Investment Company Administration, L.L.C.
4455 E. Camelback Rd., Suite 261E
Phoenix, Arizona 85018
(602) 952-1100
November 8, 1999
Securities and Exchange Commission
Attn: Filing Desk, Stop 1-4
450 Fifth Street, N.W.
Washington, DC 20549
Re: Advisors Series Trust
FILE NO. 333-17391 AND 811-07959
Dear Sir or Madam:
On behalf of the above Registrant and pursuant to Rule 497(e) under the
Securities Act of 1933, I enclose for filing via EDGAR for The Rockhaven Fund
and the Rockhaven Premier Dividend Fund series of the registrant a copy of the
Statement of Additional Information dated September 7, 1999, supplemented
November 8, 1999.
Sincerely yours,
/s/ Scott B. Warner
Scott B. Warner
cc: Chris Moser
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THE ROCKHAVEN FUND
THE ROCKHAVEN PREMIER DIVIDEND FUND
Statement of Additional Information
Dated September 7, 1999
as supplemented November 8, 1999
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated September 7, 1999, as may be
amended from time to time, of The Rockhaven Fund and The Rockhaven Premier
Dividend Fund (the "Premier Dividend Fund"), each a series of Advisors Series
Trust (the "Trust"). (Collectively, both The Rockhaven Fund and The Rockhaven
Premier Dividend Fund may be referred to as the "Funds." ) Rockhaven Asset
Management, LLC (the "Advisor") is the Advisor to each of the Funds. A copy of
the prospectus may be obtained from the Fund at 100 First Avenue, Suite 850,
Pittsburgh, PA 15222, telephone (800) 522-3508.
TABLE OF CONTENTS
Cross-reference to sections
Page in the prospectus
---- ---------------------------
Investment Objective and Policies..... B-2 Investment Objective and Policies
Management............................ B-10 Management of the Fund; General
Information
Distribution Arrangements............. B-14 Expense Table
Portfolio Transactions and Brokerage.. B-14 Management of the Funds
Net Asset Value....................... B-15 Investor Guide
Taxation ............................ B-16 Distributions and Taxes
Dividends and Distributions........... B-19 Distributions and Taxes
Performance Information............... B-19 General Information
General Information................... B-21 General Information
Appendix ............................ B-21 Not applicable
B-1
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of The Rockhaven Fund is to obtain above average
current income together with capital appreciation. The primary investment
objective of The Premier Dividend Fund is to obtain high current income, and the
Fund has a secondary objective of seeking capital appreciation. There is no
assurance that either Fund will achieve its objective. The discussion below
supplements information contained in the prospectus as to investment policies of
the Funds.
CONVERTIBLE SECURITIES AND WARRANTS
The Funds 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 dividend. Investments in warrants involve certain risks, including the
possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in debt
securities (including convertible securities). Yields on short, intermediate,
and long-term securities depend on a variety of factors, including the general
condition of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue.
Debt securities with longer maturities tend to produce higher yields and
are generally subject to potentially greater capital appreciation and
depreciation than obligations with short maturities and lower yields. The market
prices of debt securities usually vary, depending upon available yields. An
increase in interest rates will generally reduce the value of such portfolio
investments, and a decline in interest rates will generally increase the value
of such portfolio investments. The ability of the Funds to achieve its
investment objective also depends on the continuing ability of the issuers of
the debt securities in which a Fund invests to meet their obligations for the
payment of interest and principal when due.
RISKS OF INVESTING IN LOWER-RATED DEBT SECURITIES
As set forth in the prospectus, each Fund may invest a portion of its net
assets in debt securities, which may be rated below "Baa" by Moody's or "BBB" by
S&P or below investment grade by other recognized rating agencies, or in unrated
securities of comparable quality under certain circumstances. Securities with
ratings below "Baa" and/or "BBB" are commonly referred to as "junk bonds." Such
bonds are subject to greater market fluctuations and risk of loss of income and
principal than higher rated bonds for a variety of reasons, including the
following:
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates affect high yield securities differently from other securities. For
example, the prices of high yield bonds have been found to be less sensitive to
interest rate changes than higher-rated investments, but more sensitive to
adverse economic changes or individual corporate developments. Also, during an
economic downturn or substantial period of rising interest rates, highly
leveraged issuers may experience financial stress which would adversely affect
their ability to service their principal and interest obligations, to meet
projected business goals, and to obtain additional financing. If the issuer of a
bond defaults, a Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to result
in increased volatility of market prices of high yield bonds and the Fund's
asset values.
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PAYMENT EXPECTATIONS. High yield bonds present certain risks based on
payment expectations. For example, high yield bonds may contain redemption and
call provisions. If an issuer exercises these provisions in a declining interest
rate market, a Fund would have to replace the security with a lower yielding
security, resulting in a decreased return for investors. Conversely, a high
yield bond's value will decrease in a rising interest rate market, as will the
value of the Fund's assets. If a Fund experiences unexpected net redemptions, it
may be forced to sell its high yield bonds without regard to their investment
merits, thereby decreasing the asset base upon which the Fund's expenses can be
spread and possibly reducing that Fund's rate of return.
LIQUIDITY AND VALUATION. To the extent that there is no established retail
secondary market, there may be thin trading of high yield bonds, and this may
impact the Advisor's ability to accurately value high yield bonds and a Fund's
assets and hinder a Fund's ability to dispose of the bonds. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield bonds, especially in a thinly
traded market.
CREDIT RATINGS. Credit ratings evaluate the safety of principal and
interest payments, not the market value risk of high yield bonds. Also, since
credit rating agencies may fail to timely change the credit ratings to reflect
subsequent events, the Advisor must monitor the issuers of high yield bonds in a
Fund's portfolio to determine if the issuers will have sufficient cash flow and
profits to meet required principal and interest payments, and to assure the
bonds' liquidity so that Fund can meet redemption requests. A Fund will dispose
of a portfolio security in an orderly manner when its rating has been downgraded
below C.
SHORT-TERM INVESTMENTS
Each Fund may invest in any of the following securities and instruments:
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. A
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 a 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 a 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 a Fund may
acquire.
B-3
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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, a 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. Each 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. Each
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 Appendix A.
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
Each Fund may invest in shares of other investment companies. Each 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
Each 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.
ZERO COUPON SECURITIES
Each Fund may invest up to 35% of its net assets in zero coupon securities.
Zero coupon securities are debt securities which have been stripped of their
unmatured interest coupons and receipts, or certificates representing interests
in such stripped debt obligations or coupons. Because a zero coupon security
pays no interest to its holder during its life or for a substantial period of
time, it usually trades at a deep discount from its face or par value and will
be subject to greater fluctuations of market value in response to changing
interest rates than debt obligations of comparable maturities which make current
distributions of interest.
B-4
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VARIABLE AND FLOATING RATE INSTRUMENTS
Each Fund may acquire variable and floating rate instruments. Such
instruments are frequently not rated by credit rating agencies; however, unrated
variable and floating rate instruments purchased by a Fund will be determined by
the Advisor under guidelines established by the Trust's Board of Trustees to be
of comparable quality at the time of the purchase to rated instruments eligible
for purchase by a Fund. In making such determinations, the Advisor will consider
the earning power, cash flow and other liquidity ratios of the issuers of such
instruments (such issuers include financial, merchandising, bank holding and
other companies) and will monitor their financial condition. An active secondary
market may not exist with respect to particular variable or floating rate
instruments purchased by a Fund. The absence of such an active secondary market
could make it difficult for the Funds to dispose of the variable or floating
rate instrument involved in the event of the issuer of the instrument defaulting
on its payment obligation or during periods in which a Fund is not entitled to
exercise its demand rights, and a Fund could, for these or other reasons, suffer
a loss to the extent of the default. Variable and floating rate instruments may
be secured by bank letters of credit.
OPTIONS ON SECURITIES AND SECURITIES INDICES
WRITING CALL OPTIONS. Each Fund may write covered call options. A call
option is "covered" if a 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
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 a 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 a Fund.
If a 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.
A 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. A 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 a 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 that Fund.
STOCK INDEX OPTIONS. Each Fund may also purchase put and call options with
respect to the S&P 500 and other stock indices. Such options may be purchased as
a hedge against changes resulting from market conditions in the values of
securities which are held in a Fund's portfolio or which it intends to purchase
or sell, or when they are economically appropriate for the reduction of risks
inherent in the ongoing management of a Fund.
The distinctive characteristics of options on stock indices create certain
risks that are not present with stock options generally. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular stock, whether a Fund will realize a gain or loss on the
purchase or sale of an option on an index depends upon movements in the level of
stock prices in the stock market generally rather than movements in the price of
a particular stock. Accordingly, successful use by a Fund of options on a stock
index would be subject to the Advisor's ability to predict correctly movements
in the direction of the stock market generally. This requires different skills
and techniques than predicting changes in the price of individual stocks.
B-5
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Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading of index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this were to occur, a Fund would not be able to
close out options which it had purchased, and if restrictions on exercise were
imposed, that Fund might be unable to exercise an option it holds, which could
result in substantial losses to that Fund. It is the policy of the Funds to
purchase put or call options only with respect to an index which the Advisor
believes includes a sufficient number of stocks to minimize the likelihood of a
trading halt in the index.
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
than the underlying instruments and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves. 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 option 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 a Fund may enter into options transactions may be limited by the Internal
Revenue Code requirements for qualification as a regulated investment company.
See "Dividends, Distributions and Taxes."
DEALER OPTIONS. Each Fund may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to dealer
options. While the Funds might look to a clearing corporation to exercise
exchange-traded options, if a Fund were to purchase a dealer option it would
need to rely on the dealer from which it purchased the option to perform if the
option were exercised. Failure by the dealer to do so would result in the loss
of the premium paid by a 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, a 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 a Fund writes a dealer
option, that 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 that Fund originally wrote the option. While a 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 that Fund, there can be
no assurance that a Fund will at any time be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Unless a 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, a Fund may be unable to liquidate a dealer option. With respect
to options written by a Fund, the inability to enter into a closing transaction
may result in material losses to that Fund. For example, because a Fund must
maintain a secured position with respect to any call option on a security it
writes, that 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
that 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. A 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
B-6
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dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option. With
that exception, however, a Fund will treat dealer options as subject to that
Fund's limitation on unmarketable securities. If the Commission changes its
position on the liquidity of dealer options, each Fund will change its treatment
of such instruments accordingly.
FOREIGN INVESTMENTS AND CURRENCIES
Each Fund may invest in securities of foreign issuers that are publicly
traded in the United States. Each Fund may also invest in depositary receipts.
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.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest payable on certain of a 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.
RISK FACTORS REGARDING EMERGING MARKETS INVESTMENTS. Investments in
securities issued by the governments of emerging or developing countries, and of
companies within those countries, involves greater risks than other foreign
investments. Investments in emerging or developing markets involve exposure to
economic and legal structures that are generally less diverse and mature (and in
some cases the absence of developed legal structures governing private and
foreign investments and private property), and to political systems which can be
expected to have less stability, than those of more developed countries. The
risks of investment in such countries may include matters such as relatively
unstable governments, higher degrees of government involvement in the economy,
the absence until recently of capital market structures or market-oriented
economies, economies based on only a few industries, securities markets which
trade only a small number of securities, restrictions on foreign investment in
stocks, and significant foreign currency devaluations and fluctuations. Emerging
markets can be substantially more volatile than both U.S. and more developed
foreign markets. Such volatility may be exacerbated by illiquidity. The average
daily trading volume in all of the emerging markets combined is a small fraction
of the average daily volume of the U.S. market. Small trading volumes may result
in a Fund being forced to purchase securities at substantially higher prices
than the current market, or to sell securities at much lower prices than the
current market.
In considering whether to invest in the securities of a foreign company,
the Advisor considers such factors as the characteristics of the particular
company, differences between economic trends and the performance of securities
markets within the U.S. and those within other countries, and also factors
relating to the general economic, governmental and social conditions of the
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country or countries where the company is located. The extent to which a Fund
will be invested in foreign companies and countries and depository receipts will
fluctuate from time to time within the limitations described in the prospectus,
depending on the Advisor's assessment of prevailing market, economic and other
conditions.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, a 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 holding
the repurchase agreement 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
Each Fund may purchase securities on a "when-issued," forward commitment or
delayed settlement basis. In this event, the Custodian will set aside 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, a Fund may be required subsequently to set aside
additional assets in order to assure that the value of the account remains equal
to the amount of that Fund's commitment. It may be expected that a 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 Funds do not intend to engage in these transactions for speculative
purposes but only in furtherance of their investment objectives. Because a Fund
will set aside liquid assets to satisfy its purchase commitments in the manner
described, that Fund's liquidity and the ability of the Advisor to manage it may
be affected in the event that Fund's forward commitments, commitments to
purchase when-issued securities and delayed settlements ever exceeded 15% of the
value of its net assets.
A 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, a 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
that Fund on the settlement date. In these cases a Fund may realize a taxable
capital gain or loss. When a 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 a 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 a Fund starting on the day that Fund agrees to
purchase the securities. A 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
Each 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 5% of the value of its total assets at the time of such borrowings.
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<PAGE>
ILLIQUID SECURITIES
Each 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 each 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 a Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption within
seven days. A 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.
INVESTMENT RESTRICTIONS
The Trust (on behalf of each 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 a 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 a 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 that Fund.
As a matter of fundamental policy, each Fund is diversified; I.E., as to
75% 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. Each Fund's investment objective
is also fundamental.
In addition, each Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except that
(i) the Fund may borrow from banks in amounts not exceeding one-third of its
total assets (not including the amount borrowed); and (ii) this restriction
shall not prohibit the Fund from engaging in options transactions or short
sales;
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);
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<PAGE>
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, or
7. Make loans of money (except for purchases of debt securities consistent
with the investment policies of the Fund and except for repurchase agreements).
Each Fund observes the following restrictions as a matter of operating but
not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
Each Fund may not:
1. Borrow money or pledge its assets, except that 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 5% of its total assets (not
including the amount borrowed);
2. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions;
3. 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;
4. 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);
5. Sell securities short;
6. Invest in stock index futures, currency or financial futures or related
options; or
7. Make investments for the purpose of exercising control or management.
MANAGEMENT
The overall management of the business and affairs of the Trust is vested
with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day to day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their birth dates and positions
with the Trust, their business addresses and principal occupations during the
past five years are:
WALTER E. AUCH, SR. (born 1921) Trustee
6001 N. 62nd Place, Paradise Valley, AZ 85253. Business Consultant and Director,
Nicholas-Applegate Institutional Mutual Funds, Salomon Smith Barney Trak Funds
and Concert Series, Pimco Advisors L.P., Banyan Strategic Realty Trust, Legend
Properties and Senele Group.
ERIC M. BANHAZL* (born 1957) Trustee, President and Treasurer
2020 E. Financial Way, Glendora, CA 91741. Executive Vice President, Investment
Company Administration, LLC; Vice President, First Fund Distributors, Inc.;
Treasurer, Guinness Flight Investment Funds, Inc.
DONALD E. O'CONNOR (born 1936) Trustee
1700 Taylor Avenue, Fort Washington, MD 20744. Retired; formerly Executive Vice
President and Chief Operating Officer of ICI Mutual Insurance Company (until
January, 1997); Vice President, Operations, Investment Company Institute (until
June, 1993); Independent Director, The Parnassus Fund, The Parnassus Income
Fund, and Allegiance Investment Trust.
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GEORGE T. WOFFORD III (born 1939) Trustee
305 Glendora Circle, Danville, CA 94526. Senior Vice President, Information
Services, Federal Home Loan Bank of San Francisco.
STEVEN J. PAGGIOLI (born 1950) Vice President
915 Broadway, Suite 1605, New York, NY 10010. Executive Vice President,
Investment Company Administration, LLC; Vice President, First Fund Distributors,
Inc.; President and Trustee, Professionally Managed Portfolios; Trustee,
Managers Funds Trust.
ROBERT H. WADSWORTH (born 1940) Vice President
4455 E. Camelback Rd. Suite 261-E, Phoenix, AZ 85018. President, Robert H.
Wadsworth & Associates, Inc., Investment Company Administration, LLC and First
Fund Distributors, Inc.; Vice President, Professionally Managed Portfolios;
President, Guiness 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
4455 E. Camelback Rd. Suite 261-E, Phoenix, AZ 85018. Employed by Investment
Company Administration, LLC (since July 1996); Formerly employed by Bank One,
N.A. (From August 1995 until July 1996; O'Connor, Cavanagh, Anderson,
Killingsworth and Beshears (law firm) (until August 1995).
* 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
For the fiscal year ended September 30, 1999, Trustees' fees and expenses in the
amount of $6,678 were allocated to the Funds. 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 Funds in accordance with the investment objectives, policies and
restrictions of each Fund as set forth in each Fund's and the Trust's governing
documents, including, without limitation, the Trust's Agreement and Declaration
of Trust and By-Laws; the Funds' 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 Advisor. In providing such services, Advisor shall at all times adhere to the
provisions and restrictions contained in the federal securities laws, applicable
state securities laws, the Internal Revenue Code, and other applicable law.
Without limiting the generality of the foregoing, the Advisor has agreed to
(i) furnish each Fund with advice and recommendations with respect to the
investment of each Fund's assets, (ii) effect the purchase and sale of portfolio
securities; (iii) manage and oversee the investments of each 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 securities; (v) maintain
the books and records required to be maintained with respect to the securities
in each Fund's portfolio; (vi) furnish reports, statements and other data on
securities, economic conditions and other matters related to the investment of
each Fund's assets which the Trustees or the officers of the Trust may
reasonably request; and (vi) render to the Trust's Board of Trustees such
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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 this
Agreement. Personnel of the Advisor may serve as officers of the Trust provided
they do so without compensation from the Trust. Without limiting the generality
of the foregoing, the staff and personnel of the Advisor shall be deemed to
include persons employed or retained by the Advisor to furnish statistical
information, research, and other factual information, advice regarding economic
factors and trends, information with respect to technical and scientific
developments, and such other information, advice and assistance as the Advisor
or the Trust's Board of Trustees may desire and reasonably request. With respect
to the operation of each 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, each Fund pays it an advisory
fee at the rate specified in the prospectus. In addition to the fees payable to
the Advisor and the Administrator, the Trust is responsible for its operating
expenses, including: fees and expenses incurred in connection with the issuance,
registration and transfer of its shares; brokerage and commission expenses; all
expenses of transfer, receipt, safekeeping, servicing and accounting for the
cash, securities and other property of the Trust for the benefit of each Fund
including all fees and expenses of its custodian, recordkeeping agent,
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
Investment Company 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 each Fund; salaries and expenses of
officers and fees and expenses of members of the Trust's Board of Trustees or
members of any advisory board or committee who are not members of, affiliated
with or interested persons of the Advisor or Administrator; insurance premiums
on property or personnel of each 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 each Fund or other communications for distribution to existing shareholders;
legal, auditing and accounting fees; trade association dues; fees and expenses
(including legal fees) of registering and maintaining registration of its shares
for sale under federal and applicable state and foreign securities laws; all
expenses of maintaining and servicing shareholder accounts, including all
charges for transfer, shareholder recordkeeping, dividend disbursing,
redemption, and other agents for the benefit of the Fund, if any; and all other
charges and costs of its operation plus any extraordinary and non-recurring
expenses, except as otherwise prescribed in the Advisory Agreement.
The Fund is responsible for its own operating expenses. The Advisor has
agreed to reduce fees payable to it by the Fund and to pay Fund operating
expenses to the extent necessary to limit the Fund's aggregate annual operating
expenses to the limit set forth in the Expense Table (the "expense cap"). Any
such reductions made by the Advisor in its fees or payment of expenses which are
the Fund's obligation are subject to reimbursement by the Fund to the Advisor,
if so requested by the Advisor, in 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 October 1, 1998 through September 30, 1999, the
Advisor earned $23,276 and $41,722 in advisory fees for The Rockhaven Fund and
The Rockhaven Premier Dividend Fund, respectively. The Advisor voluntarily
agreed to limit total fund operating expenses to 1.50% of average net assets
annually for both Funds. As a result of that limitation, the Advisor waived the
full amount of its fee and paid Fund operating expenses in the amount of $96,186
and $85,162, for The Rockhaven Fund and The Rockhaven Premier Dividend Fund,
respectively.
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<PAGE>
The Advisor is controlled by Christopher H. Wiles and AmSouth
Bancorporation.
Under the Advisory Agreement, the Advisor will not be liable to the Trust
for any error of judgment by the Advisor 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 by reason of reckless disregard of its obligations and duties under
the applicable agreement.
The Advisory Agreement will remain in effect for a period not to exceed two
years from the date each Fund commenced operations. 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
that 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 Trust 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).
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 register or
maintain the Trust's registration and/or the registration 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.
The Administrator is an affiliate of the Distributor.
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 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
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<PAGE>
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 October 1, 1998 and ending September 30, 1999,
the Fund paid the Distribution Coordinator distribution fees totaling $7,759 for
The Rockhaven Fund and $13,507 for The Rockhaven Premier Dividend 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 each Fund on
a continuing basis. The price to a 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 a 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
that Fund. The Advisor is further authorized to allocate the orders placed by it
on behalf of a 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 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 a 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 a Fund as well as other clients of the Advisor (or
proprietary accounts of the Advisor), the Advisor, to the extent permitted by
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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.
Brokerage commissions paid during the period beginning October 1, 1998 and
ending September 30, 1999, aggregated $7,287 and $12,966, for The Rockhaven Fund
and The Rockhaven Premier Dividend Fund, respectively.
WHAT IS THE PRICE YOU PAY FOR EACH SHARE OF THE FUNDS?
When you invest in the Funds, you generally pay the "offering price" of a share.
The offering price of shares is the net asset value per share plus a sales
charge that is based on the amount purchased, as described in the following
table. For Fund share sales made through December 31, 1999, selling
broker/dealers will retain the entire sales charge collected on the sale. For
Fund share sales made after December 31, 1999, selling broker/dealers will
retain the sales charge as indicated in the following table.
Sales Charge as a percent of:
<TABLE>
<CAPTION>
Charge retained by Charge retained by
dealers through dealers after
Amount of Purchase Offering Price Net Asset Value December 31, 1999 December 31, 1999
- ------------------ -------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Up to $99,999 5.75% 6.10% 5.75% 5.00%
$100,000 to $249,000 4.50% 4.71% 4.50% 4.00%
$250,000 to $499,999 3.25% 3.36% 3.25% 3.00%
$500,000 to $999,999* 2.00% 2.04% 2.00% 1.75%
$1,000,000 or more** none none none none
</TABLE>
* On accounts at or below $999,999 that are processed as part of a group of
accounts from a single broker-dealer where the amount of the group purchase
totals $1,000,000 or more, a sales charge of 2.00% will be charged. The
broker-dealer will retain the full 2.00% sales charge.
** This amount may be achieved through the aggregation of a group of accounts
from a single broker-dealer, or by such other persons who are determined by
the Board of Trustees.
LETTER OF INTENT. An investor may qualify for an immediate reduced sales
charge on purchases by completing the Letter of Intent section on the
Application Form. The investor will state an intention to purchase, during the
next 13 months a specified amount of shares which, if made at one time, would
qualify for a reduced sales charge.
RIGHTS OF ACCUMULATION. The reduced sales charge applicable to purchases
apply on a cumulative basis over any period of time. Thus the value of all
shares of the Fund owned by an investor (including the investor's own account,
IRA account, or other account), taken at current net asset value, can be
combined with a current purchase of shares to determine the rate of sales charge
applicable to the current purchase in order to receive the cumulative quantity
reduction. When opening a new account, the fact that the investor currently
holds shares of the Fund must be indicated on the Application Form in order to
receive the cumulative quantity discount. For subsequent purchases, the Funds'
Shareholder Servicing Agent 888.229.2105 should be notified of current Fund
holdings prior to the purchase of additional shares.
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<PAGE>
PURCHASES AT NET ASSET VALUE. Shares of the Funds may be purchased at net
asset value for the following shareholders:
i) Shareholders who make additional purchases into any account that existed on
or before September 17, 1999, ii) Officers, trustees, directors and full time
employees of the Trust, the Advisor, the Administrator and affiliates of those
companies, or by their family members, iii) Registered representatives and
employees of firms which have selling agreements with the Distributor, iv)
Investors making purchases through retail fund "supermarkets" for a higher
minimum initial investment of $3,000, v) Investment advisors, financial planners
or other intermediaries who place trades for their own accounts or the accounts
of their clients and who charge a management, consulting or other fee for their
services, vi) Pension, profit-sharing or other employee benefit plans qualified
under Section 401 of the Internal Revenue Code and deferred compensation and
annuity plans under Section 403 and 457 of the Internal Revenue Code, vii) By
such other investors who are determined to have acquired shares under
circumstances not involving any sales expense to the Fund or Distributor.
The Distributor has the right to decide whether a purchase may be made at
net asset value.
At the Advisor's discretion, the Advisor may pay supplemental distribution
assistance, out of its own resources, to any dealer who has executed a selling
agreement with the Distributor through which a Fund share purchase is made.
Additionally, the Advisor, at its discretion, may pay a "finders fee" to any
person who has assisted the Advisor or Distributor in securing additional
investments in the Funds.
NET ASSET VALUE
The net asset value of each Fund's shares will fluctuate and is determined
as of the close of trading on the New York Stock Exchange (generally 4:00 p.m.
Eastern time) each business day. The Exchange annually announces the days on
which it will not be open for trading. The most recent announcement indicates
that it will not be open on the following days: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. However, the Exchange may close
on days not included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by a Fund plus any cash or other assets (including interest and
dividends accrued but not yet received) minus all liabilities (including accrued
expenses) by the total number of shares in that Fund outstanding at such time.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the NYSE. In addition,
trading in and valuation of foreign securities may not take place on every day
in which the NYSE is open for trading. In that case, the price used to determine
a Fund's net asset value on the last day on which such exchange was open will be
used, unless the Trust's Board of Trustees determines that a different price
should be used. Furthermore, trading takes place in various foreign markets on
days in which the NYSE is not open for trading and on which a 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 a 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 an 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 primarily traded in the NASDAQ National Market System
for which market quotations are readily available shall be valued at the last
sale price on the day of valuation, or if there has been no sale on such day, at
the mean between the bid and asked prices. Over-the-counter ("OTC") securities
which are not traded in the NASDAQ National Market System shall be valued at the
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most recent trade price. 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.
All other assets of the Funds are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
TAXATION
Each 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. Each 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 a 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 a 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.
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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 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.
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<PAGE>
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.
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.
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<PAGE>
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 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
TOTAL RETURN
Average annual total return quotations used in the Funds' advertising and
promotional materials are calculated according to the following formula:
n
P(1 + T) = 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 October 1, 1998 through September 30, 1999, The
Rockhaven Fund and the Premier Dividend Fund had Total Returns of 13.05% and
27.86%, respectively.
YIELD
Annualized yield quotations used in the Funds' advertising and promotional
materials are calculated by dividing a 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:
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<PAGE>
6
YIELD = 2 [(A-B + 1) - 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-b" in the above formula), each 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.
For the period from November 3, 1997 (commencement of operations) through
September 30, 1998, The Rockhaven Fund and the Premier Dividend Fund had Yields
of 3.47% and 4.27%, respectively.
OTHER INFORMATION
Performance data of the Funds 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 a
Fund will fluctuate, and an investor's redemption proceeds may be more or less
than the original investment amount. In advertising and promotional materials a
Fund may compare its performance with data published by Lipper Analytical
Services, Inc. ("Lipper") or CDA Investment Technologies, Inc. ("CDA"). A 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 a
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 19 effective 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 Funds. Each share represents an interest in a Fund
proportionately equal to the interest of each other share. Upon a Fund's
liquidation, all shareholders of that Fund would share pro rata in the net
assets of that Fund available for distribution to shareholders. Income and
operating expenses not specifically attributable to a particular Fund will be
allocated fairly among the Funds by the Trustees, generally on the basis of the
relative net assets of each Fund.
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 Funds' 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 accounting services agent. The
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<PAGE>
Fund's independent accountants, PricewaterhouseCoopers, LLP, 1177 Avenue of the
Americas, New York, NY 10036, assist in the preparation of certain reports to
the Securities and Exchange Commission and the Funds' tax returns.
The Fund's principal underwriter is First Fund Distributors, Inc., 4455 E.
Camelback Road, Suite 261E, Phoenix, AZ 85018.
Shares of the Funds owned by the Trustees and officers as a group were less
than 1% at June 16, 1999.
On June 16, 1999, the following additional persons owned of record and/or
beneficially more than 5% of The Rockhaven Fund's outstanding voting securities:
Lawrence R. Garlock, Janice O. Garlock, JT TEN, 303 Churchill Road,
Greensburg, PA 15601; 15.36% record.
On June 16, 1999, the following additional persons owned of record and/or
beneficially more than 5% of The Rockhaven Premier Dividend Fund's outstanding
voting securities:
Henry C. Cohen TTEE, U/A DTD 2-21-97, FBO Patricia J. Burns, 11 Stanwix
Street, 15th Floor, Pittsburgh, PA 15222-1319; 5.86% record.
Lawrence R. Garlock, Janice O. Garlock, JT TEN, 303 Churchill Road,
Greensburg, PA 15601; 10.92% record.
APPENDIX
DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.: CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa---Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
period of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B -- Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or maintenance of other
terms of the contract over any long period of time may be small.
CAA -- Bonds rated Caa are of poor standing. Such issues may be in default
or there may be present elements of danger with respect to principal or
interest.
CA -- Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked short-comings.
C -- Bonds rated C are the lowest-rated class of bonds, and such issues can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.
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Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modified 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION: CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB -- Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B -- Debt rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB- rating.
CCC -- Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- Rating.
CC -- Debt rated CC is typically applied to debt subordinated to senior
debt which is assigned an actual or implied CCC debt rating.
C -- The Rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
The ratings from AA to CCC may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are assessments of the issuer's ability to
repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1--highest quality; Prime 2--higher
quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
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