KAMINSKI POLAND FUND
Statement of Additional Information
Dated March 16, 1999
Supplemented May 3, 1999
This Statement of Additional Information is not a prospectus and contains
information in addition to that set forth in: the prospectus for the Class I
shares of the Kaminski Poland Fund dated October 30, 1998, and the prospectus
for the Class A shares of the Kaminski Poland Fund, dated March 16, 1999, each
as may be revised from time to time (each a "prospectus" and collectively, the
"prospectuses"). Kaminski Poland Fund (the "Fund") is a series of Advisors
Series Trust (the "Trust"). Kaminski Asset Management, Inc. (the "Advisor"), is
the Advisor to the Fund. Copies of the prospectuses may be obtained from the
Fund at 319 1st Avenue North, Minneapolis, Minnesota, telephone number (612)
305-9026.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference to sections
Page in the prospectus
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<S> <C> <C>
Investment Objective and Policies........... B-2 Investment Objectives and Policies
Management.................................. B-11 Management of the Fund
Distribution Arrangements................... B-14 Management of the Fund
Portfolio Transactions and Brokerage........ B-14 Management of the Fund
Net Asset Value............................. B-15 Investor Guide
Taxation ................................... B-16 Distributions and Taxes
Dividends and Distributions................. B-18 Distributions and Taxes
Performance Information..................... B-19 General Information
General Information......................... B-20 General Information
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is long term growth of capital, which
it attempts to achieve by investing in equity securities that are issued by
companies based in the Republic of Poland. 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.
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in convertible securities and warrants. A convertible
security is a fixed income security (a debt instrument or a preferred stock)
which 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 affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant 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 debt securities or 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).
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.
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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.
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.
INVESTMENT COMPANY SECURITIES
The Fund may invest in shares of other investment companies. The Fund may
invest in money market mutual funds in connection with its management of daily
cash positions. In addition to the advisory and operational fees a Fund bears
directly in connection with its own operation, the Fund would also bear its pro
rata portions of each other investment company's advisory and operational
expenses.
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 thecancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to
B-3
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service its debt in a timely manner.
FOREIGN INVESTMENTS AND CURRENCIES
The Fund will invest in securities of foreign issuers that are not publicly
traded in the United States. The Fund may also invest in depositary receipts and
in foreign currency futures contracts and may purchase and sell foreign currency
on a spot basis.
DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs 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, which are described in the Fund's prospectus.
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 subject to certain restrictions. The Fund will engage in
trading of such derivative securities exclusively for hedging purposes.
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 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
B-4
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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.
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities. 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 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."
In addition, when trading options on foreign exchanges, many of the
protections afforded to participants in United States option exchanges will not
be available. For example, there may be no daily price fluctuation limits in
such exchanges or markets, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the Fund as an option writer
could lose amounts substantially in excess of its initial investment, due to the
margin and collateral requirements typically associated with such option
writing. See "Dealer Options".
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
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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.
FOREIGN CURRENCY OPTIONS. The Fund may buy or sell put and call options on
foreign currencies. A put or call option on a foreign currency gives the
purchaser of the option the right to sell or purchase a foreign currency at the
exercise price until the option expires. The Fund will use foreign currency
options separately or in combination to control currency volatility. Among the
strategies employed to control currency volatility is an option collar. An
option collar involves the purchase of a put option and the simultaneous sale of
a call option on the same currency with the same expiration date but with
different exercise (or "strike") prices. Generally, the put option will have an
out-of-the-money strike price, while the call option will have either an
at-the-money strike price or an in-the-money strike price. Foreign currency
options are derivative securities. Currency options traded on U.S. or other
exchanges may be subject to position limits which may limit the ability of the
Fund to reduce foreign currency risk using such options.
As with other kinds of option transactions, the writing of an option on
foreign currency will constitute only a partial hedge, up to the amount of the
premium received. The Fund could be required to purchase or sell foreign
currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations: however, in the event of exchange rate
movements adverse to the Fund's position, the Fund may forfeit the entire amount
of the premium plus related transaction costs.
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.
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FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. For example, the Fund might purchase a
particular currency or enter into a forward currency contract to preserve the
U.S. dollar price of securities it intends to or has contracted to purchase.
Alternatively, it might sell a particular currency on either a spot or forward
basis to hedge against an anticipated decline in the dollar value of securities
it intends to or has contracted to sell. Although this strategy could minimize
the risk of loss due to a decline in the value of the hedged currency, it could
also limit any potential gain from an increase in the value of the currency.
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.
BORROWING
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 10% of the value of its total assets at the time of such borrowings. The
use of borrowing by the Fund involves special risk considerations that may not
be associated with other funds
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having similar objectives and policies. Since substantially all of the Fund's
assets fluctuate in value, whereas the interest obligation resulting from a
borrowing will be fixed by the terms of the Fund's agreement with its lender,
the 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 funds. 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. Under adverse market conditions, the Fund might have
to sell portfolio securities to meet interest or principal payments at a time
when fundamental investment considerations would not favor such sales.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities in an amount not exceeding
one-third of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund to
reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Code.
SHORT SALES
The Fund is authorized to make short sales of securities it owns or has the
right to acquire at no added cost through conversion or exchange of other
securities it owns (referred to as short sales "against the box") and to make
short sales of securities which it does not own or have the right to acquire.
In a short sale that is not "against the box," the Fund sells a security
which it does not own, in anticipation of a decline in the market value of the
security. To complete the sale, the Fund must borrow the security (generally
from the broker through which the short sale is made) in order to make delivery
to the buyer. The Fund is then obligated to replace the security borrowed by
purchasing it at the market price at the time of replacement. The Fund is said
to have a "short position" in the securities sold until it delivers them to the
broker. The period during which the Fund has a short position can range from one
day to more than a year. Until the security is replaced, the proceeds of the
short sale are retained by the broker, and the Fund is required to pay to the
broker a negotiated portion of any dividends or interest which accrue during the
period of the loan. To meet current margin requirements, the Fund is also
required to deposit with the broker additional cash or securities so that the
total deposit with the broker is maintained daily at 150% of the current market
value of the securities sold short (100% of the current market value if a
security is held in the account that is convertible or exchangeable into the
security sold short within 90 days without restriction other than the payment of
money).
Short sales by the Fund that are not made "against the box" create
opportunities to increase the Fund's return but, at the same time, involve
specific risk considerations and may be considered a speculative technique.
Since the Fund in effect profits from a decline in the price of the securities
sold short without the need to invest the full purchase price of the securities
on the date of the short sale, the Fund's net asset value per share will tend to
increase more when the securities it has sold short decrease in value, and to
decrease more when the securities it has sold short increase in value, than
would otherwise be the case if it had not engaged in such short sales. The
amount of any gain will be decreased, and the amount of any loss increased, by
the amount of any premium, dividends or interest the Fund may be required to pay
in connection with the short sale. Furthermore, under adverse market conditions
the Fund might have difficulty purchasing securities to meet its short sale
delivery obligations, and might have to sell portfolio securities to raise the
capital necessary to meet its short sale obligations at a time when fundamental
investment considerations would not favor such sales.
If the Fund makes a short sale "against the box," the Fund would not
immediately deliver the securities sold and would not receive the proceeds from
the sale. The seller is said to have a short position in the securities sold
until it delivers the securities sold, at which time it receives the proceeds of
the sale. To secure its obligation to deliver securities sold short, the Fund
will deposit in escrow in a separate account with the Custodian an equal amount
of the securities sold short or securities convertible into or exchangeable for
such securities. The Fund can close out its short
B-8
<PAGE>
position by purchasing and delivering an equal amount of the securities sold
short, rather than by delivering securities already held by the Fund, because
the Fund might want to continue to receive interest and dividend payments on
securities in its portfolio that are convertible into the securities sold short.
The Fund's decision to make a short sale "against the box" may be a
technique to hedge against market risks when the Advisor believes that the price
of a security may decline, causing a decline in the value of a security owned by
the Fund or a security convertible into or exchangeable for such security. In
such case, any future losses in the Fund's long position would be reduced by a
gain in the short position. The extent to which such gains or losses in the long
position are reduced will depend upon the amount of securities sold short
relative to the amount of the securities the Fund owns, either directly or
indirectly, and, in the case where the Fund owns convertible securities, changes
in the investment values or conversion premiums of such securities.
The extent to which the Fund may enter into short sales transactions may be
limited by the Code requirements for qualification of the Fund as a regulated
investment company. See "Taxation."
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 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
As stated in the prospectus, the Fund may purchase securities of companies
with market capitalization as low as $10 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.
B-9
<PAGE>
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 non-diversified; I.E., as to
50% of the value of a its total assets: (i) no more than 5% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities); and (ii) the Fund may not purchase more than 10% of
the outstanding voting securities of an issuer. The Fund's investment objective
is also fundamental. The Fund will also, as a matter of fundamental policy,
invest at least 80% of its total assets, under normal market conditions, in
securities of issuers based in the Republic of Poland.
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except that
(i) the Fund may borrow on an unsecured basis from banks for temporary or
emergency purposes or for the clearance of transactions in amounts not exceeding
10% of its total assets (including the amount borrowed), provided that it will
not make investments while borrowings in excess of 5% of the value of its total
assets are outstanding; and (ii) this restriction shall not prohibit the Fund
from engaging in options and foreign currency transactions or short sales;
2. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions:
3. Act as underwriter (except to the extent the Fund may be deemed to be an
underwriter in connection with 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 one industry (other than U.S. Government
securities);
5. Purchase of sell real estate or interests in real estate or real estate
limited partnerships (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 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; or
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).
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,
B-10
<PAGE>
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 Auch, Sr. (Born 1921) Trustee Director, Mutual Funds, Nicholas-Applegate, Brinson
6002 N. 62d Place Funds (since 19940, Smith Barney Trak Fund, Pimco
Paradise Valley, AZ 85253 Advisors L.P., Banyan Realty Trust, Banyan Land
Fund II and Legend Properties.
Eric M. Banhazl (Born 1957)* Trustee, Senior Vice President, Investment Company
2025 E. Financial Way President Administration Corporation; Vice President, First Fund
Glendora, CA 91740 and Distributors, Inc.; Assistant Treasurer, RNC Mutual
Treasurer Fund Group; Treasurer, Guinness Flight Investment
Funds, Inc. and Professionally Managed Portfolios.
Donald E. O'Connor Trustee Retired; formerly Executive Vice President and chief Operating
(Born 1936) Officer of ICI Mutual Insurance Company (until January 1997),
1700 Taylor Avenue Vice President, Operations, Investment Company Institute
Fort Washington, MD 20744 (until June 1993).
George T. Wofford III Trustee Vice President, Information Services, Federal Home Loan Bank
(Born 1939) San Francisco (since March 1993); formerly Director of
305 Glendora Circle Management Information Services, Morrison & Foerster (law firm).
Danville, CA 94526
Steven J. Paggioli (Born 1950) Vice Executive Vice President, Robert H. Wadsworth &
479 W. 22d Street President Associates, Inc. and Investment Company
New York, NY 10011 Administration Corporation; Vice President, First Fund
Distributors, Inc.; President and Trustee, Professionally
Managed Portfolios; Director, Managers Funds, Inc.
Robert H. Wadsworth Vice President, Robert H. Wadsworth & Associates, Inc.,
(Born 1940) President Investment Company Administration Corporation and
4455 E. Camelback Road First Fund Distributors, Inc.; Vice President,
Suite 261E Professional Managed Portfolios; President Guinness
Phoenix, AZ 85018 Flight Investment Funds, Inc.; Director, Germany
Fund, Inc. New Germany Fund, Inc., Central European
Equity Fund, Inc. and Deutsche Funds, Inc.
Chris O. Moser (Born 1949) Secretary Employed by Investment Company Administration
4455 E. Camelback Road (since July 1996); formerly employed by Bank One,
Suite 261E N.A. (From August 1995 until July 1996); O'Connor,
Phoenix, AZ 85018 Cavanagh, Anderson, Killingsworth and Beshears (law
Trustee firm) (until August 1995).
</TABLE>
*denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
B-11
<PAGE>
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
*Estimated for the current fiscal year. For the fiscal year ended June 30, 1998,
the aggregate compensation paid by the Trust to each Trustee was $8,500. 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 provision
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 investment 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 other officers of the
Trust may reasonably request; and (vii) render to the Trust's Board of Trustees
such periodic and special reports as the Board may reasonably request. The
Advisor 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 ti 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 fo 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 marketing
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 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 calculation 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 member of, affiliated with or interested persons of the Advisor or
Administrator; insurance premiums on property or personnel of the Fund which
insure 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 distributing
to existing shareholders; legal, auditing and accounting fees; trade association
dues; fees and expense (including legal fees) of registering and maintaining and
servicing shareholder accounts, including charges for transfer, shareholder
record keeping, dividend disbursing, redemption, and other agents for the
benefit of
B-12
<PAGE>
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 Fund is responsible for its own operating expenses. The Advisor has
contractually 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 (excluding interest and tax 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 subsequent fiscal years 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. The
Advisor is permitted to be reimbursed only for fee reductions and expense
payments made in the previous three fiscal years, but is permitted to look back
five years and four years, respectively, during the initial six years and
seventh year of the Fund's operations. Any such reimbursement is also contingent
upon Board of Trustees' subsequent review and ratification of the reimbursed
amounts. Such reimbursement may not be paid prior to the Fund's payment of
current ordinary operating expenses.
During the period beginning July 9, 1997 and ending June 30, 1998, the
Advisor earned $13,159 in advisory fees. The Advisor has contractually agreed to
limit total fund operating expenses to 2.75% of average net assets annually. As
a result of that limitation, the Advisor waived the full amount of its fee and
paid Fund operating expenses in the amount of $121,213.
The Advisor is controlled by M. G. Kaminski.
Under the Advisory Agreement, the Advisor will not be liable to the Trust
of the Fund or any shareholder for any act or commission 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 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 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 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.
For its services, the Administrator receives a fee monthly at the following
annual rate:
Fund asset level Fee rate
- ---------------- --------
First $50 million 0.20% of average daily net assets
Next $50 million 0.15% of average daily net assets
Next $50 million 0.10% of average daily net assets
Next $50 million, and thereafter 0.05% of average daily net assets
B-13
<PAGE>
DISTRIBUTION ARRANGEMENTS
Pursuant to a plan of distribution adopted by the Trust, on behalf of the
Fund, pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Fund may pay
distribution and related expenses up to 0.25% of its average net assets to the
Advisor as distribution coordinator. Expenses permitted to be paid include
preparation, printing and mailing of prospectuses, shareholder reports such as
semi-annual and annual reports, performance reports and newsletters, sales
literature and other promotional material to prospective investors, direct mail
solicitations, advertising, public relations, compensation of sales personnel,
advisors or other third parties for their assistance with respect to the
distribution of the Fund's shares, payments to financial intermediaries for
shareholder support, administrative and accounting services with respect to
shareholders of the Fund and such other expenses as may be approved from time to
time by the Board of Trustees of the Trust.
The Plan allows excess distribution expenses to be carried forward by the
Advisor, as distribution coordinator, and resubmitted in a subsequent fiscal
year, provided that (i) distribution expenses cannot be carried forward for more
than three years following initial submission; (ii) the Trustees have made a
determination at the time of initial submission that the distribution expenses
are appropriate to be carried forward and (iii) the Trustees make a further
determination, at the time any distribution expenses which have been carried
forward are submitted for payment, that payment at the time is appropriate,
consistent with the objectives of the Plan and in the current best interests of
shareholders.
Under the Plan, the Trustees will be furnished quarterly with information
detailing the amount of expenses paid under the Plan and the purposes for which
payments were made. The Plan may be terminated at any time by vote of a majority
of the Trustees of the Trust who are not interested persons. Continuation of the
Plan is considered by such Trustees no less frequently than annually. During the
period beginning July 9, 1997 and ending June 30, 1998, the Fund paid to the
Distribution Coordinator distribution fees totaling $1,977 for the original
class of shares of the Fund.
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 yo
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 of lower brokerage
B-14
<PAGE>
commissions and the most efficient execution. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Advisor in the manner it considers to be most
equitable and consistent with its fiduciary obligations to the Fund and to such
other clients.
Brokerage commissions paid during the period beginning July 9, 1997, and
ending June 30, 1998, aggregated $30,234.
NET ASSET VALUE
The net asset value of each class of the Fund's shares will fluctuate and
is determined as of the close of trading on the New York Stock Exchange (the
"NYSE") (generally 4:00p.m. Eastern time) each business day the NYSE is open for
trading. The NYSE annually announces the days on which it will not be open for
trading. The NSYE generally closes for holidays such as: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day. However, the NYSE may close
on days not included in this list.
The net asset value per share of a class of the Fund is computed by
dividing the value of the securities held by the Fund plus any other cash or
other assets (including interest and dividends accrued but not yet received)
minus that class's proportional interest in the Fund's liabilities (including
accrued expenses) by the total number of shares of that class outstanding at
such time.
Generally, trading in and valuation of securities in Poland is
substantially completed each day prior to the close of the NYSE. In addition,
trading in, and valuation of, those securities may not take place on some days
in which the NYSE is open for trading. In that case, the price used to determine
the Fund's net asset value on the last day on which such security was traded of
was priced will be used, unless the Trust's Board of Trustees determines that a
different price should be used. Furthermore, trading takes place in Poland on
days which the NYSE is not open for trading on which the Fund's net asset value
is not calculated. Occasionally, events affecting the values of such securities
in U.S. dollars on a day on which the Fund calculates its net asset value may
occur between the times when such securities are valued and the close of the
NYSE that will not be reflected in the computation of the Fund's net asset value
unless the Board or its delegates deem that such events would materially affect
the net asset value, in which case and adjustment would be made.
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, EDRs and GDRs, 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.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. if
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
B-15
<PAGE>
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 intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, (the "Code"), for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its
assets, and the timing of its distributions. The Fund's policy is to distribute
to its shareholders all of its investment company taxable income and any net
realized capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes based on net income. However, the Board may
elect to pay such excise taxes if it determines that payment is, under the
circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains by
the Fund will be taxable to shareholders whether made in cash or reinvested by
the Fund in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carry-overs from the eight prior taxable years
will be applied against capital gains. Shareholders receiving a distribution
from the Fund 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 or the securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("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 certain
required certifications on the New Account application 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.
The Fund intends to declare and pay dividends and other distributions, as
stated in the prospectuses. 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 may receive dividend distributions from U.S. corporations. To the
extent that the Fund receives such
B-16
<PAGE>
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.
If more than 50% in value of the total assets of the Fund at the end of its
fiscal year is invested in stock or securities of foreign corporations, the Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by the Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of the Fund's
foreign source income (including any foreign income taxes paid by the Fund), and
(ii) entitled either to deduct their share of such foreign taxes in computing
their taxable income or to claim a credit for such taxes against their U.S.
income tax, subject to certain limitations under the Code, including certain
holding period requirements. In this case, shareholders will be informed in
writing by the Fund at the end of each calendar year regarding the availability
of any credits on and the amount of foreign source income (including or
excluding foreign income taxes paid by the Fund) to be included in their income
tax returns. If not more than 50% in value of the Fund's total assets at the end
of its fiscal year is invested in stock or securities of foreign corporations,
the Fund will not be entitled under the Code to pass through to its shareholders
their pro rata share of the foreign taxes paid by the Fund. In this case, these
taxes will be taken as a deduction by the Fund.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
The use of hedging strategies, such as entering into futures contracts and
forward contracts and purchasing options, involves complex rules that will
determine the character and timing of recognition of the income received in
connection therewith by the Fund. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) and income from
transactions in options, futures contracts and forward contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
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 the Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of 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, futures contracts and forward contracts 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.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by the Fund. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency denominated
payables and receivables and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60/40 rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of the Fund's
gain or loss on the sale or other disposition of shares of a foreign corporation
may, because of changes in foreign currency exchange rates, be treated as
ordinary income or loss under Section 988 of the Code rather than as capital
gain or loss.
B-17
<PAGE>
A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize gain or loss
for income tax purposes on the difference, if any, between the adjusted basis of
the securities tendered to the fund and the purchase price of the Fund's shares
acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must
generally "mark to market" at the end of its taxable year all securities which
it owns. The resulting gain or loss is treated as ordinary (and not capital)
gain or loss, except to the extent allocable to periods during which the dealer
held the security for investment. The "mark to market" rules do not apply,
however, to a security held for investment which is clearly identified in the
dealer's records as being held for investment before the end of the day in which
the security was acquired. The IRS has issued guidance under Section 475 that
provides that, for example, a bank that regularly originates and sells loans is
a dealer in securities, and subject to the "mark to market" rules. Shares of the
Fund held by a dealer in securities will be subject to the "mark to market"
rules unless they are held by the dealer for investment and the dealer property
identifies the shares as held for investment.
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 during such six-month period. All or a portion
of a loss realized upon the redemption of shares may be disallowed to the extent
shares 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 prospectuses 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
LLP 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
The Fund will receive income in the form of dividends and interest earned
on its investments in securities. This income, less the expenses incurred in its
operations, is the Fund's net investment income, substantially all of which will
be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon the
amount of net investment income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
The Fund also may derive capital gains or losses in connection with sales
or other dispositions of its portfolio securities. Any net gain the Fund may
realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders. For more information
concerning applicable capital gains tax rates, see your tax advisor.
Any dividend or distribution paid by the Fund reduces the Fund's net asset
value per share on the date paid
B-18
<PAGE>
by the amount of the dividend or distribution per share. Accordingly, a dividend
or distribution paid shortly after a purchase of shares by a shareholder would
represent, in substance, a partial return of capital (to the extent it is paid
on the shares so purchased), even though it would be subject to income taxes.
Dividends and other distributions will be made in the form of additional
shares of the Fund unless the shareholder has otherwise indicated. Investors
have the right to change their elections with respect to the reinvestment of
dividends and distributions by notifying the Transfer Agent in writing, but any
such change will be effective only as to dividends and other distributions for
which the record date is seven or more business days after the Transfer Agent
has received the written request.
PERFORMANCE INFORMATION
The Fund may, from time to time, quote various performance figures in
advertisements and other communications to illustrate its past performance.
Performance figures will be calculated separately for each class of shares.
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.
For the period from July 9, 1997 (commencement of operations) through June
30, 1998, the Kaminski Poland Fund had a Total Return of (17.6)%.
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
B-19
<PAGE>
performance and is not intended to predict or guarantee 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
Advisors Series Trust is an open-end management investment company
organized as a Delaware business trust under the laws of the State of Delaware
on October 3, 1996. The Trust currently consists of 17 series of shares of
beneficial interest, par value of $0.01 per share. 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 15 series of
shares, and may create additional series in the future, each of 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.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but,
under abnormal conditions that make payment in cash unwise, the Fund may make
payment partly in its portfolio securities with a current amortized cost or
market value, as appropriate, equal to the redemption price. Although the Fund
does not anticipate that it will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trust has elected to be governed by the
provisions of Rule 18f-1 under the Investment Company Act, which require that
the Fund pay in cash all requests for redemption by any shareholder of record
limited in amount, however, during any 90-day period to the lesser of $250,000
or 1% of the value of the Fund's net assets at the beginning of such period.
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 principal underwriter is First Fund Distributors, Inc., 4455 E.
Camelback Road, Suite 261E, Phoenix, AZ 85018. The Fund's custodian, Firstar
Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202 is responsible for holding
the Funds' assets. Citibank, N.A. acts as the Fund's sub-custodian in Poland.
American Data Services, 150 Motor Parkway, Suite 109, Hauppauge, NY 11788 acts
as the Fund's transfer agent and accounting services agent. The Fund's
independent accountants, PricewaterhouseCoopers LLP 650 Third Avenue South,
Suite 1300, Minneapolis, MN 55402 assist in the preparation of certain reports
to the Securities and Exchange Commission and the Fund's tax returns.
B-20
<PAGE>
The Fund is a management, open-end, diversified investment company.
The validity of the shares offered by the prospectus have been passed upon
by Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.
Shares of the Fund owned by the Trustees and officers as a group were less
than 1% at April 30, 1999.
On April 30, 1999, the following additional persons owned of record and/or
beneficially more than 5% of the Fund's outstanding voting securities:
Mager, Donald V. and Shirley M., 2111 Delaware Ave., St. Paul, MN 55118,
6.13% record.
B-21
<PAGE>
THE LIBERTY FREEDOM FUND
Statement of Additional Information
Dated June 29, 1998
Supplemented May 3, 1999
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated June 29, 1998, as may be amended
from time to time, of The Liberty Freedom Fund (the "Fund"), a series of
Advisors Series Trust (the "Trust"). Liberty Bank and Trust Company, 3801 Canal
Street, New Orleans, Louisiana 70019, is the Manager of the Fund. The Edgar
Lomax Company (the "Advisor") is the Sub-Advisor to the Fund. A copy of the
prospectus may be obtained from the Fund at 4101 Pauger Street, New Orleans, LA
70122; or by calling the Fund's shareholder servicing agent at (888) 229-2105.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference to sections
Page in the prospectus
---- -----------------
<S> <C> <C>
Investment Objective and Policies............. B-2 Investment Objective and Policies
Management.................................... B-7 Management of the Fund
Portfolio Transactions and Brokerage.......... B-12 Management of the Fund
Net Asset Value............................... B-12 Investor Guide
Taxation .................................... B-13 Distributions and Taxes
Dividends and Distributions................... B-16 Distributions and Taxes
Performance Information....................... B-16 General Information
General Information........................... B-17 General Information
</TABLE>
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is growth of capital, with a secondary
objective of providing 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.
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in convertible securities and warrants. A convertible
security is a fixed income security (a debt instrument or a preferred stock)
which 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 debt securities or 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).
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
BANK CERTIFICATES OF 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.
B-2
<PAGE>
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.
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.
INVESTMENT COMPANY SECURITIES
The Fund may invest in shares of other investment companies. The Fund may
invest in money market mutual funds in connection with its management of daily
cash positions. In addition to the advisory and operational fees a Fund bears
directly in connection with its own operation, the Fund would also bear its pro
rata portions of each other investment company's advisory and operational
expenses.
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
B-3
<PAGE>
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 AND CURRENCIES
The Fund may invest in securities of foreign issuers, provided that they
are publicly traded in the United States.
DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs 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:
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.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
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.
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.
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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 segregate liquid
assets 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 segregate
additional assets 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 segregate liquid assets 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 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
B-5
<PAGE>
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.
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;
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 or real estate
limited partnerships (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;
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 net 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);
3. Sell securities short;
4. Make loans of securities; or
5. Notwithstanding fundamental restriction 1 above, borrow money, except
from banks for temporary or emergency purposes, and in amounts not to exceed 5%
of total net assets, and subject to the further restriction that no additional
investment in securities will be made while any such loan is outstanding.
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<PAGE>
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 Manager, 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 Auch, Sr. (Born 1921) Trustee Director, Mutual Funds, Nicholas-Applegate , Brinson Funds
6001 N. 62d Place (since 1994), Smith Barney Trak Fund, Pimco Advisors L.P.,
Paradise Valley, AZ 85253 Banyan Realty Trust, Banyan Land Fund II and Legend
Properties.
Eric Banhazl (Born 1957)* Trustee, Senior Vice President, Investment Company Administration,
2025 E. Financial Way President and LLC; Vice President, First Fund Distributors; Assistant Treasurer,
Glendora, CA 91740 Treasurer RNC Mutual Fund Group; Treasurer, Guiness Flight Investment
Funds, Inc. and Professionally Managed Portfolios.
Donald O'Connor Trustee Retired; formerly Executive Vice President and Chief
(Born 1936) Operating Officer of ICI Mutual Insurance Company (until January
1700 Taylor Avenue 1997), Vice President, Operations, Investment Company
Fort Washington, MD 20744 Institute (until June, 1993).
George T. Wofford III Trustee Vice President, Information Services, Federal Home Loan Bank
(Born 1939) of San Francisco (since March, 1993); formerly Director of
305 Glendora Circle Management Information Services, Morrison & Foerster (law
firm).
Steven Paggioli (Born 1950) Vice Executive Vice President, Robert H. Wadsworth & Associates, Inc.
479 W. 22d Street President and Investment Company Administration, LLC; Vice
New York, NY 10011 President First Fund Distributors, Inc.; President and Trustee,
Professionally Managed Portfolios; Director, Managers Funds, Inc.
Robert H. Wadsworth Vice President, Robert H. Wadsworth & Associates, Inc., Investment
(Born 1940) President Company Administration, LLC and First Fund Distributors,
4455 E. Camelback Road Inc.; Vice President, Professionally Managed Portfolios; President,
Suite 261E Guinness Flight Investment Funds, Inc.; Director, Germany Fund,
Phoenix, AZ 85018 Inc., New Germany Fund, Inc. and Central European Equity Fund,
Inc. and Deutsche Funds, Inc.
Chris O. Moser (49) Secretary Employed by Investment Company Administration, LLC
4455 E. Camelback Road (since July, 1996); formerly employed by Bank One, N.A.
Suite 261-E (from August, 1995 until July, 1996); O'Connor, Cavanagh, Anderson,
Phoenix, AZ 85018 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.
B-7
<PAGE>
THE MANAGER
Subject to the supervision of the Board of Trustees, investment management
and related services are provided by the Manager, pursuant to a Management
Agreement (the "Management Agreement"). The Manager is a majority-owned
subsidiary of Liberty Financial Services, Inc.
Under the Management Agreement, the Manager has overall responsibility for
the assets of the Fund, including responsibility for investing the assets 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 Manager. In providing such services,
the Manager 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 Manager has agreed to
(i) furnish the Fund with advice and recommendations with respect to the
investment of the Fund's assets, (ii) manage and oversee the investments of the
Fund, subject to the ultimate supervision and direction of the Trust's Board of
Trustees; (iii) monitor the day-to-day activity of the Advisor; (iv) furnish
such reports, statements and other data on securities, economic conditions and
other matters related to the investment of the Fund's assets as the Trustees or
the officers of the Trust may reasonably request; and (v) render to the Trust's
Board of Trustees such periodic and special reports as the Board may reasonably
request. The Manager 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 Management Agreement. Personnel of the Manager 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 Manager shall be deemed to include persons employed or retained by the
Manager 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 Manager or the Trust's Board of Trustees may desire
and reasonably request. With respect to the operation of the Fund, the Manager
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 Manager.
As compensation for the Manager's services, the Fund pays it an management
fee at the rate specified in the prospectus. In addition to the fees payable to
the Manager, 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
Manager, 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 Management Agreement.
B-8
<PAGE>
The Fund is responsible for its own operating expenses. The Manager has
contractually 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 (excluding interest and tax expenses) to the limit set forth
in the Expense Table (the "expense cap"). Any such reductions made by the
Manager in its fees or payment of expenses which are the Fund's obligation are
subject to reimbursement by the Fund to the Manager, if so requested by the
Manager, in subsequent fiscal years 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. The
Manager is permitted to be reimbursed only for fee reductions and expense
payments made in the previous three fiscal years, but is permitted to look back
five years and four years, respectively, during the initial six years and
seventh year of the Fund's operations. Any such reimbursement is also contingent
upon Board of Trustees' subsequent review and ratification of the reimbursed
amounts. Such reimbursement may not be paid prior to the Fund's payment of
current ordinary operating expenses.
Under the Management Agreement, the Manager 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 Management Agreement will remain in effect for a period not to exceed
two years. Thereafter, if not terminated, the Management 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 Management 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 Manager. The
Management Agreement also may be terminated by the Manager on 60 days written
notice to the Trust. The Advisory Agreement terminates automatically upon its
assignment (as defined in the 1940 Act).
THE SUB-ADVISOR
Subject to the supervision of the Board of Trustees, investment management
and related services are also provided by the Advisor, pursuant to a
Sub-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 Manager and 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 such reports,
statements and other data on securities, economic conditions and other matters
related to the investment of the Fund's assets as the Trustees or the officers
of the Trust may reasonably request; and (vii) render to the Trust's Board of
Trustees such periodic and special reports as the Board may reasonably request.
The Advisor 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
B-9
<PAGE>
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 a fee at the
rate specified in the prospectus. The Advisor may agree to waive certain of its
fees or reimburse the Fund for certain expenses, in order to limit the expense
ratio of the Fund. In that event, subject to approval by the Trust's Board of
Trustees, the Fund may reimburse the Advisor in subsequent years for fees waived
and expenses reimbursed, provided the expense ratio before reimbursement is less
than the expense limitation in effect at that time.
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. 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).
DISTRIBUTION PLAN. The Fund has adopted a Distribution Plan pursuant to
Rule 12b-1 under the 1940 Act with respect to its Class A shares. The Manager
acts as Distribution Coordinator under the Plan, and may make payments on behalf
of the Fund for distribution and related expenses of the Fund, including
preparation, printing and mailing of prospectuses; shareholder reports such as
semi-annual and annual reports, performance reports and newsletters; sales
literature and other promotional material to prospective investors; direct mail
solicitation; advertising; public relations; compensation of sales personnel,
advisors or other third parties for their assistance with respect to the
distribution of the Funds' shares; payments to financial intermediaries for
shareholder support; administrative and accounting services with respect to Fund
shareholders; and such other expenses related to the distribution of the Fund's
shares.
Plan payments will be reviewed by the Trustees. However, it is possible
that at times the amount of the Advisor's compensation could exceed the
Advisor's distribution expenses, resulting in a profit to the Advisor. If the
Plan is terminated, the Fund will not be required to make payments for expenses
incurred after the termination.
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
B-10
<PAGE>
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.
For its services, the Administrator receives a fee monthly at the following
annual rate, subject to a $30,000 minimum:
Fund asset level Fee rate
- ---------------- --------
First $50 million 0.20% of average daily net assets
Next $50 million 0.15% of average daily net assets
Next $50 million 0.10% of average daily net assets
Next $50 million, and thereafter 0.05% of average daily net assets
DISTRIBUTION ARRANGEMENTS
Pursuant to a plan of distribution adopted by the Trust, on behalf of ONLY Class
A shares of the Fund, pursuant to Rule 12b-1 under the 1940 Act (the "Plan"),
Class A shares of the Fund may pay distribution and related expenses up to 0.50%
of its average net assets to the Advisor as distribution coordinator. Expenses
permitted to be paid include preparation, printing and mailing of prospectuses,
shareholder reports such as semi-annual and annual reports, performance reports
and newsletters, sales literature and other promotional material to prospective
investors, direct mail solicitations, advertising, public relations,
compensation of sales personnel, advisors or other third parties for their
assistance with respect to the distribution of Class A Fund shares, payments to
financial intermediaries for shareholder support, administrative and accounting
services with respect to shareholders of Class A shares of the Fund and such
other expenses as may be approved from time to time by the Board of Trustees of
the Trust.
The Plan allows excess distribution expenses to be carried forward by the
Advisor, as distribution coordinator, and resubmitted in a subsequent fiscal
year, provided that (i) distribution expenses cannot be carried forward for more
than three years following initial submission; (ii) the Trustees have made a
determination at the time of initial submission that the distribution expenses
are appropriate to be carried forward and (iii) the Trustees make a further
determination, at the time any distribution expenses which have been carried
forward are submitted for payment, that payment at the time is appropriate,
consistent with the objectives of the Plan and in the current best interests of
shareholders.
Under the Plan, the Trustees will be furnished quarterly with information
detailing the amount of expenses paid under the Plan and the purposes for which
payments were made. The Plan may be terminated at any time by vote of a majority
of the Trustees of the Trust who are not interested persons. Continuation of the
Plan is considered by such Trustees no less frequently than annually.
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
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<PAGE>
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 Manager, 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 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.
NET ASSET VALUE
The net asset value of each class of the Fund's shares will fluctuate and
is determined as of the close of trading on the New York Stock Exchange (the
"NYSE") (generally 4:00 p.m. Eastern time) each business day the NYSE is open
for trading. The NYSE annually announces the days on which it will not be open
for trading. The NYSE generally closes for holidays such as: 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 this list.
The net asset value per share of a class of the Fund 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
that class's proportional interest in the Fund's liabilities (including accrued
expenses) by the total number of shares of that class 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, EDRs and GDRs, 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
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<PAGE>
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.
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 intends to continue to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its
assets, and the timing of its distributions. The Fund's policy is to distribute
to its shareholders all of its investment company taxable income and any net
realized capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes based on net income. However, the Board may
elect to pay such excise taxes if it determines that payment is, under the
circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains by
the Fund will be taxable to shareholders whether made in cash or reinvested by
the Fund in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carry-overs from the eight prior taxable years
will be applied against capital gains. Shareholders receiving a distribution
from the Fund 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 or the securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("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 certain
required certifications on the New Account application 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.
The Fund intends to declare and pay dividends and other distributions, as
stated in the prospectuses. 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.
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<PAGE>
The Fund may 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.
If more than 50% in value of the total assets of the Fund at the end of its
fiscal year is invested in stock or securities of foreign corporations, the Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by the Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of the Fund's
foreign source income (including any foreign income taxes paid by the Fund), and
(ii) entitled either to deduct their share of such foreign taxes in computing
their taxable income or to claim a credit for such taxes against their U.S.
income tax, subject to certain limitations under the Code, including certain
holding period requirements. In this case, shareholders will be informed in
writing by the Fund at the end of each calendar year regarding the availability
of any credits on and the amount of foreign source income (including or
excluding foreign income taxes paid by the Fund) to be included in their income
tax returns. If not more than 50% in value of the Fund's total assets at the end
of its fiscal year is invested in stock or securities of foreign corporations,
the Fund will not be entitled under the Code to pass through to its shareholders
their pro rata share of the foreign taxes paid by the Fund. In this case, these
taxes will be taken as a deduction by the Fund.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
The use of hedging strategies, such as entering into futures contracts and
forward contracts and purchasing options, involves complex rules that will
determine the character and timing of recognition of the income received in
connection therewith by the Fund. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) and income from
transactions in options, futures contracts and forward contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
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 the Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of 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, futures contracts and forward contracts 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.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by the Fund. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign
B-14
<PAGE>
currency forward contracts, foreign currency denominated payables and
receivables and foreign currency options and futures contracts (other than
options and futures contracts that are governed by the mark-to-market and 60/40
rules of Section 1256 of the Code and for which no election is made) is treated
as ordinary income or loss. Some part of the Fund's gain or loss on the sale or
other disposition of shares of a foreign corporation may, because of changes in
foreign currency exchange rates, be treated as ordinary income or loss under
Section 988 of the Code rather than as capital gain or loss.
A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize gain or loss
for income tax purposes on the difference, if any, between the adjusted basis of
the securities tendered to the fund and the purchase price of the Fund's shares
acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must
generally "mark to market" at the end of its taxable year all securities which
it owns. The resulting gain or loss is treated as ordinary (and not capital)
gain or loss, except to the extent allocable to periods during which the dealer
held the security for investment. The "mark to market" rules do not apply,
however, to a security held for investment which is clearly identified in the
dealer's records as being held for investment before the end of the day in which
the security was acquired. The IRS has issued guidance under Section 475 that
provides that, for example, a bank that regularly originates and sells loans is
a dealer in securities, and subject to the "mark to market" rules. Shares of the
Fund held by a dealer in securities will be subject to the "mark to market"
rules unless they are held by the dealer for investment and the dealer property
identifies the shares as held for investment.
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 during such six-month period. All or a portion
of a loss realized upon the redemption of shares may be disallowed to the extent
shares 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 prospectuses 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
LLP 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
The Fund will receive income in the form of dividends and interest earned
on its investments in securities. This income, less the expenses incurred in its
operations, is the Fund's net investment income, substantially all of which will
be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon the
amount of net investment income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
The Fund also may derive capital gains or losses in connection with sales
or other dispositions of its portfolio securities. Any net gain the Fund may
realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to
B-15
<PAGE>
ordinary income. If during any year the Fund realizes a net gain on transactions
involving investments held more than the period required for long-term capital
gain or loss recognition or otherwise producing long-term capital gains and
losses, the Fund will have a net long-term capital gain. After deduction of the
amount of any net short-term capital loss, the balance (to the extent not offset
by any capital losses carried over from the eight previous taxable years) will
be distributed and treated as long-term capital gains in the hands of the
shareholders regardless of the length of time the Fund's shares may have been
held by the shareholders. For more information concerning applicable capital
gains tax rates, see your tax advisor.
Any dividend or distribution paid by the Fund will be allocated, based on
the relative net assets of that class and will to each class of shares reduce
that class's net asset value per share on the date paid by the amount of the
dividend or distribution per share. Accordingly, a dividend or distribution paid
shortly after a purchase of shares by a shareholder would represent, in
substance, a partial return of capital (to the extent it is paid on the shares
so purchased), even though it would be subject to income taxes.
Dividends and other distributions will be made in the form of additional
shares of the Fund unless the shareholder has otherwise indicated. Investors
have the right to change their elections with respect to the reinvestment of
dividends and distributions by notifying the Transfer Agent in writing, but any
such change will be effective only as to dividends and other distributions for
which the record date is seven or more business days after the Transfer Agent
has received the written request.
PERFORMANCE INFORMATION
The Fund may, from time to time, quote various performance figures in
advertisements and other communications to illustrate its past performance.
Performance figures will be calculated separately for each class of shares.
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.
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
B-16
<PAGE>
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
guarantee 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"), Morningstar, Inc. 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
Advisors Series Trust is an open-end management investment company
organized as a Delaware business trust under the laws of the State of Delaware
on October 3, 1996. The Trust currently consists of 17 series of shares of
beneficial interest, par value of $0.01 per share. 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, each of 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.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but,
under abnormal conditions that make payment in cash unwise, the Fund may make
payment partly in its portfolio securities with a current amortized cost or
market value, as appropriate, equal to the redemption price. Although the Fund
does not anticipate that it will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trust has elected to be governed by the
provisions of Rule 18f-1 under the Investment Company Act, which require that
the Fund pay in cash all
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<PAGE>
requests for redemption by any shareholder of record limited in amount, however,
during any 90-day period to the lesser of $250,000 or 1% of the value of the
Fund's net assets at the beginning of such period.
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 principal underwriter is First Fund Distributors, Inc., 4455
E. Camelback Road, Suite 261E, Phoenix, AZ 85018. The Fund's custodian, Firstar
Bank, 425 Walnut Street, Cincinnati, Ohio 45202 is responsible for holding the
Funds' assets. American Data Services, P.O. Box 5536, Hauppauge NY 11788 acts as
the Fund's transfer agent and 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.
The validity of the Fund's shares has been passed on by Paul, Hastings,
Janofsky & Walker LLP, 345 California Street, San Francisco, CA 94104.
Shares of the Fund owned by the Trustees and officers as a group were
less than 1% at June 29, 1998.
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