as Filed With the Securities and Exchange Commission On April 30, 1999
File No. 333-17391
811-07959
- --------------------------------------------------------------------------------
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 43 [X]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 45 [X]
ADVISORS SERIES TRUST
(Exact name of registrant as specified in charter)
4455 E. Camelback Road, Suite 261E
Phoenix, Az 85018
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number (Including Area Code): (602) 952-1100
Robert H. Wadsworth
Advisors Series Trust
4455 E. Camelback Road, Suite 261E
Phoenix, Az 85018
(Name and address of agent for service of process)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the
effective date of the registration statement.
It is proposed that this filing will become effective (check appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i)
[ ] 75 days after filing pursuant to paragraph (a)(ii)
[ ] on (date) pursuant to paragraph (a)(ii) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
================================================================================
<PAGE>
THE AL FRANK FUND
PROSPECTUS
APRIL 30, 1999
THE AL FRANK FUND invests in value stocks for growth of capital.
This Prospectus contains basic information that you should know before you
invest. Please read it and keep it for future reference.
TABLE OF CONTENTS
Goal and Strategy ............................. 1
Fund Performance .............................. 2
Expense Table ................................. 2
Investment Objectives, Principal Strategies and
Related Risks ............................... 3
Management of the Fund ........................ 5
Investor Guide ................................ 6
Services Available to Shareholders ............ 8
How to Redeem Your Shares ..................... 9
Distributions and Taxes ....................... 11
Financial Highlights .......................... 13
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
GOAL AND STRATEGY
WHAT IS THE FUND'S GOAL?
The Fund seeks growth of capital.
HOW WILL THE FUND TRY TO REACH ITS GOAL?
Al Frank Asset Management, Inc. (the Advisor) selects equity securities that it
believes are out of favor and undervalued. The Advisor then purchases the
securities and holds them until it believes that the securities have reached a
fair value or sells them when it believes a strong market sell signal has been
generated. The Advisor does not expect the Fund's annual turnover rate to exceed
25%.
For leverage purposes, the Fund may borrow money from banks, up to one-third of
its total assets, and may also sell securities short. If the Advisor believes
that market conditions warrant a temporary defensive position, the Fund may
invest without limit in high-quality, short-term debt securities and money
market instruments. In this scenario, the Fund will not be pursuing its stated
investment objective.
WHAT ARE THE PRINCIPLE RISKS OF INVESTING IN THE FUND?
The value of your investment in the Fund will go up and down as the stocks in
the Fund's portfolio change in price. The prices of the stocks the Advisor
selects may fall. Also, the stock market may decline suddenly and for extended
periods adversely affecting the prices of the stocks held by the Fund.
Additional risks are associated with borrowing money and selling stocks short.
Please see a description of these risks in the "Investment Objectives, Principal
Strategies and Related Risks" section of this prospectus.
1
<PAGE>
By itself, the Fund is not a complete, balanced investment plan. And no fund can
guarantee that it will achieve its goal. When you sell your shares, you may lose
money.
FUND PERFORMANCE
The following performance information indicates some of the risks of investing
in the Fund. The bar chart shows the Fund's total return for calendar year 1998,
its first year of operations. The table shows the Fund's average return over
time compared with a broad-based market index. This past performance is no
guarantee of future results.
Calendar Year Total Returns
1998
----
-9.30%
During the period of time displayed in the bar chart, the Fund's best quarter
was Q4 1998, up 19.03%, and its worst quarter was Q3 1998, down 22.48%.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
1 Year*
-------
The Al Frank Fund -9.30%
S&P/Barra Value Index 15.22%
Russell 2000 Index -3.45%
Wilshire 5000 Equity Index 21.72%
* The Fund commenced operations on January 2, 1998.
The S&P/Barra Value Index is an unmanaged capitalization-weighted index that
contains approximately the 50% of the stocks in the S&P 500 with lower
price-to-book ratios.
The Russell 2000 Index is a widely regarded small cap index of the 2,000
smallest stocks of the Russell 3000 index which comprises the 3,000 largest U.S.
stocks as determined by total market capitalization.
The Wilshire 5000 Equity Index tracks the performance of all equity securities
issued by the U.S. head-quartered companies regardless of exchange. As of 12/98,
the index was comprised of 7,234 companies.
EXPENSE TABLE
There are two types of expenses involved: shareholder transaction expenses, such
as sales loads and redemption fees, and annual operating expenses, such as
investment advisory fees. THE FUND IS A NO-LOAD MUTUAL FUND.
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee (a) (on shares held less than 6 months) 2.00%
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fees 1.00%
Rule 12b-1 Distribution Fee 0.25%
Other Expenses 2.49%
----
Total Annual Fund Operating Expenses 3.74%
Expense Reimbursements (b) (1.49)%
-----
Annual Operating Expenses 2.25%
====
(a) A 2.00% redemption fee, payable to the Fund, will be assessed on shares
purchased and held for less than 6 months.
2
<PAGE>
(b) The Advisor has contractually agreed to waive its fees and/or pay Fund
expenses in order to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 2.25%. This contract's term is
indefinite and may be terminated only by the Board of Trustees. The advisor
is permitted to be reimbursed, subject to limitations, for fees it waives
and for Fund expenses it pays.
EXPENSE EXAMPLE
This Example will help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It is based on the annual operating
expenses shown above, and it assumes that these expenses will remain the same
over the time periods shown. It also assumes that you make a single $10,000
investment in the Fund to start with and that you earn a 5% return each year.
Finally, it assumes that you redeem all of your shares at the end of each of the
time periods. Again, this Example is hypothetical, and your actual expenses may
be higher or lower.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$227 $701 $1,205 $2,588
INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND RELATED RISKS
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The investment objective of the Fund is to seek growth of capital.
HOW DOES THE FUND SEEK TO ACHIEVE ITS OBJECTIVE?
The Advisor selects equity securities for the Fund's portfolio that it believes
are out of favor and undervalued -- I.E., those trading for low fundamental
valuations relative to what the Advisor thinks their businesses will be worth
over the next five years. The Advisor then attempts to purchase the securities
and hold them until it believes that the securities have reached a fair value.
There is no assurance that the Fund's objective will be achieved. As prices of
common stocks and other securities fluctuate, the value of an investment in the
Fund will vary as the market value of its investment portfolio changes.
HOW DOES THE ADVISOR SELECT EQUITY SECURITIES FOR THE FUND'S PORTFOLIO?
The Advisor selects equity securities, consisting of common stocks and
securities having the characteristics of common stocks, such as convertible
securities, rights and warrants, on the basis of fundamental corporate analysis.
It screens a universe of more than 6,000 stocks in order to identify those with
low price-to-earnings, price-to-book value, price-to-cash flow and
price-to-revenues. The Advisor also uses technical analysis to anticipate
periods when the securities markets are either extremely undervalued and
oversold, or overvalued and overbought. When the Advisor believes the market is
undervalued, it may borrow money to leverage the Fund's portfolio, as described
below. When it believes the market is overvalued, it may take a temporary
defensive position or use options, as described below. The Fund's portfolio is
expected to be highly diversified, generally with more than 100 separate
securities.
The Advisor sells a stock when its analysis indicates that it is fairly valued
or when it believes a strong market sell signal has been generated.
3
<PAGE>
WHAT DOES THE FUND USE FOR CASH RESERVES?
For temporary defensive purposes, the Advisor may invest up to 100% of the
Fund's total assets in high-quality, short-term debt securities and money-market
instruments. These short-term debt securities and money-market instruments
include shares of other mutual funds, commercial paper, certificates of deposit,
bankers' acceptances, U.S. Government securities and repurchase agreements.
BORROWING MONEY.
The Fund may borrow money from banks for leverage, up to one-third of its total
assets. The use of borrowing by the Fund involves special risks that may not be
associated with other funds having similar objectives and policies. Leverage
magnifies the effect of fluctuating stock prices on the value of the Fund's
shares that you own. The asset value per share of the Fund will tend to increase
more when its portfolio securities increase in value and to decrease more when
its portfolio securities decrease in value than would otherwise be the case if
the Fund did not borrow funds. In addition, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or
exceed the return earned on borrowed funds. Under adverse market conditions, the
Fund might have to sell portfolio securities to meet interest or principal
payments at a time when the principal strategy does not favor such sales. The
Fund is required to designate assets with its custodian equal to the amount it
has borrowed.
SELLING SHORT.
The Fund may sell securities short by borrowing securities it does not own and
selling them. The Fund is then obligated to replace the borrowed securities by
purchasing them at the market price at a later time. If the securities sold
short increase in value between the time of sale and the time the Fund purchases
them, the Fund will incur a loss. On the other hand, if the securities decline
in value, the Fund may repurchase them at a lower price and realize a profit.
There are limits on the extent to which the Fund may engage in short sales, as
described in the Fund's Statement of Additional Information (SAI). Please see
the back cover of this prospectus for information on how to obtain the SAI.
YEAR 2000 RISK. Like other business organizations around the world, the Fund
could be adversely affected if the computer systems used by its investment
advisor and other service providers do not properly process and calculate
information related to dates beginning January 1, 2000. This is commonly known
as the "Y2K Problem." Failure of computer systems used for securities trading
could result in settlement and liquidity problems for the Fund and investors.
That failure could have a negative impact on handling securities trades and
pricing and accounting services. Additionally, the services provided to the Fund
depend on the interaction of computer systems with those of brokers, information
vendors and other parties; therefore, any failure of the computer systems of
those parties may cause service problems for the Fund. In addition, this
situation may negatively affect the companies in which the Fund invests and
consequently, the value of the Fund's shares. The Board of Trustees of the Fund
has adopted a Y2K Project Plan that is reasonably designed to address the Y2K
Problem with respect to the Advisor's and other service providers'
4
<PAGE>
computer systems. Included in the Y2K Project Plan is a provision for a
contingency plan to convert to Y2K compliant data processing equipment in the
event that the Fund determines its suppliers Y2K efforts have been less than
satisfactory. There can be no assurance that these actions will be sufficient to
avoid any adverse impact on the Fund. The extent of that risk cannot be
ascertained at this time.
MANAGEMENT OF THE FUND
THE ADVISOR.
The Fund's Advisor, Al Frank Asset Management, Inc., 465 Forest Avenue, Suite I,
Laguna Beach, California 92651, has provided asset management services to
individuals and institutional investors since 1977. The Advisor was established
and is controlled by its President, Al Frank. Mr. Frank and John Buckingham,
another member of the firm, are principally responsible for the management of
the Fund's portfolio. Mr. Buckingham has been Executive Vice President and
Director of Research of the Advisor since 1990, having joined the firm in 1987.
The Advisor also publishes a newsletter under the name THE PRUDENT SPECTULATOR.
This publication has been in circulation for over 21 years.
The Advisor provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Advisor a monthly management fee
based upon the average daily net assets of the Fund at the annual rate of 1.00%.
During the last fiscal year the Advisor waived its entire management fee.
PRIOR PERFORMANCE OF THE ADVISOR.
The following table sets forth composite performance data relating to the
historical performance of private accounts managed by the Advisor for the
periods indicated, that have investment objectives, policies, strategies and
risks substantially similar to those of the Fund. The data is provided to
illustrate the past performance of the Advisor in managing substantially similar
accounts and does not represent the performance of the Fund. You should not
consider this performance data as an indication of future performance of the
Fund or of the Advisor.
The composite performance data shown below were calculated on a total return
basis and include all dividends and interest, accrued income and realized and
unrealized gains and losses. All returns reflect the deduction of investment
advisory fees, brokerage commissions and execution costs paid by private
accounts of the Advisor without provision for federal or state income taxes.
Custodial fees, if any, were not included in the calculation. The Advisor's
Composite includes all actual, fee-paying, discretionary private accounts in
excess of $100,000 in equity, where some level of margin trading is utilized.
Securities transactions are accounted for on the trade date and accrual
accounting is used. Cash and equivalents are included in performance returns.
The quarterly returns of the Advisor's Composite combine the individual
accounts' returns, calculated on a time-weighted rate of return by
asset-weighting each individual account's asset value as of the beginning of the
quarter. The yearly returns are computed by geometrically linking the returns of
each quarter within the calendar year. This
5
<PAGE>
method of calculation differs from the method that mutual funds are required to
use in calculating their total return and will provide a different result than
using the formula required by Securities and Exchange Commission rules.
The private accounts that are included in the Advisor's Composite are not
subject to the same types of expenses to which the Fund is subject nor to the
diversification requirements, specific tax restrictions and investment
limitations imposed on the Fund by the Investment Company Act or the Internal
Revenue Code. In addition, certain of the accounts in the Composite used margin
leverage at higher levels than the Fund will be able to achieve through its
borrowing. The performance results for the Advisor's Composite could have been
adversely affected if the private accounts included in the Composite had been
regulated as investment companies. The investment results of the Advisor's
Composite presented below are unaudited and are not intended to predict or
suggest the returns that might be experienced by the Fund or an individual
investing in the Fund. Investors should also be aware that the use of a
methodology different from that used below to calculate performance could result
in different performance data. The record is presented for the last seven years,
which reflects the complete joint management record of both Al Frank and John
Buckingham, who became involved in the decision making process in the fourth
quarter of 1990.
ANNUALIZED TOTAL RETURN OF THE ADVISOR'S MARGIN ACCOUNTS FOR YEARS ENDED
DECEMBER 31, 1997.
NUMBER ADVISOR'S
OF YEARS COMPOSITE S&P 500*
- -------- --------- --------
Seven 1/4 Years 25.67% 20.34%
Five Years 22.50% 20.11%
Three Years 33.93% 30.90%
One Year 22.51% 32.61%
* The Standard & Poor's 500 Index is an unmanaged index of common stocks that
is considered to be generally representative of the larger capitalization
United States stock market. The Index is adjusted to reflect reinvestment
of dividends.
INVESTOR GUIDE
PRICING THE FUND'S SHARES.
The Fund's price, or net asset value per share, is calculated by dividing the
value of a Fund's total assets, less its liabilities, by the number of its
shares outstanding. In calculating the net asset value, portfolio securities are
valued using current market values, if available. Securities for which market
quotations are not readily available are valued at fair values determined in
good faith by or under the supervision of the Board of Trustees of the Trust.
The net asset value is calculated at the close of regular trading of the New
York Stock Exchange ("NYSE"), normally 4:00 pm, Eastern time.
HOW TO PURCHASE SHARES OF THE FUND.
There are several ways to purchase shares of the Fund. An Application Form,
which accompanies this Prospectus, is used if you send money directly to the
Fund by mail or by wire. If you have questions about how to invest, or about how
to complete the Application Form, please call an account representative at (888)
263-6443.
YOU MAY SEND MONEY TO THE FUND BY MAIL.
If you wish to invest by mail, simply complete the Application Form and mail it
with a check (made payable to The Al Frank Fund) to the Fund's Shareholder
Servicing Agent, American Data Services, Inc., at the following address:
6
<PAGE>
The Al Frank Fund
P.O. Box 641265
Cincinnati, OH 45264-1265
If you wish to send your Application Form and check via an overnight delivery
service (such as Federal Express) you should use the following address:
The Al Frank Fund
c/o Firstar Bank, N.A.
Mutual Fund Custody Department
425 Walnut Street, M/L 6118, Sixth Floor
Cincinnati, OH 45202
YOU MAY WIRE MONEY TO THE FUND.
Before sending a wire, you should call the Fund at (888) 263-6443 between 9:00
a.m. and 5:00 p.m., Eastern time, on a day when the New York Stock Exchange
("NYSE") is open for trading, in order to receive an account number. It is
important to call and receive this account number, because if your wire is sent
without it or without the name of the Fund, there may be a delay in investing
the money you wire. You should then ask your bank to wire money to:
Firstar
ABA # 0420-0001-3
for credit to The Al Frank Fund
DDA # 488877309
for further credit to [your name and account number]
Your bank may charge you a fee for sending a wire to the Fund.
YOU MAY PURCHASE SHARES THROUGH AN INVESTMENT DEALER.
You may buy and sell Fund shares through certain brokers (and their authorized
agents, together "brokers") that have made arrangements with the Fund. An order
placed with such a broker is treated as if it were placed directly with the
Fund, and will be executed at the next share price calculated by the Fund. Your
shares will be held in a pooled account in the broker's name, and the broker
will maintain your individual ownership information. The Fund may pay the broker
for maintaining these records as well as providing other shareholder services.
In addition, the broker may charge you a fee for handling your order. The broker
is responsible for processing your order correctly and promptly, keeping you
advised of the status of your individual account, confirming your transactions
and ensuring that you receive copies of the Fund's prospectus.
MINIMUM INVESTMENTS.
The minimum initial investment in the Fund is $5,000. The minimum subsequent
investment is $500. However, if you are investing in an Individual Retirement
Account ("IRA"), or you are starting an Automatic Investment Plan (see below),
the minimum initial and subsequent investments are $2,000 and $250,
respectively.
SUBSEQUENT INVESTMENTS.
You may purchase additional shares of the Fund by sending a check, with the stub
from an account statement, to the Fund at the previously noted address. Please
also write your account number on the check. If you do not have a stub from an
account statement, you can write your name, address and account number on a
separate piece of paper and enclose it with your check. If you want to send
additional money for investment by wire, it is important for you to call the
Fund at (888) 263-6443. You may also make additional purchases through an
investment broker or dealer, as described above.
7
<PAGE>
WHEN IS MONEY INVESTED IN THE FUND?
Any money received for investment in the Fund from an investor, whether sent by
check or by wire, is invested at the net asset value of the Fund which is next
calculated after the money is received (assuming the check or wire correctly
identifies the Fund and account). Orders received from dealers are invested at
the net asset value next calculated after the order is received. A check or wire
received after the NYSE closes is invested as of the next calculation of the
Fund's net asset value.
OTHER INFORMATION
The Fund's Distributor may waive the minimum investment requirements for
purchases by certain group or retirement plans. All investments must be made in
U.S. dollars, and checks must be drawn on U.S. banks. Third-party checks will
not be accepted. A charge may be imposed if a check used to make an investment
does not clear. The Fund and its Distributor reserve the right to reject any
investment, in whole or in part. Federal tax law requires that investors provide
a certified taxpayer identification number and other certifications on opening
an account in order to avoid backup withholding of taxes. See the Application
Form for more information about backup withholding. The Fund is not required to
issue share certificates. All shares are held in non-certificated form on the
books of the Fund, for the account of the shareholder. The Fund, under certain
circumstances, may accept investments of securities appropriate for the Fund's
portfolio, in lieu of cash. Prior to making such a purchase, you should call the
Advisor to determine if such an investment may be made. The Advisor may, at its
own expense, pay third parties for assistance in gathering assets for the Fund.
The daily Net Asset Value (NAV) can be obtained from The Al Frank fund website
(www.alfrank.com) or by calling toll-free 877-654-1325.
SERVICES AVAILABLE TO SHAREHOLDERS
RETIREMENT PLANS.
You may obtain prototype IRA plans from the Fund. Shares of the Fund are also
eligible investments for other types of retirement plans.
AUTOMATIC INVESTING BY CHECK.
You may make regular monthly investments in the Fund using the Automatic
Investment Plan. A check is automatically drawn on your personal checking
account each month for a predetermined amount (but not less than $250), as if
you had written it directly. Upon receipt of the withdrawn funds, the Fund
automatically invests the money in additional shares of the Fund at the current
net asset value. Applications for this service are available from the Fund.
There is no charge by the Fund for this service. The Fund may terminate or
modify this privilege at any time, and shareholders may terminate their
participation by notifying the Shareholder Servicing Agent in writing,
sufficiently in advance of the next withdrawal.
AUTOMATIC WITHDRAWALS.
The Fund offers a Systematic Withdrawal Program whereby shareholders may request
that a check drawn in a predetermined
8
<PAGE>
amount be sent to them each month or calendar quarter. To start this Program,
your account must have Fund shares with a value of at least $10,000, and the
minimum amount that may be withdrawn each month or quarter is $50. This Program
may be terminated or modified by a shareholder or the Fund at any time without
charge or penalty. A withdrawal under the Systematic Withdrawal Program involves
a redemption of shares of the Fund, and may result in a gain or loss for federal
income tax purposes. No redemption fee will apply to redemptions made under the
Automatic Withdrawal Program. In addition, if the amount withdrawn exceeds the
dividends credited to your account, the account ultimately may be depleted.
HOW TO REDEEM YOUR SHARES
You have the right to redeem all or any portion of your shares of the Fund at
their net asset value on each day the NYSE is open for trading. You will be
charged a 2.00% redemption fee, payable to the Fund, on shares redeemed within 6
months of the purchase date. The fee will be applied on a first-in, first-out
basis.
REDEMPTION IN WRITING.
You may redeem your shares by simply sending a written request to the Fund. You
should give your account number and state whether you want all or part of your
shares redeemed. The letter should be signed by all of the shareholders whose
names appear in the account registration. You should send your redemption
request to:
The Al Frank Fund
150 Motor Parkway, Suite 109
Hauppauge, NY 11788
SIGNATURE GUARANTEE.
If the value of the shares you wish to redeem exceeds $100,000, the signatures
on the redemption request must be guaranteed by an "eligible guarantor
institution." These institutions include banks, broker-dealers, credit unions
and savings institutions. A broker-dealer guaranteeing a signature must be a
member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program. A notary public is not an
acceptable guarantor.
REDEMPTION BY TELEPHONE.
If you complete the Redemption by Telephone portion of the Fund's Application
Form, you may redeem shares on any business day the NYSE is open by calling the
Fund's Shareholder Servicing Agent at (888) 263-6443 before 4:00 p.m. Eastern
time. Redemption proceeds will be mailed or wired, at your direction, on the
next business day to the bank account you designated on the Application Form.
The minimum amount that may be wired is $1,000 (wire charges, if any, will be
deducted from redemption proceeds). Telephone redemptions cannot be made for IRA
accounts.
By establishing telephone redemption privileges, you authorize the Fund and its
Shareholder Servicing Agent to act upon the instruction of any person who makes
the telephone call to redeem shares from your account and transfer the proceeds
to the bank account designated in the Application Form. The Fund and the
Shareholder Servicing Agent will use procedures to
9
<PAGE>
confirm that redemption instructions received by telephone are genuine,
including recording of telephone instructions and requiring a form of personal
identification before acting on these instructions. If these normal
identification procedures are followed, neither the Fund nor the Shareholder
Servicing Agent will be liable for any loss, liability, or cost which results
from acting upon instructions of a person believed to be a shareholder with
respect to the telephone redemption privilege. The Fund may change, modify, or
terminate these privileges at any time upon at least 60 days notice to
shareholders.
You may request telephone redemption privileges after your account is opened;
however, the authorization form will require a separate signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity.
WHAT PRICE IS USED FOR A REDEMPTION?
The redemption price is the net asset value of the Fund's shares less the
redemption fee (if applicable), next determined after shares are validly
tendered for redemption. All signatures of account holders must be included in
the request, and a signature guarantee, if required, must also be included for
the request to be valid.
WHEN ARE REDEMPTION PAYMENTS MADE?
As noted above, redemption payments for telephone redemptions are sent on the
day after the telephone call is received. Payments for redemptions sent in
writing are normally made promptly, but no later than seven days after the
receipt of a request that meets requirements described above. However, the Fund
may suspend the right of redemption under certain extraordinary circumstances in
accordance with rules of the Securities and Exchange Commission. If shares were
purchased by wire, they cannot be redeemed until the day after the Application
Form is received. If shares were purchased by check and then redeemed shortly
after the check is received, the Fund may delay sending the redemption proceeds
until it has been notified that the check used to purchase the shares has been
collected, a process which may take up to 15 days. This delay may be avoided by
investing by wire or by using a certified or official bank check to make the
purchase.
REPURCHASES FROM DEALERS.
The Fund may accept orders to repurchase shares from an investment dealer on
behalf of a dealer's customers. The net asset value for a repurchase is that
next calculated after receipt of the order from the dealer. The dealer is
responsible for forwarding any documents required in connection with a
redemption, including a signature guarantee, and the Fund may cancel the order
if these documents are not received promptly.
OTHER INFORMATION ABOUT REDEMPTIONS.
A redemption may result in recognition of a gain or loss for federal income tax
purposes. Due to the relatively high cost of maintaining smaller accounts, the
shares in your account (unless it is a retirement plan or Uniform Gifts or
Transfers to Minors Act account) may be redeemed by the Fund if, due to
redemptions you have made, the total value of your account is reduced to less
than $500. If the Fund determines to make such an involuntary redemption, you
will first be notified that the value of your account is less than $500, and you
will be
10
<PAGE>
allowed 30 days to make an additional investment to bring the value of your
account to at least $500 before the Fund takes any action.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS.
Dividends from net investment income, if any, are normally declared and paid by
the Fund in December. Capital gains distributions, if any, are also normally
made in December, but the Fund may make an additional payment of dividends or
distributions if it deems it desirable at another time during any year.
Dividends and capital gain distributions (net of any required tax withholding)
are automatically reinvested in additional shares of the Fund at the net asset
value per share on the reinvestment date unless you have previously requested in
writing to the Shareholder Servicing Agent or on the new account application
form that payment be made in cash.
Any dividend or distribution paid by the Fund has the effect of reducing the net
asset value per share on the record date by the amount of the dividend or
distribution. You should note that a dividend or distribution paid on shares
purchased shortly before that dividend or distribution was declared will be
subject to income taxes even though the dividend or distribution represents, in
substance, a partial return of capital to you.
TAXES.
Distributions made by the Fund will be taxable to shareholders whether received
in shares (through dividend reinvestment) or in cash. Distributions derived from
net investment income, including net short-term capital gains, are taxable to
shareholders as ordinary income. Distributions designated as capital gains
dividends are taxable as long-term capital gains regardless of the length of
time you have owned your Fund shares. The maximum capital gains rate for
corporate shareholders is the same as the maximum tax rate for ordinary income.
Although distributions are generally taxable when received, certain
distributions made in January are taxable as if received the prior December. You
will be informed annually of the amount and nature of the Fund's distributions.
You should consult your own tax advisors concerning federal, state and local
taxation of distributions from the Fund.
DISTRIBUTION ARRANGEMENTS
THE TRUST.
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 reimburse
the Advisor for sales distribution and related expenses incurred by the Advisor
up to 0.25% of the Fund's average annual net assets. 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
11
<PAGE>
approved from time to time by the Board of Trustees of the Trust.
Because these fees are paid out of the Fund's assets on an on-going basis, over
time these fees will increase the cost of your investment in the Fund and may
cost you more than paying other types of sales charges.
12
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance during its past fiscal period. Certain information
reflects financial results for a single fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by McGladrey & Pullen, LLP. Their report and the
Fund's financial statements are included in the Fund's annual report which is
available upon request.
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- --------------------------------------------------------------------------------
January 2, 1998*
through
December 31, 1998
-----------------
Net asset value, beginning period.................................. $10.00
------
Income from investment operations:
Net investment loss........................................... (0.08)
Net realized and unrealized loss on securities................ (0.85)
------
Total from investment operations................................... (0.93)
------
Net asset value, end of period..................................... $ 9.07
======
Total return....................................................... (9.30%)+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands).............................. $7,042
Ratio of expenses to average net assets............................ 2.25%++
Ratio of net investment loss to average net assets................. (1.28%)++
Portfolio turnover rate............................................ 5.82%
* Commencement of operations.
++ Annualized. These figures reflect the effect of the Advisor's agreement to
waive its fees and/or reimburse Fund expenses.
+ Not annualized.
13
<PAGE>
THE AL FRANK FUND
PROSPECTUS
APRIL 30, 1999
THE AL FRANK FUND
465 FOREST AVENUE, SUITE I
LAGUNA BEACH, CA 92651
(888) 263-6443
WWW.ALFRANK.COM
<PAGE>
FOR MORE INFORMATION
The Statement of Additional Information (SAI) includes additional information
about the Fund.
The Fund's annual and semi-annual reports to shareholders contain additional
information about the Fund's investments. The annual report includes a
discussion of the market conditions and investment strategies which
significantly affected the Fund's performance during its last fiscal year.
The SAI and shareholder reports are available free upon request. To request them
or other information, or to ask any questions, please call or write:
888-263-6443 (Shareholder Services)
877-654-1325 (Daily NAV)
The Al Frank Fund
c/o American Data Services
150 Motor Parkway, Ste. 109
Hauppauge, NY 11788
The SAI and other Fund information may also be reviewed and copied at the SEC's
Public Reference Room in Washington, DC. Call 1-800-SEC-0330 for information
about its operations.
Reports and other Fund information are also available on the SEC's Internet site
at http://www.sec.gov. Copies of this information may be obtained, upon payment
of the proper duplicating fees, by writing to the SEC's Public Reference
Section, Washington, DC 20549-6009.
The Fund's SEC File Number is 811-07959.
<PAGE>
THE AVATAR
ADVANTAGE EQUITY
ALLOCATION FUND
&
THE AVATAR
ADVANTAGE
BALANCED FUND
PROSPECTUS
MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
Objectives of the Funds .................................. 2
Expense Table ............................................ 4
How the Funds Will Try to Reach
Their Investment Objectives .............................. 5
How the Funds are Managed ................................ 7
A Guide for Investors .................................... 10
Services Available to Shareholders ....................... 13
How to Redeem Your Shares ................................ 14
Distributions and Taxes .................................. 16
Financial Highlights ..................................... 18
OBJECTIVES OF THE FUNDS
The AVATAR ADVANTAGE EQUITY ALLOCATION FUND (the "Equity Fund") invests in
stocks for the purpose of seeking long-term capital appreciation. The AVATAR
ADVANTAGE BALANCED FUND (the "Balanced Fund") (collectively the "Funds") invests
in stocks, bonds and money-market securities for the purpose of seeking
long-term capital appreciation and preserving profits during market downturns.
In addition, the Funds may enter into futures contracts or options on those
contracts.
WHAT ARE THE PRINCIPLE RISKS OF INVESTING IN THE FUNDS?
The risk exists that you could lose money on your investment in either Fund.
This could happen if any of the following events happen:
IN EITHER FUND
+ The market in general, in which the Fund invests, falls.
+ The Advisor mis-calculates a Fund's commitment either to stocks, bonds or
cash, contrary to market conditions.
+ The advisor is incorrect in its expectations about the direction or extent
of market movements.
+ The prices of futures and options on futures may not correlate with the
prices of the securities in a Fund's portfolio.
+ A Fund cannot liquidate its positions in futures and options on futures
because a secondary market for these securities may not exist at all times.
IN THE EQUITY FUND
+ Companies in which the Fund invests do not grow, grow more slowly than
anticipated or fall in value
+ A particular segment of the stock market where the Equity Fund is heavily
invested falls out of favor with investors.
+ The Advisors's asset allocation model fails to direct the Advisor to the
most appropriate mix of cash and stocks.
IN THE BALANCED FUND
+ The Advisors's asset allocation model fails to direct the Advisor to the
most appropriate mix of stocks, bonds or cash.
+ Interest rates rise, causing bond prices to fall.
2
<PAGE>
+ The issuer of a bond held in the Balanced Fund's portfolio defaults or
threatens default on payment of interest to investors.
By themselves, the Funds may not be a complete investment plan for you. No Fund
can guarantee that it will achieve its objective. When you sell your shares, you
may lose money. An investment in the Balanced Fund which may invest in Money
Market instruments is not a bank deposit and is not insured or guaranteed by any
insurance agency.
WHAT IS THE FUNDS' PERFORMANCE?
The following performance information illustrates some of the risk of investing
in the Funds. The bar chart shows the Equity Fund's total return for calendar
year 1998, its only full calendar year of operation. Since the Balanced Fund has
not been in operation for a full calendar year, its return is not represented in
this bar chart. The table, which follows the bar chart, shows each Fund's
average annual total return over time compared with broad-based market indices.
Past performance is no guarantee of future results.
CALENDAR YEAR TOTAL RETURNS FOR THE EQUITY FUND
25.81% During the period of time displayed in the bar chart,
------ the Equity Fund's best quarter was Q4 1998, up 17.13%
1998 and its worst quarter was Q3 1998, down 6.16%.
AVERAGE ANNUAL TOTAL RETURNS
as of December 31, 1998
1 Year Since Inception*
------ ----------------
The Equity Fund 25.81% 26.09%
The Balanced Fund N/A 23.11%
The S&P 500 Index 28.59% 27.91%
Blended Index N/A 21.10%
* The inception date of the Equity Fund was December 3, 1997. The inception
date of the Balanced Fund was January 13, 1998.
The S&P 500 Composite Stock Price Index is a broad market-capitalization
weighted index of 500 stocks designed to represent the broad domestic economy.
The Blended Index consists of the S&P 500 Index (60%) and the Lehman Corporate
Bond Index (40%). The S&P 500 Stock Index is a broad market
capitalization-weighted index of 500 stocks designed to represent the broad
domestic economy. The Lehman Corporate Bond Index includes all publicly issued,
fixed-rate, non-convertible investment grade domestic corporate debt issues and
also includes Yankee Bonds.
3
<PAGE>
EXPENSE TABLE
You pay certain fees and expenses as an investor in a Fund. There are two types
of expenses involved: shareholder transaction expenses, such as sales loads, and
annual operating expenses, such as investment advisory fees.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases....................................... 4.50%
Sales Load Imposed on Reinvested Dividends............................ None
Deferred Redemption Fee (a)........................................... 1.00%
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
EQUITY FUND BALANCED FUND
----------- -------------
Investment Advisory Fees...................... 0.85% 0.75%
12b-1 Fee..................................... 0.25% 0.25%
Other Expenses................................ 0.93% 7.58%
---- ----
Total Annual Fund Operating Expenses.......... 2.03% 8.58%
Fee Waiver and/or Expense
Reimbursement (b)........................ (0.53)% (7.18)%
----- -----
Actual operating expenses..................... 1.50% 1.40%
==== ====
(a) The Redemption Fee (as a percentage of original purchase price or
redemption proceeds, whichever is lower) will be imposed on redemptions
made within 1 year of purchase.
(b) The Advisor has contractually agreed to waive its fees and/or pay Fund
expenses in order to limit each Fund's total Annual Operating Expenses
(excluding interest and tax expenses) as indicated above. This contract's
term is indefinite and may be terminated only by the board of Trustees. The
Advisor is permitted to be reimbursed, subject to limitations, for fees it
waives and for Fund expenses it pays.
WHAT DOES THE EXPENSE EXAMPLE SHOW?
This example will help you compare the cost of investing in the Funds with the
cost of investing in other mutual funds. It is based on the annual operating
expenses shown above, and it assumes that these expenses will remain the same
over the time periods shown. It also assumes that you make a single $10,000
investment in each Fund to start with and that you earn a 5% return each year.
Finally, the example assumes that you redeem all of your shares at the end of
each of the time periods. This example is hypothetical, and your actual expenses
may be higher or lower.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
EQUITY FUND $694 $902 $1,230 $2,161
Without redemption: $595 $902 $1,230 $2,161
BALANCED FUND $684 $872 $1,180 $2,055
Without redemption: $585 $872 $1,180 $2,055
4
<PAGE>
HOW THE FUNDS WILL TRY TO REACH THEIR INVESTMENT OBJECTIVES
The investment objective of the Funds is to seek long-term capital appreciation
by participating in rising markets and then preserving the bulk of those profits
during high-risk periods.
Avatar Investors Associates Corp., the Advisor believes that the most important
step in its investment process is determining a Fund's portfolio mix. The asset
allocation decision is based on the Advisor's asset allocation models.
In the Equity Fund, when the Advisor believes market risk is low, it maintains a
large commitment (as fully invested as practical) to stocks. When the Advisor
believes market risk is high, it shifts an appropriate amount of the Equity
Fund's assets into cash reserves to protect capital. These shifts from and to
stocks are generally made in increments of five to ten percent of the Equity
Fund's net assets, as conditions warrant based on the Advisor's asset allocation
model.
In the Balanced Fund, when the Advisor believes market risk is low, it invests
as fully as practical in stocks and bonds. When the Advisor believes market risk
is high, it reduces stock and bond holdings. These shifts are generally made in
increments of five to ten percent of the Balanced Fund's total net assets, as
conditions warrant based on the Advisor's asset allocation model. However, the
Balanced Fund will at all times maintain at least 25% of the value of its total
assets in fixed-income senior securities.
The Advisor's asset allocation models measure liquidity in the market place.
Based on its experience and research, the Advisor believes that changes in
financial liquidity -- for example, money, credit and reserves -- are the best
measures of investment market risk. When this liquidity expands beyond what is
needed by the "real" or production side of the economy, much of the excess moves
into the stock and bond markets. This movement causes stock and bond prices to
rise. On the other hand, when liquidity is contracting, economic demands siphon
money away from the stock and bond markets. Investment risks increase, and stock
and bond prices are subject to declines. Thus, the Advisor makes orderly asset
mix decisions by measuring and reacting to current market risk levels as
quantified by the Advisor's models.
HOW DOES THE ADVISOR SELECT EQUITY SECURITIES FOR EACH FUND'S PORTFOLIO?
The Advisor's approach to purchasing equity securities is the same for both
Funds. The Advisor selects equity securities, consisting of common stocks and
securities having the characteristics of common stocks, such as convertible
securities, rights and warrants, on the basis of both quantitative and
qualitative analysis. It screens a
5
<PAGE>
universe of more than 3,400 stocks for liquidity, in order to identify stocks
with sufficient trading volume to establish or eliminate a position quickly and
cost-effectively. This screen reduces the list of potential candidates to 600 to
700 actively traded issues. The Advisor then ranks each security on both growth
and value factors, to identify stocks that possess good growth potential at
reasonable prices. The Advisor's qualitative analysis involves identifying the
investment themes and stocks that are the best performers in the current market
environment. The Standard and Poor's 500 ("S&P 500") benchmarks are employed to
determine industry and sector weight. When the Advisor desires maximum exposure
to equities, each Fund's diversified portfolio is expected to have between 50
and 70 separate securities. The Advisor may sell a stock when its model calls
for a reduction in the exposure to equities, when the stock becomes less
attractive due to deteriorating fundamentals or when the stock's price falls to
a pre-set limit.
HOW DOES THE ADVISOR SELECT BONDS FOR THE BALANCED FUND'S PORTFOLIO?
The Advisor concentrates on U.S. Government Securities thus avoiding the risks
associated with corporate debt. The Advisor actively adjusts the maturity and
duration of the securities from among which it chooses. Utilizing various
strategies, the Advisor tailors the holdings based on current bond market
research and analysis. Quantitative analysis helps determine optimal bond
portfolio duration while qualitative analysis helps to carefully assess various
maturity combinations to achieve a duration target.
The Advisor does not expect either Fund's annual turnover rate to exceed 150%.
High portfolio turnover will increase transaction costs and may result in higher
taxes for you.
FUTURES AND OPTIONS ON FUTURES
The Funds may enter into futures contracts, or options on those contracts,
involving interest rates, securities and securities indices, for hedging
purposes or as a substitute for positions in the underlying securities. As a
general rule, the Funds will not purchase or sell futures if, immediately
thereafter, more than 25% of a Fund's net assets would be hedged.
LENDING SECURITIES
To increase its income, the Fund may lend securities from its portfolio to
brokers, dealers and other financial institutions. No more than one-third of the
Funds' total assets may be loaned. The Funds' loans of portfolio securities will
be collateralized at all times by high quality liquid securities. Under the
present regulatory requirements which govern loans of portfolio securities, the
loan collateral must, on each business day, at least equal the value of the
loaned securities and must consist of cash, letters of credit of
6
<PAGE>
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Funds if the demand meets
the terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Funds. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Funds' loans must permit the Fund to
reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Internal Revenue Code of
1986.
WHAT DO THE FUNDS USE FOR CASH RESERVES?
The Advisor uses high quality, short-term debt securities and money market
instruments as cash reserves for the Funds. These short-term debt securities and
money market instruments include shares of Money Market mutual funds, commercial
paper, certificates of deposit, bankers' acceptances, U.S. Government securities
and repurchase agreements. The Funds may also buy mortgage-backed securities.
HOW THE FUNDS ARE MANAGED
The Board of Trustees of the Trust establishes the Funds' policies and
supervises and reviews the management of the Funds.
THE ADVISOR
The Funds' Advisor, Avatar Associates, 900 Third Avenue, New York, NY 10022 has
provided asset management services to individuals and institutional investors
since 1970. The Advisor was established and is controlled by its Chairman,
Edward S. Babbitt, Jr. Two members of the firm, Charles M. White and Elizabeth
A. Sonders, are principally responsible for the management of each Fund's
portfolio. Mr. White has been President of the Advisor since March 1, 1998,
having joined the firm in 1988 as a Portfolio Manager. From 1992 until his
elevation to President, he was a Managing Director and Vice President of the
Advisor. Ms. Sonders has been a Vice President and Portfolio Manager of the
Advisor since 1989. She joined the firm in 1986. She became a Managing Director
in 1998.
The Advisor provides the Funds with advice on buying and selling securities,
manages the investments of the Funds, furnishes the Funds with office space and
certain administrative services, and provides most of the personnel needed by
the Funds. As compensation, the Funds pay the Advisor a monthly management fee
based upon the average daily net assets of the Fund at the annual rate of 0.85%
for the Equity Fund and 0.75% for the Balanced Fund. During the last fiscal
period, total fees paid to the Advisor for the Equity Fund amounted to $47,243.
The Advisor waived its entire fee of $9,496 for the Balanced Fund.
7
<PAGE>
PRIOR PERFORMANCE OF THE ADVISOR
The table which follows this discussion sets forth composite performance data
relating to the historical performance of institutional private accounts managed
by the Advisor for the periods indicated, that have investment objectives,
policies, strategies and risks substantially similar to those of the Funds
(each, a "Composite"). The data is provided to illustrate the past performance
of the Advisor in managing substantially similar accounts and does not represent
the performance of the Funds. You should not consider this performance data as
an indication of future performance of the Fund or of the Advisor.
The Composite performance data shown on page 8 was calculated in accordance with
recommended standards of the Association for Investment Management and Research
(AIMR*). All returns presented were calculated on a total return basis and
include all dividends and interest, accrued income and realized and unrealized
gains and losses. All returns reflect the deduction of investment advisory fees
(For the Equity Composite: At actual rates paid from 1983 to the present;
returns prior to 1983 reflect the deduction of a fee of 1% per annum, the
Advisor's highest advisory fee.), brokerage commissions and execution costs paid
by institutional private accounts of the Advisor without provision for federal
or state income taxes. Custodial fees, if any, were not included in the
calculation. Each Composite includes all actual, fee-paying, discretionary
institutional private accounts managed by the Advisor that have investment
objectives, policies, strategies and risks substantially similar to those of the
Composite. Securities transactions are accounted for on the trade date and
accrual accounting is used. Cash and equivalents are included in performance
returns. Beginning in January 1993 for the Equity Composite and beginning in
January 1994 for the Balanced Composite, the quarterly returns combine the
individual accounts' returns (calculated on a time-weighted rate of return that
is revalued whenever cash flows exceed 3% of the value of the account) by
asset-weighting each individual account's asset value as of the beginning of the
quarter. Quarterly returns prior to that time are equally weighted. The yearly
returns are computed by geometrically linking the returns of each quarter within
the calendar year.
- ------
* AIMR is a non-profit membership and education organization with more than
60,000 members worldwide that, among other things, has formulated a set of
performance presentation standards for investment advisors. These AIMR
performance presentation standards are intended to (i) promote full and fair
presentations by investment advisors of their performance results, and (ii)
ensure uniformity in reporting so that performance results of investment
advisors are directly comparable.
8
<PAGE>
The institutional private accounts that are included in each Composite are not
subject to the same types of expenses to which the Funds are subject to nor to
the diversification requirements, specific tax restrictions and investment
limitations imposed on the Funds by the Investment Company Act or the Internal
Revenue Code. Consequently, the performance results for the Composites could
have been adversely affected if the institutional private accounts included in
the Composites had been regulated as investment companies.
The investment results of the Composites presented below are unaudited and are
not intended to predict or suggest the returns that might be experienced by the
Funds or an individual investing in the Funds. Investors should also be aware
that the use of the methodology required by Securities and Exchange Commission
rules could result in different performance data than that shown.
EQUITY COMPOSITE
ANNUALIZED TOTAL RETURN FOR YEARS ENDED DECEMBER 31, 1998.
NUMBER ADVISOR'S S&P
OF YEARS COMPOSITE 500
- -------- --------- -----
One Year 27.0% 28.6%
Three Years 20.1% 28.2%
Five Years 16.3% 24.0%
Ten Years 14.6% 19.2%
Inception
(1/1/74 - 12/31/98) 14.5% 14.9%
BALANCED COMPOSITE
ANNUALIZED TOTAL RETURN FOR YEARS ENDED DECEMBER 31, 1998.
NUMBER ADVISOR'S 60S/30B/
OF YEARS COMPOSITE 10C*
- -------- --------- --------
One Year 22.8% 21.1%
Three Years 16.7% 19.7%
Five Years 14.1% 17.1%
Ten Years 13.8% 15.0%
Inception
(7/1/86 - 12/31/98) 13.0% 13.5%
* The 60s/30b/10c Index is a blended index that provides the most appropriate
comparison for the Advisor's composite. The Index is weighted 60% S&P 500
Index, 30% Lehman Corporate Bond Index (including all publicly issued,
fixe-rate, non-convertible investment grade domestic corporate debt issues
and Yankee Bonds) and 10% cash equivalent securities (primarily Treasury
bills).
YEAR 2000 RISK
Like other business organizations around the world, the Funds could be adversely
affected if the computer systems used by its investment advisor and other
service providers do not properly process and calculate information related to
dates beginning January 1, 2000. This is commonly known as the "Year 2000
Problem." Failure of computer systems used for securities trading could result
in settlement and liquidity problems for the Funds and investors. That failure
could have a negative impact on handling securities trades and pricing and
accounting services. Additionally, the services provided to the Funds depend on
the interaction of computer systems with those of brokers, information vendors
and other parties; therefore, any failure
9
<PAGE>
of the computer systems of those parties may cause service problems for the
Funds. In addition, this situation may negatively affect the companies in which
the Fund invests and consequently, the value of the Fund's shares. The Board of
Trustees of the Fund has adopted a Year 2000 Project Plan that is reasonably
designed to address the Year 2000 Problem with respect to the Advisor's and
other service providers' computer systems. Included in the Year 2000 Project
Plan is a provision for a contingency plan for the retention of other service
providers to replace those services providers whose performance in converting to
Year 2000 compliant data processing equipment has been deemed to be less than
satisfactory. There can be no assurance that these actions will be sufficient to
avoid any adverse impact on the Funds. The extent of that risk cannot be
ascertained at this time.
A GUIDE FOR INVESTORS
PRICING THE FUNDS' SHARES
Each Fund's price, or net asset value per share, is calculated by dividing the
value of a Fund's total assets, less its liabilities, by the number of its
shares outstanding. In calculating the net asset value, portfolio securities are
valued using current market values, if available. Securities for which market
quotations are not readily available are valued at fair values determined in
good faith by or under the supervision of the Board of Trustees of the Trust.
The net asset value is calculated at the close of regular trading of the New
York Stock Exchange ("NYSE"), normally 4:00 p.m., Eastern time.
HOW TO PURCHASE SHARES OF THE FUNDS
There are several ways to purchase shares of the Funds. An Application Form,
which accompanies this Prospectus, is used if you send money directly to the
Funds by mail or by wire. If you have questions about how to invest, or about
how to complete the Application Form, please call an account representative at
(888) 263-6452.
YOU MAY SEND MONEY TO THE FUND BY MAIL
If you wish to invest by mail, simply complete the Application Form and mail it
with a check (made payable to the Avatar Funds) to the Funds' Shareholder
Servicing Agent, American Data Services, Inc. at the following address:
The Avatar Funds
P.O. Box 640947
Cincinnati, OH 45264-0947
If you wish to send your Application Form and check via an overnight delivery
services (such as FedEx), delivery cannot be made to a post office box. In that
case, you should use the following address:
The Avatar Funds
c/o Firstar Bank
Mutual Fund Custody Department
425 Walnut Street, M/L 6118,
Sixth Floor
Cincinnati, OH 45202
10
<PAGE>
YOU MAY WIRE MONEY TO THE FUNDS
Before sending a wire, you should call the Fund at (888) 263-6452 between 9:00
a.m. and 5:00 p.m., Eastern time, on a day when the NYSE is open for trading, in
order to receive an account number. It is important to call and receive this
account number, because if your wire is sent without it or without the name of
the Fund, there may be a delay in investing the money you wire. You should then
ask your bank to wire money to:
Firstar Bank
ABA # 0420-0001-3
for credit to [Avatar Fund of your choice] DDA # 488840232 for further credit to
[your name and account number]
Your bank may charge you a fee for sending a wire to the Fund.
YOU MAY PURCHASE SHARES THROUGH AN INVESTMENT DEALER
You may buy and sell shares of the Fund through certain brokers (and their
agents, together "brokers") that have made arrangements with the Fund. An order
placed with such a broker is treated as if it were placed directly with the
Fund, and will be executed at the next share price calculated by the Fund less
any sales charge (if applicable). Your shares will be held in a pooled account
in the broker's name, and the broker will maintain your individual ownership
information. The Fund may pay the broker for maintaining these records as well
as providing other shareholder services. In addition, the broker may charge you
a fee for handling your order. The broker is responsible for processing your
order correctly and promptly, keeping you advised of the status of your
individual account, confirming your transactions and ensuring that you receive
copies of the Fund's prospectus.
Investment Advisors or Financial Planners 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; and clients of such investment
advisors or financial planners who place trades for their own accounts, if the
accounts are linked to the master account of such investment advisor or
financial planner on the books and records of the broker or agent may place
trades with the Fund at Net Asset Value. Additionally, Retirement and deferred
compensation plans and trusts used to fund those plans, including, but not
limited to, those defined in section 401(a), 403(b), or 457 of the Internal
Revenue Code and "rabbi trusts" may also purchase at Net Asset Value.
MINIMUM INVESTMENTS
The minimum initial investment in each Fund is $2,500. The minimum subsequent
investment is $250. However, if you are investing in an Individual Retirement
Account ("IRA"), or you are starting an Automatic Investment Plan (see below),
the minimum initial and subsequent investments are $1,000 and $50, respectively.
11
<PAGE>
SUBSEQUENT INVESTMENTS
You may purchase additional shares of the Funds by sending a check, with the
stub from an account statement, to the Funds at the address above. Please also
write your account number on the check. (If you do not have a stub from an
account statement, you can write your name, address and account number on a
separate piece of paper and enclose it with your check.) If you want to send
additional money for investment by wire, it is important for you to call the
Fund at (888) 263-6452. You may also make additional purchases through an
investment dealer, as described above.
WHAT IS THE PRICE YOU PAY FOR EACH SHARE OF THE FUNDS?
When you invest in the Funds, you pay the "offering price" of a share. The
offering price of shares is the net asset value (the "NAV") per share plus a
sales charge that is based on the amount purchased. The sales charge is 4.50% of
the offering price (4.71% of the NAV). The entire sales charge will be retained
by the selling broker/dealer.
PURCHASES AT NET ASSET VALUE - Shares of the funds may be purchased at net asset
value by (i) officers, Trustees, directors and full time employees of the Trust,
the Advisor, the Administrator and affiliates of those companies, or by their
family members; (ii) registered representatives and employees of firms which
have selling agreements with the Distributor; (iii) investment advisors,
financial planners or other intermediaries who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; (iv) clients of such investment
advisors, including pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Sections 457 and 403 of the Internal
Revenue Code, financial planners or other intermediaries who place trades for
their own accounts if the accounts are linked to the master account of such
investment advisor, financial planner or other intermediary on the books and
records of the broker or agent; and (v) by such other investors who are
determined to have acquired shares under circumstances not involving any sales
expense to the Fund or Distributor. The Distributor or Distribution Coordinator
has the right to decide whether a purchase may be made at net asset value.
If an investment is made at net asset value that meets any of the above
referenced requirements, the Advisor may pay supplemental distribution
assistance out of its own resources, to any dealer who has executed a selling
agreement with the Distributor through which the purchase is made. Additionally,
the Advisor, at its discretion, may pay a "finders fee" to any person who has
assisted the Advisor or Distributor in securing additional investments in the
Funds.
12
<PAGE>
MONEY INVESTED IN THE FUNDS
Any money received for investment in a Fund from an investor, whether sent by
check or by wire, is invested at the net asset value of the Fund which is next
calculated after the money is received (assuming the check or wire correctly
identifies the Fund and account), less any sales charge (if applicable). Orders
received from dealers are invested at the net asset value next calculated after
the order is received, less any sales charge (if applicable). A check or wire
received after the NYSE closes is invested as of the next calculation of the
Fund's net asset value.
OTHER INFORMATION
The Funds' Distributor may waive the minimum investment requirements for
purchases by certain group or retirement plans. All investments must be made in
U.S. dollars, and checks must be drawn on U.S. banks. Third party checks will
not be accepted. A charge may be imposed if a check used to make an investment
does not clear. The Funds and the Distributor reserve the right to reject any
investment, in whole or in part. Federal tax law requires that investors provide
a certified taxpayer identification number and other certifications on opening
an account in order to avoid backup withholding of taxes. See the Application
Form for more information about backup withholding. The Fund is not required to
issue share certificates; all shares are normally held in non-certificated form
on the books of the Funds, for the account of the shareholder. The Funds, under
certain circumstances, may accept investments of securities appropriate for a
Fund's portfolio, in lieu of cash. Prior to making such a purchase, you should
call the Advisor to determine if such an investment may be made. The Advisor
may, at its own expense, pay third parties for assistance in gathering assets
for the Funds.
SERVICES AVAILABLE TO SHAREHOLDERS
RETIREMENT PLANS
You may obtain prototype IRA plans from the Funds. Shares of the Funds are also
eligible investments for other types of retirement plans.
AUTOMATIC INVESTING BY CHECK
You may make regular monthly investments in the Funds using the "Automatic
Investment Plan." A check is automatically drawn on your personal checking
account each month for a predetermined amount (but not less than $50), as if you
had written it directly. Upon receipt of the withdrawn money, the Fund
automatically invests the money in additional shares of the Fund at the current
net asset value. Applications for this service are available from the Fund or
you may simply complete this section on the new account application form. There
is no charge to you for this service. The Funds may
13
<PAGE>
terminate or modify this privilege at any time, and shareholders may terminate
their participation by notifying the Shareholder Servicing Agent in writing,
sufficiently in advance of the next withdrawal.
AUTOMATIC WITHDRAWALS
The Funds offer a Systematic Withdrawal Program whereby shareholders may request
that a check drawn in a predetermined amount be sent to them each month or
calendar quarter. To start this Program, your account must have Fund shares with
a value of at least $10,000, and the minimum amount that may be withdrawn each
month or quarter is $50. This Program may be terminated or modified by a
shareholder or the Funds at any time without charge or penalty. A withdrawal
under the Systematic Withdrawal Program involves a redemption of shares of a
Fund, and may result in a gain or loss for federal income tax purposes. In
addition, if the amount withdrawn exceeds the dividends credited to your
account, the account ultimately may be depleted.
HOW TO REDEEM YOUR SHARES
You have the right to redeem all or any portion of your shares of a Fund on each
day the NYSE is open for trading. A redemption fee of 1.00% (as a percentage of
original purchase price or redemption proceeds, whichever is lower) will be
imposed on redemptions made within 1 year of purchase. In order to keep any
applicable redemption fee as low as possible, shares not subject to a redemption
fee will be sold first, on a first-in, first-out basis.
REDEMPTION IN WRITING
You may redeem your shares by simply sending a written request to the Funds. You
should give your account number and state whether you want all or part of your
shares redeemed. The letter should be signed by all of the shareholders whose
names appear in the account registration. You should send your redemption
request to:
The Avatar Funds
150 Motor Parkway, Suite 109
Hauppauge, NY 11788
SIGNATURE GUARANTEE
If the value of the shares you wish to redeem exceeds $100,000, or is being sent
to any address other than that to what we send your statements, the signatures
on the redemption request must be guaranteed by an "eligible guarantor
institution." These institutions include banks, broker-dealers, credit unions
and savings institutions. A broker-dealer guaranteeing a signature must be a
member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program. A notary public is not an
acceptable guarantor.
14
<PAGE>
REDEMPTION BY TELEPHONE
If you complete the Redemptions by Telephone portion of the Fund's Application
Form, you may redeem shares on any business day the NYSE is open by calling the
Funds' Shareholder Servicing Agent at (888) 263-6452 before 4:00 p.m. Eastern
time. Redemption proceeds will be mailed or wired, at your direction, on the
next business day to the bank account you designated on the Application Form.
The minimum amount that may be wired is $1,000 (wire charges, if any, will be
deducted from redemption proceeds). Telephone redemptions cannot be made for IRA
accounts.
By establishing telephone redemption privileges, you authorize the Funds and
their Shareholder Servicing Agent to act upon the instruction of any person who
makes the telephone call to redeem shares from your account and transfer the
proceeds to the bank account designated in the Application Form. The Funds and
the Shareholder Servicing Agent will use procedures to confirm that redemption
instructions received by telephone are genuine, including recording of telephone
instructions and requiring a form of personal identification before acting on
these instructions. If these normal identification procedures are followed,
neither the Funds nor the Shareholder Servicing Agent will be liable for any
loss, liability, or cost which results from acting upon instructions of a person
believed to be a shareholder with respect to the telephone redemption privilege.
The Fund may change, modify, or terminate these privileges at any time upon at
least 60 days notice to shareholders.
You may request telephone redemption privileges after your account is opened;
however, the authorization form will require a separate signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity.
THE PRICE USED FOR A REDEMPTION
The redemption price is the net asset value of the Fund's shares, less the
Redemption Fee (if applicable) next determined after shares are validly tendered
for redemption. All signatures of account holders must be included in the
request, and a signature guarantee, if required, must also be included for the
request to be valid.
WHEN REDEMPTION PAYMENTS ARE MADE
As noted above, redemption payments for telephone redemptions are sent on the
day after the telephone call is received. Payments for redemptions sent in
writing are normally made promptly, but no later than seven days after the
receipt of a request that meets requirements described above. However, the Funds
may suspend the right of redemption under certain extraordinary circumstances in
accordance with rules of the Securities and Exchange Commission.
15
<PAGE>
If shares were purchased by wire, they cannot be redeemed until the day after
the Application Form is received. If shares were purchased by check and then
redeemed shortly after the check is received, the Fund may delay sending the
redemption proceeds until it has been notified that the check used to purchase
the shares has been collected, a process which may take up to 15 days. This
delay may be avoided by investing by wire or by using a certified or official
bank check to make the purchase.
REPURCHASES FROM DEALERS
The Fund may accept orders to sell shares from an investment dealer (or their
agent) on behalf of a dealer's (or their agent's) customers. The net asset value
for a sale is that next calculated after receipt of the order from the dealer
(or agent). The dealer (or agent) is responsible for forwarding any documents
required in connection with a redemption, including a signature guarantee, and
the Funds may cancel the order if these documents are not received promptly.
OTHER INFORMATION ABOUT REDEMPTIONS
A redemption may result in recognition of a gain or loss for federal income tax
purposes. Due to the relatively high cost of maintaining smaller accounts, the
shares in your account (unless it is a retirement plan or Uniform Gifts or
Transfers to Minors Act account) may be redeemed by the Fund if, due to
redemptions you have made, the total value of your account is reduced to less
than $500. If the Fund determines to make such an involuntary redemption, you
will first be notified that the value of your account is less than $500, and you
will be allowed 30 days to make an additional investment to bring the value of
your account to at least $500 before the Fund takes any action.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income, if any, are normally declared and paid by
the Funds in December. Capital gains distributions, if any, are also normally
made in December, but the Funds may make an additional payment of dividends or
distributions if it deems it desirable at another time during any year.
Dividends and capital gain distributions (net of any required tax withholding)
are automatically reinvested in additional shares of the Fund at the net asset
value per share on the reinvestment date unless you have previously requested in
writing to the Shareholder Servicing Agent or on the Account Application Form
that payment be made in cash.
Any dividend or distribution paid by the Fund has the effect of reducing the net
asset value per share on the record date by the amount of the dividend or
distribution. You should note that a dividend or distribution paid on shares
purchased shortly before that
16
<PAGE>
dividend or distribution was declared will be subject to income taxes even
though the dividend or distribution represents, in substance, a partial return
of capital to you.
TAXES
Distributions made by the Fund will be taxable to shareholders whether received
in shares (through dividend reinvestment) or in cash. Distributions derived from
net investment income, including net short-term capital gains, are taxable to
shareholders as ordinary income. Distributions designated as capital gains
dividends are taxable as capital gains regardless of the length of time shares
of the Fund have been held. You should consult your own advisors concerning
federal, state and local taxation of distributions from the Fund.
DISTRIBUTION ARRANGEMENTS
Pursuant to a plan of distribution adopted by the Trust, on behalf of each Fund,
pursuant to Rule 12b-1 under the 1940 Act, each Fund may reimburse the Advisor
for sales distribution and related expenses incurred by the Advisor up to 0.25%
of the Fund's average net assets. 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 each Fund's shares, payments to financial intermediaries for
shareholder support, administrative and accounting services with respect to
shareholders of each Fund, and such other expenses as may be approved from time
to time by the Board of Trustees of the Trust.
Because these fees are paid out of each Fund's assets on an on-going basis, over
time these fees will increase the cost of your investment in the Fund and may
cost you more than paying other types of sales charges.
17
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each Fund's
financial performance during its past fiscal period. Certain information
reflects financial results for a single fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
each Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by McGladrey & Pullen, LLP. Their report and each
Fund's financial statements are included in each Fund's annual report which is
available upon request.
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- --------------------------------------------------------------------------------
EQUITY FUND
-------------------------------
Year Dec. 3, 1997*
Ended through
Dec. 31, 1998 Dec. 31, 1997
------------- -------------
Net asset value, beginning of period...........$ 10.02 $ 10.00
--------- --------
Income from investment operations:
Net investment income....................... 0.05 0.01
Net realized and unrealized gain
on securities.............................. 2.48 0.02
--------- --------
Total from investment operations............... 2.53 0.03
--------- --------
Less distributions:
From net investment income.................. (0.05) (0.01)
From capital gains.......................... (0.64) --
Return of capital........................... (0.02) --
--------- --------
Total distributions............................ (0.71) (0.01)
--------- --------
Net asset value, end of period.................$ 11.84 $ 10.02
========= ========
Total return................................... 25.81% 0.22%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)...........$ 14.7 $ 20.2
Ratio of expenses to average net assets........ 1.50%+ 1.39%+
Ratio of net investment income
(loss) to average net assets................... 0.36%+ 0.47%+
Portfolio turnover rate........................ 79.95% 2.48%++
* Commencement of operations.
+ Annualized. These figures reflect the effect of the Advisor's agreement to
waive its fees and/or reimburse Fund expenses.
++ Not annualized.
18
<PAGE>
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
BALANCED FUND
-------------
Jan. 13, 1998*
through
Dec. 31, 1998
-------------
Net asset value, beginning of period....................... $ 10.00
Income from investment operations:
Net investment income................................... 0.19
Net realized and unrealized gain
on investments......................................... 2.11
--------
Total from investment operations........................... 2.30
--------
Less distributions:
From net investment income.............................. (0.19)
From net capital gains.................................. (0.16)
--------
Total distributions........................................ (0.35)
--------
Net asset value, end of period............................. $ 11.95
========
Total return............................................... 23.11%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (millions)....................... $ 1.5
Ratio of expenses to average net assets.................... 1.40%+
Ratio of net investment income (loss) to
average net assets....................................... 1.89%+
Portfolio turnover rate.................................... 95.00%
* Commencement of operations.
+ Annualized. These figures reflect the effect of the Advisor's agreement to
waive its fees and/or reimburse Fund expenses.
++ Not annualized.
19
<PAGE>
THE AVATAR ADVANTAGE EQUITY ALLOCATION FUND AND
THE AVATAR ADVANTAGE BALANCED FUND,
EACH A SERIES OF ADVISORS SERIES TRUST
FOR MORE INFORMATION
The Statement of Additional Information (SAI) for each Fund includes additional
information about the Funds.
Each Fund's annual and semi-annual report to shareholders contains additional
information about the Funds' investments. The annual reports include a
discussion of the market conditions and investment strategies which
significantly affected each Fund's performance during their last fiscal year.
The SAIs and shareholder reports are available free upon request. To request
them or other information, or to ask any questions, please call or write:
1-888-263-6452
The Avatar Funds
150 Motor Parkway, Suite 109
Hauppauge, NY 11788
The SAIs and other Fund information may also be reviewed and copied at the SEC's
Public Reference Room in Washington, DC. Call 1-800-SEC-0330 for information
about the Room's operations.
Reports and other Fund information are also available on the SEC's Internet site
at http://www.sec.gov. Copies of this information may be obtained, for
duplicating fees, by writing to the SEC's Public Reference Section, Washington,
DC 20549-6009.
The Funds' SEC File Number is 811-07959.
20
<PAGE>
This combined Prospectus sets forth basic information about the Funds that you
should know before investing. It should be read and retained for future
reference.
SHARES OF THE FUNDS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
THE AVATAR
ADVANTAGE
INTERNATIONAL EQUITY
ALLOCATION FUND
PROSPECTUS
MAY 1, 1999
<PAGE>
TABLE OF CONTENTS
Objective of the Fund ................................... 2
Expense Table ........................................... 3
How the Fund Will Try to
Reach Its Investment Objective .......................... 4
How the Fund is Managed ................................. 7
A Guide for Investors ................................... 8
Services Available to Shareholders ...................... 11
How to Redeem Your Shares ............................... 11
Distributions and Taxes ................................. 14
Financial Highlights .................................... 15
OBJECTIVE OF THE FUND
The AVATAR ADVANTAGE INTERNATIONAL EQUITY ALLOCATION FUND (the "Fund") seeks
long-term capital appreciation.
HOW DOES THE FUND SEEK TO ACHIEVE ITS OBJECTIVE?
The Fund seeks to achieve its objective by investing in rising stock markets
outside of the United States and then preserving the bulk of those profits
during high-risk periods. Under normal market conditions, the Fund will invest
at least 65% of its total assets in equity securities of issuers from at least
three countries other than the United States. Equity securities include common
stocks and securities having the characteristics of common stocks, such as
convertible securities, rights, warrants and World Equity Benchmark Shares
(WEBS). In addition to investing in equity securities, the Fund may also enter
into foreign currency exchange contracts and purchase other securities to
protect against fluctuations in foreign exchange rates.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
The Fund is designed for investors who are willing to accept the risks involved
in investing in foreign securities. These risks include changing market
conditions, economic and political instability and changes in currency exchange
rates. Information on foreign companies is often limited, and financial
information may be prepared following accounting rules that are different from
those used by public companies in the United States. Investing in any equity
security carries a degree of risk. Stock markets move up and down, which can
cause temporary or lengthy fluctuations in the value of the stocks in the Fund's
portfolio.
Since the prices of WEBS are correlated to diversified portfolios, WEBS are
subject to the declining stock prices, underlying index decline and the
possibility that the specific issuer may have financial difficulties. Because
WEBS mirror the performance of a single country index, an economic downturn in a
single country could adversely affect the price of the WEBS for that country.
In addition, because WEBS will continue to be traded even when trading is halted
in the stocks of the underlying indices, price quotations for these securities
may, at times, be based upon non-current price information.
2
<PAGE>
The Fund may also use forward currency contracts to try to offset the rise and
fall of currency values, which may cause the Fund to suffer a loss.
There is the risk that you may lose money on your investment.
FUND PERFORMANCE
The Fund commenced operations on February 2, 1998. Fund performance results have
not been provided because the Fund has not been in existence for a full calendar
year.
EXPENSE TABLE
You pay certain fees and expenses as an investor in the Fund. There are two
types of expenses involved: shareholder transaction expenses, such as sales
loads, and annual operating expenses, such as investment advisory fees. The Fund
is a no-load mutual fund and has no shareholder transaction expenses.
ANNUAL OPERATING EXPENSES
(as a percentage of average net assets)
Investment Advisory Fees...................................... 1.00%
12b-1 Fee..................................................... 0.25%
Other Expenses................................................ 30.07%
-----
Total Annual Fund Operating Expenses.......................... 31.32%
Fee Waiver and/or Expense Reimbursement(a) .................. 29.67%
-----
Actual Operating Expenses..................................... 1.65%
=====
(a) The Advisor has contractually agreed to waive its fees and/or pay Fund
expenses in order to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.65% of average daily net assets.
This contract's term is indefinite and may be terminated only by the Board
of Trustees. The Advisor is permitted to be reimbursed, subject to
limitations, for fees it waives and for Fund expenses it pays.
WHAT DOES THE EXPENSE EXAMPLE SHOW?
This example will help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It is based on the Annual Operating
Expenses shown above, and it assumes that these expenses will remain the same
over the time periods shown. The example also assumes that you make a single
$10,000 investment in the Fund to start with and that you earn a 5% return each
year. Finally, it assumes that you redeem all of your shares at the end of each
of the time periods. This example is hypothetical, and your actual expenses may
be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$167 $519 $895 $1,956
3
<PAGE>
HOW THE FUND WILL TRY TO REACH ITS INVESTMENT OBJECTIVE
WHAT ARE THE FUND'S INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND
RELATED RISKS?
INVESTMENT OBJECTIVE
The investment objective of the Fund is to seek long-term capital appreciation.
WHAT DOES THE FUND INVEST IN?
Under normal market conditions, the Fund will invest at least 65% of its total
assets in equity securities of issuers from at least three countries other than
the United States or through the purchase of World Equity Benchmark Shares
("WEBS"), which are open-end investment companies that invest in international
equities. Equity securities include common stocks and securities having the
characteristics of common stock, such as convertible securities, rights and
warrants. In an attempt to hedge the Fund's portfolio, the Fund may buy and sell
options on securities and enter into futures contracts and options on such
contracts.
The Fund may invest in companies located anywhere in the world but intends to
invest principally in the following countries: Australia, Canada, France,
Germany, Hong Kong, Italy, Japan, Netherlands, Spain, Switzerland and the United
Kingdom. The Fund is permitted to invest up to 10% of its total assets in U.S.
Companies. The Fund may invest more heavily in U.S. companies when the Advisor's
models indicate that foreign markets or economic conditions or trends in
currency exchange rates favor domestic securities.
The Fund may invest in foreign securities in the form of American Depositary
Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts
(GDRs), International Depositary Receipts (IDRs) or other similar securities
representing an interest in securities of foreign issuers.
OPTIONS ON SECURITIES
The Fund may buy options as a substitute for positions in the underlying
securities. The Fund may also buy call options on securities in order to fix the
cost of a future purchase or to attempt to enhance return. The Fund may buy put
options on securities to hedge against a decline in the value of the securities
it owns. The Fund may also write (sell) put and covered call options on
securities in which it is authorized to invest. Options transactions will be
entered into for hedging purposes and not for speculation.
RISKS. The Fund's ability to use these instruments successfully will depend on
the Advisor's ability to accurately predict movements in the prices of the
securities, interest rates and the securities markets. There is no assurance
that liquid secondary markets for options will always exist, and the correlation
between hedging instruments and the securities or sectors being hedged may be
imperfect. The requirement to cover
4
<PAGE>
obligations may impede portfolio management or the ability to meet redemption
requests. It may also be necessary to defer closing out options positions to
avoid adverse tax consequences.
FUTURES AND OPTIONS ON FUTURES
The Fund may enter into futures contracts and forward foreign currency exchange
contracts, or options on those contracts, involving interest rates, securities
and securities indices, for hedging purposes or as a substitute for positions in
the underlying securities, as well as in an attempt to realize income.
RISKS. There are risks involved in the use of futures and options on futures,
including the risk that the prices of the hedging vehicles may not correlate
perfectly with the prices of the securities in the Fund's portfolio. This may
cause the futures contracts or options to react differently from the Fund's
portfolio securities to market changes. In addition, the Advisor could be
incorrect in its expectations about the direction or extent of market movements.
In these events, the Fund could lose money on the futures contracts or options.
It is also not certain that a secondary market for positions in futures
contracts or options will exist at all times, although the Advisor will consider
liquidity before entering into these transactions.
WHAT ARE THE FUND'S INVESTMENT STRATEGIES?
Avatar Investors Associates Corp., the Advisor, is a passive investor and will
not focus on the characteristics of individual stocks. The Advisor will use
internally constructed baskets of equity securities or other instruments to make
investments and not engage in active security selection. The Advisor believes
the most important step in its investment process is determining the Fund's
allocation between equity securities and cash reserves in markets around the
world.
The asset allocation decision is based on proprietary asset allocation models
(described below) which measure the risk and potential reward of investing in
equity securities relative to the safety of cash reserves in markets around the
world. When the Advisor's models indicate that stock market risk is low within a
given country, it maintains a large commitment (as fully invested as
practicable) to equity securities within a given country. When the Advisor's
models indicate that stock market risk is high within a given country, it shifts
an appropriate amount of the Fund's assets to cash reserves to protect capital.
The Advisor may also shift assets between countries around the world to position
itself in markets it feels are more favorable. These shifts to and from equity
securities are generally made in increments of five to ten percent of the Fund's
net assets, as conditions warrant, based on the Advisor's asset allocation
model. To the extent that cash from additional shareholder investments has been
received by the Fund, that
5
<PAGE>
cash could be invested either in foreign markets or in the United States,
depending on which country the Advisor believes the allocation would be most
advantageous.
In creating the Fund's international portfolio, the Advisor employs the
following three-step process that incorporates its proprietary asset allocation
model.
STEP 1. WITHIN COUNTRY PORTFOLIO ALLOCATION. Each country has its own
proprietary liquidity model for stocks because there are characteristics and
historical development issues that vary from market to market. These models
measure the degree of market risk for each country. The model readings formulate
the asset allocation mix daily. Once the asset allocation mix has been
established, each country portfolio is constructed using exchange-listed WEBs
that provide appropriate market exposure in a cost effective manner.
STEP 2. BETWEEN COUNTRY PORTFOLIO ALLOCATION. Benchmark guidelines are set for
each country based on the market capitalization weight of each market in the
benchmark. These guidelines are rebalanced monthly. The benchmark guideline for
the Fund is the Morgan Stanley EAFE plus Canada Index, a capitalization-weighted
index comprised of stocks representing a sampling of companies in a manner that
replicates the industry composition of the markets in which the Advisor would
like the Fund to be invested. The index sets the basis for the Fund's allocation
of stocks between countries. A range above and below the benchmark is then set
based on the trading volume and available investment vehicles for that country.
Given these specified guidelines, the model readings or market risk determine
the country weights.
STEP 3. CURRENCY MANAGEMENT. Currency movements are an important part of the
total investment return for non-dollar or international investments. The Advisor
uses a proprietary quantitative approach to determine when currency exposure
will enhance portfolio performance. Since exchange rate movements are generally
independent from stock movements, the Advisor's currency exposure decision is
determined independently from its asset allocation decision. The Advisor's
currency models combine economic fundamentals with trend data.
WHAT ARE THE RISKS OF INVESTING IN FOREIGN SECURITIES?
Investments in foreign securities involve significant and special risks. These
include currency fluctuations, political or economic instability in the country
of issuer and the possible imposition of exchange controls or other laws or
restrictions. In addition, securities prices in foreign markets are generally
subject to different economic, financial, political and social factors than are
the price of securities in U.S. markets. With respect to some foreign countries
there may be the possibility of expropriation or confiscatory taxation,
limitations on liquidity of securities or political or
6
<PAGE>
economic developments which could affect the foreign investments of the Fund.
Morever, most securities of foreign issuers are not registered with the SEC, and
most foreign issuers are not subject to the SEC's reporting requirements.
Accordingly, there is likely to be less publicly available information
concerning foreign issuers of securities held by the Fund than is available
concerning U.S. securities issuers. Foreign companies are also generally not
subject to uniform accounting, auditing and financial reporting standards or to
practices and requirements comparable to those applicable to U.S. companies.
There may also be less government supervision and regulation of foreign
broker-dealers, financial institutions and listed companies than exists in the
U.S. These factors could make foreign investments, especially those in
developing countries, more volatile. In addition, several European countries
have adopted a single uniform currency known as the "euro." The euro conversion
could have potential adverse effect on the Fund's ability to value its portfolio
holdings in foreign securities and could increase the costs associated with the
Fund's operations. The Fund and the Advisor are working with the providers of
services to the Fund in the areas of clearance and settlement of trades in an
effort to avoid any material impact on the Fund due to the euro conversion.
There can be no assurance, however, that the steps taken by the Fund or the
Advisor will be sufficient to avoid any adverse impact on the Fund. All of the
above issues should be considered before investing in the Fund.
WHAT DOES THE FUND USE FOR CASH RESERVES?
The Advisor uses high quality, short-term debt securities and money market
instruments as cash reserves for the Fund. These short-term debt securities and
money market instruments include commercial paper, Money Market Mutual Fund
Shares, certificates of deposit, bankers' acceptances, U.S. Government
securities and repurchase agreements, as well as short-term securities issued by
other sovereign governments and investment grade money market instruments issued
by foreign banking institutions.
HOW THE FUND IS MANAGED
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund.
THE ADVISOR
The Fund's Advisor, Avatar Associates, 900 Third Avenue, New York, NY 10022 has
provided asset management services to individuals and institutional investors
since 1970. The Advisor was established and is controlled by its President,
Edward S. Babbitt, Jr. Theodore M. Theodore is principally responsible for the
management of the Fund's portfolio. Mr. Theodore joined the Advisor in 1989 as a
Vice President and portfolio manager. He became a Managing Director in 1992 and
was Co-Chairman of Research at Avatar from 1993 to 1996. In January 1997
7
<PAGE>
he became Director of Research for the Advisor.
The Advisor provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Advisor a monthly management fee
based upon the average daily net assets of the Fund at the annual rate of 1.00%.
YEAR 2000 RISK
Like other business organizations around the world, the Fund could be adversely
affected if the computer systems used by its investment advisor and other
service providers do not properly process and calculate information related to
dates beginning January 1, 2000. This is commonly known as the "Year 2000
Problem." Failure of computer systems used for securities trading could result
in settlement and liquidity problems for the Funds and investors. That failure
could have a negative impact on handling securities trades and pricing and
accounting services. Additionally, the services provided to the Fund depend on
the interaction of computer systems with those of brokers, information vendors
and other parties; therefore, any failure of the computer systems of those
parties may cause service problems for the Fund. This situation may negatively
affect the companies in which the Fund invests and consequently, the value of
the Fund's shares. Because of the difficulty in assessing the Year 2000
preparedness of issuers of foreign securities and foreign governments that
regulate these issuers, the Fund could face risks beyond those encountered by
mutual funds that invest solely in the United States. The Board of Trustees of
the Fund has adopted a Year 2000 Project Plan that is reasonably designed to
address the Year 2000 Problem with respect to the Advisor's and other service
providers' computer systems. Included in the Year 2000 Project Plan is a
provision for a contingency plan for the retention of other service providers to
replace those services providers whose performance in converting to Year 2000
compliant data processing equipment has been deemed to be less than
satisfactory. There can be no assurance that these actions will be sufficient to
avoid any adverse impact on the Fund. The extent of that risk cannot be
ascertained at this time.
A GUIDE FOR INVESTORS
PRICING THE FUND'S SHARES
The Fund's price, or net asset value per share, is calculated by dividing the
value of a Fund's total assets, less its liabilities, by the number of its
shares outstanding. In calculating the net asset value, portfolio securities are
valued using current market values, if available. Securities for which market
quotations are not readily available are valued at fair values determined
8
<PAGE>
in good faith by or under the supervision of the Board of Trustees of the Trust.
The net asset value is calculated at the close of regular trading of the New
York Stock Exchange ("NYSE"), normally 4:00 p.m., eastern time.
HOW TO PURCHASE SHARES OF THE FUND
The Fund was established primarily to serve those investors in the qualified
retirement plan market. There are several ways to purchase shares of the Fund.
An Application Form, which accompanies this Prospectus, is used if you send
money directly to the Fund by mail or by wire. If you have questions about how
to invest, or about how to complete the Application Form, please call an account
representative at (800) 841-0924.
YOU MAY SEND MONEY TO THE FUND BY MAIL
If you wish to invest by mail, simply complete the Application Form and mail it
with a check (made payable to the Avatar Advantage International Equity
Allocation Fund) to the Fund's Shareholder Servicing Agent, Countrywide Fund
Services, Inc. at the following address:
Avatar Advantage International Equity Allocation Fund
P.O. Box 5354
Cincinnati, OH 45201-5354
If you wish to send your Application Form and check via an overnight delivery
services (such as FedEx), delivery cannot be made to a post office box. You
should use the following address instead:
The Avatar Funds
c/o Firstar Bank, N.A.
Mutual Fund Custody Department
425 Walnut Street, M/L 6118,
Sixth Floor
Cincinnati, OH 45202
YOU MAY WIRE MONEY TO THE FUNDS
Before sending a wire, you should call the Fund at (800) 841-0924 between 8:30
a.m. and 7:00 p.m., Eastern time, on a day when the NYSE is open for trading, in
order to receive an account number. It is important to call and receive this
account number, because if your wire is sent without it or without the name of
the Fund, there may be a delay in investing the money you wire. You should then
ask your bank to wire money to:
Firstar Bank, N.A.
ABA # 0420-0001-3
for credit to Avatar Advantage International Equity Allocation Fund DDA #
488886201 for further credit to [your name and account number]
Your bank may charge you a fee for sending a wire to the Fund.
YOU MAY PURCHASE SHARES THROUGH AN INVESTMENT BROKER
You may buy and sell shares of the Fund through certain brokers (and their
agents, together "brokers") that have made arrangements with the Fund. An order
placed with such a broker is treated as if it were placed directly with the
Fund, and will be executed at the next share price calculated by the Fund. Your
shares
9
<PAGE>
will be held in a pooled account in the broker's name, and the broker will
maintain your individual ownership information. The Fund may pay the broker for
maintaining these records as well as providing other shareholder services. In
addition, the broker may charge you a fee for handling your order. The broker is
responsible for processing your order correctly and promptly, keeping you
advised of the status of your individual account, confirming your transactions
and ensuring that you receive copies of the Fund's prospectus.
MINIMUM INVESTMENTS
The minimum initial investment in the Fund is $2,500. The minimum subsequent
investment is $250. However, if you are investing in an Individual Retirement
Account (IRA), or you are starting an Automatic Investment Plan (see below), the
minimum initial and subsequent investments are $1,000 and $50, respectively.
SUBSEQUENT INVESTMENTS
You may purchase additional shares of the Fund by sending a check, with the stub
from an account statement, to the Fund at the address above. Please also write
your account number on the check. (If you do not have a stub from an account
statement, you can write your name, address and account number on a separate
piece of paper and enclose it with your check.) If you want to send additional
money for investment by wire, it is important for you to call the Fund at (800)
841-0924. You may also make additional purchases through an investment dealer,
as described above.
WHEN IS MONEY INVESTED IN THE FUND?
Any money received for investment in the Fund from an investor, whether sent by
check or by wire, is invested at the net asset value of the Fund which is next
calculated after the money is received (assuming the check or wire correctly
identifies the Fund and account), less any sales charge (if applicable). Orders
received from dealers are invested at the net asset value next calculated after
the order is received, less any sales charge (if applicable). A check or wire
received after the NYSE closes is invested as of the next calculation of the
Fund's net asset value.
OTHER INFORMATION
The Distributor may waive the minimum investment requirements for purchases by
certain group or retirement plans. All investments must be made in U.S. dollars,
and checks must be drawn on U.S. banks. Third party checks will not be accepted.
A charge may be imposed if a check used to make an investment does not clear.
The Fund and the Distributor reserve the right to reject any investment, in
whole or in part. Federal tax law requires that investors provide a certified
taxpayer identification number and other certifications on opening an account in
order to avoid backup withholding of taxes. See the Application Form for more
information about backup
10
<PAGE>
withholding. The Fund is not required to issue share certificates; all shares
are normally held in non-certificated form on the books of the Fund, for the
account of the shareholder. The Fund, under certain circumstances, may accept
investments of securities appropriate for the Fund's portfolio, in lieu of cash.
Prior to making such a purchase, you should call the Advisor to determine if
such an investment may be made. The Advisor may, at its own expense, pay third
parties for assistance in gathering assets for the Fund.
SERVICES AVAILABLE TO SHAREHOLDERS
RETIREMENT PLANS
You may obtain prototype IRA plans from the Fund. Shares of the Fund are also
eligible investments for other types of retirement plans.
AUTOMATIC INVESTING BY CHECK
You may make regular monthly investments in the Fund using the "Automatic
Investment Plan." A check is automatically drawn on your personal checking
account each month for a predetermined amount (but not less than $100), as if
you had written it directly. Upon receipt of the withdrawn money, the Fund
automatically invests the money in additional shares of the Fund at the current
net asset value. Applications for this service are available from the Fund or
you may simply complete this section on the new account application form. There
is no charge to you for this service. The Funds may terminate or modify this
privilege at any time, and shareholders may terminate their participation by
notifying the Shareholder Servicing Agent in writing, sufficiently in advance of
the next withdrawal.
AUTOMATIC WITHDRAWALS
The Fund offers a Systematic Withdrawal Program whereby shareholders may request
that a check drawn in a predetermined amount be sent to them each month or
calendar quarter. To start this Program, your account must have Fund shares with
a value of at least $10,000, and the minimum amount that may be withdrawn each
month or quarter is $50. This Program may be terminated or modified by a
shareholder or the Funds at any time without charge or penalty. A withdrawal
under the Systematic Withdrawal Program involves a redemption of Fund shares,
and may result in a gain or loss for federal income tax purposes. In addition,
if the amount withdrawn exceeds the dividends credited to your account, the
account ultimately may be depleted.
HOW TO REDEEM YOUR SHARES
You have the right to redeem all or any portion of your Fund shares on each day
the NYSE is open for trading.
REDEMPTION IN WRITING
You may redeem your shares by simply sending a written request to the Fund. You
should give your
11
<PAGE>
account number and state whether you want all or part of your shares redeemed.
The letter should be signed by all of the shareholders whose names appear in the
account registration. You should send your redemption request to:
Avatar Advantage International Equity Allocation Fund
P.O. Box 5354
Cincinnati, OH 45201-5354
SIGNATURE GUARANTEE
If the value of the shares you wish to redeem exceeds $100,000, or is being sent
to any address other than that to what we send your statements, the signatures
on the redemption request must be guaranteed by an "eligible guarantor
institution." These institutions include banks, broker-dealers, credit unions
and savings institutions. A broker-dealer guaranteeing a signature must be a
member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program. A notary public is not an
acceptable guarantor.
REDEMPTION BY TELEPHONE
If you complete the Redemption by Telephone portion of the Fund's Application
Form, you may redeem shares on any business day the NYSE is open by calling the
Fund's Shareholder Servicing Agent at (800) 841-0924 before 4:00 p.m. Eastern
time. Redemption proceeds will be mailed or wired, at your direction, on the
next business day to the bank account you designated on the Application Form.
The minimum amount that may be wired is $1,000 (wire charges, if any, will be
deducted from redemption proceeds). Telephone redemptions cannot be made for IRA
accounts.
By establishing telephone redemption privileges, you authorize the Fund and its
Shareholder Servicing Agent to act upon the instruction of any person who makes
the telephone call to redeem shares from your account and transfer the proceeds
to the bank account designated in the Application Form. The Fund and the
Shareholder Servicing Agent will use procedures to confirm that redemption
instructions received by telephone are genuine, including recording of telephone
instructions and requiring a form of personal identification before acting on
these instructions. If these normal identification procedures are followed,
neither the Fund nor the Shareholder Servicing Agent will be liable for any
loss, liability, or cost which results from acting upon instructions of a person
believed to be a shareholder with respect to the telephone redemption privilege.
The Fund may change, modify, or terminate these privileges at any time upon at
least 60 days notice to shareholders.
You may request telephone redemption privileges after your
12
<PAGE>
account is opened; however, the authorization form will require a separate
signature guarantee. Shareholders may experience delays in exercising telephone
redemption privileges during periods of abnormal market activity.
THE PRICE USED FOR A REDEMPTION
The redemption price is the net asset value of the Fund's shares next determined
after shares are validly tendered for redemption. All signatures of account
holders must be included in the request, and a signature guarantee, if required,
must also be included for the request to be valid.
WHEN REDEMPTION PAYMENTS ARE MADE
As noted above, redemption payments for telephone redemptions are sent on the
day after the telephone call is received. Payments for redemptions sent in
writing are normally made promptly, but no later than seven days after the
receipt of a request that meets requirements described above. However, the Fund
may suspend the right of redemption under certain extraordinary circumstances in
accordance with rules of the Securities and Exchange Commission.
If shares were purchased by wire, they cannot be redeemed until the day after
the Application Form is received. If shares were purchased by check and then
redeemed shortly after the check is received, the Fund may delay sending the
redemption proceeds until it has been notified that the check used to purchase
the shares has been collected, a process which may take up to 15 days. This
delay may be avoided by investing by wire or by using a certified or official
bank check to make the purchase.
REPURCHASES FROM DEALERS
The Fund may accept orders to sell shares from an investment dealer (or their
agent) on behalf of a dealer's (or their agent's) customers. The net asset value
for a sale is that next calculated after receipt of the order from the dealer
(or agent). The dealer (or agent) is responsible for forwarding any documents
required in connection with a redemption, including a signature guarantee, and
the Fund may cancel the order if these documents are not received promptly.
OTHER INFORMATION ABOUT REDEMPTIONS
A redemption may result in recognition of a gain or loss for federal income tax
purposes. Due to the relatively high cost of maintaining smaller accounts, the
shares in your account (unless it is a retirement plan or Uniform Gifts or
Transfers to Minors Act account) may be redeemed by the Fund if, due to
redemptions you have made, the total value of your account is reduced to less
than $500. If the Fund determines to make such an involuntary redemption, you
will first be notified that the value of your account is less than $500, and you
will be allowed 30 days to make an additional investment to bring the value of
your account to at least $500 before the Fund takes any action.
13
<PAGE>
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income, if any, are normally declared and paid by
the Fund in December. Capital gains distributions, if any, are also normally
made in December, but the Fund may make an additional payment of dividends or
distributions if it deems it desirable at another time during any year.
Dividends and capital gain distributions (net of any required tax withholding)
are automatically reinvested in additional shares of the Fund at the net asset
value per share on the reinvestment date unless you have previously requested in
writing to the Shareholder Servicing Agent or on the Account Application Form
that payment be made in cash.
Any dividend or distribution paid by the Fund has the effect of reducing the net
asset value per share on the record date by the amount of the dividend or
distribution. You should note that a dividend or distribution paid on shares
purchased shortly before that dividend or distribution was declared will be
subject to income taxes even though the dividend or distribution represents, in
substance, a partial return of capital to you.
TAXES
Distributions made by the Fund will be taxable to shareholders whether received
in shares (through dividend reinvestment) or in cash. Distributions derived from
net investment income, including net short-term capital gains, are taxable to
shareholders as ordinary income. Distributions designated as capital gains
dividends are taxable as capital gains regardless of the length of time shares
of the Fund have been held. You should consult your own advisors concerning
federal, state and local taxation of distributions from the Fund.
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 Fund may reimburse the Advisor
for sales distribution and related expenses incurred by the Advisor up to 0.25%
of the Fund's average net assets. 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.
14
<PAGE>
Because these fees are paid out of the Fund's assets on an on-going basis, over
time these fees will increase the cost of your investment in the Fund and may
cost you more than paying other types of sales charges.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance during its past fiscal period. Certain information
reflects financial results for a single fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by McGladrey & Pullen, LLP. Their report and the
Fund's financial statements are included in the Fund's annual report which is
available upon request.
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
- --------------------------------------------------------------------------------
February 2, 1998*
through
December 31, 1998
-----------------
Net asset value, beginning of period....................... $ 10.00
--------
Income from investment operations:
Net investment income................................... 0.23
Net realized and unrealized gain
on securities.......................................... 0.30
--------
Total from investment operations........................... 0.53
--------
Less distributions:
From net investment income.............................. (0.21)
From net capital gains.................................. (0.38)
--------
Total distributions paid................................... (0.59)
--------
Net asset value, end of period............................. $ 9.94
========
Total return............................................... 5.50%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands)...................... $ 413
Ratio of expenses to average net assets.................... 1.65%+
Ratio of net investment income to average net assets....... 2.45%+
Portfolio turnover rate.................................... 177.43%
* Commencement of operations.
+ Annualized. These figures reflect the effect of the Advisor's agreement to
waive its fees and/or reimburse Fund expenses.
++ Not Annualized.
15
<PAGE>
THE AVATAR ADVANTAGE INTERNATIONAL EQUITY ALLOCATION FUND,
A SERIES OF ADVISORS SERIES TRUST
FOR MORE INFORMATION
The Statement of Additional Information (SAI) for the Fund includes additional
information about the Fund.
The Fund's annual and semi-annual reports to shareholders contain additional
information about the Fund's investments. The annual reports include a
discussion of the market conditions and investment strategies which
significantly affected the Fund's performance during its last fiscal year.
The SAIs and shareholder reports are available free upon request. To request
them or other information, or to ask any questions, please call or write:
1-800-585-8052
Avatar International Equity Allocation Fund
150 Motor Parkway, Suite 109
Hauppauge, NY 11788
The SAIs and other Fund information may also be reviewed and copied at the SEC's
Public Reference Room in Washington, DC. Call 1-800-SEC-0330 for information
about the Room's operations.
Reports and other Fund information are also available on the SEC's Internet site
at http://www.sec.gov. Copies of this information may be obtained, for
duplicating fees, by writing to the SEC's Public Reference Section, Washington,
DC 20549-6009.
The Funds' SEC File Number is 811-07959.
16
<PAGE>
This Prospectus sets forth basic information about the Fund that you should know
before investing. It should be read and retained for future reference.
SHARES OF THE FUND HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
THE AL FRANK FUND
STATEMENT OF ADDITIONAL INFORMATION
Dated April 30, 1999
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated April 30, 1999 of The Al Frank
Fund (the "Fund"), a series of Advisors Series Trust (the "Trust"). Al Frank
Asset Management, Inc. (the "Advisor") is the Advisor to the Fund. A copy of the
prospectus may be obtained by writing to the Fund at 465 Forest Avenue, Suite I,
Laguna Beach, CA 92651; or by calling 888-263-6443.
TABLE OF CONTENTS
Investment Policies.......................... B-2
Management................................... B-9
Portfolio Transactions and Brokerage......... B-13
Net Asset Value.............................. B-14
Taxation..................................... B-15
Dividends and Distributions.................. B-17
Performance Information...................... B-18
General Information.......................... B-19
B-1
<PAGE>
INVESTMENT POLICIES
This discussion below supplements information contained in the
prospectus as to investment policies of the Fund.
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in convertible securities and warrants. A
convertible security is a fixed-income security (a debt instrument or a
preferred stock) which may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed-income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
gives an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the issuing company depending upon a
market price advance in the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
BANK CERTIFICATES OR DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
monies deposited in a commercial bank for a definite period of time and earning
a specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that the
Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its prospectus, the Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
B-2
<PAGE>
SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The
Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Advisor to be of
comparable quality. These rating symbols are described in the Appendix.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
INVESTMENT COMPANY SECURITIES
The Fund may invest in shares of other investment companies. The Fund
may invest in money market mutual funds in connection with its management of
daily cash positions. In addition to the advisory and operational fees a Fund
bears directly in connection with its own operation, the Fund would also bear
its pro rata portions of each other investment company's advisory and
operational expenses.
GOVERNMENT OBLIGATIONS
The Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
The Fund may invest in sovereign debt obligations of foreign countries.
A sovereign debtor's willingness or ability to repay principal and interest in a
timely manner may be affected by a number of factors, including its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which it may be
subject. Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to meet
such conditions could result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debt in a timely manner.
B-3
<PAGE>
FOREIGN INVESTMENTS AND CURRENCIES
The Fund may invest in securities of foreign issuers, provided that
they are publicly traded in the United States.
DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs are
receipts typically issued in connection with a U.S. or foreign bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
TAXES. The interest and dividends payable on certain of the Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.
OPTIONS ON SECURITIES
PURCHASING PUT AND CALL OPTIONS. The Fund may purchase covered "put"
and "call" options with respect to securities which are otherwise eligible for
purchase by the Fund and with respect to various stock indices subject to
certain restrictions, not in excess of 5% of the Fund's total net assets. The
Fund will engage in trading of such derivative securities exclusively for
hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Advisor perceives significant short-term risk but
substantial long-term appreciation for the underlying security. The put option
acts as an insurance policy, as it protects against significant downward price
movement while it allows full participation in any upward movement. If the Fund
is holding a security which it feels has strong fundamentals, but for some
reason may be weak in the near term, the Fund may purchase a put option on such
security, thereby giving itself the right to sell such security at a certain
strike price throughout the term of the option. Consequently, the Fund will
exercise the put only if the price of such security falls below the strike price
of the put. The difference between the put's strike price and the market price
of the underlying security on the date the Fund exercises the put, less
transaction costs, will be the amount by which the Fund will be able to hedge
against a decline in the underlying security. If during the period of the option
the market price for the underlying security remains at or above the put's
strike price, the put will expire worthless, representing a loss of the price
the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put may be sold.
If the Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases
B-4
<PAGE>
in price. The Fund will exercise a call option only if the price of the
underlying security is above the strike price at the time of exercise. If during
the option period the market price for the underlying security remains at or
below the strike price of the call option, the option will expire worthless,
representing a loss of the price paid for the option, plus transaction costs. If
the call option has been purchased to hedge a short position of the Fund in the
underlying security and the price of the underlying security thereafter falls,
the profit the Fund realizes on the cover of the short position in the security
will be reduced by the premium paid for the call option less any amount for
which such option may be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which the
Advisor believes there is an active secondary market to facilitate closing
transactions.
WRITING CALL OPTIONS. The Fund may write covered call options. A call
option is "covered" if the Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Custodian). The writer of
a call option receives a premium and gives the purchaser the right to buy the
security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer of
an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. Also, effecting
a closing transaction will permit the cash or proceeds from the concurrent sale
of any securities subject to the option to be used for other investments of the
Fund. If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
The Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option. The Fund will realize a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing transaction
are less than the premium paid to purchase the option. However, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss to the Fund resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Fund.
STOCK INDEX OPTIONS. The Fund may also purchase put and call options
with respect to the S&P 500 and other stock indices. Such options may be
purchased as a hedge against changes resulting from market conditions in the
values of securities which are held in the Fund's portfolio or which it intends
to purchase or sell, or when they are economically appropriate for the reduction
of risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create
certain risks that are not present with stock options generally. Because the
value of an index option depends upon movements in the level of the index rather
than the price of a particular stock, whether the Fund will realize a gain or
loss on the purchase or sale of an option on an index depends upon movements in
the level of stock prices in the stock market generally rather than movements in
the price of a particular stock. Accordingly, successful use by the Fund of
options on a stock index would be subject to 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.
Index prices may be distorted if trading of certain stocks included in
the index is interrupted. Trading of index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this were to occur, the Fund would not be able
to close out options which it had purchased, and if restrictions on exercise
were imposed, the Fund might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the policy of the Fund to
purchase put or call options only with respect to an index which the Advisor
believes includes a sufficient number of stocks to minimize the likelihood of a
trading halt in the index.
B-5
<PAGE>
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
than the underlying securities and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying securities themselves. There are also significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objective. In addition, a liquid secondary market for particular options may
be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options of underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or clearing corporation may not at all times be adequate to handle
current trading volume; or one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which the Fund may enter into options transactions may be limited by
the Internal Revenue Code of 1986 (the "Code") requirements for qualification of
the Fund as a regulated investment company. See "Dividends and Distributions"
and "Taxation."
DEALER OPTIONS. The Fund may engage in transactions involving dealer
options as well as exchange-traded options. Certain additional risks are
specific to dealer options. While the Fund might look to a clearing corporation
to exercise exchange-traded options, if the Fund were to purchase a dealer
option it would need to rely on the dealer from which it purchased the option to
perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, the Fund may generally be able to realize
the value of a dealer option it has purchased only by exercising or reselling
the option to the dealer who issued it. Similarly, when the Fund writes a dealer
option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will at any time be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Unless the Fund, as a
covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair the Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities.
The Fund may treat the cover used for written dealer options as liquid if the
dealer agrees that the Fund may repurchase the dealer option it has written for
a maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
Accordingly, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the Commission changes its position on the
liquidity of dealer options, the Fund will change its treatment of such
instruments accordingly.
SPREAD TRANSACTIONS. The Fund may purchase covered spread options from
securities dealers. These covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put securities that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to the Fund, in addition to the risks of
dealer options described above, is the cost of the premium paid as well as any
transaction costs. The purchase of spread options will
B-6
<PAGE>
be used to protect the Fund against adverse changes in prevailing credit quality
spreads, I.E., the yield spread between high quality and lower quality
securities. This protection is provided only during the life of the spread
options.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor, subject to the seller's agreement to repurchase and
the Fund's agreement to resell such securities at a mutually agreed upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio security). Securities subject
to repurchase agreements will be held by the Custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund will
suffer a loss to the extent that the proceeds from a sale of the underlying
securities are less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans under the 1940 Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The Fund may purchase securities on a "when-issued," forward commitment
or delayed settlement basis. In this event, the Custodian will segregate liquid
assets equal to the amount of the commitment in a separate account. Normally,
the Custodian will set aside portfolio securities to satisfy a purchase
commitment. In such a case, the Fund may be required subsequently to segregate
additional assets in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the Fund will segregate liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and the ability of the
Advisor to manage it may be affected in the event the Fund's forward
commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 15% of the value of its net assets.
The Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When the Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities in an amount not exceeding
one-third of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund to
reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Code.
B-7
<PAGE>
SHORT SALES
The Fund is authorized to make short sales of securities. In a short
sale, the Fund sells a security which it does not own, in anticipation of a
decline in the market value of the security. To complete the sale, the Fund must
borrow the security (generally from the broker through which the short sale is
made) in order to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The Fund is said to have a "short position" in the securities
sold until it delivers them to the broker. The period during which the Fund has
a short position can range from one day to more than a year. Until the security
is replaced, the proceeds of the short sale are retained by the broker, and the
Fund is required to pay to the broker a negotiated portion of any dividends or
interest which accrue during the period of the loan. To meet current margin
requirements, the Fund is also required to deposit with the broker additional
cash or securities so that the total deposit with the broker is maintained daily
at 150% of the current market value of the securities sold short (100% of the
current market value if a security is held in the account that is convertible or
exchangeable into the security sold short within 90 days without restriction
other than the payment of money).
Short sales by the Fund create opportunities to increase the Fund's
return but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since the Fund in effect profits from a
decline in the price of the securities sold short without the need to invest the
full purchase price of the securities on the date of the short sale, the Fund's
net asset value per share will tend to increase more when the securities it has
sold short decrease in value, and to decrease more when the securities it has
sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions the Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell portfolio securities to raise the capital necessary to meet its
short sale obligations at a time when fundamental investment considerations
would not favor such sales.
INVESTMENT RESTRICTIONS
The Trust (on behalf of the Fund) has adopted the following
restrictions as fundamental policies, which may not be changed without the
favorable vote of the holders of a "majority," as defined in the 1940 Act, of
the outstanding voting securities of the Fund. Under the 1940 Act, the "vote of
the holders of a majority of the outstanding voting securities" means the vote
of the holders of the lesser of (i) 67% of the shares of the Fund represented at
a meeting at which the holders of more than 50% of its outstanding shares are
represented or (ii) more than 50% of the outstanding shares of the Fund.
As a matter of fundamental policy, the Fund is diversified. The Fund's
investment objective is also fundamental.
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except
that (i) the Fund may borrow from banks in amounts not exceeding one-third of
its total assets (not including the amount borrowed); and (ii) this restriction
shall not prohibit the Fund from engaging in options transactions or short
sales;
2. Purchase securities on margin, except such short-term credits as may
be necessary for the clearance of transactions and except that the Fund may
borrow money from banks to purchase securities;
3. Act as underwriter (except to the extent the Fund may be deemed to
be an underwriter in connection with the sale of securities in its investment
portfolio);
4. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities);
5. Purchase or sell real estate or interests in real estate or real
estate limited partnerships (although the Fund may purchase and sell securities
which are secured by real estate and securities of companies which invest or
deal in real estate);
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell foreign currency contracts in accordance
with any rules of the Commodity Futures Trading Commission;
B-8
<PAGE>
7. Make loans of money (except for purchases of debt securities
consistent with the investment policies of the Fund and except for repurchase
agreements); or
8. Make investments for the purpose of exercising control or
management.
The Fund observes the following restrictions as a matter of operating
but not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
The Fund may not:
1. Invest in the securities of other investment companies or purchase
any other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal law;
2. Invest in securities which are restricted as to disposition or
otherwise are illiquid or have no readily available market (except for
securities which are determined by the Board of Trustees to be liquid); or
3. Purchase or sell future contracts.
MANAGEMENT
The overall management of the business and affairs of the Trust is
vested with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day-to-day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their ages and positions with
the Trust, their business addresses and principal occupations during the past
five years are:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
<S> <C> <C>
Walter Auch, Sr.(Born 1921) Trustee Director, Nicholas-Applegate Mutual Funds, Brinson Funds
6001 N. 62d Place (since 1994), Smith Barney Trak Fund, Pimco Advisors L.P.,
Paradise Valley, AZ 85253 Banyan Realty Trust, Banyan Land Fund II and Legend Properties.
Eric Banhazl (Born 1957)* Trustee, Senior Vice President, Investment Company Administration LLC;
2025 E. Financial Way President and Vice President, First Fund Distributors, Inc.; Assistant Treasurer,
Glendora, CA 91740 Treasurer RNC Mutual Fund Group; Treasurer, Guinness Flight Investment
Funds, Inc. and Professionally Managed Portfolios.
Donald O'Connor (Born 1936) Trustee Retired; formerly Executive Vice President and Chief Operating 1700
Taylor Avenue Officer of ICI Mutual Insurance Company (until January, 1997), Fort
Washington MD, 20744 Vice President, Operations, Investment Company Institute (until June,
1993).
George Wofford III Trustee Vice President, Information Services, Federal Home Loan Bank of
(Born 1939) San Francisco (since March, 1993); formerly Director of
305 Glendora Circle Management Information Services, Morrison & Foerster (law
Danville, CA 94526 firm).
Steven J. Paggioli Vice Executive Vice President, Robert H. Wadsworth & Associates, Inc.
(Born 1950) President and Investment Company Administration LLC; Vice President,
479 W. 22nd Street First Fund Distributors, Inc.; President and Trustee,
New York, NY 10011 Professionally Managed Portfolios; Director, Managers Funds, Inc.
</TABLE>
B-9
<PAGE>
<TABLE>
<S> <C> <C>
Robert H. Wadsworth Vice President, Robert H. Wadsworth & Associates, Inc., Investment
(Born 1940) President Company Administration, LLC and First Fund Distributors, Inc.;
4455 E. Camelback Road Vice President, Professionally Managed Portfolios; President,
Suite 261E Guinness Flight Investment Funds, Inc.; Director, Germany Fund,
Phoenix, AZ 85018 Inc., New Germany Fund, Inc. and Central European Equity Fund,
Inc. and Deutsche Funds, Inc.
Chris O. Moser (Born 1949) Secretary Employed by Investment Company Administration LLC (since
4455 E. Camelback Road July, 1996); formerly employed by Bank One, N.A. (from August,
Suite 261E 1995 until July, 1996); O'Connor, Cavanagh, Anderson,
Phoenix, AZ 85018 Killingsworth and Beshears (law firm) (until August, 1995).
</TABLE>
* denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
NAME AND POSITION AGGREGATE COMPENSATION FROM THE TRUST*
Walter E. Auch, Sr., Trustee $12,000
Donald E. O'Connor, Trustee $12,000
George T. Wofford III, Trustee $12,000
For the fiscal year ended December 31, 1998, Trustees' fees and expenses in the
amount of $12,000 per independent Trustee were paid by the Trust. 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"). The Advisor is
controlled by Alfred Frank.
Under the Advisory Agreement, the Advisor agrees to invest the assets
of the Fund in accordance with the investment objectives, policies and
restrictions of the Fund as set forth in the Fund's and Trust's governing
documents, including, without limitation, the Trust's Agreement and Declaration
of Trust and By-Laws; the Fund's prospectus, Statement of Additional
Information, and undertakings; and such other limitations, policies and
procedures as the Trustees of the Trust may impose from time to time in writing
to the Advisor. In providing such services, the Advisor shall at all times
adhere to the provisions and restrictions contained in the federal securities
laws, applicable state securities laws, the Code, and other applicable law.
Without limiting the generality of the foregoing, the Advisor has
agreed to (i) furnish the Fund with advice and recommendations with respect to
the investment of the Fund's assets, (ii) effect the purchase and sale of
portfolio securities; (iii) manage and oversee the investments of the Fund,
subject to the ultimate supervision and direction of the Trust's Board of
Trustees; (iv) vote proxies and take other actions with respect to the Fund's
securities; (v) maintain the books and records required to be maintained with
respect to the securities in the Fund's portfolio; (vi) furnish reports,
statements and other data on securities, economic conditions and other matters
related to the investment of the Fund's assets which the Trustees or the
officers of the Trust may reasonably request; and (vi) render to the Trust's
Board of Trustees such periodic and special reports as the Board may reasonably
request. The Advisor has also agreed, at its own expense, to maintain such staff
and employ or retain such personnel and consult with such other persons as it
shall from time to time determine to be necessary to the performance of its
obligations under the Advisory Agreement. Personnel of the Advisor may serve as
officers of the Trust provided they do so without compensation from the Trust.
Without limiting the generality of the foregoing, the staff and personnel of the
Advisor shall be deemed to include persons employed or retained by the Advisor
to furnish statistical information, research, and other factual information,
advice regarding economic factors and trends, information with respect to
technical and scientific developments, and such other information, advice and
assistance as the Advisor or the Trust's Board of Trustees may desire and
reasonably request. With respect to the operation of the Fund, the Advisor has
agreed to be responsible for the expenses of printing and distributing extra
copies of the Fund's prospectus, statement of additional information, and sales
and advertising materials
B-10
<PAGE>
(but not the legal, auditing or accounting fees attendant thereto) to
prospective investors (but not to existing shareholders); and the costs of any
special Board of Trustees meetings or shareholder meetings convened for the
primary benefit of the Advisor.
As compensation for the Advisor's services, the Fund pays it an
advisory fee at the rate specified in the prospectus. In addition to the fees
payable to the Advisor and the Administrator, the Fund is responsible for its
operating expenses, including: fees and expenses incurred in connection with the
issuance, registration and transfer of its shares; brokerage and commission
expenses; all expenses of transfer, receipt, safekeeping, servicing and
accounting for the cash, securities and other property of the Trust for the
benefit of the Fund including all fees and expenses of its custodian,
shareholder services agent and accounting services agent; interest charges on
any borrowings; costs and expenses of pricing and calculating its daily net
asset value and of maintaining its books of account required under the 1940 Act;
taxes, if any; a pro rata portion of expenditures in connection with meetings of
the Fund's shareholders and the Trust's Board of Trustees that are properly
payable by the Fund; salaries and expenses of officers and fees and expenses of
members of the Trust's Board of Trustees or members of any advisory board or
committee who are not members of, affiliated with or interested persons of the
Advisor or Administrator; insurance premiums on property or personnel of the
Fund which inure to its benefit, including liability and fidelity bond
insurance; the cost of preparing and printing reports, proxy statements,
prospectuses and statements of additional information of the Fund or other
communications for distribution to existing shareholders; legal, auditing and
accounting fees; trade association dues; fees and expenses (including legal
fees) of registering and maintaining registration of its shares for sale under
federal and applicable state and foreign securities laws; all expenses of
maintaining and servicing shareholder accounts, including all charges for
transfer, shareholder recordkeeping, dividend disbursing, redemption, and other
agents for the benefit of the Fund, if any; and all other charges and costs of
its operation plus any extraordinary and non-recurring expenses, except as
otherwise prescribed in the Advisory Agreement.
The Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce fees payable to it by the Fund and to pay Fund
operating expenses to the extent necessary to limit the Fund's aggregate annual
operating expenses (excluding interest and tax expenses) to the limit set forth
in the Expense Table (the "expense cap"). Any such reductions made by the
Advisor in its fees or payment of expenses which are the Fund's obligation are
subject to reimbursement by the Fund to the Advisor, if so requested by the
Advisor, in subsequent fiscal years if the aggregate amount actually paid by the
Fund toward the operating expenses for such fiscal year (taking into account the
reimbursement) does not exceed the applicable limitation on Fund expenses. The
Advisor is permitted to be reimbursed only for fee reductions and expense
payments made in the previous three fiscal years, except that it 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 the 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 year ended December 31, 1998, the Advisor earned $50,113 in
advisory fees. The Advisor has contractually agreed to limit total fund
operating expenses to 2.25% of average net assets annually. As a result of that
limitation, during the year ended December 31, 1998, the Advisor waived the full
amount of its fee and paid Fund operating expenses in the amount of $25,133.
Under the Advisory Agreement, the Advisor will not be liable to the
Trust or the Fund or any shareholder for any act or omission in the course of,
or connected with, rendering services or for any loss sustained by the Trust
except in the case of a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad faith or gross
negligence, or reckless disregard of its obligations and duties under the
Agreement.
The Advisory Agreement will remain in effect for a period not to exceed
two years. Thereafter, if not terminated, the Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of Trustees
or by the holders of a majority of the outstanding voting securities of the Fund
at any time without penalty, on 60 days written notice to the Advisor. The
Advisory Agreement also may be terminated by the Advisor on 60 days written
notice to the Trust. The Advisory
B-11
<PAGE>
Agreement terminates automatically upon its assignment (as defined in the 1940
Act).
THE ADMINISTRATOR. The Administrator has agreed to be responsible for
providing such services as the Trustees may reasonably request, including but
not limited to (i) maintaining the Trust's books and records (other than
financial or accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Trust's insurance
relationships; (iii) preparing for the Trust (or assisting counsel and/or
auditors in the preparation of) all required tax returns, proxy statements and
reports to the Trust's shareholders and Trustees and reports to and other
filings with the Commission and any other governmental agency (the Trust
agreeing to supply or cause to be supplied to the Administrator all necessary
financial and other information in connection with the foregoing); (iv)
preparing such applications and reports as may be necessary to permit the offer
and sale of the shares of the Trust under the securities or "blue sky" laws of
the various states selected by the Trust (the Trust agreeing to pay all filing
fees or other similar fees in connection therewith); (v) responding to all
inquiries or other communications of shareholders, if any, which are directed to
the Administrator, or if any such inquiry or communication is more properly to
be responded to by the Trust's custodian, transfer agent or accounting services
agent, overseeing their response thereto; (vi) overseeing all relationships
between the Trust and any custodian(s), transfer agent(s) and accounting
services agent(s), including the negotiation of agreements and the supervision
of the performance of such agreements; and (vii) authorizing and directing any
of the Administrator's directors, officers and employees who may be elected as
Trustees or officers of the Trust to serve in the capacities in which they are
elected. All services to be furnished by the Administrator under this Agreement
may be furnished through the medium of any such directors, officers or employees
of the Administrator.
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 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 year ended December 31, 1998, the Fund paid the Distribution
Coordinator distribution fees totaling
B-12
<PAGE>
$12,529. These fees were used to reimburse the Advisor for Fund advertising
expenses, presentation and road show expenses incurred, marketing-related
printing and postage, trail commissions and dealer fees paid to brokers who sold
shares of the Fund and compensation to employees involved in distribution of
Fund shares.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that the Advisor shall be responsible for
broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Advisor shall not direct orders to an affiliated person of the
Advisor without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. The Advisor's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction, the
Advisor may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of Trustees of
the Trust may determine, the Advisor shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to the Advisor
an amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Advisor determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Advisor's overall responsibilities with respect to
the Fund. The Advisor is further authorized to allocate the orders placed by it
on behalf of the Fund to such brokers or dealers who also provide research or
statistical material, or other services, to the Trust, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions as
the Advisor shall determine, and the Advisor shall report on such allocations
regularly to the Advisor and the Trust, indicating the broker-dealers to whom
such allocations have been made and the basis therefor. The Advisor is also
authorized to consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions, subject to the
requirements of best execution, I.E., that such brokers or dealers are able to
execute the order promptly and at the best obtainable securities price.
On occasions when the Advisor deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients of the Advisor,
the Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well 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 by the Fund during the year ended December
31, 1998, totaled $35,541.
Portfolio turnover for the Fund during the year ended December 31,
1998, was 5.82%.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is
determined as of the close of trading on the New York Stock Exchange (the
"NYSE") (generally 4:00 p.m. Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value
B-13
<PAGE>
as determined in good faith by the Advisor and the Trust's Valuation Committee
pursuant to procedures approved by or under the direction of the Board.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Advisor to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. If an options
exchange closes after the time at which the Fund's net asset value is
calculated, the last sale or last bid and asked prices as of that time will be
used to calculate the net asset value.
All other assets of the Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
TAXATION
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986 as amended, (the "Code"), for each taxable year by complying with all
applicable requirements regarding the source of its income, the diversification
of its assets, and the timing of its distributions. The Fund's policy is to
distribute to its shareholders all of its investment company taxable income and
any net realized capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes based on net income. However, the
Board may elect to pay such excise taxes if it determines that payment is, under
the circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains
by the Fund will be taxable to shareholders whether made in cash or reinvested
by the Fund in shares. In determining amounts of net realized capital gains to
be distributed, any capital loss carry-overs from the eight prior taxable years
will be applied against capital gains. Shareholders receiving a distribution
from the Fund in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of the Fund on the reinvestment
B-14
<PAGE>
date. Fund distributions also will be included in individual and corporate
shareholders' income on which the alternative minimum tax may be imposed.
The Fund or the securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("IRS") with respect to distributions and payments made
to the shareholder. In addition, the Fund will be required to withhold federal
income tax at the rate of 31% on taxable dividends, redemptions and other
payments made to accounts of individual or other non-exempt shareholders who
have not furnished their correct taxpayer identification numbers and certain
required certifications on the New Account application or with respect to which
the Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions,
as stated in the prospectuses. In order to avoid the payment of any federal
excise tax based on net income, the Fund must declare on or before December 31
of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To
the extent that the Fund receives such 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
B-15
<PAGE>
losses with respect to straddle positions by requiring, among other things, that
the loss realized on disposition of one position of a straddle be deferred until
gain is realized on disposition of the offsetting position; that the Fund's
holding period in certain straddle positions not begin until the straddle is
terminated (possibly resulting in the gain being treated as short-term capital
gain rather than long-term capital gain); and that losses recognized with
respect to certain straddle positions, which would otherwise constitute
short-term capital losses, be treated as long-term capital losses. Different
elections are available to the Fund that may mitigate the effects of the
straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code rather than
as capital gain or loss.
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.
B-16
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
The Fund will receive income in the form of dividends and interest
earned on its investments in securities. This income, less the expenses incurred
in its operations, is the Fund's net investment income, substantially all of
which will be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon
the amount of net investment income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
The Fund also may derive capital gains or losses in connection with
sales or other dispositions of its portfolio securities. Any net gain the Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders. For more information
concerning applicable capital gains tax rates, see your tax advisor.
Any dividend or distribution paid by the Fund reduces the Fund's net
asset value per share on the date paid 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 Fund's 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.
B-17
<PAGE>
For the period from January 2, 1998(commencement of operations) through
December 31, 1998, the Fund had a total return of -9.30%.
OTHER INFORMATION
Performance data of the Fund quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or guarantee future results. The return and principal value of an investment in
the Fund will fluctuate, and an investor's redemption proceeds may be more or
less than the original investment amount. In advertising and promotional
materials the Fund may compare its performance with data published by Lipper
Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc.
("CDA"). The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper or CDA. Advertising and promotional materials also may refer
to discussions of the Fund and comparative mutual fund data and ratings reported
in independent periodicals including, but not limited to, THE WALL STREET
JOURNAL, MONEY MAGAZINE, FORBES, BUSINESS WEEK, FINANCIAL WORLD and BARRON'S.
GENERAL INFORMATION
Advisors Series Trust is an open-end management investment company
organized as a Delaware business trust under the laws of the State of Delaware
on October 3, 1996. The Trust currently consists of 16 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 Fund. Each share represents an interest in the Fund
proportionately equal to the interest of each other share. Upon the Fund's
liquidation, all shareholders would share pro rata in the net assets of the Fund
available for distribution to shareholders.
The Declaration of Trust does not require the issuance of stock
certificates. If stock certificates are issued, they must be returned by the
registered owners prior to the transfer or redemption of shares represented by
such certificates.
If they deem it advisable and in the best interest of shareholders, the
Board of Trustees may create additional series of shares which differ from each
other only as to dividends. The Board of Trustees has created two series of
shares, and may create additional series in the future, which have separate
assets and liabilities. Income and operating expenses not specifically
attributable to a particular Fund are be allocated fairly among the Funds by the
Trustees, generally on the basis of the relative net assets of each Fund.
Rule 18f-2 under the 1940 Act provides that as to any investment
company which has two or more series outstanding and as to any matter required
to be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
The Fund's principal underwriter is First Fund Distributors, Inc., 4455
E. Camelback Road, Suite 261E, Phoenix, AZ 85018.
The Fund's custodian, Firstar Bank, 425 Walnut Street, Cincinnati, Ohio
45202 is responsible for holding the Funds' assets. American Data Services, P.O.
Box 5536, Hauppauge, NY 11788 acts as the Fund's transfer agent and accounting
services agent. The Fund's independent accountants, McGladrey & Pullen, LLP, 555
Fifth Avenue, New York, NY 10017, assist in the preparation of certain reports
to the Securities and Exchange Commission and the Fund's tax returns.
The Fund is a diversified series of the Trust.
B-18
<PAGE>
Shares of the Fund owned by the Trustees and officers as a group were
less than 1% at January 22, 1999.
On February 23, 1999, the following additional persons owned of record
and/or beneficially more than 5% of The Al Frank Fund's outstanding voting
securities:
Robert & Linda Green, JT TEN, 6076 Maiden Lane, Memphis, Tennessee
38120; 6.78% record.
B-19
<PAGE>
THE AVATAR ADVANTAGE
EQUITY ALLOCATION FUND
Statement of Additional Information
Dated May 1, 1999
This Statement of Additional Information ("SAI") is not a prospectus, and it
should be read in conjunction with the prospectus dated May 1, 1999, as may be
revised from time to time, of The Avatar Advantage Equity Allocation Fund (the
"Fund") and The Avatar Advantage Balanced Fund, each a series of Advisors Series
Trust (the "Trust"). Avatar Associates (the "Advisor") is the Advisor to the
Fund. A copy of the prospectus may be obtained from the Fund by writing to 900
Third Avenue, New York, NY 10022 or by telephone at (888) 263-6452.
TABLE OF CONTENTS
PAGE
Investment Objectives and Policies........... B-2
-Investment Strategies and Risks
-Fund Policies
Management of the Fund....................... B-13
Investment Advisory and Other Services....... B-14
Control Persons and Principal Holders
of Securities................................ B-17
Distribution Arrangements.................... B-17
Portfolio Transactions and Brokerage......... B-17
Net Asset Value.............................. B-18
Taxation..................................... B-19
Dividends and Distributions.................. B-21
Performance Information...................... B-22
General Information.......................... B-22
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is long-term capital appreciation.
There is no assurance that the Fund will achieve its objective. The discussion
below supplements information contained in the prospectus as to investment
policies of the Fund. The Fund is a management, open-end, diversified investment
company.
INVESTMENT STRATEGIES AND RISKS
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in convertible securities and warrants. A
convertible security is a fixed income security (a debt instrument or a
preferred stock) which may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
gives an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the issuing company depending upon a
market price advance in the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a dividend. Investments in warrants involve certain risks, including the
possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
INVESTMENT COMPANY SECURITIES. The Fund may invest in shares of other
investment companies. The Fund may invest in money market mutual funds in
connection with its management of daily cash positions. In addition to the
advisory and operational fees a Fund bears directly in connection with its own
operation, the Fund would also bear its pro rata portions of each other
investment company's advisory and operational expenses.
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending
B-2
<PAGE>
operations under prevailing money market conditions. General economic conditions
as well as exposure to credit losses arising from possible financial
difficulties of borrowers play an important part in the operations of the
banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that the
Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its prospectus, the Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The
Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Advisor to be of
comparable quality. These rating symbols are described in the Appendix.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
GOVERNMENT OBLIGATIONS. The Fund may make short-term investments in
U.S. Government obligations. Such obligations include Treasury bills,
certificates of indebtedness, notes and bonds, and issues of such entities as
the Government National Mortgage Association ("GNMA"), Export-Import Bank of the
United States, Tennessee Valley Authority, Resolution Funding Corporation,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks, Federal Housing
Administration, Federal National Mortgage Association ("FNMA"), Federal Home
Loan Mortgage Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
SOVEREIGN DEBT OBLIGATIONS OF FOREIGN COUNTRIES. The Fund may invest
in sovereign debt obligations of foreign countries. A sovereign debtor's
willingness or ability to repay principal and interest in a timely manner may be
affected by a number of factors, including its cash flow situation, the extent
of its foreign reserves, the availability of sufficient foreign exchange on the
date a payment is due, the relative size of the debt service burden to the
economy as a whole, the sovereign debtor's policy toward principal international
lenders and the political constraints to which it may be subject. Emerging
market governments could default on their sovereign debt. Such sovereign debtors
also may be dependent on expected disbursements from foreign governments,
multilateral agencies and other
B-3
<PAGE>
entities abroad to reduce principal and interest arrearages on their debt. The
commitments on the part of these governments, agencies and others to make such
disbursements may be conditioned on a sovereign debtor's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to meet such conditions could result in the
cancellation of such third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to service
its debt in a timely manner.
MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-related securities. Mortgage-related
securities are derivative interests in pools of mortgage loans made to U.S.
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. The Fund may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by GNMA) are described as "modified pass-throughs." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is GNMA, a wholly owned United States Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not insured
or guaranteed by any government agency from a list of approved seller/services
which include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks and credit unions and mortgage bankers.
FHLMC is a government-sponsored corporation created to increase availability of
mortgage credit for residential housing and owned entirely by private
stockholders. FHLMC issues participation certificates which represent interests
in conventional mortgages from FHLMC's national portfolio. Pass-through
securities issued by FNMA and participation certificates issued by FHLMC are
guaranteed as to timely payment of principal and interest by FNMA and FHLMC,
respectively, but are not backed by the full faith and credit of the United
States Government.
Although the underlying mortgage loans in a pool may have maturities of
up to 30 years, the actual average life of the pool certificates typically will
be substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
B-4
<PAGE>
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign CMO
in which the Fund may invest is a hybrid between a mortgage-backed bond and a
mortgage pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.
FOREIGN INVESTMENTS AND CURRENCIES
The Fund may invest in securities of foreign issuers, provided that
they are publicly traded in the United States.
DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs are
receipts typically issued in connection with a U.S. or foreign bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign
securities involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
TAXES. The interest and dividends payable on certain of the Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.
OPTIONS ON SECURITIES
PURCHASING PUT AND CALL OPTIONS. The Fund may purchase covered "put"
and "call" options with respect to securities which are otherwise eligible for
purchase by the Fund subject to certain restrictions. The Fund will engage in
trading of such derivative securities exclusively for hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Advisor
B-5
<PAGE>
perceives significant short-term risk but substantial long-term appreciation for
the underlying security. The put option acts as an insurance policy, as it
protects against significant downward price movement while it allows full
participation in any upward movement of the underlying security held by the
Fund. If the Fund is holding a security which it feels has strong fundamentals,
but for some reason may be weak in the near term, the Fund may purchase a put
option on such security, thereby giving itself the right to sell such security
at a certain strike price throughout the term of the option. Consequently, the
Fund will exercise the put only if the price of such security falls below the
strike price of the put. The difference between the put's strike price and the
market price of the underlying security on the date the Fund exercises the put,
less transaction costs, will be the amount by which the Fund will be able to
hedge against a decline in the underlying security. If during the period of the
option the market price for the underlying security remains at or above the
put's strike price, the put will expire worthless, representing a loss of the
price the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put may be sold.
If the Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If the call option has been
purchased to hedge a short position of the Fund in the underlying security and
the price of the underlying security thereafter falls, the profit the Fund
realizes on the cover of the short position in the security will be reduced by
the premium paid for the call option less any amount for which such option may
be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which the
Advisor believes there is an active secondary market to facilitate closing
transactions.
WRITING CALL OPTIONS. The Fund may write covered call options. A call
option is "covered" if the Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Custodian). The writer of
a call option receives a premium and gives the purchaser the right to buy the
security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer of
an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. Also, effecting
a closing transaction will permit the cash or proceeds from the concurrent sale
of any securities subject to the option to be used for other investments of the
Fund. If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
The Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option. The Fund will realize a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing transaction
are less than the premium paid to purchase the option. However, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss to the Fund resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Fund.
B-6
<PAGE>
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities. Options may be more volatile than the
underlying securities and, therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying securities themselves. There are also significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its objective.
In addition, a liquid secondary market for particular options may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options of underlying securities; unusual or unforeseen circumstances may
interrupt normal operations on an exchange; the facilities of an exchange or
clearing corporation may not at all times be adequate to handle current trading
volume; or one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which the Fund may enter into options transactions may be limited by
the Internal Revenue Code of 1986 (the "Code") requirements for qualification of
the Fund as a regulated investment company. See "Dividends and Distributions"
and "Taxation."
DEALER OPTIONS. The Fund will engage in transactions involving dealer
options as well as exchange-traded options. Certain additional risks are
specific to dealer options. While the Fund might look to a clearing corporation
to exercise exchange-traded options, if the Fund were to purchase a dealer
option it would need to rely on the dealer from which it purchased the option to
perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, the Fund may generally be able to realize
the value of a dealer option it has purchased only by exercising or reselling
the option to the dealer who issued it. Similarly, when the Fund writes a dealer
option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will at any time be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Unless the Fund, as a
covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair the Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities.
The Fund may treat the cover used for written dealer options as liquid if the
dealer agrees that the Fund may repurchase the dealer option it has written for
a maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
Accordingly, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the Commission changes its position on the
liquidity of dealer options, the Fund will change its treatment of such
instruments accordingly.
SPREAD TRANSACTIONS. The Fund may purchase covered spread options from
securities dealers. These covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives
B-7
<PAGE>
the Fund the right to put securities that it owns at a fixed dollar spread or
fixed yield spread in relationship to another security that the Fund does not
own, but which is used as a benchmark. The risk to the Fund, in addition to the
risks of dealer options described above, is the cost of the premium paid as well
as any transaction costs. The purchase of spread options will be used to protect
the Fund against adverse changes in prevailing credit quality spreads, I.E., the
yield spread between high quality and lower quality securities. This protection
is provided only during the life of the spread options.
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates. The
Fund will trade in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). The Fund will segregate liquid assets in a separate account
with its Custodian when required to do so by CFTC guidelines in order to cover
its obligation in connection with futures and options transactions.
No price is paid or received by the Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund will
be required to deposit in a segregated account with its Custodian an amount of
cash or U.S. Treasury bills equal to approximately 5% of the contract amount.
This amount is known as initial margin. The margin requirements for foreign
futures contracts may be different.
The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying stock index fluctuates, to
reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when the
Fund has purchased a stock index futures contract and the price of the
underlying stock index has risen, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when the Fund has purchased a stock index futures
contract and the price of the underlying stock index has declined, the position
will be less valuable and the Fund will be required to make a variation margin
payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract A final determination
of variation margin is made on closing the position. Additional cash is paid by
or released to the Fund, which realizes a loss or a gain.
In addition to amounts segregated or paid as initial and variation
margin, the Fund must segregate liquid assets with its custodian equal to the
market value of the futures contracts, in order to comply with Commission
requirements intended to ensure that the Fund's use of futures is unleveraged.
The requirements for margin payments and segregated accounts apply to both
domestic and foreign futures contracts.
STOCK INDEX FUTURES CONTRACTS. The Fund may invest in futures contracts
on stock indices. Currently, stock index futures contracts can be purchased or
sold with respect to, among others, the S&P 500 Stock Price Index on the Chicago
Mercantile Exchange, the Major Market Index on the Chicago Board of Trade, the
New York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index on the Kansas City Board of Trade.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established in
the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
B-8
<PAGE>
The sale of an interest rate or financial futures contract by the Fund
would create an obligation by the Fund, as seller, to deliver the specific type
of financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by the Fund would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
The Fund will deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; GNMA modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and 90-day
commercial paper. The Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract,
the Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Advisor believes that over time the value
of a diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
B-9
<PAGE>
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Advisor may still not result in a
successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund may
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by the Fund is also subject to the Advisor's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which the Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
OPTIONS ON FUTURES CONTRACTS. As described above, the Fund may purchase
options on the futures contracts they can purchase or sell. A futures option
gives the holder, in return for the premium paid, the right to buy (call) from
or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder or writer of an option has the right to terminate its
position prior to the scheduled expiration of the option by selling, or
purchasing an option of the same series, at which time the person entering into
the closing transaction will realize a gain or loss. There is no guarantee that
such closing transactions can be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
B-10
<PAGE>
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is limited to the premium paid for the options (plus
transaction costs).
RESTRICTIONS ON THE USE OR FUTURES CONTRACTS AND RELATED OPTIONS. The
Fund will not engage in transactions in futures contracts or related options for
speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase and where the transactions are economically appropriate to
the reduction of risks inherent in the ongoing management of the Fund. The Fund
may not purchase or sell futures or purchase related options if, immediately
thereafter, more than 33% of its net assets would be hedged. The Fund also may
not purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets.
These restrictions, which are derived from current federal regulations
regarding the use of options and futures by mutual funds, are not "fundamental
restrictions" and may be changed by the Trustees of the Trust if applicable law
permits such a change and the change is consistent with the overall investment
objective and policies of the Fund.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor, subject to the seller's agreement to repurchase and
the Fund's agreement to resell such securities at a mutually agreed upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio security). Securities subject
to repurchase agreements will be held by the Custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund will
suffer a loss to the extent that the proceeds from a sale of the underlying
securities are less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans under the 1940 Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The Fund may purchase securities on a "when-issued," forward commitment
or delayed settlement basis. In this event, the Custodian will segregate liquid
assets equal to the amount of the commitment in a separate account. Normally,
the Custodian will set aside portfolio securities to satisfy a purchase
commitment. In such a case, the Fund may be required subsequently to segregate
additional assets in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the Fund will segregate liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and the ability of the
Advisor to manage it may be affected in the event the Fund's forward
commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 15% of the value of its net assets.
The Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When the Fund engages in when-issued,
forward commitment and delayed
B-11
<PAGE>
settlement transactions, it relies on the other party to consummate the trade.
Failure of such party to do so may result in the Fund's incurring a loss or
missing an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities in an amount not exceeding
one-third of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund to
reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Code.
SHORT SALES
The Fund is authorized to make short sales of securities. In a short
sale, the Fund sells a security which it does not own, in anticipation of a
decline in the market value of the security. To complete the sale, the Fund must
borrow the security (generally from the broker through which the short sale is
made) in order to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The Fund is said to have a "short position" in the securities
sold until it delivers them to the broker. The period during which the Fund has
a short position can range from one day to more than a year. Until the security
is replaced, the proceeds of the short sale are retained by the broker, and the
Fund is required to pay to the broker a negotiated portion of any dividends or
interest which accrue during the period of the loan. To meet current margin
requirements, the Fund is also required to deposit with the broker additional
cash or securities so that the total deposit with the broker is maintained daily
at 150% of the current market value of the securities sold short (100% of the
current market value if a security is held in the account that is convertible or
exchangeable into the security sold short within 90 days without restriction
other than the payment of money).
Short sales by the Fund create opportunities to increase the Fund's
return but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since the Fund in effect profits from a
decline in the price of the securities sold short without the need to invest the
full purchase price of the securities on the date of the short sale, the Fund's
net asset value per share will tend to increase more when the securities it has
sold short decrease in value, and to decrease more when the securities it has
sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions the Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell portfolio securities to raise the capital necessary to meet its
short sale obligations at a time when fundamental investment considerations
would not favor such sales.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. The Advisor will monitor the amount of
illiquid securities in the Fund's portfolio, under the supervision of the
Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
B-12
<PAGE>
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees may determine that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
FUND POLICIES
The Trust (on behalf of the Fund) has adopted the following
restrictions as fundamental policies, which may not be changed without the
favorable vote of the holders of a "majority," as defined in the 1940 Act, of
the outstanding voting securities of the Fund. Under the 1940 Act, the "vote of
the holders of a majority of the outstanding voting securities" means the vote
of the holders of the lesser of (i) 67% of the shares of the Fund represented at
a meeting at which the holders of more than 50% of its outstanding shares are
represented or (ii) more than 50% of the outstanding shares of the Fund.
As a matter of fundamental policy, the Fund is diversified. The Fund's
investment objective is also fundamental.
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except
that (i) the Fund may borrow from banks in amounts not exceeding one-third of
its total assets (not including the amount borrowed) for temporary and emergency
purchases; 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;
3. Act as underwriter (except to the extent the Fund may be deemed to
be an underwriter in connection with the sale of securities in its investment
portfolio);
4. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities);
5. Purchase or sell real estate or interests in real estate or real
estate limited partnerships (although the Fund may purchase and sell securities
which are secured by real estate and securities of companies which invest or
deal in real estate);
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell foreign currency contracts in accordance
with any rules of the Commodity Futures Trading Commission;
7. Make loans of money (except for purchases of debt securities
consistent with the investment policies of the Fund and except for repurchase
agreements); or
8. Make investments for the purpose of exercising control or
management.
B-13
<PAGE>
The Fund observes the following restrictions as a matter of operating
but not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
The Fund may not:
1. Invest in the securities of other investment companies or purchase
any other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal law; or
2. Invest more than 15% of its net assets in securities which are
restricted as to disposition or otherwise are illiquid or have no readily
available market (except for securities which are determined by the Board of
Trustees to be liquid).
MANAGEMENT OF THE FUND
The overall management of the business and affairs of the Trust is
vested with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day to day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their ages and positions with
the Trust, their business addresses and principal occupations during the past
five years are:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
<S> <C> <C>
Walter Auch, Sr. (Born 1921) Trustee Director, Nicholas-Applegate Mutual Funds, Brinson Funds
6001 N. 62d Place (since 1994), Smith Barney Trak Fund, Pimco Advisors L.P.,
Paradise Valley, AZ 85253 Banyan Realty Trust, Banyan Land Fund II and Legend Properties.
Eric Banhazl (Born 1957)* Trustee, Senior Vice President, Investment Company Administration
2025 E. Financial Way President and Corporation; Vice President, First Fund Distributors; Assistant,
Glendora, CA 91740 Treasurer Treasurer, RNC Mutual Fund Group; Treasurer, Guinness Flight
Investment Funds, Inc. and Professionally Managed Portfolios.
Donald O'Connor (Born 1936) Trustee Retired; formerly Executive Vice President and Chief Operating 1700
Taylor Avenue Officer of ICI Mutual Insurance Company (until January, 1997), Fort
Washington, MD, 20744 Vice President, Operations, Investment Company Institute (until
June, 1993).
George Wofford III (Born 1939) Trustee Vice President, Information Services, Federal Home Loan Bank of
305 Glendora Circle San Francisco (since March, 1993); formerly Director of
Danville, CA 94526 Management Information Services, Morrison & Foerster ( law
firm).
Steven Paggioli (Born 1950) Vice Executive Vice President, Robert H. Wadsworth & Associates, Inc.
479 W. 22nd Street President and Investment Company Administration Corporation; Vice
New York, NY 10011 President First Fund Distributors, Inc.; President and Trustee,
Professionally Managed Portfolios; Director, Managers Funds, Inc.
Robert Wadsworth (Born 1940) Vice President, Robert H. Wadsworth & Associates, Inc., Investment
4455 E. Camelback Road President Company Administration Corporation and First Fund Distributors,
Suite 261E Inc.; Vice President, Professionally Managed Portfolios; President,
Phoenix, AZ 85018 Guinness Flight Investment Funds, Inc.; Director, Germany Fund,
Inc., New Germany Fund., Central European Equity Fund, Inc. and
Deutsche Funds, Inc.
</TABLE>
B-14
<PAGE>
<TABLE>
<S> <C> <C>
Chris Moser (Born 1949) Secretary Employed by Investment Company Administration Corporation
4455 E. Camelback Road (since July, 1996); formerly employed by Bank One, N.A. (from
Suite 261E August until July, 1996); O'Connor, Cavanagh, Anderson,
Phoenix, AZ 85018 Killingsworth and Beshears (law firm) (until August, 1995).
</TABLE>
* denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
NAME AND POSITION AGGREGATE COMPENSATION FROM THE TRUST*
Walter E. Auch, Sr., Trustee $12,000
Donald E. O'Connor, Trustee $12,000
George T. Wofford III, Trustee $12,000
*For the calendar-year ended December 31, 1998. The Trust has no pension or
retirement plan. No other entity affiliated with the Trust pays any compensation
to the Trustees.
INVESTMENT ADVISORY AND OTHER SERVICES
Subject to the supervision of the Board of Trustees, investment
management and related services are provided by the Advisor, pursuant to an
Investment Advisory Agreement (the "Advisory Agreement").
Under the Advisory Agreement, the Advisor agrees to invest the assets
of the Fund in accordance with the investment objectives, policies and
restrictions of the Fund as set forth in the Fund's and Trust's governing
documents, including, without limitation, the Trust's Agreement and Declaration
of Trust and By-Laws; the Fund's prospectus, Statement of Additional
Information, and undertakings; and such other limitations, policies and
procedures as the Trustees of the Trust may impose from time to time in writing
to the Advisor. In providing such services, the Advisor shall at all times
adhere to the provisions and restrictions contained in the federal securities
laws, applicable state securities laws, the Code, and other applicable law.
Without limiting the generality of the foregoing, the Advisor has
agreed to (i) furnish the Fund with advice and recommendations with respect to
the investment of the Fund's assets, (ii) effect the purchase and sale of
portfolio securities; (iii) manage and oversee the investments of the Fund,
subject to the ultimate supervision and direction of the Trust's Board of
Trustees; (iv) vote proxies and take other actions with respect to the Fund's
securities; (v) maintain the books and records required to be maintained with
respect to the securities in the Fund's portfolio; (vi) furnish reports,
statements and other data on securities, economic conditions and other matters
related to the investment of the Fund's assets which the Trustees or the
officers of the Trust may reasonably request; and (vi) render to the Trust's
Board of Trustees such periodic and special reports as the Board may reasonably
request. The Advisor has also agreed, at its own expense, to maintain such staff
and employ or retain such personnel and consult with such other persons as it
shall from time to time determine to be necessary to the performance of its
obligations under the Advisory Agreement. Personnel of the Advisor may serve as
officers of the Trust provided they do so without compensation from the Trust.
Without limiting the generality of the foregoing, the staff and personnel of the
Advisor shall be deemed to include persons employed or retained by the Advisor
to furnish statistical information, research, and other factual information,
advice regarding economic factors and trends, information with respect to
technical and scientific developments, and such other information, advice and
assistance as the Advisor or the Trust's Board of Trustees may desire and
reasonably request. With respect to the operation of the Fund, the Advisor has
agreed to be responsible for the expenses of printing and distributing extra
copies of the Fund's prospectus, Statement of Additional Information, and sales
and advertising materials (but not the legal, auditing or accounting fees
attendant thereto) to prospective investors (but not to existing shareholders);
and the costs of any special Board of Trustees meetings or shareholder meetings
convened for the primary benefit of the Advisor.
As compensation for the Advisor's services, the Fund pays it an
advisory fee at the rate specified in the prospectus. For the period ending
December 31, 1997, the Advisor earned $12,099 in advisory fees. In its
undertaking to limit Fund operating expenses during the year, the Advisor waived
$2,080 of the advisory fee earned. For the period ending December 31, 1998, the
Advisor earned $125,574 in advisory fees. In its undertaking to limit Fund
operating expenses during the year, the Advisor waived $78,331 of the advisory
fee earned. In addition to the fees payable to the Advisor and the
Administrator, the Trust is responsible for its operating expenses, including:
fees and
B-15
<PAGE>
expenses incurred in connection with the issuance, registration and transfer of
its shares; brokerage and commission expenses; all expenses of transfer,
receipt, safekeeping, servicing and accounting for the cash, securities and
other property of the Trust for the benefit of the Fund including all fees and
expenses of its custodian, shareholder services agent and accounting services
agent; interest charges on any borrowings; costs and expenses of pricing and
calculating its daily net asset value and of maintaining its books of account
required under the 1940 Act; taxes, if any; a pro rata portion of expenditures
in connection with meetings of the Fund's shareholders and the Trust's Board of
Trustees that are properly payable by the Fund; salaries and expenses of
officers and fees and expenses of members of the Trust's Board of Trustees or
members of any advisory board or committee who are not members of, affiliated
with or interested persons of the Advisor or Administrator; insurance premiums
on property or personnel of the Fund which inure to its benefit, including
liability and fidelity bond insurance; the cost of preparing and printing
reports, proxy statements, prospectuses and statements of additional information
of the Fund or other communications for distribution to existing shareholders;
legal, auditing and accounting fees; trade association dues; fees and expenses
(including legal fees) of registering and maintaining registration of its shares
for sale under federal and applicable state and foreign securities laws; all
expenses of maintaining and servicing shareholder accounts, including all
charges for transfer, shareholder recordkeeping, dividend disbursing,
redemption, and other agents for the benefit of the Fund, if any; and all other
charges and costs of its operation plus any extraordinary and non-recurring
expenses, except as otherwise prescribed in the Advisory Agreement.
The Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce fees payable to it by the Fund and to pay Fund
operating expenses to the extent necessary to limit the Fund's aggregate annual
operating expenses (excluding interest and tax expenses) to the limit set forth
in the Expense Table (the "expense cap"). Any such reductions made by the
Advisor in its fees or payment of expenses which are the Fund's obligation are
subject to reimbursement by the Fund to the Advisor, if so requested by the
Advisor, in subsequent fiscal years if the aggregate amount actually paid by the
Fund toward the operating expenses for such fiscal year (taking into account the
reimbursement) does not exceed the applicable limitation on Fund expenses. The
Advisor is permitted to be reimbursed only for fee reductions and expense
payments made in the previous three fiscal years, but is permitted to look back
five years and four years, respectively, during the initial six years and
seventh year of the Fund's operations. Any such reimbursement is also contingent
upon Board of Trustees' subsequent review and ratification of the reimbursed
amounts. Such reimbursement may not be paid prior to the Fund's payment of
current ordinary operating expenses.
Under the Advisory Agreement, the Advisor will not be liable to the
Trust or the Fund or any shareholder for any act or omission in the course of,
or connected with, rendering services or for any loss sustained by the Trust
except in the case of a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad faith or gross
negligence, or reckless disregard of its obligations and duties under the
Agreement.
The Advisory Agreement will remain in effect for a period not to exceed
two years. Thereafter, if not terminated, the Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of Trustees
or by the holders of a majority of the outstanding voting securities of the Fund
at any time without penalty, on 60 days written notice to the Advisor. The
Advisory Agreement also may be terminated by the Advisor on 60 days written
notice to the Trust. The Advisory Agreement terminates automatically upon its
assignment (as defined in the 1940 Act).
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
B-16
<PAGE>
foregoing); (iv) preparing such applications and reports as may be necessary to
permit the offer and sale of the shares of the Trust under the securities or
"blue sky" laws of the various states selected by the Trust (the Trust agreeing
to pay all filing fees or other similar fees in connection therewith); (v)
responding to all inquiries or other communications of shareholders, if any,
which are directed to the Administrator, or if any such inquiry or communication
is more properly to be responded to by the Trust's custodian, transfer agent or
accounting services agent, overseeing their response thereto; (vi) overseeing
all relationships between the Trust and any custodian(s), transfer agent(s) and
accounting services agent(s), including the negotiation of agreements and the
supervision of the performance of such agreements; and (vii) authorizing and
directing any of the Administrator's directors, officers and employees who may
be elected as Trustees or officers of the Trust to serve in the capacities in
which they are elected. All services to be furnished by the Administrator under
this Agreement may be furnished through the medium of any such directors,
officers or employees of the Administrator.
For its services, the Administrator receives a fee monthly at the following
annual rate, 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
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Shares of the Fund owned by the Trustees and officers as a group were
less than 1% at December 31, 1998.
As of January 21, 1999, the Fund was controlled by Putnam Fiduciary
Trust Co. TTEE, FBO: The Oschner Clinic Thrift Plan, 859 Williard St. MS E2C,
Quincy, MA 02269 which owned 99.08% of the outstanding shares of the Fund. The
controlling shareholder would be able to control decisions made by the
shareholders with respect to matters affecting only the Fund, such as the
Investment Advisory Agreement.
DISTRIBUTION ARRANGEMENTS
Pursuant to a plan of distribution adopted by the Trust, on behalf of
the Fund, pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Fund may
pay distribution and related expenses up to 0.25% of its average net assets to
the Advisor as distribution coordinator. Expenses permitted to be paid include
preparation, printing and mailing of prospectuses, shareholder reports such as
semi-annual and annual reports, performance reports and newsletters, sales
literature and other promotional material to prospective investors, direct mail
solicitations, advertising, public relations, compensation of sales personnel,
advisors or other third parties for their assistance with respect to the
distribution of the Fund's shares, payments to financial intermediaries for
shareholder support, administrative and accounting services with respect to
shareholders of the Fund and such other expenses as may be approved from time to
time by the Board of Trustees of the Trust.
The Plan allows excess distribution expenses to be carried forward by
the Advisor, as distribution coordinator, and resubmitted in a subsequent fiscal
year, provided that (i) distribution expenses cannot be carried forward for more
than three years following initial submission; (ii) the Trustees have made a
determination at the time of initial submission that the distribution expenses
are appropriate to be carried forward and (iii) the Trustees make a further
determination, at the time any distribution expenses which have been carried
forward are submitted for payment, that payment at the time is appropriate,
consistent with the objectives of the Plan and in the current best interests of
shareholders.
Under the Plan, the Trustees will be furnished quarterly with
information detailing the amount of expenses paid under the Plan and the
purposes for which payments were made. The Plan may be terminated at any time by
vote of a majority of the Trustees of the Trust who are not interested persons.
Continuation of the Plan is considered by such Trustees no less frequently than
annually.
During the period ending December 31, 1997, the Fund paid the
Distribution Coordinator distribution fees totaling $3,820. During the period
ending December 31, 1998, the Fund paid the Distribution Coordinator
distribution
B-17
<PAGE>
fees totaling $36,934. These fees were used to reimburse the Advisor for Fund
advertising expenses, marketing-related printing and postage and trail
commissions and dealer fees paid to agents who sold shares of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that the Advisor shall be responsible for
broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Advisor shall not direct orders to an affiliated person of the
Advisor without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. The Advisor's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction, the
Advisor may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of Trustees of
the Trust may determine, the Advisor shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to the Advisor
an amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Advisor determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Advisor's overall responsibilities with respect to
the Fund. The Advisor is further authorized to allocate the orders placed by it
on behalf of the Fund to such brokers or dealers who also provide research or
statistical material, or other services, to the Trust, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions as
the Advisor shall determine, and the Advisor shall report on such allocations
regularly to the Advisor and the Trust, indicating the broker-dealers to whom
such allocations have been made and the basis therefor. The Advisor is also
authorized to consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions, subject to the
requirements of best execution, I.E., that such brokers or dealers are able to
execute the order promptly and at the best obtainable securities price.
On occasions when the Advisor deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients of the Advisor,
the Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Advisor in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
Portfolio turnover for the period ended December 31, 1998 was 80.00%
Brokerage Commissions paid by the Fund during the period ended December
31, 1997 totaled $1,478. Brokerage Commissions paid by the Fund during the
period ended December 31, 1998 totaled $615,943.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is
determined as of the close of trading on the New York Stock Exchange (the
"NYSE") (generally 4:00 p.m. Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement.
B-18
<PAGE>
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor and the Trust's Valuation Committee pursuant to procedures approved by
or under the direction of the Board.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Advisor to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. If an options
exchange closes after the time at which the Fund's net asset value is
calculated, the last sale or last bid and asked prices as of that time will be
used to calculate the net asset value.
All other assets of the Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
TAXATION
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, (the "Code"), for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its
assets, and the timing of its distributions. The Fund's policy is to distribute
to its shareholders all of its investment company taxable income and any net
realized capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes based on net income. However, the Board may
elect to pay such excise taxes if it determines that payment is, under the
circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
B-19
<PAGE>
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains
by the Fund will be taxable to shareholders whether made in cash or reinvested
by the Fund in shares. In determining amounts of net realized capital gains to
be distributed, any capital loss carry-overs from the eight prior taxable years
will be applied against capital gains. Shareholders receiving a distribution
from the Fund in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of the Fund on the reinvestment date. Fund distributions also
will be included in individual and corporate shareholders' income on which the
alternative minimum tax may be imposed.
The Fund or the securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("IRS") with respect to distributions and payments made
to the shareholder. In addition, the Fund will be required to withhold federal
income tax at the rate of 31% on taxable dividends, redemptions and other
payments made to accounts of individual or other non-exempt shareholders who
have not furnished their correct taxpayer identification numbers and certain
required certifications on the New Account application or with respect to which
the Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions,
as stated in the prospectuses. In order to avoid the payment of any federal
excise tax based on net income, the Fund must declare on or before December 31
of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To
the extent that the Fund receives such 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.
B-20
<PAGE>
For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by the Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by the
Fund that substantially diminishes the Fund's risk of loss from any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code rather than
as capital gain or loss.
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.
B-21
<PAGE>
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the prospectuses are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Fund. The law firm of Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund will receive income in the form of dividends and interest
earned on its investments in securities. This income, less the expenses incurred
in its operations, is the Fund's net investment income, substantially all of
which will be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon
the amount of net investment income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
The Fund also may derive capital gains or losses in connection with
sales or other dispositions of its portfolio securities. Any net gain the Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders. For more information
concerning applicable capital gains tax rates, see your tax advisor.
Any dividend or distribution paid by the Fund reduces the Fund's net
asset value per share on the date paid 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 Fund's
advertising and promotional materials are calculated according to the following
formula:
n
P(1 + T) = ERV
where "P" equals a hypothetical initial payment of $1,000; "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 $1,000 payment made
at the beginning of the period.
B-22
<PAGE>
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 the Fund's inception on December 3, 1997 to
December 31, 1998, the Fund's average annual total return was 26.09%. For the
one-year period ended December 31, 1998, the Fund's total return was 25.81%.
OTHER INFORMATION. Performance data of the Fund quoted in advertising
and other promotional materials represents past performance and is not intended
to predict or guarantee future results. The return and principal value of an
investment in the Fund will fluctuate, and an investor's redemption proceeds may
be more or less than the original investment amount. In advertising and
promotional materials the Fund may compare its performance with data published
by Lipper Analytical Services, Inc. ("Lipper") or CDA Investment Technologies,
Inc. ("CDA"). The Fund also may refer in such materials to mutual fund
performance rankings and other data, such as comparative asset, expense and fee
levels, published by Lipper or CDA. Advertising and promotional materials also
may refer to discussions of the Fund and comparative mutual fund data and
ratings reported in independent periodicals including, but not limited to, THE
WALL STREET JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD and
BARRON'S.
GENERAL INFORMATION
The Trust was organized as a Delaware business trust on October 3,
1996. The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest and to divide or combine
the shares into a greater or lesser number of shares without thereby changing
the proportionate beneficial interest in the Fund. Each share represents an
interest in the Fund proportionately equal to the interest of each other share.
Upon the Fund's liquidation, all shareholders would share pro rata in the net
assets of the Fund available for distribution to shareholders.
The Declaration of Trust does not require the issuance of stock
certificates. If stock certificates are issued, they must be returned by the
registered owners prior to the transfer or redemption of shares represented by
such certificates.
If they deem it advisable and in the best interest of shareholders, the
Board of Trustees may create additional series of shares which differ from each
other only as to dividends. The Board of Trustees has created fifteen series of
shares, and may create additional series in the future, which have separate
assets and liabilities. Income and operating expenses not specifically
attributable to a particular Fund are be allocated fairly among the Funds by the
Trustees, generally on the basis of the relative net assets of each Fund.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions that make payment in cash unwise, the Fund may
make payment partly in its portfolio securities with a current amortized cost or
market value, as appropriate, equal to the redemption price. Although the Fund
does not anticipate that it will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trust has elected to be governed by the
provisions of Rule 18f-1 under the Investment Company Act, which require that
the Fund pay in cash all requests for redemption by any shareholder of record
limited in amount, however, during any 90-day period to the lesser of $250,000
or 1% of the value of the Fund's net assets at the beginning of such period.
Rule 18f-2 under the 1940 Act provides that as to any investment
company which has two or more series outstanding and as to any matter required
to be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in
B-23
<PAGE>
which an advisory contract is approved by one or more, but not all, series. A
change in investment policy may go into effect as to one or more series whose
holders so approve the change even though the required vote is not obtained as
to the holders of other affected series.
The Fund's principal underwriter is First Fund Distributors, Inc., 4455
E. Camelback Rd., Suite 261E, Phoenix, AZ 85018
The Fund's custodian, Firstar Bank, 425 Walnut Street, Cincinnati, Ohio
45202 is responsible for holding the Funds' assets. American Data Services, P.O.
Box 5536, Hauppauge, NY 11788 acts as the Fund's transfer agent and accounting
services agent. The Fund's independent accountants, McGladrey & Pullen, LLP, 555
Fifth Avenue, New York, NY 10017, assist in the preparation of certain reports
to the Securities and Exchange Commission and the Fund's tax returns.
B-24
<PAGE>
THE AVATAR ADVANTAGE
BALANCED FUND
Statement of Additional Information
Dated May 1, 1999
This Statement of Additional Information ("SAI") is not a prospectus, and it
should be read in conjunction with the prospectus dated May 1, 1999, as may be
revised from time to time, of The Avatar Advantage Balanced Fund (the "Fund")
and The Avatar Advantage Equity Allocation Fund, each a series of Advisors
Series Trust (the "Trust"). Avatar Associates (the "Advisor") is the Advisor to
the Fund. A copy of the prospectus may be obtained from the Fund by writing 900
Third Avenue, New York, NY 10022 or by calling the Trust at (888) 263-6452.
TABLE OF CONTENTS
PAGE
Investment Objectives and Policies.................... B-2
-Investment Strategies and Risks
-Fund Policies
Management of the Fund ............................... B-14
Distribution Arrangements............................. B-15
Control Persons and Principal Holders of Securities B-15
Investment Advisory and Other Services ............... B-16
Portfolio Transactions and Brokerage.................. B-18
Net Asset Value....................................... B-19
Taxation.............................................. B-19
Dividends and Distributions........................... B-22
Performance Information............................... B-22
General Information................................... B-23
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is long-term capital appreciation.
There is no assurance that the Fund will achieve its objective. The discussion
below supplements information contained in the prospectus as to investment
policies of the Fund.
INVESTMENT STRATEGIES AND RISKS
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in convertible securities and warrants. A
convertible security is a fixed income security (a debt instrument or a
preferred stock) which may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
gives an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the issuing company depending upon a
market price advance in the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
INVESTMENT COMPANY SECURITIES. The Fund may invest in shares of other
investment companies. The Fund may invest in money market mutual funds in
connection with its management of daily cash positions. In addition to the
advisory and operational fees a Fund bears directly in connection with its own
operation, the Fund would also bear its pro rata portions of each other
investment company's advisory and operational expenses.
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of
B-2
<PAGE>
financing lending operations under prevailing money market conditions. General
economic conditions as well as exposure to credit losses arising from possible
financial difficulties of borrowers play an important part in the operations of
the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that the
Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its prospectus, the Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The
Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Advisor to be of
comparable quality. These rating symbols are described in the Appendix.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's. GOVERNMENT OBLIGATIONS
The Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
The Fund may invest in sovereign debt obligations of foreign countries.
A sovereign debtor's willingness or ability to repay principal and interest in a
timely manner may be affected by a number of factors, including its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which it may be
subject. Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on
B-3
<PAGE>
expected disbursements from foreign governments, multilateral agencies and other
entities abroad to reduce principal and interest arrearages on their debt. The
commitments on the part of these governments, agencies and others to make such
disbursements may be conditioned on a sovereign debtor's implementation of
economic reforms and/or economic performance and the timely service of such
debtor's obligations. Failure to meet such conditions could result in the
cancellation of such third parties' commitments to lend funds to the sovereign
debtor, which may further impair such debtor's ability or willingness to service
its debt in a timely manner. MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-related securities. Mortgage-related
securities are derivative interests in pools of mortgage loans made to U.S.
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. The Fund may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by GNMA) are described as "modified pass-throughs." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is GNMA, a wholly owned United States Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not insured
or guaranteed by any government agency from a list of approved seller/services
which include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks and credit unions and mortgage bankers.
FHLMC is a government-sponsored corporation created to increase availability of
mortgage credit for residential housing and owned entirely by private
stockholders. FHLMC issues participation certificates which represent interests
in conventional mortgages from FHLMC's national portfolio. Pass-through
securities issued by FNMA and participation certificates issued by FHLMC are
guaranteed as to timely payment of principal and interest by FNMA and FHLMC,
respectively, but are not backed by the full faith and credit of the United
States Government.
Although the underlying mortgage loans in a pool may have maturities of
up to 30 years, the actual average life of the pool certificates typically will
be substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
B-4
<PAGE>
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign CMO
in which the Fund may invest is a hybrid between a mortgage-backed bond and a
mortgage pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically collateralized by portfolios of mortgage pass-through securities
guaranteed by GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.
FOREIGN INVESTMENTS AND CURRENCIES
The Fund may invest in securities of foreign issuers, provided that
they are publicly traded in the United States.
DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs are
receipts typically issued in connection with a U.S. or foreign bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
TAXES. The interest and dividends payable on certain of the Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.
OPTIONS ON SECURITIES
PURCHASING PUT AND CALL OPTIONS. The Fund may purchase covered "put"
and "call" options with respect to securities which are otherwise eligible for
purchase by the Fund subject to certain restrictions. The Fund will engage in
trading of such derivative securities exclusively for hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment
B-5
<PAGE>
strategy when the Advisor perceives significant short-term risk but substantial
long-term appreciation for the underlying security. The put option acts as an
insurance policy, as it protects against significant downward price movement
while it allows full participation in any upward movement. If the Fund is
holding a security which it feels has strong fundamentals, but for some reason
may be weak in the near term, the Fund may purchase a put option on such
security, thereby giving itself the right to sell such security at a certain
strike price throughout the term of the option. Consequently, the Fund will
exercise the put only if the price of such security falls below the strike price
of the put. The difference between the put's strike price and the market price
of the underlying security on the date the Fund exercises the put, less
transaction costs, will be the amount by which the Fund will be able to hedge
against a decline in the underlying security. If during the period of the option
the market price for the underlying security remains at or above the put's
strike price, the put will expire worthless, representing a loss of the price
the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put may be sold.
If the Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If the call option has been
purchased to hedge a short position of the Fund in the underlying security and
the price of the underlying security thereafter falls, the profit the Fund
realizes on the cover of the short position in the security will be reduced by
the premium paid for the call option less any amount for which such option may
be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which the
Advisor believes there is an active secondary market to facilitate closing
transactions.
WRITING CALL OPTIONS. The Fund may write covered call options. A call
option is "covered" if the Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Custodian). The writer of
a call option receives a premium and gives the purchaser the right to buy the
security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer of
an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. Also, effecting
a closing transaction will permit the cash or proceeds from the concurrent sale
of any securities subject to the option to be used for other investments of the
Fund. If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
The Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option. The Fund will realize a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing transaction
are less than the premium paid to purchase the option. However, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss to the Fund
B-6
<PAGE>
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the Fund.
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities. Options may be more volatile than the
underlying securities and, therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying securities themselves. There are also significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its objective.
In addition, a liquid secondary market for particular options may be absent for
reasons which include the following: there may be insufficient trading interest
in certain options; restrictions may be imposed by an exchange on opening
transactions or closing transactions or both; trading halts, suspensions or
other restrictions may be imposed with respect to particular classes or series
of options of underlying securities; unusual or unforeseen circumstances may
interrupt normal operations on an exchange; the facilities of an exchange or
clearing corporation may not at all times be adequate to handle current trading
volume; or one or more exchanges could, for economic or other reasons, decide or
be compelled at some future date to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in accordance
with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which the Fund may enter into options transactions may be limited by
the Internal Revenue Code of 1986 (the "Code") requirements for qualification of
the Fund as a regulated investment company. See "Dividends and Distributions"
and "Taxation."
DEALER OPTIONS. The Fund will engage in transactions involving dealer
options as well as exchange-traded options. Certain additional risks are
specific to dealer options. While the Fund might look to a clearing corporation
to exercise exchange-traded options, if the Fund were to purchase a dealer
option it would need to rely on the dealer from which it purchased the option to
perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, the Fund may generally be able to realize
the value of a dealer option it has purchased only by exercising or reselling
the option to the dealer who issued it. Similarly, when the Fund writes a dealer
option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will at any time be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Unless the Fund, as a
covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair the Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities.
The Fund may treat the cover used for written dealer options as liquid if the
dealer agrees that the Fund may repurchase the dealer option it has written for
a maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
Accordingly, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the Commission
B-7
<PAGE>
changes its position on the liquidity of dealer options, the Fund will change
its treatment of such instruments accordingly.
SPREAD TRANSACTIONS. The Fund may purchase covered spread options from
securities dealers. These covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put securities that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to the Fund, in addition to the risks of
dealer options described above, is the cost of the premium paid as well as any
transaction costs. The purchase of spread options will be used to protect the
Fund against adverse changes in prevailing credit quality spreads, I.E., the
yield spread between high quality and lower quality securities. This protection
is provided only during the life of the spread options.
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may invest in futures contracts and options on futures
contracts as a hedge against changes in market conditions or interest rates. The
Fund will trade in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). The Fund will segregate liquid assets in a separate account
with its Custodian when required to do so by CFTC guidelines in order to cover
its obligation in connection with futures and options transactions.
No price is paid or received by the Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund will
be required to deposit in a segregated account with its Custodian an amount of
cash or U.S. Treasury bills equal to approximately 5% of the contract amount.
This amount is known as initial margin. The margin requirements for foreign
futures contracts may be different.
The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying stock index fluctuates, to
reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when the
Fund has purchased a stock index futures contract and the price of the
underlying stock index has risen, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when the Fund has purchased a stock index futures
contract and the price of the underlying stock index has declined, the position
will be less valuable and the Fund will be required to make a variation margin
payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract A final determination
of variation margin is made on closing the position. Additional cash is paid by
or released to the Fund, which realizes a loss or a gain.
In addition to amounts segregated or paid as initial and variation
margin, the Fund must segregate liquid assets with its custodian equal to the
market value of the futures contracts, in order to comply with Commission
requirements intended to ensure that the Fund's use of futures is unleveraged.
The requirements for margin payments and segregated accounts apply to both
domestic and foreign futures contracts.
STOCK INDEX FUTURES CONTRACTS. The Fund may invest in futures contracts
on stock indices. Currently, stock index futures contracts can be purchased or
sold with respect to, among others, the S&P 500 Stock Price Index on the Chicago
Mercantile Exchange, the Major Market Index on the Chicago Board of Trade, the
New York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index on the Kansas City Board of Trade.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within
B-8
<PAGE>
five business days after the trade. In the futures market, a contract is made to
purchase or sell a bond in the future for a set price on a certain date.
Historically, the prices for bonds established in the futures markets have
generally tended to move in the aggregate in concert with cash market prices,
and the prices have maintained fairly predictable relationships.
The sale of an interest rate or financial futures contract by the Fund
would create an obligation by the Fund, as seller, to deliver the specific type
of financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by the Fund would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
The Fund will deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; GNMA modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and 90-day
commercial paper. The Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract,
the Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Advisor believes that over time the value
of a diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
B-9
<PAGE>
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures market are less onerous than margin requirements in the securities
market. Therefore, increased participation by speculators in the futures market
may also cause temporary price distortions. As a result of price distortions in
the futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Advisor may still not result in a
successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund may
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by the Fund is also subject to the Advisor's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which the Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
OPTIONS ON FUTURES CONTRACTS. As described above, the Fund may purchase
options on the futures contracts they can purchase or sell. A futures option
gives the holder, in return for the premium paid, the right to buy (call) from
or sell (put) to the writer of the option a futures contract at a specified
price at any time during the period of the option. Upon exercise, the writer of
the option is obligated to pay the difference between the cash value of the
futures contract and the exercise price. Like the buyer or seller of a futures
contract, the holder
B-10
<PAGE>
or writer of an option has the right to terminate its position prior to the
scheduled expiration of the option by selling, or purchasing an option of the
same series, at which time the person entering into the closing transaction will
realize a gain or loss. There is no guarantee that such closing transactions can
be effected.
Investments in futures options involve some of the same considerations
as investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options can be expected to be more volatile than the market
prices on the underlying futures contracts. Compared to the purchase or sale of
futures contracts, however, the purchase of call or put options on futures
contracts may frequently involve less potential risk to the Fund because the
maximum amount at risk is limited to the premium paid for the options (plus
transaction costs).
RESTRICTIONS ON THE USE OR FUTURES CONTRACTS AND RELATED OPTIONS. The
Fund will not engage in transactions in futures contracts or related options for
speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase and where the transactions are economically appropriate to
the reduction of risks inherent in the ongoing management of the Fund. The Fund
may not purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. The Fund also may
not purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets.
These restrictions, which are derived from current federal regulations
regarding the use of options and futures by mutual funds, are not "fundamental
restrictions" and may be changed by the Trustees of the Trust if applicable law
permits such a change and the change is consistent with the overall investment
objective and policies of the Fund.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor, subject to the seller's agreement to repurchase and
the Fund's agreement to resell such securities at a mutually agreed upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio security). Securities subject
to repurchase agreements will be held by the Custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund will
suffer a loss to the extent that the proceeds from a sale of the underlying
securities are less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans under the 1940 Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The Fund may purchase securities on a "when-issued," forward commitment
or delayed settlement basis. In this event, the Custodian will segregate liquid
assets equal to the amount of the commitment in a separate account. Normally,
the Custodian will set aside portfolio securities to satisfy a purchase
commitment. In such a case, the Fund may be required subsequently to segregate
additional assets in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the Fund will segregate liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and the ability of the
Advisor to manage it may be affected in the event
B-11
<PAGE>
the Fund's forward commitments, commitments to purchase when-issued securities
and delayed settlements ever exceeded 15% of the value of its net assets.
The Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When the Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities in an amount not exceeding
one-third of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund to
reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Code.
SHORT SALES
The Fund is authorized to make short sales of securities. In a short
sale, the Fund sells a security which it does not own, in anticipation of a
decline in the market value of the security. To complete the sale, the Fund must
borrow the security (generally from the broker through which the short sale is
made) in order to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The Fund is said to have a "short position" in the securities
sold until it delivers them to the broker. The period during which the Fund has
a short position can range from one day to more than a year. Until the security
is replaced, the proceeds of the short sale are retained by the broker, and the
Fund is required to pay to the broker a negotiated portion of any dividends or
interest which accrue during the period of the loan. To meet current margin
requirements, the Fund is also required to deposit with the broker additional
cash or securities so that the total deposit with the broker is maintained daily
at 150% of the current market value of the securities sold short (100% of the
current market value if a security is held in the account that is convertible or
exchangeable into the security sold short within 90 days without restriction
other than the payment of money).
Short sales by the Fund create opportunities to increase the Fund's
return but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since the Fund in effect profits from a
decline in the price of the securities sold short without the need to invest the
full purchase price of the securities on the date of the short sale, the Fund's
net asset value per share will tend to increase more when the securities it has
sold short decrease in value, and to decrease more when the securities it has
sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions the Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell
B-12
<PAGE>
portfolio securities to raise the capital necessary to meet its short sale
obligations at a time when fundamental investment considerations would not favor
such sales.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. The Advisor will monitor the amount of
illiquid securities in the Fund's portfolio, under the supervision of the
Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees may determine that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
FUND POLICIES
The Trust (on behalf of the Fund) has adopted the following
restrictions as fundamental policies, which may not be changed without the
favorable vote of the holders of a "majority," as defined in the 1940 Act, of
the outstanding voting securities of the Fund. Under the 1940 Act, the "vote of
the holders of a majority of the outstanding voting securities" means the vote
of the holders of the lesser of (i) 67% of the shares of the Fund represented at
a meeting at which the holders of more than 50% of its outstanding shares are
represented or (ii) more than 50% of the outstanding shares of the Fund.
As a matter of fundamental policy, the Fund is diversified. The Fund's
investment objective is also fundamental.
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except
that (i) the Fund may borrow from banks in amounts not exceeding one-third of
its total assets (not including the amount borrowed) for temporary and emergency
purchases; 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;
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);
B-13
<PAGE>
4. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities);
5. Purchase or sell real estate or interests in real estate or real
estate limited partnerships (although the Fund may purchase and sell securities
which are secured by real estate and securities of companies which invest or
deal in real estate);
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell foreign currency contracts in accordance
with any rules of the Commodity Futures Trading Commission;
7. Make loans of money (except for purchases of debt securities
consistent with the investment policies of the Fund and except for repurchase
agreements); or
8. Make investments for the purpose of exercising control or
management.
The Fund observes the following restrictions as a matter of operating
but not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
The Fund may not:
1. Invest in the securities of other investment companies or purchase
any other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal law; or
2. Invest more than 15% of its net assets in securities which are
restricted as to disposition or otherwise are illiquid or have no readily
available market (except for securities which are determined by the Board of
Trustees to be liquid).
MANAGEMENT OF THE FUND
The overall management of the business and affairs of the Trust is
vested with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day to day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their ages and positions with
the Trust, their business addresses and principal occupations during the past
five years are:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
<S> <C> <C>
Walter Auch, Sr. (Born 1921) Trustee Director, Nicholas-Applegate Mutual Funds, Brinson Funds
6001 N. 62d Place (since 1994), Smith Barney Trak Fund, Pimco Advisors L.P.,
Paradise Valley, AZ 85253 Banyan Realty Trust, Banyan Land Fund II and Legend
Properties.
Eric Banhazl (Born 1957)* Trustee, Senior Vice President, Investment Company Administration
2025 E. Financial Way President and Corporation; Vice President, First Fund Distributors; Assistant,
Glendora, CA 91740 Treasurer Treasurer, RNC Mutual Fund Group; Treasurer, Guinness Flight
Investment Funds, Inc. and Professionally Managed Portfolios.
Donald O'Connor (Born 1936) Trustee Retired; formerly Executive Vice President and Chief Operating
1700 Taylor Avenue Officer of ICI Mutual Insurance Company (until January, 1997),
Fort Washington, MD, 20744 Vice President, Operations, Investment Company Institute (until
June, 1993).
</TABLE>
B-14
<PAGE>
<TABLE>
<S> <C> <C>
George Wofford III (Born 1939) Trustee Vice President, Information Services, Federal Home Loan Bank
of 305 Glendora Circle San Francisco (since March, 1993); formerly Director of
Danville, CA 94526 Management Information Services, Morrison & Foerster ( law
firm).
Steven Paggioli (Born 1950) Vice Executive Vice President, Robert H. Wadsworth & Associates, Inc.
479 W. 22nd Street President and Investment Company Administration Corporation; Vice
New York, NY 10011 President First Fund Distributors, Inc.; President and Trustee,
Professionally Managed Portfolios; Director, Managers Funds,
Inc.
Robert Wadsworth (Born 1940) Vice President, Robert H. Wadsworth & Associates, Inc., Investment
4455 E. Camelback Road President Company Administration Corporation and First Fund
Distributors, Suite 261E Inc.; Vice President, Professionally Managed Portfolios; President,
Phoenix, AZ 85018 Guinness Flight Investment Funds, Inc.; Director, Germany Fund, Inc.,
New Germany Fund., Central European Equity Fund, Inc.
and Deutsche Funds, Inc.
Chris Moser (Born 1949) Secretary Employed by Investment Company Administration Corporation
4455 E. Camelback Road (since July, 1996); formerly employed by Bank One, N.A.(from
Suite 261E August until July, 1996); O'Connor, Cavanagh, Anderson,
Phoenix, AZ 85018 Killingsworth and Beshears (law firm) (until August, 1995) .
</TABLE>
* denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
NAME AND POSITION AGGREGATE COMPENSATION FROM THE TRUST*
Walter E. Auch, Sr., Trustee $12,000
Donald E. O'Connor, Trustee $12,000
George T. Wofford III, Trustee $12,000
*For the calendar-year ended December 31, 1998. The Trust has no pension or
retirement plan. No other entity affiliated with the Trust pays any compensation
to the Trustees.
DISTRIBUTION ARRANGEMENTS
Pursuant to a plan of distribution adopted by the Trust, on behalf of
the Fund, pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Fund may
pay distribution and related expenses up to 0.25% of its average net assets to
the Advisor as distribution coordinator. Expenses permitted to be paid include
preparation, printing and mailing of prospectuses, shareholder reports such as
semi-annual and annual reports, performance reports and newsletters, sales
literature and other promotional material to prospective investors, direct mail
solicitations, advertising, public relations, compensation of sales personnel,
advisors or other third parties for their assistance with respect to the
distribution of the Fund's shares, payments to financial intermediaries for
shareholder support, administrative and accounting services with respect to
shareholders of the Fund and such other expenses as may be approved from time to
time by the Board of Trustees of the Trust.
The Plan allows excess distribution expenses to be carried forward by
the Advisor, as distribution coordinator, and resubmitted in a subsequent fiscal
year, provided that (i) distribution expenses cannot be carried forward for more
than three years following initial submission; (ii) the Trustees have made a
determination at the time of initial submission that the distribution expenses
are appropriate to be carried forward and (iii) the
B-15
<PAGE>
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 ending December 31, 1998, the Fund paid the
Distribution Coordinator distribution fees totaling $3,165. These fees were used
to reimburse the Advisor for Fund marketing-related printing and postage and
advertising and road shows.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The Fund is a management, open-end, diversified investment company
Shares of the Fund owned by the Trustees and officers as a group were
less than 1% at December 31, 1998.
As of January 21, 1999, the Fund was controlled by the Avatar
Associates Money Purchase Pension Plan, DTD January 1, 1983, Richard McBride,
TTEE, 900 Third Avenue, New York, NY 10022, which owned 99.87% of the
outstanding shares of the Fund. The controlling shareholder would be able to
control decisions made by the shareholders with respect to matters affecting
only the Fund, such as the Investment Advisory Agreement.
INVESTMENT ADVISORY AND OTHER SERVICES
Subject to the supervision of the Board of Trustees, investment
management and related services are provided by the Advisor, pursuant to an
Investment Advisory Agreement (the "Advisory Agreement").
Under the Advisory Agreement, the Advisor agrees to invest the assets
of the Fund in accordance with the investment objectives, policies and
restrictions of the Fund as set forth in the Fund's and Trust's governing
documents, including, without limitation, the Trust's Agreement and Declaration
of Trust and By-Laws; the Fund's prospectus, statement of additional
information, and undertakings; and such other limitations, policies and
procedures as the Trustees of the Trust may impose from time to time in writing
to the Advisor. In providing such services, the Advisor shall at all times
adhere to the provisions and restrictions contained in the federal securities
laws, applicable state securities laws, the Code, and other applicable law.
Without limiting the generality of the foregoing, the Advisor has
agreed to (i) furnish the Fund with advice and recommendations with respect to
the investment of the Fund's assets, (ii) effect the purchase and sale of
portfolio securities; (iii) manage and oversee the investments of the Fund,
subject to the ultimate supervision and direction of the Trust's Board of
Trustees; (iv) vote proxies and take other actions with respect to the Fund's
securities; (v) maintain the books and records required to be maintained with
respect to the securities in the Fund's portfolio; (vi) furnish reports,
statements and other data on securities, economic conditions and other matters
related to the investment of the Fund's assets which the Trustees or the
officers of the Trust may reasonably request; and (vi) render to the Trust's
Board of Trustees such periodic and special reports as the Board may reasonably
request. The Advisor has also agreed, at its own expense, to maintain such staff
and employ or retain such personnel and consult with such other persons as it
shall from time to time determine to be necessary to the performance of its
obligations under the Advisory Agreement. Personnel of the Advisor may serve as
officers of the Trust provided they do so without compensation from the Trust.
Without limiting the generality of the foregoing, the staff and personnel of the
Advisor shall be deemed to include persons employed or retained by the Advisor
to furnish statistical information, research, and other factual information,
advice regarding economic factors and trends, information with respect to
technical and scientific developments, and such other information, advice and
assistance as the Advisor or the Trust's Board of Trustees may desire and
reasonably request. With respect to the operation of the Fund, the Advisor has
agreed to be responsible for the expenses of printing and
B-16
<PAGE>
distributing extra copies of the Fund's prospectus, statement of additional
information, and sales and advertising materials (but not the legal, auditing or
accounting fees attendant thereto) to prospective investors (but not to existing
shareholders); and the costs of any special Board of Trustees meetings or
shareholder meetings convened for the primary benefit of the Advisor.
As compensation for the Advisor's services, the Fund pays it an
advisory fee at the rate specified in the prospectus. For the period ending
December 31, 1998, the Advisor earned $9,496 in advisory fees. In its
undertaking to limit Fund operating expenses during the year, the Advisor waived
the entire amount of the advisory fee earned. In addition to the fees payable to
the Advisor and the Administrator, the Trust is responsible for its operating
expenses, including: fees and expenses incurred in connection with the issuance,
registration and transfer of its shares; brokerage and commission expenses; all
expenses of transfer, receipt, safekeeping, servicing and accounting for the
cash, securities and other property of the Trust for the benefit of the Fund
including all fees and expenses of its custodian, shareholder services agent and
accounting services agent; interest charges on any borrowings; costs and
expenses of pricing and calculating its daily net asset value and of maintaining
its books of account required under the 1940 Act; taxes, if any; a pro rata
portion of expenditures in connection with meetings of the Fund's shareholders
and the Trust's Board of Trustees that are properly payable by the Fund;
salaries and expenses of officers and fees and expenses of members of the
Trust's Board of Trustees or members of any advisory board or committee who are
not members of, affiliated with or interested persons of the Advisor or
Administrator; insurance premiums on property or personnel of the Fund which
inure to its benefit, including liability and fidelity bond insurance; the cost
of preparing and printing reports, proxy statements, prospectuses and statements
of additional information of the Fund or other communications for distribution
to existing shareholders; legal, auditing and accounting fees; trade association
dues; fees and expenses (including legal fees) of registering and maintaining
registration of its shares for sale under federal and applicable state and
foreign securities laws; all expenses of maintaining and servicing shareholder
accounts, including all charges for transfer, shareholder recordkeeping,
dividend disbursing, redemption, and other agents for the benefit of the Fund,
if any; and all other charges and costs of its operation plus any extraordinary
and non-recurring expenses, except as otherwise prescribed in the Advisory
Agreement.
The Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce fees payable to it by the Fund and to pay Fund
operating expenses to the extent necessary to limit the Fund's aggregate annual
operating expenses (excluding interest and tax expenses) to the limit set forth
in the Expense Table (the "expense cap"). Any such reductions made by the
Advisor in its fees or payment of expenses which are the Fund's obligation are
subject to reimbursement by the Fund to the Advisor, if so requested by the
Advisor, in subsequent fiscal years if the aggregate amount actually paid by the
Fund toward the operating expenses for such fiscal year (taking into account the
reimbursement) does not exceed the applicable limitation on Fund expenses. The
Advisor is permitted to be reimbursed only for fee reductions and expense
payments made in the previous three fiscal years, but is permitted to look back
five years and four years, respectively, during the initial six years and
seventh year of the Fund's operations. Any such reimbursement is also contingent
upon Board of Trustees' subsequent review and ratification of the reimbursed
amounts. Such reimbursement may not be paid prior to the Fund's payment of
current ordinary operating expenses.
Under the Advisory Agreement, the Advisor will not be liable to the
Trust or the Fund or any shareholder for any act or omission in the course of,
or connected with, rendering services or for any loss sustained by the Trust
except in the case of a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad faith or gross
negligence, or reckless disregard of its obligations and duties under the
Agreement.
The Advisory Agreement will remain in effect for a period not to exceed
two years. Thereafter, if not terminated, the Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund.
B-17
<PAGE>
The Advisory Agreement is terminable by vote of the Board of Trustees
or by the holders of a majority of the outstanding voting securities of the Fund
at any time without penalty, on 60 days written notice to the Advisor. The
Advisory Agreement also may be terminated by the Advisor on 60 days written
notice to the Trust. The Advisory Agreement terminates automatically upon its
assignment (as defined in the 1940 Act).
THE ADMINISTRATOR. The Administrator has agreed to be responsible for
providing such services as the Trustees may reasonably request, including but
not limited to (i) maintaining the Trust's books and records (other than
financial or accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Trust's insurance
relationships; (iii) preparing for the Trust (or assisting counsel and/or
auditors in the preparation of) all required tax returns, proxy statements and
reports to the Trust's shareholders and Trustees and reports to and other
filings with the Commission and any other governmental agency (the Trust
agreeing to supply or cause to be supplied to the Administrator all necessary
financial and other information in connection with the foregoing); (iv)
preparing such applications and reports as may be necessary to permit the offer
and sale of the shares of the Trust under the securities or "blue sky" laws of
the various states selected by the Trust (the Trust agreeing to pay all filing
fees or other similar fees in connection therewith); (v) responding to all
inquiries or other communications of shareholders, if any, which are directed to
the Administrator, or if any such inquiry or communication is more properly to
be responded to by the Trust's custodian, transfer agent or accounting services
agent, overseeing their response thereto; (vi) overseeing all relationships
between the Trust and any custodian(s), transfer agent(s) and accounting
services agent(s), including the negotiation of agreements and the supervision
of the performance of such agreements; and (vii) authorizing and directing any
of the Administrator's directors, officers and employees who may be elected as
Trustees or officers of the Trust to serve in the capacities in which they are
elected. All services to be furnished by the Administrator under this Agreement
may be furnished through the medium of any such directors, officers or employees
of the Administrator.
For its services, the Administrator receives a fee monthly at the following
annual rate, 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
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that the Advisor shall be responsible for
broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Advisor shall not direct orders to an affiliated person of the
Advisor without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. The Advisor's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction, the
Advisor may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of Trustees of
the Trust may determine, the Advisor shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to the Advisor
an amount of commission for effecting a portfolio
B-18
<PAGE>
transaction in excess of the amount of commission another broker or dealer would
have charged for effecting that transaction, if the Advisor determines in good
faith that such amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such broker or dealer, viewed in
terms of either that particular transaction or the Advisor's overall
responsibilities with respect to the Fund. The Advisor is further authorized to
allocate the orders placed by it on behalf of the Fund to such brokers or
dealers who also provide research or statistical material, or other services, to
the Trust, the Advisor, or any affiliate of either. Such allocation shall be in
such amounts and proportions as the Advisor shall determine, and the Advisor
shall report on such allocations regularly to the Advisor and the Trust,
indicating the broker-dealers to whom such allocations have been made and the
basis therefor. The Advisor is also authorized to consider sales of shares of
the Fund as a factor in the selection of brokers or dealers to execute portfolio
transactions, subject to the requirements of best execution, I.E., that such
brokers or dealers are able to execute the order promptly and at the best
obtainable securities price.
On occasions when the Advisor deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients of the Advisor,
the Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Advisor in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
Portfolio turnover for the period ended December 31, 1998 was 95.09%
Brokerage Commissions paid by the Fund during the period ended December
31, 1998 totaled $39,311.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is
determined as of the close of trading on the New York Stock Exchange (the
"NYSE") (generally 4:00 p.m. Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor and the Trust's Valuation Committee pursuant to procedures approved by
or under the direction of the Board.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded
on securities exchanges are valued at the last sale price on the exchange on
which such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Advisor to be the
primary market. Securities traded in the over-the-counter market are valued at
the mean between the last available bid and asked price prior to the time of
valuation. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
B-19
<PAGE>
An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or, in the absence of the last sale price, the last bid price. If an options
exchange closes after the time at which the Fund's net asset value is
calculated, the last sale or last bid and asked prices as of that time will be
used to calculate the net asset value.
All other assets of the Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
TAXATION
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, (the "Code"), for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its
assets, and the timing of its distributions. The Fund's policy is to distribute
to its shareholders all of its investment company taxable income and any net
realized capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes based on net income. However, the Board may
elect to pay such excise taxes if it determines that payment is, under the
circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains
by the Fund will be taxable to shareholders whether made in cash or reinvested
by the Fund in shares. In determining amounts of net realized capital gains to
be distributed, any capital loss carry-overs from the eight prior taxable years
will be applied against capital gains. Shareholders receiving a distribution
from the Fund in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of the Fund on the reinvestment date. Fund distributions also
will be included in individual and corporate shareholders' income on which the
alternative minimum tax may be imposed.
The Fund or the securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("IRS") with respect to distributions and payments made
to the shareholder. In addition, the Fund will be required to withhold federal
income tax at the rate of 31% on taxable dividends, redemptions and other
payments made to accounts of individual or other non-exempt shareholders who
have not furnished their correct taxpayer identification numbers and certain
required certifications on the New Account application or with respect to which
the Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions,
as stated in the prospectuses. In order to avoid the payment of any federal
excise tax based on net income, the Fund must declare on or before December 31
of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
realized in the one-year period ending October 31 of that year, together with
any undistributed amounts of ordinary income and capital gains (in excess of
capital losses) from the previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To
the extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
B-20
<PAGE>
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
If more than 50% in value of the total assets of the Fund at the end of
its fiscal year is invested in stock or securities of foreign corporations, the
Fund may elect to pass through to its shareholders the pro rata share of all
foreign income taxes paid by the Fund. If this election is made, shareholders
will be (i) required to include in their gross income their pro rata share of
the Fund's foreign source income (including any foreign income taxes paid by the
Fund), and (ii) entitled either to deduct their share of such foreign taxes in
computing their taxable income or to claim a credit for such taxes against their
U.S. income tax, subject to certain limitations under the Code, including
certain holding period requirements. In this case, shareholders will be informed
in writing by the Fund at the end of each calendar year regarding the
availability of any credits on and the amount of foreign source income
(including or excluding foreign income taxes paid by the Fund) to be included in
their income tax returns. If not more than 50% in value of the Fund's total
assets at the end of its fiscal year is invested in stock or securities of
foreign corporations, the Fund will not be entitled under the Code to pass
through to its shareholders their pro rata share of the foreign taxes paid by
the Fund. In this case, these taxes will be taken as a deduction by the Fund.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
The use of hedging strategies, such as entering into futures contracts
and forward contracts and purchasing options, involves complex rules that will
determine the character and timing of recognition of the income received in
connection therewith by the Fund. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) and income from
transactions in options, futures contracts and forward contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by the Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by the
Fund that substantially diminishes the Fund's risk of loss from any other
position held by the Fund may constitute a "straddle" for federal income tax
purposes. In general, straddles are subject to certain rules that may affect the
amount, character and timing of the Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are
subject to Section 1256 of the Code ("Section 1256 Contracts") and that are held
by the Fund at the end of its taxable year generally will be required to be
"marked to market" for federal income tax purposes, that is, deemed to have been
sold at market value. Sixty percent of any net gain or loss recognized on these
deemed sales and 60% of any net gain or loss realized from any actual sales of
Section 1256 Contracts will be treated as long-term capital gain or loss, and
the balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by the Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of the Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code rather than
as capital gain or loss.
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
B-21
<PAGE>
adjusted basis of the securities tendered to the fund and the purchase price of
the Fund's shares acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must
generally "mark to market" at the end of its taxable year all securities which
it owns. The resulting gain or loss is treated as ordinary (and not capital)
gain or loss, except to the extent allocable to periods during which the dealer
held the security for investment. The "mark to market" rules do not apply,
however, to a security held for investment which is clearly identified in the
dealer's records as being held for investment before the end of the day in which
the security was acquired. The IRS has issued guidance under Section 475 that
provides that, for example, a bank that regularly originates and sells loans is
a dealer in securities, and subject to the "mark to market" rules. Shares of the
Fund held by a dealer in securities will be subject to the "mark to market"
rules unless they are held by the dealer for investment and the dealer property
identifies the shares as held for investment.
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends during such six-month period. All or a portion
of a loss realized upon the redemption of shares may be disallowed to the extent
shares are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the prospectuses are
not intended to be complete discussions of all applicable federal tax
consequences of an investment in the Fund. The law firm of Paul, Hastings,
Janofsky & Walker LLP has expressed no opinion in respect thereof. Nonresident
aliens and foreign persons are subject to different tax rules, and may be
subject to withholding of up to 30% on certain payments received from the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of foreign, federal, state and local taxes to an investment in the
Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund will receive income in the form of dividends and interest
earned on its investments in securities. This income, less the expenses incurred
in its operations, is the Fund's net investment income, substantially all of
which will be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon
the amount of net investment income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
The Fund also may derive capital gains or losses in connection with
sales or other dispositions of its portfolio securities. Any net gain the Fund
may realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders. For more information
concerning applicable capital gains tax rates, see your tax advisor.
Any dividend or distribution paid by the Fund reduces the Fund's net
asset value per share on the date paid 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.
B-22
<PAGE>
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 Fund's 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.
For the period from the Fund's inception on January 13, 1998 to
December 31, 1998, the Fund's total return was 23.11%.
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.
OTHER INFORMATION
Performance data of the Fund quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or guarantee future results. The return and principal value of an investment in
the Fund will fluctuate, and an investor's redemption proceeds may be more or
less than the original investment amount. In advertising and promotional
materials the Fund may compare its performance with data published by Lipper
Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc.
("CDA"). The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper or CDA. Advertising and promotional materials also may refer
to discussions of the Fund and comparative mutual fund data and ratings reported
in independent periodicals including, but not limited to, THE WALL STREET
JOURNAL, MONEY Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD and BARRON'S.
GENERAL INFORMATION
The Trust was organized as a Delaware business trust on October 3,
1996. The Trust has no business history prior to the offering of the first of
its series of shares. The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of beneficial interest and to
divide or combine the shares into a greater or lesser number of shares without
thereby changing the proportionate beneficial interest in the Fund. Each share
represents an interest in the Fund proportionately equal to the interest of each
other share. Upon the Fund's liquidation, all shareholders would share pro rata
in the net assets of the Fund available for distribution to shareholders.
B-23
<PAGE>
The Declaration of Trust does not require the issuance of stock
certificates. If stock certificates are issued, they must be returned by the
registered owners prior to the transfer or redemption of shares represented by
such certificates.
If they deem it advisable and in the best interest of shareholders, the
Board of Trustees may create additional series of shares which differ from each
other only as to dividends. The Board of Trustees has created fifteen series of
shares, and may create additional series in the future, which have separate
assets and liabilities. Income and operating expenses not specifically
attributable to a particular Fund are be allocated fairly among the Funds by the
Trustees, generally on the basis of the relative net assets of each Fund.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions that make payment in cash unwise, the Fund may
make payment partly in its portfolio securities with a current amortized cost or
market value, as appropriate, equal to the redemption price. Although the Fund
does not anticipate that it will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trust has elected to be governed by the
provisions of Rule 18f-1 under the Investment Company Act, which require that
the Fund pay in cash all requests for redemption by any shareholder of record
limited in amount, however, during any 90-day period to the lesser of $250,000
or 1% of the value of the Fund's net assets at the beginning of such period.
Rule 18f-2 under the 1940 Act provides that as to any investment
company which has two or more series outstanding and as to any matter required
to be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
The Fund's principal underwriter is First Fund Distributors, Inc., 4455
E. Camelback Rd., Suite 261E, Phoenix, AZ 85018
The Fund's custodian, Firstar Bank, 425 Walnut Street, Cincinnati, Ohio
45202 is responsible for holding the Funds' assets. American Data Services, P.O.
Box 5536, Hauppauge, NY 11788 acts as the Fund's transfer agent and accounting
services agent. The Fund's independent accountants, McGladrey & Pullen, LLP, 555
Fifth Avenue, New York, NY 10017, assist in the preparation of certain reports
to the Securities and Exchange Commission and the Fund's tax returns.
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.
B-24
<PAGE>
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa
and Aa rating classifications. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the issue
ranks in the lower end of its generic rating category.
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.
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.
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.
B-25
<PAGE>
THE AVATAR ADVANTAGE
INTERNATIONAL EQUITY ALLOCATION FUND
Statement of Additional Information
Dated May 1, 1999
This Statement of Additional Information ("SAI") is not a prospectus, and it
should be read in conjunction with the prospectus dated May 1, 1999, as may be
revised from time to time, of The Avatar Advantage International Equity
Allocation Fund (the "Fund"), a series of Advisors Series Trust (the "Trust").
Avatar Associates (the "Advisor") is the Advisor to the Fund. A copy of the
prospectus may be obtained from the Fund by writing to 900 Third Avenue, New
York, NY 10022 or by telephone at 800-585-8052.
TABLE OF CONTENTS
CROSS-REFERENCE TO SECTIONS
PAGE IN THE PROSPECTUS
Investment Objective and Policies...... B-2 How the Fund Will Try to Reach
its Investment Objective
-Investment Strategies and Risks
-Fund Policies
Management of The Fund................. B-14 How the Fund is Managed
Control Persons and Principal Holders
of Securities.......................... B-15 Not applicable
Investment Advisory and Other Services. B-15 How the Fund is Managed
Portfolio Transactions and Brokerage... B-17 Not applicable
Distribution Arrangements.............. B-18 Distributions and Taxes
Net Asset Value........................ B-19 A Guide for Investors
Taxation ............................. B-19 Distributions and Taxes
Dividends and Distributions............ B-22 Distributions and Taxes
Performance Information................ B-22 Not applicable
General Information.................... B-23 Not applicable
Appendix............................... B-24 Not applicable
B-1
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is long-term capital appreciation.
There is no assurance that the Fund will achieve its objective. The discussion
below supplements information contained in the prospectus as to investment
policies of the Fund. The Fund is a management, open-end, diversified investment
company.
INVESTMENT STRATEGIES AND RISKS
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in convertible securities and warrants. A
convertible security is a fixed income security (a debt instrument or a
preferred stock) which may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
gives an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the issuing company depending upon a
market price advance in the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
INVESTMENT COMPANY SECURITIES. The Fund may invest in shares of other
investment companies. The Fund may invest in money market mutual funds in
connection with its management of daily cash positions. In addition to the
advisory and operational fees a Fund bears directly in connection with its own
operation, the Fund would also bear its pro rata portions of each other
investment company's advisory and operational expenses.
BANK CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS.
The Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit
B-2
<PAGE>
losses arising from possible financial difficulties of borrowers play an
important part in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks
are, among other things, required to maintain specified levels of reserves,
limited in the amount which they can loan to a single borrower, and subject to
other regulations designed to promote financial soundness. However, such laws
and regulations do not necessarily apply to foreign bank obligations that the
Fund may acquire.
In addition to purchasing certificates of deposit and bankers'
acceptances, to the extent permitted under its investment objectives and
policies stated above and in its prospectus, the Fund may make interest-bearing
time or other interest-bearing deposits in commercial or savings banks. Time
deposits are non-negotiable deposits maintained at a banking institution for a
specified period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The
Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's,
or similarly rated by another nationally recognized statistical rating
organization or, if unrated, will be determined by the Advisor to be of
comparable quality. These rating symbols are described in the Appendix.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's. These rating symbols are described in the Appendix.
GOVERNMENT OBLIGATIONS
The Fund may make short-term investments in U.S. Government
obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
The Fund may invest in sovereign debt obligations of foreign countries.
A sovereign debtor's willingness or ability to repay principal and interest in a
timely manner may be affected by a number of factors, including its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which it may be
subject. Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be
B-3
<PAGE>
conditioned on a sovereign debtor's implementation of economic reforms and/or
economic performance and the timely service of such debtor's obligations.
Failure to meet such conditions could result in the cancellation of such third
parties' commitments to lend funds to the sovereign debtor, which may further
impair such debtor's ability or willingness to service its debt in a timely
manner.
MORTGAGE-RELATED SECURITIES
The Fund may invest in mortgage-related securities. Mortgage-related
securities are derivative interests in pools of mortgage loans made to U.S.
residential home buyers, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations. The Fund may also invest in debt
securities which are secured with collateral consisting of U.S. mortgage-related
securities, and in other types of U.S. mortgage-related securities.
U.S. MORTGAGE PASS-THROUGH SECURITIES. Interests in pools of
mortgage-related securities differ from other forms of debt securities, which
normally provide for periodic payment of interest in fixed amounts with
principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their residential mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying residential property, refinancing or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by GNMA) are described as "modified pass-throughs." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of U.S. mortgage-related
securities is GNMA, a wholly owned United States Government corporation within
the Department of Housing and Urban Development. GNMA is authorized to
guarantee, with the full faith and credit of the United States Government, the
timely payment of principal and interest on securities issued by institutions
approved by GNMA (such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of mortgages insured by the Federal
Housing Agency or guaranteed by the Veterans Administration.
Government-related guarantors include the Federal National Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC").
FNMA is a government-sponsored corporation owned entirely by private
stockholders and subject to general regulation by the Secretary of Housing and
Urban Development. FNMA purchases conventional residential mortgages not insured
or guaranteed by any government agency from a list of approved seller/services
which include state and federally chartered savings and loan associations,
mutual savings banks, commercial banks and credit unions and mortgage bankers.
FHLMC is a government-sponsored corporation created to increase availability of
mortgage credit for residential housing and owned entirely by private
stockholders. FHLMC issues participation certificates which represent interests
in conventional mortgages from FHLMC's national portfolio. Pass-through
securities issued by FNMA and participation certificates issued by FHLMC are
guaranteed as to timely payment of principal and interest by FNMA and FHLMC,
respectively, but are not backed by the full faith and credit of the United
States Government.
Although the underlying mortgage loans in a pool may have maturities of
up to 30 years, the actual average life of the pool certificates typically will
be substantially less because the mortgages will be subject to normal principal
amortization and may be prepaid prior to maturity. Prepayment rates vary widely
and may be affected by changes in market interest rates. In periods of falling
interest rates, the rate of prepayment tends to increase, thereby shortening the
actual average life of the pool certificates. Conversely, when interest rates
are rising, the rate of prepayments tends to decrease, thereby lengthening the
actual average life of the certificates. Accordingly, it is not possible to
predict accurately the average life of a particular pool.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS"). A domestic or foreign CMO
in which the Fund may invest is a hybrid between a mortgage-backed bond and a
mortgage pass-through security. Like a bond, interest is paid, in most cases,
semiannually. CMOs may be collateralized by whole mortgage loans, but are more
typically
B-4
<PAGE>
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, FNMA or equivalent foreign entities.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal and
interest received from the pool of underlying mortgages, including prepayments,
is first returned to the class having the earliest maturity date or highest
maturity. Classes that have longer maturity dates and lower seniority will
receive principal only after the higher class has been retired.
FOREIGN INVESTMENTS AND CURRENCIES. The Fund may invest in securities
of foreign issuers that are not publicly traded in the United States. The Fund
may also invest in depositary receipts and in foreign currency futures contracts
and may purchase and sell foreign currency on a spot basis.
DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs are
receipts typically issued in connection with a U.S. or foreign bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation.
EQUITY-LINKED DERIVATIVES--WEBS AND OPALS.
The Fund may invest in World Equity Benchmark Series ("WEBS") and
baskets of Country Securities ("OPALS"). Each of these instruments are
derivative securities whose value follows a well-known securities index or
basket of securities.
OPALS track the performance of adjustable baskets of stocks owned by
Morgan Stanley Capital (Luxembourg) S.A. (the "Counterparty") until a specified
maturity date. Holders of OPALS will receive semi-annual distributions
corresponding to dividends received on shares contained in the underlying basket
of stocks and certain amounts, net of expenses. On the maturity date of the
OPALS, the holders will receive the physical securities comprising the
underlying baskets. Opals, like many of these types of instruments, represent an
unsecured obligation and therefore carry with them the risk that the
Counterparty will default and the Fund may not be able to recover the current
value of its investment.
Because the prices of WEBS and OPALS are correlated to diversified
portfolios, they are subject to the risk that the general level of stock prices
may decline, that the underlying indices decline or that financial condition of
specific issuers in the underlying indices may become impaired. However, these
securities may not fully replicate the performance of the underlying indices. In
addition, because WEBS and OPALS will continue to be traded even when trading is
halted in component stocks of the underlying indices, price quotations for these
securities may, at times, be based upon non-current price information with
respect to some of even all of the stocks in the underlying indices. Because
WEBS mirror the performance of a single country index, a economic downturn in a
single country could significantly adversely affect the price of the WEBS for
that country.
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.
B-5
<PAGE>
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
MARKET CHARACTERISTICS. The Advisor expects that many foreign
securities in which the Fund invests will be purchased in over-the-counter
markets or on exchanges located in the countries in which the principal offices
of the issuers of the various securities are located, if that is the best
available market. Foreign exchanges and markets may be more volatile than those
in the United States. While growing in volume, these markets usually have
substantially less volume than U.S. markets, and the Fund's portfolio securities
may be less liquid and more volatile than U.S. Government securities. Moreover,
settlement practices for transactions in foreign markets may differ from those
in United States markets, and may include delays beyond periods customary in the
United States. Foreign security trading practices, including those involving
securities settlement where Fund assets may be released prior to receipt of
payment or securities, may expose the Fund to increased risk in the event of a
failed trade or the insolvency of a foreign broker-dealer.
Transactions in options on securities, futures contracts, futures
options and currency contracts may not be regulated as effectively on foreign
exchanges as similar transactions in the United States, and may not involve
clearing mechanisms and related guarantees. The value of such positions also
could be adversely affected by the imposition of different exercise terms and
procedures and margin requirements than in the United States. The value of the
Fund's positions may also be adversely impacted by delays in its ability to act
upon economic events occurring in foreign markets during non-business hours in
the United States.
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 and dividends payable on certain of the Fund's
foreign portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.
COSTS. To the extent that the Fund invests in foreign securities, its
expense ratio is likely to be higher than those of investment companies
investing only in domestic securities, since the cost of maintaining the custody
of foreign securities is higher.
EMERGING MARKETS. Some of the securities in which the Fund may invest
may be located in developing or emerging markets, which entail additional risks,
including less social, political and economic stability; smaller securities
markets and lower trading volume, which may result in a less liquidity and
greater price volatility; national policies that may restrict the Fund's
investment opportunities, including restrictions on investment in issuers or
industries, or expropriation or confiscation of assets or property; and less
developed legal structures governing private or foreign investment. The extent
to which the 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.
OPTIONS ON SECURITIES
PURCHASING PUT AND CALL OPTIONS. The Fund may purchase covered "put"
and "call" options with respect to securities which are otherwise eligible for
purchase by the Fund subject to certain restrictions. The Fund will engage in
trading of such derivative securities exclusively for hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to sell
the underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Advisor perceives significant short-term risk but
substantial long-term appreciation for the underlying security. The put option
acts as an insurance policy, as it protects against significant downward price
movement while it allows full participation in any upward movement. If the Fund
is holding a security which it feels has strong fundamentals, but
B-6
<PAGE>
for some reason may be weak in the near term, the Fund may purchase a put option
on such security, thereby giving itself the right to sell such security at a
certain strike price throughout the term of the option. Consequently, the Fund
will exercise the put only if the price of such security falls below the strike
price of the put. The difference between the put's strike price and the market
price of the underlying security on the date the Fund exercises the put, less
transaction costs, will be the amount by which the Fund will be able to hedge
against a decline in the underlying security. If during the period of the option
the market price for the underlying security remains at or above the put's
strike price, the put will expire worthless, representing a loss of the price
the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put may be sold.
If the Fund purchases a call option, it acquires the right to purchase
the underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If the call option has been
purchased to hedge a short position of the Fund in the underlying security and
the price of the underlying security thereafter falls, the profit the Fund
realizes on the cover of the short position in the security will be reduced by
the premium paid for the call option less any amount for which such option may
be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which the
Advisor believes there is an active secondary market to facilitate closing
transactions.
WRITING CALL OPTIONS. The Fund may write covered call options. A call
option is "covered" if the Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Custodian). The writer of
a call option receives a premium and gives the purchaser the right to buy the
security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer of
an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option
will permit the Fund to write another call option on the underlying security
with either a different exercise price, expiration date or both. Also, effecting
a closing transaction will permit the cash or proceeds from the concurrent sale
of any securities subject to the option to be used for other investments of the
Fund. If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
The Fund will realize a gain from a closing transaction if the cost of
the closing transaction is less than the premium received from writing the
option or if the proceeds from the closing transaction are more than the premium
paid to purchase the option. The Fund will realize a loss from a closing
transaction if the cost of the closing transaction is more than the premium
received from writing the option or if the proceeds from the closing transaction
are less than the premium paid to purchase the option. However, because
increases in the market price of a call option will generally reflect increases
in the market price of the underlying security, any loss to the Fund resulting
from the repurchase of a call option is likely to be offset in whole or in part
by appreciation of the underlying security owned by the Fund.
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities. Options may be more volatile than the
underlying securities and, therefore, on a percentage basis, an investment in
options may be subject to greater fluctuation than an investment in the
underlying securities themselves. There are
B-7
<PAGE>
also significant differences between the securities and options markets that
could result in an imperfect correlation between these markets, causing a given
transaction not to achieve its objective. In addition, a liquid secondary market
for particular options may be absent for reasons which include the following:
there may be insufficient trading interest in certain options; restrictions may
be imposed by an exchange on opening transactions or closing transactions or
both; trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options of underlying securities;
unusual or unforeseen circumstances may interrupt normal operations on an
exchange; the facilities of an exchange or clearing corporation may not at all
times be adequate to handle current trading volume; or one or more exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the
exercise of skill and judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or unexpected events. The
extent to which the Fund may enter into options transactions may be limited by
the Internal Revenue Code of 1986 (the "Code") requirements for qualification of
the Fund as a regulated investment company. See "Dividends and Distributions"
and "Taxation."
DEALER OPTIONS. The Fund will engage in transactions involving dealer
options as well as exchange-traded options. Certain additional risks are
specific to dealer options. While the Fund might look to a clearing corporation
to exercise exchange-traded options, if the Fund were to purchase a dealer
option it would need to rely on the dealer from which it purchased the option to
perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, the Fund may generally be able to realize
the value of a dealer option it has purchased only by exercising or reselling
the option to the dealer who issued it. Similarly, when the Fund writes a dealer
option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will at any time be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Unless the Fund, as a
covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair the Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission")
has taken the position that purchased dealer options are illiquid securities.
The Fund may treat the cover used for written dealer options as liquid if the
dealer agrees that the Fund may repurchase the dealer option it has written for
a maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
Accordingly, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the Commission changes its position on the
liquidity of dealer options, the Fund will change its treatment of such
instruments accordingly.
SPREAD TRANSACTIONS. The Fund may purchase covered spread options from
securities dealers. These covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put securities that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to the Fund, in addition to the risks of
dealer options described above, is the cost of the premium paid as well as any
transaction costs. The purchase of spread options will be used to protect the
Fund against adverse changes in prevailing credit quality spreads, I.E., the
B-8
<PAGE>
yield spread between high quality and lower quality securities. This protection
is provided only during the life of the spread options.
FUTURES CONTRACTS
The Fund may invest in futures contracts as a hedge against changes in
market conditions or interest rates. The Fund will trade in such derivative
securities for bona fide hedging purposes and otherwise in accordance with the
rules of the Commodity Futures Trading Commission ("CFTC"). The Fund will
segregate liquid assets in a separate account with its Custodian when required
to do so by CFTC guidelines in order to cover its obligation in connection with
futures transactions.
No price is paid or received by the Fund upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund will
be required to deposit in a segregated account with its Custodian an amount of
cash or U.S. Treasury bills equal to approximately 5% of the contract amount.
This amount is known as initial margin. The margin requirements for foreign
futures contracts may be different.
The nature of initial margin in futures transactions is different from
that of margin in securities transactions. Futures contract margin does not
involve the borrowing of funds by the customer to finance the transactions.
Rather, the initial margin is in the nature of a performance bond or good faith
deposit on the contract which is returned to the Fund upon termination of the
futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments (called variation margin) to and from the broker will be
made on a daily basis as the price of the underlying stock index fluctuates, to
reflect movements in the price of the contract making the long and short
positions in the futures contract more or less valuable. For example, when the
Fund has purchased a stock index futures contract and the price of the
underlying stock index has risen, that position will have increased in value and
the Fund will receive from the broker a variation margin payment equal to that
increase in value. Conversely, when the Fund has purchased a stock index futures
contract and the price of the underlying stock index has declined, the position
will be less valuable and the Fund will be required to make a variation margin
payment to the broker.
At any time prior to expiration of a futures contract, the Fund may
elect to close the position by taking an opposite position, which will operate
to terminate the Fund's position in the futures contract A final determination
of variation margin is made on closing the position. Additional cash is paid by
or released to the Fund, which realizes a loss or a gain.
In addition to amounts segregated or paid as initial and variation
margin, the Fund must segregate liquid assets with its custodian equal to the
market value of the futures contracts, in order to comply with Commission
requirements intended to ensure that the Fund's use of futures is unleveraged.
The requirements for margin payments and segregated accounts apply to both
domestic and foreign futures contracts.
STOCK INDEX FUTURES CONTRACTS. The Fund may invest in futures contracts
on stock indices. Currently, stock index futures contracts can be purchased or
sold with respect to, among others, the S&P 500 Stock Price Index on the Chicago
Mercantile Exchange, the Major Market Index on the Chicago Board of Trade, the
New York Stock Exchange Composite Index on the New York Futures Exchange and the
Value Line Stock Index on the Kansas City Board of Trade.
INTEREST RATE OR FINANCIAL FUTURES CONTRACTS. The Fund may invest in
interest rate or financial futures contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, a contract is made to purchase or sell a bond in the future for
a set price on a certain date. Historically, the prices for bonds established in
the futures markets have generally tended to move in the aggregate in concert
with cash market prices, and the prices have maintained fairly predictable
relationships.
The sale of an interest rate or financial futures contract by the Fund
would create an obligation by the Fund, as seller, to deliver the specific type
of financial instrument called for in the contract at a specific future time for
a specified price. A futures contract purchased by the Fund would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until at or near that date. The
B-9
<PAGE>
determination would be in accordance with the rules of the exchange on which the
futures contract sale or purchase was made.
Although interest rate or financial futures contracts by their terms
call for actual delivery or acceptance of securities, in most cases the
contracts are closed out before the settlement date without delivery of
securities. Closing out of a futures contract sale is effected by the Fund's
entering into a futures contract purchase for the same aggregate amount of the
specific type of financial instrument and the same delivery date. If the price
in the sale exceeds the price in the offsetting purchase, the Fund is paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund's entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
The Fund will deal only in standardized contracts on recognized
exchanges. Each exchange guarantees performance under contract provisions
through a clearing corporation, a nonprofit organization managed by the exchange
membership. Domestic interest rate futures contracts are traded in an auction
environment on the floors of several exchanges - principally, the Chicago Board
of Trade and the Chicago Mercantile Exchange. A public market now exists in
domestic futures contracts covering various financial instruments including
long-term United States Treasury bonds and notes; GNMA modified pass-through
mortgage-backed securities; three-month United States Treasury bills; and 90-day
commercial paper. The Fund may trade in any futures contract for which there
exists a public market, including, without limitation, the foregoing
instruments.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks
related to the use of futures as a hedging device. One risk arises because of
the imperfect correlation between movements in the price of the futures contract
and movements in the price of the securities which are the subject of the hedge.
The price of the future may move more or less than the price of the securities
being hedged. If the price of the future moves less than the price of the
securities which are the subject of the hedge, the hedge will not be fully
effective, but if the price of the securities being hedged has moved in an
unfavorable direction, the Fund would be in a better position than if it had not
hedged at all. If the price of the securities being hedged has moved in a
favorable direction, this advantage will be partially offset by the loss on the
future. If the price of the future moves more than the price of the hedged
securities, the Fund will experience either a loss or a gain on the future which
will not be completely offset by movements in the price of the securities which
are subject to the hedge.
To compensate for the imperfect correlation of movements in the price
of securities being hedged and movements in the price of the futures contract,
the Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
its portfolio securities. However, the Advisor believes that over time the value
of a diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
Where futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the futures and the
securities being hedged, the price of futures may not correlate perfectly with
movement in the stock index or cash market due to certain market distortions.
All participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the index or
cash market and futures markets. In addition, the deposit requirements in the
futures
B-10
<PAGE>
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may also
cause temporary price distortions. As a result of price distortions in the
futures market and the imperfect correlation between movements in the cash
market and the price of securities and movements in the price of futures, a
correct forecast of general trends by the Advisor may still not result in a
successful hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund may
intend to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange or board of trade will exist for any
particular contract or at any particular time. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by the Fund is also subject to the Advisor's
ability to predict correctly movements in the direction of the market. For
example, if the Fund has hedged against the possibility of a decline in the
market adversely affecting stocks held in its portfolio and stock prices
increase instead, the Fund will lose part or all of the benefit of the increased
value of the stocks which it has hedged because it will have offsetting losses
in its futures positions. In addition, in such situations, if the Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which the Fund
engages in transactions in futures contracts or options, the Fund could
experience delays and losses in liquidating open positions purchased or sold
through the broker, and incur a loss of all or part of its margin deposits with
the broker.
RESTRICTIONS ON THE USE OR FUTURES CONTRACTS. The Fund will not engage
in transactions in futures contracts for speculation, but only as a hedge
against changes resulting from market conditions in the values of securities
held in the Fund's portfolio or which it intends to purchase and where the
transactions are economically appropriate to the reduction of risks inherent in
the ongoing management of the Fund. The Fund may not purchase or sell futures
if, immediately thereafter, more than 25% of its net assets would be hedged. The
Fund also may not purchase or sell futures if, immediately thereafter, the sum
of the amount of margin deposits on the Fund's existing futures positions would
exceed 5% of the market value of the Fund's net assets.
These restrictions, which are derived from current federal regulations
regarding the use of futures by mutual funds, are not "fundamental restrictions"
and may be changed by the Trustees of the Trust if applicable law permits such a
change and the change is consistent with the overall investment objective and
policies of the Fund.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to its
portfolio securities. Pursuant to such agreements, the Fund acquires securities
from financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor, subject to the seller's agreement to repurchase and
the Fund's agreement to resell such securities at a mutually agreed upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the
B-11
<PAGE>
underlying portfolio security). Securities subject to repurchase agreements will
be held by the Custodian or in the Federal Reserve/Treasury Book-Entry System or
an equivalent foreign system. The seller under a repurchase agreement will be
required to maintain the value of the underlying securities at not less than
102% of the repurchase price under the agreement. If the seller defaults on its
repurchase obligation, the Fund will suffer a loss to the extent that the
proceeds from a sale of the underlying securities are less than the repurchase
price under the agreement. Bankruptcy or insolvency of such a defaulting seller
may cause the Fund's rights with respect to such securities to be delayed or
limited. Repurchase agreements are considered to be loans under the 1940 Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The Fund may purchase securities on a "when-issued," forward commitment
or delayed settlement basis. In this event, the Custodian will segregate liquid
assets equal to the amount of the commitment in a separate account. Normally,
the Custodian will set aside portfolio securities to satisfy a purchase
commitment. In such a case, the Fund may be required subsequently to segregate
additional assets in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
The Fund does not intend to engage in these transactions for
speculative purposes but only in furtherance of its investment objectives.
Because the Fund will segregate liquid assets to satisfy its purchase
commitments in the manner described, the Fund's liquidity and the ability of the
Advisor to manage it may be affected in the event the Fund's forward
commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 15% of the value of its net assets.
The Fund will purchase securities on a when-issued, forward commitment
or delayed settlement basis only with the intention of completing the
transaction. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a taxable capital gain or loss. When the Fund engages in when-issued,
forward commitment and delayed settlement transactions, it relies on the other
party to consummate the trade. Failure of such party to do so may result in the
Fund's incurring a loss or missing an opportunity to obtain a price credited to
be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities in an amount not exceeding
one-third of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund to
reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Code.
SHORT SALES
The Fund is authorized to make short sales of securities. In a short
sale, the Fund sells a security which it does not own, in anticipation of a
decline in the market value of the security. To complete the sale, the Fund must
borrow the security (generally from the broker through which the short sale is
made) in order to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The Fund is said to have a "short position" in the securities
sold until it delivers them to the broker.
B-12
<PAGE>
The period during which the Fund has a short position can range from one day to
more than a year. Until the security is replaced, the proceeds of the short sale
are retained by the broker, and the Fund is required to pay to the broker a
negotiated portion of any dividends or interest which accrue during the period
of the loan. To meet current margin requirements, the Fund is also required to
deposit with the broker additional cash or securities so that the total deposit
with the broker is maintained daily at 150% of the current market value of the
securities sold short (100% of the current market value if a security is held in
the account that is convertible or exchangeable into the security sold short
within 90 days without restriction other than the payment of money).
Short sales by the Fund create opportunities to increase the Fund's
return but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since the Fund in effect profits from a
decline in the price of the securities sold short without the need to invest the
full purchase price of the securities on the date of the short sale, the Fund's
net asset value per share will tend to increase more when the securities it has
sold short decrease in value, and to decrease more when the securities it has
sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions the Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell portfolio securities to raise the capital necessary to meet its
short sale obligations at a time when fundamental investment considerations
would not favor such sales.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. The Advisor will monitor the amount of
illiquid securities in the Fund's portfolio, under the supervision of the
Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act,
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees may determine that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
FUND POLICIES
The Trust (on behalf of the Fund) has adopted the following
restrictions as fundamental policies, which may not be changed without the
favorable vote of the holders of a "majority," as defined in the 1940 Act, of
the outstanding voting securities of the Fund. Under the 1940 Act, the "vote of
the holders of a majority of the outstanding voting securities" means the vote
of the holders of the lesser of (i) 67% of the shares of the Fund
B-13
<PAGE>
represented at a meeting at which the holders of more than 50% of its
outstanding shares are represented or (ii) more than 50% of the outstanding
shares of the Fund.
As a matter of fundamental policy, the Fund is diversified. The Fund's
investment objective is also fundamental.
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except
that (i) the Fund may borrow from banks in amounts not exceeding one-third of
its total assets (not including the amount borrowed) for temporary and emergency
purchases; 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;
3. Act as underwriter (except to the extent the Fund may be deemed to
be an underwriter in connection with the sale of securities in its investment
portfolio);
4. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities);
5. Purchase or sell real estate or interests in real estate or real
estate limited partnerships (although the Fund may purchase and sell securities
which are secured by real estate and securities of companies which invest or
deal in real estate);
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may purchase and sell foreign currency contracts in accordance
with any rules of the Commodity Futures Trading Commission;
7. Make loans of money (except for purchases of debt securities
consistent with the investment policies of the Fund and except for repurchase
agreements); or
8. Make investments for the purpose of exercising control or
management.
The Fund observes the following restrictions as a matter of operating
but not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
The Fund may not:
1. Invest in the securities of other investment companies or purchase
any other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal law;
2. Invest more than 15% of its net assets in securities which are
restricted as to disposition or otherwise are illiquid or have no readily
available market (except for securities which are determined by the Board of
Trustees to be liquid); or
3. borrow money from banks to purchase securities.
MANAGEMENT OF THE FUND
The overall management of the business and affairs of the Trust is
vested with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day to day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their ages and positions with
the Trust, their business addresses and principal occupations during the past
five years are:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
<S> <C> <C>
Walter Auch, Sr. (Born 1921) Trustee Director, Nicholas-Applegate Mutual Funds, Brinson Funds
6001 N. 62d Place (since 1994), Smith Barney Trak Fund, Pimco Advisors L.P.,
Paradise Valley, AZ 85253 Banyan Realty Trust, Banyan Land Fund II and Legend Properties.
</TABLE>
B-14
<PAGE>
<TABLE>
<S> <C> <C>
Eric Banhazl (Born 1957)* Trustee, Senior Vice President, Investment Company Administration
2025 E. Financial Way President and Corporation; Vice President, First Fund Distributors; Assistant,
Glendora, CA 91740 Treasurer Treasurer, RNC Mutual Fund Group; Treasurer, Guinness Flight
Investment Funds, Inc. and Professionally Managed Portfolios.
Donald O'Connor (Born 1936) Trustee Retired; formerly Executive Vice President and Chief Operating 1700
Taylor Avenue Officer of ICI Mutual Insurance Company (until January, 1997), Fort
Washington, MD, 20744 Vice President, Operations, Investment Company Institute (until
June, 1993).
George Wofford III (Born 1939) Trustee Vice President, Information Services, Federal Home Loan Bank of
305 Glendora Circle San Francisco (since March, 1993); formerly Director of
Danville, CA 94526 Management Information Services, Morrison & Foerster ( law
firm).
Steven Paggioli (Born 1950) Vice Executive Vice President, Robert H. Wadsworth & Associates, Inc.
479 W. 22nd Street President and Investment Company Administration Corporation; Vice
New York, NY 10011 President First Fund Distributors, Inc.; President and Trustee,
Professionally Managed Portfolios; Director, Managers Funds, Inc.
Robert Wadsworth (Born 1940) Vice President, Robert H. Wadsworth & Associates, Inc., Investment
4455 E. Camelback Road President Company Administration Corporation and First Fund Distributors,
Suite 261E Inc.; Vice President, Professionally Managed Portfolios; President,
Phoenix, AZ 85018 Guinness Flight Investment Funds, Inc.; Director, Germany Fund,
Inc., New Germany Fund., Central European Equity Fund, Inc. and
Deutsche Funds, Inc.
Chris Moser (Born 1949) Secretary Employed by Investment Company Administration Corporation
4455 E. Camelback Road (since July, 1996); formerly employed by Bank One, N.A. (from
Suite 261E August until July, 1996); O'Connor, Cavanagh, Anderson,
Phoenix, AZ 85018 Killingsworth and Beshears (law firm) (until August, 1995) .
</TABLE>
* denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
NAME AND POSITION AGGREGATE COMPENSATION FROM THE TRUST*
Walter E. Auch, Sr., Trustee $12,000
Donald E. O'Connor, Trustee $12,000
George T. Wofford III, Trustee $12,000
*For the calendar-year ended December 31, 1998. The Trust has no pension or
retirement plan. No other entity affiliated with the Trust pays any compensation
to the Trustees.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Shares of the Fund owned by the Trustees and officers as a group were
less than 1% at January 21, 1999.
As of January 21, 1999, the Fund was controlled by Theodore M.
Theodore, IRA Account, c/o Avatar Assoc., 900 Third Ave. 33rd Floor, New York,
NY 10022 who owned 49.71% of the outstanding shares of the Fund. The controlling
shareholder would be able to control decisions made by the shareholders with
respect to matters affecting only the Fund, such as the Investment Advisory
Agreement. Other principal shareholders include Susan Babbitt, IRA Account, 43
W. 12th St., New York, NY 10022, who owns 24.06% of the outstanding shares of
the
B-15
<PAGE>
Fund and Edward Babbitt, IRA Account, 43 W. 12th St., New York, NY 10022, who
owns 24.58% of the outstanding shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
Subject to the supervision of the Board of Trustees, investment
management and related services are provided by the Advisor, pursuant to an
Investment Advisory Agreement (the "Advisory Agreement").
Under the Advisory Agreement, the Advisor agrees to invest the assets
of the Fund in accordance with the investment objectives, policies and
restrictions of the Fund as set forth in the Fund's and Trust's governing
documents, including, without limitation, the Trust's Agreement and Declaration
of Trust and By-Laws; the Fund's prospectus, statement of additional
information, and undertakings; and such other limitations, policies and
procedures as the Trustees of the Trust may impose from time to time in writing
to the Advisor. In providing such services, the Advisor shall at all times
adhere to the provisions and restrictions contained in the federal securities
laws, applicable state securities laws, the Code, and other applicable law.
Without limiting the generality of the foregoing, the Advisor has
agreed to (i) furnish the Fund with advice and recommendations with respect to
the investment of the Fund's assets, (ii) effect the purchase and sale of
portfolio securities; (iii) manage and oversee the investments of the Fund,
subject to the ultimate supervision and direction of the Trust's Board of
Trustees; (iv) vote proxies and take other actions with respect to the Fund's
securities; (v) maintain the books and records required to be maintained with
respect to the securities in the Fund's portfolio; (vi) furnish reports,
statements and other data on securities, economic conditions and other matters
related to the investment of the Fund's assets which the Trustees or the
officers of the Trust may reasonably request; and (vi) render to the Trust's
Board of Trustees such periodic and special reports as the Board may reasonably
request. The Advisor has also agreed, at its own expense, to maintain such staff
and employ or retain such personnel and consult with such other persons as it
shall from time to time determine to be necessary to the performance of its
obligations under the Advisory Agreement. Personnel of the Advisor may serve as
officers of the Trust provided they do so without compensation from the Trust.
Without limiting the generality of the foregoing, the staff and personnel of the
Advisor shall be deemed to include persons employed or retained by the Advisor
to furnish statistical information, research, and other factual information,
advice regarding economic factors and trends, information with respect to
technical and scientific developments, and such other information, advice and
assistance as the Advisor or the Trust's Board of Trustees may desire and
reasonably request. With respect to the operation of the Fund, the Advisor has
agreed to be responsible for the expenses of printing and distributing extra
copies of the Fund's prospectus, statement of additional information, and sales
and advertising materials (but not the legal, auditing or accounting fees
attendant thereto) to prospective investors (but not to existing shareholders);
and the costs of any special Board of Trustees meetings or shareholder meetings
convened for the primary benefit of the Advisor.
As compensation for the Advisor's services, the Fund pays it an
advisory fee at the rate specified in the prospectus. For the period ending
December 31, 1998, the Advisor earned $3,577 in advisory fees. In its
undertaking to limit Fund operating expenses during the year, the Advisor waived
its entire advisory fee earned. In addition to the fees payable to the Advisor
and the Administrator, the Trust is responsible for its operating expenses,
including: fees and expenses incurred in connection with the issuance,
registration and transfer of its shares; brokerage and commission expenses; all
expenses of transfer, receipt, safekeeping, servicing and accounting for the
cash, securities and other property of the Trust for the benefit of the Fund
including all fees and expenses of its custodian, shareholder services agent and
accounting services agent; interest charges on any borrowings; costs and
expenses of pricing and calculating its daily net asset value and of maintaining
its books of account required under the 1940 Act; taxes, if any; a pro rata
portion of expenditures in connection with meetings of the Fund's shareholders
and the Trust's Board of Trustees that are properly payable by the Fund;
salaries and expenses of officers and fees and expenses of members of the
Trust's Board of Trustees or members of any advisory board or committee who are
not members of, affiliated with or interested persons of the Advisor or
Administrator; insurance premiums on property or personnel of the Fund which
inure to its benefit, including liability and fidelity bond insurance; the cost
of preparing and printing reports, proxy statements, prospectuses and statements
of additional information of the Fund or other communications for distribution
to existing shareholders; legal, auditing and accounting fees; trade association
dues; fees and expenses (including legal fees) of registering and maintaining
registration of its shares for sale under federal and applicable state and
foreign securities laws; all expenses of maintaining and servicing shareholder
accounts,
B-16
<PAGE>
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
contractually agreed to reduce fees payable to it by the Fund and to pay Fund
operating expenses to the extent necessary to limit the Fund's aggregate annual
operating expenses (excluding interest and tax expenses) to the limit set forth
in the Expense Table (the "expense cap"). Any such reductions made by the
Advisor in its fees or payment of expenses which are the Fund's obligation are
subject to reimbursement by the Fund to the Advisor, if so requested by the
Advisor, in subsequent fiscal years if the aggregate amount actually paid by the
Fund toward the operating expenses for such fiscal year (taking into account the
reimbursement) does not exceed the applicable limitation on Fund expenses. The
Advisor is permitted to be reimbursed only for fee reductions and expense
payments made in the previous three fiscal years, but is permitted to look back
five years and four years, respectively, during the initial six years and
seventh year of the Fund's operations. Any such reimbursement is also contingent
upon Board of Trustees' subsequent review and ratification of the reimbursed
amounts. Such reimbursement may not be paid prior to the Fund's payment of
current ordinary operating expenses.
Under the Advisory Agreement, the Advisor will not be liable to the
Trust or the Fund or any shareholder for any act or omission in the course of,
or connected with, rendering services or for any loss sustained by the Trust
except in the case of a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad faith or gross
negligence, or reckless disregard of its obligations and duties under the
Agreement.
The Advisory Agreement will remain in effect for a period not to exceed
two years. Thereafter, if not terminated, the Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of Trustees
or by the holders of a majority of the outstanding voting securities of the Fund
at any time without penalty, on 60 days written notice to the Advisor. The
Advisory Agreement also may be terminated by the Advisor on 60 days written
notice to the Trust. The Advisory Agreement terminates automatically upon its
assignment (as defined in the 1940 Act).
THE ADMINISTRATOR. The Administrator has agreed to be responsible for
providing such services as the Trustees may reasonably request, including but
not limited to (i) maintaining the Trust's books and records (other than
financial or accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Trust's insurance
relationships; (iii) preparing for the Trust (or assisting counsel and/or
auditors in the preparation of) all required tax returns, proxy statements and
reports to the Trust's shareholders and Trustees and reports to and other
filings with the Commission and any other governmental agency (the Trust
agreeing to supply or cause to be supplied to the Administrator all necessary
financial and other information in connection with the foregoing); (iv)
preparing such applications and reports as may be necessary to permit the offer
and sale of the shares of the Trust under the securities or "blue sky" laws of
the various states selected by the Trust (the Trust agreeing to pay all filing
fees or other similar fees in connection therewith); (v) responding to all
inquiries or other communications of shareholders, if any, which are directed to
the Administrator, or if any such inquiry or communication is more properly to
be responded to by the Trust's custodian, transfer agent or accounting services
agent, overseeing their response thereto; (vi) overseeing all relationships
between the Trust and any custodian(s), transfer agent(s) and accounting
services agent(s), including the negotiation of agreements and the supervision
of the performance of such agreements; and (vii) authorizing and directing any
of the Administrator's directors, officers and employees who may be elected as
Trustees or officers of the Trust to serve in the capacities in which they are
elected. All services to be furnished by the Administrator under this Agreement
may be furnished through the medium of any such directors, officers or employees
of the Administrator.
B-17
<PAGE>
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
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that the Advisor shall be responsible for
broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Advisor shall not direct orders to an affiliated person of the
Advisor without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. The Advisor's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction, the
Advisor may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of Trustees of
the Trust may determine, the Advisor shall not be deemed to have acted
unlawfully or to have breached any duty created by this Agreement or otherwise
solely by reason of its having caused the Fund to pay a broker or dealer that
provides (directly or indirectly) brokerage or research services to the Advisor
an amount of commission for effecting a portfolio transaction in excess of the
amount of commission another broker or dealer would have charged for effecting
that transaction, if the Advisor determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Advisor's overall responsibilities with respect to
the Fund. The Advisor is further authorized to allocate the orders placed by it
on behalf of the Fund to such brokers or dealers who also provide research or
statistical material, or other services, to the Trust, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions as
the Advisor shall determine, and the Advisor shall report on such allocations
regularly to the Advisor and the Trust, indicating the broker-dealers to whom
such allocations have been made and the basis therefor. The Advisor is also
authorized to consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions, subject to the
requirements of best execution, I.E., that such brokers or dealers are able to
execute the order promptly and at the best obtainable securities price.
On occasions when the Advisor deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients of the Advisor,
the Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well 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.
Portfolio turnover for the period ended December 31, 1998 was 185.75%.
This turnover amount exceeded 150%, the expected turnover for the year. During
the year, the Advisor moved to the Fund to a relative defensive position for a
period of time. This movement of securities to short-term investments caused the
turnover number to increase by reducing the average long-term portfolio and at
the same time increasing long term portfolio sales, both components of the
turnover calculation.
Brokerage Commissions paid during the period ended December 31, 1998,
totaled $7,058.
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
B-18
<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 ending December 31, 1998, the Fund paid the
Distribution Coordinator distribution fees totaling $895. These fees were used
to reimburse the Advisor for printing and postage charges and advertising
expenses.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is
determined as of the close of trading on the New York Stock Exchange (the
"NYSE") (generally 4:00 p.m. Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor and the Trust's Valuation Committee pursuant to procedures approved by
or under the direction of the Board.
The Fund's securities, including ADRs, 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 bid and asked prices. Securities that are traded on more than one
exchange are valued on the exchange determined by the Advisor to be the primary
market. Securities traded in the over-the-counter market are valued at the last
sale price or, lacking any reported sales, at the mean between the last bid and
asked prices. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to the Fund if
acquired within 60 days of maturity or, if already held by the Fund on the 60th
day, based on the value determined on the 61st day.
An option that is written by the Fund is generally valued at the last
sale price or, in the absence of the last sale price, the last offer price. An
option that is purchased by the Fund is generally valued at the last sale price
or,
B-19
<PAGE>
in the absence of the last sale price, the last bid price. If an options
exchange closes after the time at which the Fund's net asset value is
calculated, the last sale or last bid and asked prices as of that time will be
used to calculate the net asset value.
All other assets of the Fund are valued in such manner as the Board in
good faith deems appropriate to reflect their fair value.
TAXATION
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, (the "Code"), for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its
assets, and the timing of its distributions. The Fund's policy is to distribute
to its shareholders all of its investment company taxable income and any net
realized capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes based on net income. However, the Board may
elect to pay such excise taxes if it determines that payment is, under the
circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must,
among other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains
by the Fund will be taxable to shareholders whether made in cash or reinvested
by the Fund in shares. In determining amounts of net realized capital gains to
be distributed, any capital loss carry-overs from the eight prior taxable years
will be applied against capital gains. Shareholders receiving a distribution
from the Fund in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of the Fund on the reinvestment date. Fund distributions also
will be included in individual and corporate shareholders' income on which the
alternative minimum tax may be imposed.
The Fund or the securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("IRS") with respect to distributions and payments made
to the shareholder. In addition, the Fund will be required to withhold federal
income tax at the rate of 31% on taxable dividends, redemptions and other
payments made to accounts of individual or other non-exempt shareholders who
have not furnished their correct taxpayer identification numbers and certain
required certifications on the New Account application or with respect to which
the Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions,
as stated in the prospectuses. In order to avoid the payment of any federal
excise tax based on net income, the Fund must declare on or before December 31
of each year, and pay on or before January 31 of the following year,
distributions at least equal to 98% of its ordinary income for that calendar
year and at least 98% of the excess of any capital gains over any capital losses
B-20
<PAGE>
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.
B-21
<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.
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
B-22
<PAGE>
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 Fund's 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 ended December 31, 1998, the Fund's total return was
5.50%.
OTHER INFORMATION
Performance data of the Fund quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or guarantee future results. The return and principal value of an investment in
the Fund will fluctuate, and an investor's redemption proceeds may be more or
less than the original investment amount. In advertising and promotional
materials the Fund may compare its performance with data published by Lipper
Analytical Services, Inc. ("Lipper") or CDA Investment Technologies, Inc.
("CDA"). The Fund also may refer in such materials to mutual fund performance
rankings and other data, such as comparative asset, expense and fee levels,
published by Lipper or CDA. Advertising and promotional materials also may refer
to discussions of the Fund and comparative mutual fund data and ratings reported
in independent periodicals
B-23
<PAGE>
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 14 effective series of
shares of beneficial interest, par value of 0.01 per share. The Trust has no
business history prior to the offering of the first of its series of shares. The
Declaration of Trust permits the Trustees to issue an unlimited number of full
and fractional shares of beneficial interest and to divide or combine the shares
into a greater or lesser number of shares without thereby changing the
proportionate beneficial interest in the Fund. Each share represents an interest
in the Fund proportionately equal to the interest of each other share. Upon the
Fund's liquidation, all shareholders would share pro rata in the net assets of
the Fund available for distribution to shareholders.
The Declaration of Trust does not require the issuance of stock
certificates. If stock certificates are issued, they must be returned by the
registered owners prior to the transfer or redemption of shares represented by
such certificates.
If they deem it advisable and in the best interest of shareholders, the
Board of Trustees may create additional series of shares which differ from each
other only as to dividends. The Board of Trustees has created two series of
shares, and may create additional series in the future, which have separate
assets and liabilities. Income and operating expenses not specifically
attributable to a particular Fund are be allocated fairly among the Funds by the
Trustees, generally on the basis of the relative net assets of each Fund.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions that make payment in cash unwise, the Fund may
make payment partly in its portfolio securities with a current amortized cost or
market value, as appropriate, equal to the redemption price. Although the Fund
does not anticipate that it will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trust has elected to be governed by the
provisions of Rule 18f-1 under the Investment Company Act, which require that
the Fund pay in cash all requests for redemption by any shareholder of record
limited in amount, however, during any 90-day period to the lesser of $250,000
or 1% of the value of the Fund's net assets at the beginning of such period.
Rule 18f-2 under the 1940 Act provides that as to any investment
company which has two or more series outstanding and as to any matter required
to be submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
The Fund's principal underwriter is First Fund Distributors, Inc. 4455
E. Camelback Rd., Suite 261E, Phoenix, AZ 85018.
The Fund's custodian, Firstar Bank, 425 Walnut Street, Cincinnati, Ohio
45202 is responsible for holding the Funds' assets. Countrywide Fund Services,
Inc., 312 Walnut Street, Cincinnati, OH 45202 acts as the Fund's transfer agent
and accounting services agent. The Fund's independent accountants, McGladrey &
Pullen, LLP, 555 Fifth Avenue, New York, NY 10017, assist in the preparation of
certain reports to the Securities and Exchange Commission and the Fund's tax
returns.
B-24
<PAGE>
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.
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa
and Aa rating classifications. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the modifier "2"
indicates a mid-range ranking; and the modifier "3" indicates that the issue
ranks in the lower end of its generic rating category.
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.
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.
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.
B-25
<PAGE>
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.
B-26
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) Agreement and Declaration of Trust (1)
(b) By-Laws (1)
(c) Not applicable
(d) Form of Investment Advisory Agreement (5)
(e) Distribution Agreement (2)
(f) Not applicable
(g) Custodian Agreement (3)
(h) (i) Administration Agreement with Investment
Company Administration Corporation (2)
(ii) Fund Accounting Service Agreement (2)
(iii) Transfer Agency and Service Agreement (2)
(i) Not applicable
(j) Consent of Independent Auditor
(k) Not applicable
(l) Investment letters (3)
(m) Form of Rule 12b-1 Plan (5)
(n) Financial Data Schedule
(o) Not applicable
(1) Previously filed with the Registration Statement on Form N-1A (File
No. 333-17391) on December 6, 1996 and incorporated herein by reference.
(2) Previously filed with Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-17391) on January 29, 1997 and
incorporated herein by reference.
(3) Previously filed with Pre-Effective Amendment No. 2 to the
Registration Statement on Form N-1A (File No. 333-17391) on February 28, 1997
and incorporated herein by reference.
(4) Previously filed with Post-Effective Amendment No. 26 to the
Registration Statement on Form N-1A (File No. 333-17391) on June 29, 1998 and
incorporated herein by reference.
(5) Previously filed with Post-Effective Amendment No. 37 to the
Registration Statement on Form N-1A (File No. 333-17391) on January 15, 1999 and
incorporated herein by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
<PAGE>
ITEM 25. INDEMNIFICATION.
Article VI of Registrant's By-Laws states as follows:
Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a Trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
Trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
Trustee, director, officer, employee or agent of a foreign or domestic
corporation which was a predecessor of another enterprise at the request of such
predecessor entity; "proceeding" means any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative;
and "expenses" includes without limitation attorney's fees and any expenses of
establishing a right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of this Trust) by reason of
the fact that such person is or was an agent of this Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding, if it is determined that person acted in
good faith and reasonably believed:
(a) in the case of conduct in his official capacity as a Trustee
of the Trust, that his conduct was in the Trust's best
interests, and
(b) in all other cases, that his conduct was at least not opposed
to the Trust's best interests, and
(c) in the case of a criminal proceeding, that he had no
reasonable cause to believe the conduct of that person was
unlawful.
The termination of any proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent shall not of
itself create a presumption that the person did not act in good faith and in a
manner which the person reasonably believed to be in the best interests of this
Trust or that the person had reasonable cause to believe that the person's
conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action by or in the right of this Trust to procure a
judgment in its favor by reason of the fact that that person is or was an agent
of this Trust, against expenses actually and reasonably incurred by that person
in connection with the defense or settlement of that action if that person acted
in good faith, in a manner that person believed to be in the best interests of
this Trust and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision
to the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with this Trust.
<PAGE>
No indemnification shall be made under Sections 2 or 3 of this Article:
(a) In respect of any claim, issue, or matter as to which that
person shall have been adjudged to be liable on the basis that
personal benefit was improperly received by him, whether or
not the benefit resulted from an action taken in the person's
official capacity; or
(b) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable in the
performance of that person's duty to this Trust, unless and
only to the extent that the court in which that action was
brought shall determine upon application that in view of all
the circumstances of the case, that person was not liable by
reason of the disabling conduct set forth in the preceding
paragraph and is fairly and reasonably entitled to indemnity
for the expenses which the court shall determine; or
(c) of amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval,
or of expenses incurred in defending a threatened or pending
action which is settled or otherwise disposed of without court
approval, unless the required approval set forth in Section 6
of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
this Trust has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article or in defense of any claim, issue
or matter therein, before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith, provided that the Board of
Trustees, including a majority who are disinterested, non-party Trustees, also
determines that based upon a review of the facts, the agent was not liable by
reason of the disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:
(a) A majority vote of a quorum consisting of Trustees who are not
parties to the proceeding and are not interested persons of
the Trust (as defined in the Investment Company Act of 1940);
or
(b) A written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding upon a written undertaking by or on behalf of the agent, to repay the
amount of the advance if it is ultimately determined that he or she is not
entitled to indemnification, together with at least one of the following as a
condition to the advance: (i)security for the undertaking; or (ii) the existence
of insurance protecting the Trust against losses arising by reason of any lawful
advances; or (iii) a determination by a majority of a quorum of Trustees who are
not parties to the proceeding and are not interested persons of the Trust, or by
an independent legal counsel in a written opinion,
<PAGE>
based on a review of readily available facts that there is reason to believe
that the agent ultimately will be found entitled to indemnification.
Determinations and authorizations of payments under this Section must be made in
the manner specified in Section 6 of this Article for determining that the
indemnification is permissible.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than Trustees
and officers of this Trust or any subsidiary hereof may be entitled by contract
or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Sections 5 or 6 in any circumstances
where it appears:
(a) that it would be inconsistent with a provision of the
Agreement and Declaration of Trust of the Trust, a resolution
of the shareholders, or an agreement in effect at the time of
accrual of the alleged cause of action asserted in the
proceeding in which the expenses were incurred or other
amounts were paid which prohibits or otherwise limits
indemnification; or
(b) that it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 10. INSURANCE. Upon and in the event of a determination by the
Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article and the Agreement and Declaration of Trust of the
Trust.
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not
apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section 1 of
this Article. Nothing contained in this Article shall limit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contract or otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The information required by this item with respect to American Trust
Company is as follows:
American Trust Company is a trust company chartered under the laws of
the State of New Hampshire. Its President and Director, Paul H. Collins, is a
director of:
MacKenzie-Childs, Ltd.
360 State Road 90
Aurora, NY 13026
<PAGE>
Great Northern Arts
Castle Music, Inc.
World Family Foundation
all with an address at
Gordon Road, Middletown, NY
Robert E. Moses, a Director of American Trust Company, is a director of:
Mascoma Mutual Hold Corp.
On The Green
Lebanon, NH 03766
Information required by this item is contained in the Form ADV of the
following entities and is incorporated herein by reference:
NAME OF INVESTMENT ADVISER FILE NO.
-------------------------- --------
Bay Isle Financial Corporation 801-27563
Kaminski Asset Management, Inc. 801-53485
Rockhaven Asset Management, LLC 801-54084
Chase Investment Counsel Corp. 801-3396
Avatar Investors Associates Corp. 801-7061
The Edgar Lomax Company 801-19358
Van Deventer & Hoch 801-6118
Al Frank Asset Management, Inc. 801-30528
Heritage West Advisors, LLC 801-55233
Howard Capital Management 801-10188
Segall Bryant & Hamill 801-47232
National Asset Management Corporation 801-14666
Charter Financial Group, Inc. 801-50956
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) The Registrant's principal underwriter also acts as principal
underwriter for the following investment companies:
Guinness Flight Investment Funds, Inc.
Fleming Capital Mutual Fund Group
Fremont Mutual Funds
Jurika & Voyles Mutual Funds
Kayne Anderson Mutual Funds
Masters' Select Funds Trust
O'Shaughnessy Funds, Inc.
PIC Investment Trust
Purisima Fund
Professionally Managed Portfolios
Rainier Investment Management Mutual Funds
RNC Mutual Fund Group
Brandes Investment Trust
RNC Mutual Fund Group, Inc.
<PAGE>
(b) The following information is furnished with respect to the officers
and directors of First Fund Distributors, Inc.:
POSITION AND OFFICES POSITION AND
NAME AND PRINCIPAL WITH PRINCIPAL OFFICES WITH
BUSINESS ADDRESS UNDERWRITER REGISTRANT
- ---------------- ----------- ----------
Robert H. Wadsworth President and Vice President
4455 E. Camelback Road Treasurer
Suite 261E
Phoenix, AZ 85018
Eric M. Banhazl Vice President President,
2020 E. Financial Way, Ste. 100 Treasurer
Glendora, CA 91741 and Trustee
Steven J. Paggioli Vice President and Vice President
915 Broadway, Ste. 1605 Secretary
New York, New York 10010
(c) Not applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession of the following persons:
(a) the documents required to be maintained by paragraph (4) of Rule
31a-1(b) will be maintained by the Registrant;
(b) the documents required to be maintained by paragraphs (5), (6),
(10) and (11) of Rule 31a-1(b) will be maintained by the respective investment
advisors:
American Trust Company, One Court Street, Lebanon, NH 03766
Bay Isle Financial Corporation, 160 Sansome Street, San Francisco, CA
94104
Kaminski Asset Management, Inc., 319 First Avenue, Suite 400,
Minneapolis, MN 55401
Rockhaven Asset Management, 100 First Avenue, Suite 1050, Pittsburgh,
PA 15222
Chase Investment Counsel Corp., 300 Preston Avenue, Charlottesville, VA
22902
Avatar Associates Investment Corp., 900 Third Avenue, New York, NY
10022
The Edgar Lomax Company, 6564 Loisdale Court, Springfield, VA 22150
Van Deventer & Hoch, 800 North Brand Boulevard, Glendale, CA 91203
<PAGE>
Al Frank Asset Management, Inc. 465 Forest Avenue, Suite I, Laguna
Beach, CA 92651
Heritage West Advisors, LLC, 1850 North Central Ave., Suite 610,
Phoenix, AZ 85004
Liberty Bank and Trust Company, 4101 Pauger St., Suite 105, New
Orleans, LA 70122
Howard Capital Management, 45 Rockefeller Plaza, Suite 1440, New York,
New York 10111
Segall Bryant & Hamill, 10 South Wacker Drive, Suite 2150, Chicago, IL
60606
National Asset Management Corporation, 101 South Fifth Street,
Louisville, KY 40202
Charter Financial Group, Inc., 1401 I Street N.W., Suite 505,
Washington, DC 20005
(c) with respect to The Heritage West Dividend Capture Income Fund
series of the Registrant, all other records will be maintained by the
Registrant; and
(d) all other documents will be maintained by Registrant's custodian,
Firstar Bank, 425 Walnut Street, Cincinnati, OH 45202.
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Registrant hereby undertakes to:
(a) Furnish each person to whom a Prospectus is delivered a copy
of the applicable latest annual report to shareholders, upon
request and without charge.
(b) If requested to do so by the holders of at least 10% of the
Trust's outstanding shares, call a meeting of shareholders for
the purposes of voting upon the question of removal of a
director and assist in communications with other shareholders.
(c) On behalf of each of its series, to change any disclosure of
past performance of an Advisor to a series to conform to
changes in the position of the staff of the Commission with
respect to such presentation.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Amendment to
the Registration Statement on Form N-1A of Advisors Series Trust to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Phoenix
and State of Arizona on the 30th day of April, 1999.
ADVISORS SERIES TRUST
By /s/ Eric M. Banhazl*
-----------------------
Eric M. Banhazl
President
This Amendment to the Registration Statement on Form N-1A of Advisors
Series Trust has been signed below by the following persons in the capacities
indicated on April 30, 1999.
/s/ Eric M. Banhazl* President, Principal Financial
- ---------------------------- and Accounting Officer, and Trustee
Eric M. Banhazl
/s/ Walter E. Auch Sr.* Trustee
- ----------------------------
Walter E. Auch, Sr.
/s/ Donald E. O'Connor* Trustee
- ----------------------------
Donald E. O'Connor
/s/ George T. Wofford III* Trustee
- ----------------------------
George T. Wofford III
* /s/ Robert H. Wadsworth
- ----------------------------
By: Robert H. Wadsworth
Attorney in Fact
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION
EX-23 Consents of Independent Auditor
EX-27 Financial Data Schedules
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our reports dated January 29, 1999, on
the financial statements of The Al Frank Fund series of Advisors Series Trust
referred to therein, in this Post-Effective Amendment to the Registration
Statement on Form N-1A, File No. 333-17391 of Advisors Series Trust as filed
with the Securities and Exchange Commission.
We also consent to the reference to our Firm in the Prospectus under
the caption "Financial Highlights" and in the Statement of Additional
Information under the caption "General Information."
McGladrey & Pullen, LLP
New York, New York
April 30, 1999
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use of our reports dated January 29, 1999, on
the financial statements of The Avatar Advantage Equity Allocation Fund, The
Avatar Advantage Balanced Fund and The Avatar Advantage International Equity
Allocation Fund series of Advisors Series Trust referred to therein, in this
Post-Effective Amendment to the Registration Statement on Form N-1A, File No.
333-17391 of Advisors Series Trust as filed with the Securities and Exchange
Commission.
We also consent to the reference to our Firm in the Prospectuses under
the caption "Financial Highlights" and in the Statements of Additional
Information under the caption "General Information."
McGladrey & Pullen, LLP
New York, New York
April 30, 1999
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 1027596
<NAME> ADVISORS SERIES TRUST
<SERIES>
<NUMBER> 7
<NAME> AVATAR ADVANTAGE EQUITY ALLOCATION FUND
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 11,691,327
<INVESTMENTS-AT-VALUE> 14,521,142
<RECEIVABLES> 164,458
<ASSETS-OTHER> 32,682
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 14,718,282
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,471
<TOTAL-LIABILITIES> 28,471
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,870,871
<SHARES-COMMON-STOCK> 1,240,801
<SHARES-COMMON-PRIOR> 2,020,959
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (10,875)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,829,815
<NET-ASSETS> 14,689,811
<DIVIDEND-INCOME> 137,570
<INTEREST-INCOME> 137,674
<OTHER-INCOME> 0
<EXPENSES-NET> 221,600
<NET-INVESTMENT-INCOME> 53,644
<REALIZED-GAINS-CURRENT> 769,922
<APPREC-INCREASE-CURRENT> 2,757,250
<NET-CHANGE-FROM-OPS> 3,580,816
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (59,113)
<DISTRIBUTIONS-OF-GAINS> (740,543)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 194,971
<NUMBER-OF-SHARES-REDEEMED> 1,050,075
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (5,556,174)
<ACCUMULATED-NII-PRIOR> 7,367
<ACCUMULATED-GAINS-PRIOR> (38,313)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 125,574
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 299,931
<AVERAGE-NET-ASSETS> 14,758,160
<PER-SHARE-NAV-BEGIN> 10.02
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 2.48
<PER-SHARE-DIVIDEND> .05
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> .66
<PER-SHARE-NAV-END> 11.84
<EXPENSE-RATIO> .015
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 1027596
<NAME> ADVISORS SERIES TRUST
<SERIES>
<NUMBER> 10
<NAME> THE AL FRANK FUND
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-02-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 7,990,024
<INVESTMENTS-AT-VALUE> 7,196,140
<RECEIVABLES> 4,731
<ASSETS-OTHER> 51,457
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 7,252,328
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 210,361
<TOTAL-LIABILITIES> 210,361
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,967,285
<SHARES-COMMON-STOCK> 776,417
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (64,518)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (66,916)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (793,884)
<NET-ASSETS> 7,041,967
<DIVIDEND-INCOME> 39,776
<INTEREST-INCOME> 8,563
<OTHER-INCOME> 0
<EXPENSES-NET> 112,857
<NET-INVESTMENT-INCOME> (64,518)
<REALIZED-GAINS-CURRENT> (66,916)
<APPREC-INCREASE-CURRENT> (793,884)
<NET-CHANGE-FROM-OPS> (925,318)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 919,730
<NUMBER-OF-SHARES-REDEEMED> 143,313
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 7,041,967
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 50,113
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 188,103
<AVERAGE-NET-ASSETS> 5,044,423
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> (0.08)
<PER-SHARE-GAIN-APPREC> (0.85)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.07
<EXPENSE-RATIO> 2.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 1027596
<NAME> ADVISORS SERIES TRUST
<SERIES>
<NUMBER> 11
<NAME> AVATAR ADVANTAGE BALANCED FUND
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-13-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,328,763
<INVESTMENTS-AT-VALUE> 1,536,751
<RECEIVABLES> 22,814
<ASSETS-OTHER> 11,043
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,570,608
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 27,700
<TOTAL-LIABILITIES> 27,700
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,330,421
<SHARES-COMMON-STOCK> 129,135
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 454
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 4,045
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 207,988
<NET-ASSETS> 1,542,908
<DIVIDEND-INCOME> 7,540
<INTEREST-INCOME> 34,182
<OTHER-INCOME> 0
<EXPENSES-NET> 17,765
<NET-INVESTMENT-INCOME> 23,957
<REALIZED-GAINS-CURRENT> 23,650
<APPREC-INCREASE-CURRENT> 207,988
<NET-CHANGE-FROM-OPS> 128,826
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 125,350
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 3,785
<NET-CHANGE-IN-ASSETS> 1,542,908
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 9,496
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 109,065
<AVERAGE-NET-ASSETS> 1,313,542
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 2.11
<PER-SHARE-DIVIDEND> .19
<PER-SHARE-DISTRIBUTIONS> .16
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.95
<EXPENSE-RATIO> .014
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 1027596
<NAME> ADVISORS SERIES TRUST
<SERIES>
<NUMBER> 12
<NAME> AVATAR ADVANTAGE INTERNATIONAL EQUITY ALLOCATION FUND
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> FEB-02-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 432,505
<INVESTMENTS-AT-VALUE> 435,336
<RECEIVABLES> 12,102
<ASSETS-OTHER> 10,488
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 457,926
<PAYABLE-FOR-SECURITIES> 16,479
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 28,856
<TOTAL-LIABILITIES> 45,335
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 412,930
<SHARES-COMMON-STOCK> 41,497
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> (3,170)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,831
<NET-ASSETS> 412,591
<DIVIDEND-INCOME> 10,631
<INTEREST-INCOME> 4,210
<OTHER-INCOME> 0
<EXPENSES-NET> 5,901
<NET-INVESTMENT-INCOME> 8,940
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 2,831
<NET-CHANGE-FROM-OPS> 20,495
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8,200
<DISTRIBUTIONS-OF-GAINS> 14,799
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39,104
<NUMBER-OF-SHARES-REDEEMED> 5
<SHARES-REINVESTED> 2,398
<NET-CHANGE-IN-ASSETS> 412,591
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 3,577
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 114,268
<AVERAGE-NET-ASSETS> 399,944
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .23
<PER-SHARE-GAIN-APPREC> .30
<PER-SHARE-DIVIDEND> .21
<PER-SHARE-DISTRIBUTIONS> .38
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.94
<EXPENSE-RATIO> .016
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
