Investment Funds, Inc.; Director, Germany Fund,
Inc., New Germany Fund, Inc., Central European Equity Fund, Inc.
and Deutsche Funds, Inc.
Chris O. Kissack (49) Secretary Employed by Investment Company Administration Corporation (since
4455 E. Camelback Road, 261E July, 1996); formerly employed by Bank One, N.A. (from August, 1995
Phoenix, AZ 85018 until July, 1996); O'Connor, Cavanagh, Anderson, Killingsworth
and Beshears (law firm) (until August, 1995).
</TABLE>
* denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
Name and Position Aggregate Compensation from The Trust*
Walter E. Auch, Sr., Trustee $12,000
Donald E. O'Connor, Trustee $12,000
George T. Wofford III, Trustee $12,000
*The Trust has no pension or retirement plan. No other entity affiliated with
the Trust pays any compensation to the Trustees.
The Advisor
Subject to the supervision of the Board of Trustees, investment
management and related services are provided by the Advisor, pursuant to an
Investment Advisory Agreement (the "Advisory Agreement").
Under the Advisory Agreement, the Advisor agrees to invest the assets
of the Fund in accordance with the investment objectives, policies and
restrictions of the Fund as set forth in the Fund's and Trust's governing
documents, including, without limitation, the Trust's Agreement and Declaration
of Trust and By-Laws; the Fund's prospectus, statement of additional
information, and undertakings; and such other limitations, policies and
procedures as the Trustees of the Trust may impose from time to time in writing
to the Advisor. In providing such services, the Advisor shall at all times
adhere to the provisions and restrictions contained in the federal securities
laws, applicable state securities laws, the Code, and other applicable law.
Without limiting the generality of the foregoing, the Advisor has agreed to (i)
furnish the Fund with advice and recommendations with respect to the investment
of the Fund's assets, (ii) effect the purchase and sale of portfolio securities;
(iii) manage and oversee the investments of the Fund, subject to the ultimate
supervision and direction of the Trust's Board of Trustees; (iv) vote proxies
and take other actions with respect to the Fund's securities; (v) maintain the
books and records required to be maintained with respect to the securities in
the Fund's portfolio; (vi) furnish reports, statements and other data on
securities, economic conditions and other matters related to the investment of
the Fund's assets which the Trustees or the officers of the Trust may reasonably
request; and (vi) render to the Trust's Board of Trustees such periodic and
special reports as the Board may reasonably request. The Advisor
B-14
<PAGE>
has also agreed, at its own expense, to maintain such staff and employ or retain
such personnel and consult with such other persons as it shall from time to time
determine to be necessary to the performance of its obligations under the
Advisory Agreement. Personnel of the Advisor may serve as officers of the Trust
provided they do so without compensation from the Trust. Without limiting the
generality of the foregoing, the staff and personnel of the Advisor shall be
deemed to include persons employed or retained by the Advisor to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Advisor or the Trust's Board of Trustees may desire and reasonably request.
With respect to the operation of the Fund, the Advisor has agreed to be
responsible for the expenses of printing and distributing extra copies of the
Fund's prospectus, statement of additional information, and sales and
advertising materials (but not the legal, auditing or accounting fees attendant
thereto) to prospective investors (but not to existing shareholders); and the
costs of any special Board of Trustees meetings or shareholder meetings convened
for the primary benefit of the Advisor.
As compensation for the Advisor's services, the Fund pays it an
advisory fee at the rate specified in the prospectus. In addition to the fees
payable to the Advisor and the Administrator, the Trust is responsible for its
operating expenses, including: fees and expenses incurred in connection with the
issuance, registration and transfer of its shares; brokerage and commission
expenses; all expenses of transfer, receipt, safekeeping, servicing and
accounting for the cash, securities and other property of the Trust for the
benefit of the Fund including all fees and expenses of its custodian,
shareholder services agent and accounting services agent; interest charges on
any borrowings; costs and expenses of pricing and calculating its daily net
asset value and of maintaining its books of account required under the 1940 Act;
taxes, if any; a pro rata portion of expenditures in connection with meetings of
the Fund's shareholders and the Trust's Board of Trustees that are properly
payable by the Fund; salaries and expenses of officers and fees and expenses of
members of the Trust's Board of Trustees or members of any advisory board or
committee who are not members of, affiliated with or interested persons of the
Advisor or Administrator; insurance premiums on property or personnel of the
Fund which inure to its benefit, including liability and fidelity bond
insurance; the cost of preparing and printing reports, proxy statements,
prospectuses and statements of additional information of the Fund or other
communications for distribution to existing shareholders; legal, auditing and
accounting fees; trade association dues; fees and expenses (including legal
fees) of registering and maintaining registration of its shares for sale under
federal and applicable state and foreign securities laws; all expenses of
maintaining and servicing shareholder accounts, including all charges for
transfer, shareholder recordkeeping, dividend disbursing, redemption, and other
agents for the benefit of the Fund, if any; and all other charges and costs of
its operation plus any extraordinary and non-recurring expenses, except as
otherwise prescribed in the Advisory Agreement.
The Advisor has agreed to reduce fees payable to it by the Fund and to pay
Fund operating expenses to the extent necessary to limit the Fund's aggregate
annual operating expenses to the limit set forth in the Expense Table (the
"expense cap"). Any such reductions made by the Advisor in its fees or payment
of expenses which are the Fund's obligation are subject to reimbursement by the
Fund to the Advisor, if so requested by the Advisor, in the first, second or
third fiscal year next succeeding the fiscal year of the reduction or absorption
if the aggregate amount actually paid by the Fund toward the operating expenses
for such fiscal year (taking into account the reimbursement) does not exceed the
applicable limitation on Fund expenses. With respect to the reimbursement of a
particular fee reduction or expense payment, a reimbursement to the Advisor is
permitted only within the three year period following the year in which the
Advisor reduced the subject fee or paid the subject expense. Any such
reimbursement is also contingent upon Board of Trustees review and approval at
the time the reimbursement is made. Such reimbursement may be paid prior to the
Fund's payment of current expenses if so requested by the Advisor even if that
practice may require the Advisor to waive, reduce or absorb current Fund
expenses.
The Advisor is controlled by Craig O. Jolly.
Under the Advisory Agreement, the Advisor will not be liable to the
Trust or the Fund or any shareholder for any act or omission in the course of,
or connected with, rendering services or for any loss sustained by the Trust
except in the case of a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad faith or gross
negligence, or reckless disregard of its obligations and duties under the
Agreement.
The Advisory Agreement will remain in effect for a period not to exceed
two years. Thereafter, if not terminated, the Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of Trustees
or by the holders of a majority of the outstanding voting securities of the Fund
at any time without penalty, on 60 days written notice to the Advisor.
B-15
<PAGE>
The Advisory Agreement also may be terminated by the Advisor on 60 days written
notice to the Trust. The Advisory Agreement terminates automatically upon its
assignment (as defined in the 1940 Act).
The Administrator. The Administrator has agreed to be responsible for
providing such services as the Trustees may reasonably request, including but
not limited to (i) maintaining the Trust's books and records (other than
financial or accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Trust's insurance
relationships; (iii) preparing for the Trust (or assisting counsel and/or
auditors in the preparation of) all required tax returns, proxy statements and
reports to the Trust's shareholders and Trustees and reports to and other
filings with the Commission and any other governmental agency (the Trust
agreeing to supply or cause to be supplied to the Administrator all necessary
financial and other information in connection with the foregoing); (iv)
preparing such applications and reports as may be necessary to permit the offer
and sale of the shares of the Trust under the securities or "blue sky" laws of
the various states selected by the Trust (the Trust agreeing to pay all filing
fees or other similar fees in connection therewith); (v) responding to all
inquiries or other communications of shareholders, if any, which are directed to
the Administrator, or if any such inquiry or communication is more properly to
be responded to by the Trust's custodian, transfer agent or accounting services
agent, overseeing their response thereto; (vi) overseeing all relationships
between the Trust and any custodian(s), transfer agent(s) and accounting
services agent(s), including the negotiation of agreements and the supervision
of the performance of such agreements; and (vii) authorizing and directing any
of the Administrator's directors, officers and employees who may be elected as
Trustees or officers of the Trust to serve in the capacities in which they are
elected. All services to be furnished by the Administrator under this Agreement
may be furnished through the medium of any such directors, officers or employees
of the Administrator.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that the Advisor shall be responsible for
broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Advisor shall not direct orders to an affiliated person of the
Advisor without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. The Advisor's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction, the
Advisor may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of Trustees of
the Trust may determine, the Advisor shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to the Advisor
an amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Advisor determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Advisor's overall responsibilities with respect to
the Fund. The Advisor is further authorized to allocate the orders placed by it
on behalf of the Fund to such brokers or dealers who also provide research or
statistical material, or other services, to the Trust, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions as
the Advisor shall determine, and the Advisor shall report on such allocations
regularly to the Advisor and the Trust, indicating the broker-dealers to whom
such allocations have been made and the basis therefor. The Advisor is also
authorized to consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions, subject to the
requirements of best execution, i.e., that such brokers or dealers are able to
execute the order promptly and at the best obtainable securities price.
On occasions when the Advisor deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients of the Advisor,
the Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well
B-16
<PAGE>
as the expenses incurred in the transaction, will be made by the Advisor in the
manner it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
The Fund expects that all, or substantially all, of its portfolio
brokerage transactions will be executed by Heritage West Securities, its
Distributor, which is an affiliate of its Advisor. The Distributor has
negotiated commission rates with the broker-dealer which clears its brokerage
transactions for it and intends to pass these rates through to the Fund without
any mark-up or other profit for the Distributor.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is
determined as of the close of trading on the New York Stock Exchange (the
"NYSE") (currently 4:00 p.m. Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor and the Trust's Valuation Committee pursuant to procedures approved by
or under the direction of the Board.
The Fund's securities, including ADRs, which are traded on securities
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any reported sales, at the mean between the last
available bid and asked price. Securities that are traded on more than one
exchange are valued on the exchange determined by the Advisor to be the primary
market. Securities traded in the over-the-counter market are valued at the mean
between the last available bid and asked price prior to the time of valuation.
Securities and assets for which market quotations are not readily available
(including restricted securities which are subject to limitations as to their
sale) are valued at fair value as determined in good faith by or under the
direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. If an options
exchange closes after the time at which the Fund's net asset value is
calculated, the last sale or last bid and asked prices as of that time will be
used to calculate the net asset value.
All other assets of the Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
TAXATION
The Fund will be taxed, under the Code, as a separate entity from any
other series of the Trust, and it intends to elect to qualify for treatment as a
regulated investment company ("RIC") under Subchapter M of the Code. In each
taxable year that the Fund so qualifies, the Fund (but not its shareholders)
will be relieved of federal income tax on that part of its investment company
taxable income (consisting generally of interest and dividend income, net
short-term capital gains and net realized gains from currency transactions) and
net capital gain that is distributed to shareholders.
B-17
<PAGE>
In order to qualify for treatment as a RIC, the Fund must distribute
annually to shareholders at least 90% of its investment company taxable income
and must meet several additional requirements. Among these requirements are, in
general, the following: (1) at least 90% of the Fund's gross income each taxable
year must be derived 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 derived with respect to its business of
investing in securities or 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, U.S. Government securities, securities of
other RICs and other securities, limited in respect of any one issuer, to an
amount that does not exceed 5% of the value of the Fund's assets and that does
not represent more than 10% of the outstanding voting securities of such issuer;
and (3) at the close of each quarter of the Fund's taxable year, not more than
25% of the value of its assets may be invested in securities (other than U.S.
Government securities or the securities of other RICs) of any one issuer.
Distributions of net investment income and net realized capital gains
by the Fund will be taxable to shareholders whether made in cash or reinvested
in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carryovers from prior years will be applied
against capital gains. Shareholders receiving distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the net asset value of a share of the Fund on the
reinvestment date. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed.
The Fund intends to declare and pay dividends quarterly and other
distributions annually, as stated in the Prospectus. In order to avoid the
payment of any federal excise tax based on net income, the Fund must declare on
or before December 31 of each year, and pay on or before January 31 of the
following year, distributions at least equal to 98% of its ordinary income for
that calendar year and at least 98% of the excess of any capital gains over any
capital losses realized in the one-year period ending October 31 of that year,
together with any undistributed amounts of ordinary income and capital gains (in
excess of capital losses) from the previous calendar year.
The Fund will receive dividend distributions from U.S. corporations. To
the extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
The use of hedging strategies, such as purchasing options, involves
complex rules that will determine the character and timing of recognition of the
income received in connection therewith by the Fund. For accounting purposes,
when the Fund purchases an option, the premium paid by the Fund is recorded as
an asset and is subsequently adjusted to the current market value of the option.
Any gain or loss realized by the Fund upon the expiration or sale of such
options held by the Fund generally will be capital gain or loss.
Any security, option, or other position entered into or held by the
Fund that substantially diminishes the Fund's risk of loss from any other
position held by that 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 the 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; that 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 the
Fund that may mitigate the effects of the straddle rules.
Certain options that are subject to Section 1256 of the Code ("Section
1256 Contracts") and that are held by the 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
capital gain or loss.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
B-18
<PAGE>
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends with respect to such shares during such
six-month period. All or a portion of a loss realized upon the redemption of
shares of the 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.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the Prospectus are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Fund. The law firm of Paul, Hastings,
Janofsky & Walker has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends from the Fund's investment company taxable income (whether
paid in cash or invested in additional shares) will be taxable to shareholders
as ordinary income to the extent of the Fund's earnings and profits.
Distributions of the Fund's net capital gain (whether paid in cash or invested
in additional shares) will be taxable to shareholders as capital gain,
regardless of how long they have held their Fund shares.
Dividends declared by the Fund in October, November or December of any
year and payable to shareholders of record on a date in one of such months will
be deemed to have been paid by the Fund and received by the shareholders on the
record date if the dividends are paid by the Fund during the following January.
Accordingly, such dividends will be taxed to shareholders for the year in which
the record date falls.
The Fund or any securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
IRS with respect to distributions and payments made to the shareholder. In
addition, the Fund will be required to withhold federal income tax at the rate
of 31% on taxable dividends, redemptions and other payments made to accounts of
individual or other non-exempt shareholders who have not furnished their correct
taxpayer identification numbers and made certain required certifications on the
Account Application Form or with respect to which the Fund or the securities
dealer has been notified by the IRS that the number furnished is incorrect or
that the account is otherwise subject to withholding. Amounts withheld under
these rules will be creditable against a shareholder's federal income tax
liability.
PERFORMANCE INFORMATION
Total Return
Average annual total return quotations used in the Fund's advertising
and promotional materials are calculated according to the following formula:
P(1 + T)n = ERV
where "P" equals a hypothetical initial payment of $1000; "T" equals average
annual total return; "n" equals the number of years; and "ERV" equals the ending
redeemable value at the end of the period of a hypothetical $1000 payment made
at the beginning of the period.
Under the foregoing formula, the time periods used in advertising will
be based on rolling calendar quarters, updated to the last day of the most
recent quarter prior to submission of the advertising for publication. Average
annual total return, or "T" in the above formula, is computed by finding the
average annual compounded rates of return over the period that would equate the
initial amount invested to the ending redeemable value. Average annual total
return assumes the reinvestment of all dividends and distributions.
B-19
<PAGE>
Yield
Annualized yield quotations used in the Fund's advertising and
promotional materials are calculated by dividing the Fund's investment income
for a specified thirty-day period, net of expenses, by the average number of
shares outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
YIELD = 2 [(a-b + 1)6 - 1]
cd
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends and "d" equals the maximum offering price per share on the
last day of the period.
Except as noted below, in determining net investment income earned
during the period ("a" in the above formula), the Fund calculates interest
earned on each debt obligation held by it during the period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the period or,
if the obligation was purchased during the period, the purchase price plus
accrued interest; (2) dividing the yield to maturity by 360 and multiplying the
resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the Fund, net investment income is then determined by
totaling all such interest earned.
For purposes of these calculations, the maturity of an obligation with
one or more call provisions is assumed to be the next date on which the
obligation reasonably can be expected to be called or, if none, the maturity
date.
Other information
Performance data of the Fund quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or indicate future results. The return and principal value of an investment in
the Fund will fluctuate, and an investor's redemption proceeds may be more or
less than the original investment amount. In advertising and promotional
materials the Fund may compare its performance with data published by Lipper
Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc.
("CDA"). The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper or CDA. Advertising and promotional materials also may refer
to discussions of the Fund and comparative mutual fund data and ratings reported
in independent periodicals including, but not limited to, The Wall Street
Journal, Money Magazine, Forbes, Business Week, Financial World and Barron's.
GENERAL INFORMATION
The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest and to divide or
combine the shares into a greater or lesser number of shares without thereby
changing the proportionate beneficial interest in the Fund. Each share
represents an interest in the Fund proportionately equal to the interest of each
other share. Upon the Fund's liquidation, all shareholders would share pro rata
in the net assets of the Fund available for distribution to shareholders.
The Declaration of Trust does not require the issuance of stock
certificates. If stock certificates are issued, they must be returned by the
registered owners prior to the transfer or redemption of shares represented by
such certificates.
If they deem it advisable and in the best interest of shareholders, the
Board of Trustees may create additional series of shares which differ from each
other only as to dividends. The Board of Trustees has created several series of
shares, and may create additional series in the future, which have separate
assets and liabilities. Income and operating expenses not specifically
attributable to a particular Fund are be allocated fairly among the Funds by the
Trustees, generally on the basis of the relative net assets of each Fund.
B-20
<PAGE>
Rule 18f-2 under the 1940 Act provides that as to any investment
company which has two or more series outstanding and as to any matter required
to be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
The Fund's custodian, Wheat First Securities is responsible for holding
the Funds' assets. The Administrator acts as the Fund's accounting services
agent. The Fund's independent accountants, McGladrey & Pullen, LLP, 555 Fifth
Avenue, New York, NY 10017, assist in the preparation of certain reports to the
Securities and Exchange Commission and the Fund's tax returns.
APPENDIX
Description of Ratings
Moody's Investors Service Ratings
Preferred Stock
A variation of Moody's bond rating symbols is used in the quality
ranking of preferred stock. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stock occupies a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
"aaa" An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
"a" An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater then in the
"aaa" and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
"ba" An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
"b" An issue which is rated "b" generally lacks the characteristics of
a desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Debt Ratings - Taxable Debt
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
B-21
<PAGE>
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 the Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa
and Aa rating classifications. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the issue
ranks in the lower end of its generic rating category.
Short-Term Taxable Debt
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Prime-1-- Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: Leading market positions in well-established industries; High
rates of return on funds employed; Conservative capitalization structure with
moderate reliance on debt and ample asset protection; Broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
Well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Standard & Poor's Corporation Ratings
Preferred Stock
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the debt rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
Preferred stock ratings are based on the following considerations:
1. Likelihood of payment-capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA - This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a
high-quality, fixed-income security. The capacity to pay preferred stock
obligations is very strong, although not as overwhelming as for issues rated
AAA.
A - An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
B-22
<PAGE>
BBB - An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B, CCC - Preferred stock rated BB, B, and CCC are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations. BB indicates the lowest degree of speculation
and CCC the highest. While such issues will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
To provide more detailed indications of preferred stock quality,
ratings from AA to CCC may be modified by the addition of a plus or minus sign
to show relative standing within the major rating categories.
Long Term Debt
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in the majority of
instances they differ from AAA issues only in small degree.
Commercial Paper Ratings
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment. Ratings are graded into four categories,
ranging from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1.
B-23
