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CHARTWELL LARGE CAP VALUE FUND
CHARTWELL SMALL CAP VALUE FUND
1235 WESTLAKES DRIVE, SUITE 330
BERWYN, PA 19312
(610) 296-1400
PROSPECTUS
OCTOBER 1, 1999
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CHARTWELL LARGE CAP VALUE FUND
CHARTWELL SMALL CAP VALUE FUND
TABLE OF CONTENTS
Fund Overview....................................................... 3
Understanding Expenses.............................................. 4
Investment Objectives, Principal Strategies and Risks............... 5
Management of the Funds............................................. 7
Account Information................................................. 8
How to Invest....................................................... 8
Earnings and Taxes.................................................. 11
For More Information................................................ Back Cover
More detailed information on all subjects covered in this prospectus is
contained in the Funds' Statement of Additional Information ("SAI"). Investors
seeking more in-depth explanations of the contents of this prospectus should
request the SAI and review it before purchasing shares.
PROSPECTUS 2
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FUND OVERVIEW
INVESTMENT OBJECTIVES
Each Fund's investment objective is growth of capital, with a secondary
objective to provide current income. The objectives of the Funds may be changed
only with shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
LARGE CAP VALUE FUND: This Fund will invest primarily in the stocks of larger
companies with a market capitalization of $1 billion or more.
The Fund's Advisor uses a disciplined approach to select dividend paying
stocks for the Fund's portfolio that it believes are undervalued, reasonably
priced and have prospects for continued consistent growth. The Advisor applies
proprietary valuation screens to select a group of 40 to 50 such companies for
investment.
SMALL CAP VALUE FUND: This Fund will invest primarily in the stocks of companies
with a market capitalization between $100 million and $2.5 billion.
The Fund's Advisor analyzes companies within this capitalization range and
identifies reasonably-priced smaller companies which are at the lower end of
their historical valuation ranges. The Advisor looks for companies with strong
business prospects and potential change factors that are likely to increase the
market's interest in the stock.
Under normal market conditions, each Fund will invest at least 65% of its
total assets in large cap value stocks and small cap value stocks, respectively,
and normally stays as fully invested as possible. Both U.S. and foreign stocks
may be purchased by the Funds. Foreign stocks will be U.S. dollar-denominated.
TYPES OF SECURITIES
The Funds invest primarily in the following securities:
1. Common Stock;
2. Preferred Stock; and
3. Convertible Securities and Warrants.
OVERVIEW OF RISKS OF INVESTING
You may lose money by investing in the Fund. Other principal risks you
should consider include:
MARKET DECLINE - A company's stock price or the overall stock market may
experience a sudden decline.
SMALLER COMPANY RISK - The Small Cap Value Fund invests in the securities of
smaller companies. Stocks of smaller companies may involve greater volatility
and liquidity risks.
FOREIGN SECURITY RISK - Both Funds may invest in U.S. dollar-denominated stocks
of foreign companies. Stocks of foreign companies may involve greater volatility
and political and economic risks.
YEAR 2000 RISK - A Fund could be adversely affected if the computer systems used
by the Advisor, other service providers or issuers in which the Funds invest do
not properly process and calculate information related to dates beginning
3 PROSPECTUS
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January 1, 2000. This is commonly known as the "Year 2000 Problem." This
situation may negatively affect the companies in which the Funds invest and by
extension the value of the Funds' shares. Although the Funds' service providers
are taking steps to address this issue, there may still be some risk of adverse
effects.
WHO MAY WANT TO INVEST
The Funds are is intended for investors who:
* Are willing to hold their shares for a long period of time (e.g. in
preparation for retirement);
* Are diversifying their investment portfolio by investing in a mutual fund
that concentrates in large-cap companies or small-cap companies; and/or
* Are willing to accept higher short-term risk in exchange for a higher
potential for a long-term total return.
UNDERSTANDING EXPENSES
FEES AND EXPENSES OF THE FUNDS
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Funds.
- --------------------------------------------------------------------------------
SHAREHOLDER FEES None
(fees paid directly from your investment)
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Large Cap Small Cap
Value Fund Value Fund
---------- ----------
Investment Advisory Fees........................ 0.50% 0.80%
Other Expenses.................................. 0.25% 0.30%
----- -----
Total Annual Fund Operating Expenses*........... 0.75% 1.10%
* The Advisor has contractually agreed to reduce its fees and/or pay expenses of
each Fund for an indefinite period to insure that total Fund annual operating
expenses do not exceed 0.75% for the Large Cap Value Fund and 1.10% for the
Small Cap Value Fund. This contract may only be terminated by the Board of
Trustees. The Advisor reserves the right to be reimbursed for any waiver of its
fees or expenses paid on behalf of the Funds if a Fund's expenses are less than
the limit agreed to by the Funds. The Trustees may terminate this expense
reimbursement arrangement at any time.
EXAMPLE
This Example is intended to help you compare the costs of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each year
and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
PROSPECTUS 4
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1 year 3 years
------ -------
Large Cap Value Fund $ 76 $239
Small Cap Value Fund $112 $349
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INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND RISKS
Each Fund's investment objective is growth of capital, with income as a
secondary objective.
The LARGE CAP VALUE FUND invests primarily in the stocks of larger
companies with a market capitalization of $1 billion or more. Such stocks also
have a yield greater than that of the Standard & Poor's ("S&P") 500 Index and
ample liquidity. The Fund's Advisor then applies its proprietary valuation
screens, focusing on ratios such as price to earnings, price to cash flow, price
to sales and price to book to identify undervalued stocks. Further analysis is
done to seek out stocks which are not only attractively valued, but also offer
significant upside potential. In addition, the Advisor seeks stocks of companies
which have or are undergoing a major fundamental change, which is likely to
spark greater market interest in the company and its stock. Overall sector
review of the portfolio is also performed in an attempt further control
portfolio risk.
In reviewing stocks for a possible sale, the Advisor looks at factors such
as a decline in yield below that of the S&P 500, achievement of price targets,
or developments indicating that an expected positive fundamental change in a
company in fact will not occur.
The SMALL CAP VALUE FUND invests primarily in the stocks of companies with
a market capitalization between $100 million and $2.5 billion. This group of
stocks is screened first for factors such as sufficient liquidity and adequate
data availability. In addition, these stocks are screened for a valuation
discount to that of the Russell 2000 Index, a well known index of 2,000 smaller
U.S. companies.
Company histories are then analyzed to identify those stocks that are
priced at the lower end of their historical valuation ranges. The Advisor's
research then concentrates on multiple valuation measures along with historical
return, margin, balance sheet and growth data. In addition, an effort is made to
uncover the causes of the perceived undervaluation by looking at factors such as
management conditions, profit margins, cost pressures, competitive deficiencies,
market perceptions or disappointments in growth. Company business prospects are
then evaluated in an attempt to isolate stocks believed to be undervalued and
have potential for appreciation, as opposed to those which are merely
inexpensive and aren't believed to hold much real value based on simple
valuation measures such as price-to-earnings ratios. As is the case with the
Large Cap Value Fund, the Advisor also seeks stocks of companies which have or
are undergoing a major fundamental change, which is likely to spark greater
market interest in the company and its stock.
5 PROSPECTUS
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Factors considered in determining when to sell stocks include valuation at
the high end of a company's historical range, deteriorating fundamentals, or an
expected change factors that were part of the original buy decision. A change in
the market capitalization of a stock outside of the large or small cap ranges
defined in this prospectus would not necessarily cause the Advisor to sell the
stock.
DEFENSIVE INVESTMENTS. Although each Fund will normally stay fully
invested, it is possible that a Fund may invest up to 100% of its assets in
cash, cash equivalents, and high quality, short-term debt securities and money
market instruments for temporary defensive purposes. During such a period, a
Fund may not reach its investment objectives.
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
These are the principal risks of investing in the Funds that may adversely
affect a Fund's net asset value or total return.
MARKET RISK. The risk that the market value of a security may move up and
down, sometimes rapidly and unpredictably. These fluctuations may cause a
security to be worth less than the price originally paid for it, or less than it
was worth at an earlier time. Market risk may affect a single issuer, industry,
sector of the economy or the market as a whole.
SMALLER COMPANIES RISK. The Small Cap Value Fund may invest in smaller
companies. Investing in such companies may involve greater risk than investing
in larger companies because they can be subject to more abrupt or erratic share
price changes than larger companies. Small companies may have limited product
lines, markets or financial resources and their management may be dependent on a
limited number of key individuals. Stocks of these companies may have limited
market liquidity and their prices may be more volatile.
FOREIGN SECURITIES RISK. Both Funds may invest in U.S. dollar-denominated
securities of foreign companies. Investing in foreign securities may involve
greater risks, including (1) economic and political instability, (2) less
publicly available information, (3) less strict auditing and financial reporting
requirements, (4) currency fluctuations, (5) less governmental supervision and
regulation of securities markets and (6) greater possibility of not being able
to sell securities on a timely basis.
YEAR 2000 RISK. Many computer systems, as originally encoded, cannot
distinguish the year 2000 from the year 1900. If not corrected, computer systems
may misinterpret and read incorrectly dates occurring after December 31, 1999.
This is commonly known as the "Year 2000 Problem." The Year 2000 Problem could
have a negative impact on handling securities trades and pricing and accounting
services. Because of the difficulty in assessing the Year 2000 preparedness of
PROSPECTUS 6
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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 Funds' Board of Trustees have adopted a
Year 2000 Project Plan that the Board of Trustees believes is reasonably
designed to address the Year 2000 Problem with respect to the Advisor's and the
Fund's service providers' computer systems. For example, should the Board of
Trustees determine that a service provider is not converting to a Year 2000
compliant system, the Board of Trustees will replace that service provider. The
Advisor and the Funds' service providers have assured the Fund that they are
moving towards Year 2000 compliant computer systems. This is not a guarantee
that the Funds will not experience an adverse impact from the Year 2000 Problem.
It is important to keep in mind that the Year 2000 Problem may adversely affect
the issuers in which the Funds invest and, by extension, the value of the shares
held by the Funds.
MANAGEMENT OF THE FUNDS
THE ADVISOR
The Fund's Advisor, Chartwell Investment Partners, provides individual and
institutional investment management services to clients with assets of
approximately $3 billion. The Advisor is responsible for formulating and
implementing the Fund's investments. The Advisor furnishes the Fund with office
space and certain administrative services. As compensation for the services it
receives, the Large Cap Fund pays the Advisor a monthly advisory fee based on
the average daily net assets of the Fund at the annual rate of 0.50% and the
Small Cap Fund pays a fee at the annual rate of 0.80%.
THE PORTFOLIO MANAGERS
LARGE CAP VALUE FUND. Mr. Kevin A. Melich, CFA, together with Ms. Terry F.
Bovarnick, CFA, are principally responsible for the day-to-day management of
this Fund's portfolio. Both Mr. Melich and Ms. Bovarnick are Managing Partners
and portfolio managers of the Advisor. Prior to joining the Advisor in 1997, Mr.
Melich and Ms. Bovarnick were Senior Portfolio Managers at Delaware Investment
Advisers since 1983 and 1993, respectively.
SMALL CAP VALUE FUND. Mr. David C. Dalrymple, CFA, a Managing Partner and
portfolio manager of the Advisor, is principally responsible for the day-to-day
management of this Fund's portfolio. Prior to joining the Advisor in 1997, Mr.
Dalrymple was a Portfolio Manager at Delaware Investment Advisers since 1991.
SHAREHOLDING SERVICING AGENT
ICA Fund Services Corp., 4455 E. Camelback Rd., Suite 261-E, Phoenix, AZ
85018 serves as the Fund's Shareholder Servicing Agent and Transfer Agent.
CUSTODIAN
Firstar Bank, N.A, 425 Walnut Street, Cincinnati, Ohio 45202, serves as the
Fund's Custodian.
7 PROSPECTUS
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DISTRIBUTOR
First Fund Distributors, Inc., 4455 E. Camelback Road, Suite 261-E,
Phoenix, Arizona 85018, serves as the Fund's Distributor.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New
York, 10036, serves as the Fund's Independent Accountants.
LEGAL COUNSEL
Morgan, Lewis & Bockius, 1800 M St. NW, Washington, DC 20036, serves as the
Fund's legal counsel.
ACCOUNT INFORMATION
WHEN THE FUNDS' SHARES ARE PRICED
The Net Asset Value or "NAV" is calculated after the close of trading on
the NYSE, every day that the NYSE is open. The NAV is not calculated on days
that the NYSE is closed for trading. The NYSE usually closes at 4 p.m., Eastern
time, on weekdays, except for holidays.
HOW THE FUND'S SHARES ARE PRICED
Fund shares are offered at their NAV. Shares of each Fund are offered
continuously for purchase at the net asset value next determined after a
purchase order is received. The price is effective for orders received by a Fund
or investment brokers and their agents prior to the time of the next
determination of a Fund's net asset value and, in the case of orders placed with
brokers, transmitted promptly to the Transfer Agent. Orders received after 4:00
p.m., Eastern time will be entered at the following day's calculated NAV.
HOW TO INVEST
OPENING A NEW ACCOUNT
You may purchase shares of a Fund by mail, or by wire. An Application Form
accompanies this Prospectus. If you have any questions or need further
information about how to purchase shares, you may call the Funds at (610)
296-1400.
PURCHASING SHARES BY MAIL
Please complete the attached Application Form and mail it with a personal
check, payable to the CHARTWELL LARGE CAP VALUE FUND or to the CHARTWELL SMALL
CAP VALUE FUND at the following address:
Chartwell Funds
c/o ICA Fund Services Corp.
4455 E. Camelback Rd., Suite 261-E
Phoenix, AZ 85018
PURCHASING SHARES BY WIRE
To place an order by wire, please call the Funds at (610) 296-1400 between
11:00 a.m. and 4:00 p.m. Eastern time, on a day when the NYSE is open for
trading.
Your bank or other financial institution may send the wire to the Funds'
Custodian with the following instructions:
PROSPECTUS 8
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Firstar Bank, N.A. Cinti/Trust
ABA # 0420-0001-3
For credit to: Chartwell Large
Cap Value Fund
DDA # 821602794
Account name (shareholder name)
Shareholder account number
OR
Firstar Bank, N.A. Cinti/Trust
For credit to: Chartwell Small
Cap Value Fund
DDA # 821602919
Account name (shareholder name)
Shareholder account number
Your bank or financial institution may charge a fee for sending the wire to
the Fund.
PURCHASING THROUGH AN INVESTMENT BROKER
You may buy and sell shares through the Funds' approved brokers and their
agents (together "Brokers"). An order placed with 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 Broker will hold your shares in a pooled account in
the Broker's name. The Funds may pay the Broker to maintain your individual
ownership information, for maintaining other required records, and for providing
other shareholder services. The Broker may charge you a fee to handle your
order. The Broker is responsible for processing your order correctly and
promptly, keeping you advised of the status of your account, confirming your
transactions and ensuring that you receive copies of the Funds' prospectus.
Please contact your broker to see if they are an approved broker of the
Funds and for additional information.
MINIMUM INVESTMENTS
Your initial purchase must be at least $1,000,000. However, if you are
purchasing shares through an Individual Retirement Account ("IRA"), or other
retirement plan, these minimum amounts may be waived.
Please contact the Funds at (610) 296-1400 for further information.
Exceptions may be made at the Funds' discretion.
ADDITIONAL INVESTMENTS
Additional purchases may be made for $100,000 or more. Exceptions may be
made at the Funds' discretion. You may purchase additional shares of either Fund
by sending a check, with the stub from your account statement, to the Funds at
the addresses listed above. Please ensure that you include your account number
on the check. If you do not have the stub from your account statement, include
your name, address and account number on a separate statement.
You may also make additional purchases by wire or through a Broker. Please
follow the procedures described above for purchasing shares through an
investment broker.
MINIMUM ACCOUNT BALANCE
Due to the relatively high administrative cost of managing small accounts,
if the value of your account falls below $50,000, that Fund may redeem your
9 PROSPECTUS
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shares. However, the Fund will give you 30 days' written notice to give you time
to add to your account and avoid involuntary redemption of your shares. The
Board of Trustees of the Funds believes this policy to be in the best interest
of all shareholders.
SELLING YOUR SHARES
You may sell some or all of your Fund shares on days that the NYSE is open
for trading. Your redemption may result in a realized gain or loss for tax
purposes. Your shares will be sold at the next net asset value calculated for
the Fund after receiving your order. You may sell your shares by mail, wire or
through a Broker.
SELLING YOUR SHARES BY MAIL
You may redeem your shares by sending a written request to the Funds. You
must give your account number and state the number of shares you wish to sell.
You must sign the written request. If the account is in the name of more than
one person, each shareholder must sign the written request. Send your written
request to the Funds at:
Chartwell Funds
c/o ICA Fund Services Corp.
4455 E. Camelback Rd., Suite 261-E
Phoenix, AZ 85018
If the dollar amount of your redemption exceeds $100,000, you must obtain a
signature guarantee (NOT A NOTARIZATION), available from may commercial banks,
savings associations, stock brokers and other NASD member firms. In unusual
circumstances, the Funds may temporarily suspend the processing of sell
requests, or postpone payments of proceeds for up to seven days as permitted by
Federal securities laws.
SELLING YOUR SHARES BY TELEPHONE
If you completed the "Redemption by Telephone" section of the Funds'
Application Form, you may sell your shares by calling the Funds at (610)
296-1400. Your redemption will be mailed or wired according to your
instructions, on the next business day to the bank account you designated on
your Application Form. The minimum wire amount is $1,000. Your bank or financial
institution may charge a fee for receiving the wire from the Funds. Telephone
redemptions may not be made for IRA accounts.
The Funds will take steps to confirm that a telephone redemption is
authentic. This may include tape recording the telephone instructions, or
requiring a form of personal identification before acting on those instructions.
The Funds reserve the right to refuse telephone instructions if they cannot
reasonably confirm the telephone instructions. The Funds may be liable for
losses from unauthorized or fraudulent telephone transactions only if these
reasonable procedures are not followed.
You may request telephone redemption privileges after your account is
opened. However, the authorization form requires a separate signature guarantee
(NOT A NOTARIZATION). The Funds may modify or terminate your telephone
PROSPECTUS 10
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privileges after giving you 60 days notice. Please be aware that you may
experience delays in redeeming your shares by telephone during periods of
abnormal market activity. In addition, the Funds may postpone payment of
proceeds for up to seven days, as permitted by Federal securities laws.
OTHER POLICIES
The Funds may waive the minimum investment requirements for purchases by
certain groups or retirement plans. All investments must be made in U.S.
dollars, and checks must be drawn on U.S. banks. Third party checks are not
accepted. The Funds may charge you if your check is returned for insufficient
funds. The Funds reserve the right to reject any investment, in whole or in
part. The IRS requires that you provide the Funds or your Broker with a taxpayer
identification number and other information upon opening an account. You must
specify whether you are subject to backup withholding. Otherwise, you may be
subject to backup withholding at a rate of 31%.
EARNINGS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Income dividends and capital gain distributions are normally declared and
paid by each Fund to its shareholders in December of each year. The Funds may
also make periodic dividend payments and distributions at other times in their
discretion.
Unless you invest through a tax-advantaged account, you will owe taxes on
the dividends and distributions. Dividends and distributions are automatically
reinvested in additional shares of a Fund unless you make a written request to
the Fund that you would like to receive dividends and distributions made in
cash.
TAXES
The Funds are required by Internal Revenue Service rules to distribute
substantially all of their net investment income, and capital gains, if any, to
shareholders. Capital gains may be taxable at different rates depending upon the
length of time a Fund holds its assets. You will be notified at least annually
about the tax consequences of distributions made each year. The Funds' dividends
and distributions, whether received in cash or reinvested, may be taxable. Any
redemption of a Fund's shares will be treated as a sale and any gain on the
transaction may be taxable. Additional information about tax issues relating to
a Fund may be found in the SAI. Please consult your tax advisor about the
potential tax consequences of investing in the Funds.
11 PROSPECTUS
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CHARTWELL LARGE CAP VALUE FUND
CHARTWELL SMALL CAP VALUE FUND,
EACH A SERIES OF ADVISORS SERIES TRUST
FOR MORE INFORMATION
You can find more information about the Funds in the Statement of Additional
Information ("SAI"), incorporated by reference in this prospectus, that is
available free of charge.
To request your free copy of the SAI, or to request other information, please
call (toll-free) (800) 576-8229 or write to the Fund:
Chartwell Funds
c/o ICA Fund Services Corp.
4455 E. Camelback Rd., Suite 261-E
Phoenix, AZ 85018
You may review and copy further information about the Funds, including the SAI,
at the Securities and Exchange Commission's ("SEC's") Public Reference Room in
Washington, D.C. Call (800) SEC-0330 for information about the operation of the
Public Reference Room.
Reports and other Fund information are also available on the SEC's Internet site
at www.sec.gov. Copies of this information may be obtained, upon payment of a
duplicating fee, by writing to the SEC's Public Reference Section, Washington,
D.C. 20549-6009.
SEC File Number: 811-07959
<PAGE>
THIS PROSPECTUS SETS FORTH BASIC INFORMATION ABOUT THE FUNDS THAT YOU SHOULD
KNOW BEFORE INVESTING. IT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION ("SEC") DOESN'T APPROVE OR DISAPPROVE
THESE SHARES OR DETERMINE WHETHER THE INFORMATION IN THIS PROSPECTUS IS TRUTHFUL
OR COMPLETE. IT IS A CRIMINAL OFFENSE FOR ANYONE TO INFORM YOU OTHERWISE.
SHARES OF THE FUNDS ARE NOT GUARANTEED OR ENDORSED BY ANY BANK. SHARES OF THE
FUNDS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"),
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. ALL INVESTMENTS ARE SUBJECT TO RISKS,
INCLUDING THE POSSIBLE LOSS OF MONEY INVESTED.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1999
CHARTWELL LARGE CAP VALUE FUND
CHARTWELL SMALL CAP VALUE FUND
SERIES OF ADVISORS SERIES TRUST
1235 WESTLAKES DRIVE, SUITE 330
BERWYN, PA 19312-2412
This Statement of Additional Information ("SAI") is not a prospectus, and it
should be read in conjunction with the Prospectus dated October 1, 1999, as may
be revised, of the Chartwell Large Cap Value Fund and the Chartwell Small Cap
Value Fund (a "Fund" or, together, the "Funds"), each a series of Advisors
Series Trust (the "Trust"). Chartwell Investment Partners (the "Advisor") is the
advisor to the Funds. A copy of the Funds' Prospectus may be obtained by
contacting ICA Fund Services Corp., 4455 E. Camelback Rd., Suite 261E, Phoenix,
AZ 85018; telephone: 1-800-576-8229.
TABLE OF CONTENTS
The Trust................................................................. B-2
Investment Objective and Policies......................................... B-2
Portfolio Transactions and Brokerage ..................................... B-10
Portfolio Turnover ....................................................... B-11
Determination of Net Asset Value ......................................... B-12
Purchase and Redemption of Fund Shares ................................... B-12
Management ............................................................... B-14
Dividends and Distributions .............................................. B-17
Tax Matters .............................................................. B-18
Performance Information .................................................. B-19
General Information ...................................................... B-20
B-1
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THE TRUST
Advisors Series Trust is an open-end, non-diversified 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 seventeen series of
shares of beneficial interest, par value $0.01 per share. This SAI relates only
to the Funds.
The Trust is registered with the SEC as a management investment company. Such a
registration does not involve supervision of the management or policies of the
Funds. The Prospectus of the Funds and this SAI omit certain of the information
contained in the Registration Statement filed with the SEC. Copies of such
information may be obtained from the SEC upon payment of the prescribed fee.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Funds is growth of capital, with a secondary
objective to provide current income. The Large Cap Fund primarily invests in
common stocks of larger companies with a market capitalization in excess of $1
billion. The Small Cap Fund invests primarily in the stocks of smaller companies
with a market capitalization between $100 million and $2.5 billion. The Fund
also will invest in dollar denominated stocks of foreign companies and in
American Depositary Receipts ("ADRs"). There is no assurance that either Fund
will achieve its objective. The Funds are classified as "diversified" under the
federal securities laws, which means as to 75% of each Fund's total assets (1)
no more than 5% may be in the securities of a single issuer, (2) neither Fund
may hold more than 10% of the outstanding voting securities of a single issuer .
The discussion below supplements information contained in the Funds' Prospectus
as to investment policies of the Funds.
In addition to the risks associated with particular types of securities, which
are discussed below, the Funds are subject to general market risks. The Funds
invest primarily in common stocks. The market risks associated with stocks
include the possibility that the entire market for common stocks could suffer a
decline in price over a short or even an extended period. This could affect the
net asset value of your Fund shares. The U.S. stock market tends to be cyclical,
with periods when stock prices generally rise and periods when stock prices
generally decline.
FOREIGN SECURITIES. Each Fund may invest in dollar denominated securities of
foreign companies, including sponsored and unsponsored American Depositary
Receipts ("ADRs"). ADRs are receipts typically issued by a U.S. bank or trust
company evidencing ownership of the underlying securities of foreign issuers,
and other forms of depository receipts for securities of foreign issuers.
Generally, ADRs, in registered form, are denominated in U.S. dollars and are
designed for use in the U.S. securities markets. Thus, these securities are not
denominated in the same currency as the securities in which they may be
converted. In addition, the issuers of the securities underlying unsponsored
ADRs are not obligated to disclose material information in the United States
and, therefore, there may be less information available regarding such issuers
and there may not be a correlation between such information and the market value
of the ADRs.
Investments in foreign securities involve risks, costs and opportunities which
are in addition to those inherent in domestic investments. Political, economic
or social instability of the issuer or the country of issue, the possibility of
expropriation or confiscatory taxation, limitations on the removal of assets or
diplomatic developments, and the possibility of adverse changes in investment or
exchange control regulations are among the inherent risks. Securities of some
foreign companies are less liquid, more volatile and more difficult to value
than securities of comparable U.S. companies. Foreign companies are not subject
to the regulatory requirements of U.S. companies and, as such, there may be less
publicly available information about such companies. Moreover, foreign companies
are not subject to uniform accounting, auditing and financial reporting
standards and requirements comparable to those applicable to U.S. companies.
ILLIQUID SECURITIES. Neither Fund may 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
B-2
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amount of illiquid securities in the Funds' portfolios, under the supervision of
the Trust's Board of Trustees, to ensure compliance with the Funds' 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 Funds might be
unable to sell restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
within seven days. The Funds might also have to register such restricted
securities in order to sell 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 reflect the actual liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the SEC under the Securities Act,
the Trust's Board of Trustees may determine that such securities are not
illiquid securities despite their legal or contractual restrictions on resale.
In all other cases, however, securities subject to restrictions on resale will
be deemed illiquid.
OPTIONS AND FUTURES STRATEGIES. Each Fund may purchase put and call options and
engage in the writing of covered call options and secured put options, and
employ a variety of other investment techniques. Specifically, a Fund may engage
in the purchase and sale of stock index futures contracts and options on such
futures, all as described more fully below. Such investment policies and
techniques may involve a greater degree of risk than those inherent in more
conservative investment approaches. The Funds will engage in such transactions
to hedge existing positions and in pursuit of their investment objectives, and
not for the purposes of speculation or leverage.
OPTIONS ON SECURITIES. A Fund may purchase put and call options on securities
held in its portfolio. In addition, a Fund may seek to increase its income in an
amount designed to meet operating expenses or may hedge a portion of its
portfolio investments through writing (that is, selling) "covered" put and call
options. A put option provides its purchaser with the right to compel the writer
of the option to purchase from the option holder an underlying security at a
specified price at any time during or at the end of the option period. In
contrast, a call option gives the purchaser the right to buy the underlying
security covered by the option from the writer of the option at the stated
exercise price. A covered call option contemplates that, for so long as the Fund
is obligated as the writer of the option, it will own (1) the underlying
securities subject to the option or (2) securities convertible into, or
exchangeable without the payment of any consideration for, the securities
subject to the option. The value of the underlying securities on which covered
call options will be written at any one time by a Fund will not exceed 25% of
the Fund's total assets.
The Funds may purchase options on securities that are listed on securities
exchanges or that are traded over-the-counter ("OTC"). As the holder of a put
option, a Fund has the right to sell the securities underlying the option and as
the holder of a call option, a Fund has the right to purchase the securities
underlying the option, in each case at the option's exercise price at any time
prior to, or on, the option's expiration date. A Fund may choose to exercise the
options it holds, permit them to expire or terminate them prior to their
expiration by entering into closing sale transactions. In entering into a
closing sale transaction, the Fund would sell an option of the same series as
the one it has purchased.
A Fund receives a premium when it writes call options, which increases the
Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund limits its
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opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. A Fund receives a premium when it
writes put options, which increases the Fund's return on the underlying security
in the event the option expires unexercised or is closed out at a profit. By
writing a put, a Fund limits its opportunity to profit from an increase in the
market value of the underlying security above the exercise price of the option
for as long as the Fund's obligation as writer of the option continues. Thus, in
some periods, a Fund will receive less total return and in other periods greater
total return from its hedged positions than it would have received from its
underlying securities if unhedged.
In purchasing a put option, a Fund seeks to benefit from a decline in the market
price of the underlying security, whereas in purchasing a call option, the Fund
seeks to benefit from an increase in the market price of the underlying
security. If an option purchased is not sold or exercised when it has remaining
value, or if the market price of the underlying security remains equal to or
greater than the exercise price, in the case of a put, or remains equal to or
below the exercise price, in the case of a call, during the life of the option,
the Fund will lose its investment in the option. For the purchase of an option
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price, in the case of a put, and must increase
sufficiently above the exercise price, in the case of a call, to cover the
premium and transaction costs. Because option premiums paid by a Fund are small
in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause a Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
OTC OPTIONS. OTC options differ from exchange-traded options in several
respects. They are transacted directly with dealers and not with a clearing
corporation, and there is a risk of non-performance by the dealer. However, the
premium is paid in advance by the dealer. OTC options are available for a
greater variety of securities and foreign currencies, and in a wider range of
expiration dates and exercise prices than exchange-traded options. Since there
is no exchange, pricing is normally done by reference to information from a
market maker, which information is carefully monitored or caused to be monitored
by the Adviser and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily only
by entering into a closing transaction. In the case of OTC options, there can be
no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, a Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when a Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which it originally wrote the option. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security or foreign currency until the option expires or the
option is exercised. Therefore, the writer of a covered OTC call option may not
be able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, the writer of a covered OTC put option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of an OTC
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
A Fund may purchase and write OTC put and call options in negotiated
transactions. The staff of the Securities and Exchange Commission has previously
taken the position that the value of purchased OTC options and the assets used
as "cover" for written OTC options are illiquid securities and, as such, are to
be included in the calculation of the Fund's 15% limitation on illiquid
securities. The Funds will attempt to enter into contracts with certain dealers
with which it writes OTC options. Each such contract will provide that the Fund
has the absolute right to repurchase the options it writes at any time at a
repurchase price which represents the fair market value, as determined in good
faith through negotiation between the parties, but which in no event will exceed
a price determined pursuant to a formula contained in the contract. Although the
specific details of such formula may vary among contracts, the formula will
generally be based upon a multiple of the premium received by the Fund for
writing the option, plus the amount, if any, of the option's intrinsic value.
The formula will also include a factor to account for the difference between the
price of the security and the strike price of the option. If such a contract is
entered into, the Fund will count as illiquid only the initial formula price
minus the option's intrinsic value.
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The Funds will enter into such contracts only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York. Moreover,
such primary dealers will be subject to the same standards as are imposed upon
dealers with which the Funds enter into repurchase agreements.
STOCK INDEX OPTIONS. The Funds may purchase and write put and call options on
stock indices listed on securities exchanges, which indices include securities
held in the Funds' portfolio.
A stock index measures the movement of a certain group of stocks by assigning
relative values to the securities included in the index. Options on stock
indices are generally similar to options on specific securities. Unlike options
on specific securities, however, options on stock indices do not involve the
delivery of an underlying security; the option in the case of an option on a
stock index represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying stock index on the exercise date.
When a Fund writes an option on a securities index, it will segregate liquid
assets in an amount equal to the market value of the option, and will maintain
while the option is open.
Stock index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded. If a Fund writes a
stock index option, it may terminate its obligation by effecting a closing
purchase transaction, which is accomplished by purchasing an option of the same
series as the option previously written. The ability of a Fund to engage in
closing purchase transactions with respect to stock index options depends on the
existence of a liquid secondary market. Although a Fund generally purchases or
writes stock index options only if a liquid secondary market for the options
purchased or sold appears to exist, no such secondary market may exist, or the
market may cease to exist at some future date, for some options. No assurance
can be given that a closing purchase transaction can be effected when a Fund
desires to engage in such a transaction.
RISKS RELATING TO PURCHASE AND SALE OF OPTIONS ON STOCK INDICES. Purchase and
sale of options on stock indices by the Funds are subject to certain risks that
are not present with options on securities. Because the effectiveness of
purchasing or writing stock index options depends upon the extent to which price
movements in the Fund's portfolio correlate with price 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 writing of an option on a stock index
depends upon movements in the level of stock prices in the stock market
generally or, in the case of certain indices, in an industry or market segment,
rather than movements in the price of a particular stock. Accordingly,
successful use by the Funds of options on stock indices will be subject to the
ability of the Adviser to correctly predict movements in the direction of the
stock market generally or of a particular industry. This requires different
skills and techniques than predicting changes in the price of individual stocks.
In the event the Adviser is unsuccessful in predicting the movements of an
index, a Fund could be in a worse position than if it hadn't engaged in these
transactions.
Stock index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in stock 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 occurred, a Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. However, it will be the Funds'
policy to purchase or write options only on indices which include a sufficient
number of stocks so that the likelihood of a trading halt in the index is
minimized.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Funds may purchase and
sell stock index futures contracts. The purpose of the acquisition or sale of a
futures contract by a Fund is to hedge against fluctuations in the value of its
portfolio without actually buying or selling securities. The futures contracts
in which the Funds may invest have been developed by and are traded on national
commodity exchanges. Stock index futures contracts may be based upon broad-based
stock indices such as the S&P 500 or upon narrow-based stock indices. A buyer
entering into a stock index futures contract will, on a specified future date,
pay or receive a final cash payment equal to the difference between the actual
value of the stock index on the last day of the contract and the value of the
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stock index established by the contract. A Fund may assume both "long" and
"short" positions with respect to futures contracts. A long position involves
entering into a futures contract to buy a commodity, whereas a short position
involves entering into a futures contract to sell a commodity.
The purpose of trading futures contracts is to protect the Fund from
fluctuations in the value of its investment securities without necessarily
buying or selling the securities. Because the value of a Fund's investment
securities will exceed the value of the futures contracts sold by the Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets. No consideration
is paid or received by the Fund upon trading a futures contract. Instead, upon
entering into a futures contract, a Fund is required to deposit an amount of
cash or U.S. Government securities generally equal to 10% or less of the
contract value. This amount is known as "initial margin" and is in the nature of
a performance bond or good faith deposit on the contract that is returned to the
Fund upon termination of the futures contract, assuming that all contractual
obligations have been satisfied; the broker will have access to amounts in the
margin account if the Fund fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the price of the currency or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, a Fund may elect to close a position by taking
an opposite position, which will operate to terminate the Fund's existing
position in the contract.
Each short position in a futures or options contract entered into by a Fund is
secured by the Fund's ownership of underlying securities. The Fund does not use
leverage when it enters into long futures or options contracts; the Fund
segregates, with respect to each of its long positions, liquid assets having a
value equal to the underlying commodity value of the contract.
The Funds may trade stock index futures contracts to the extent permitted under
rules and interpretations adopted by the Commodity Futures Trading Commission
(the "CFTC"). U.S. futures contracts have been designed by exchanges that have
been designated as "contract markets" by the CFTC, and must be executed through
a futures commission merchant, or brokerage firm, that is a member of the
relevant contract market. Futures contracts trade on a number of contract
markets, and, through their clearing corporations, the exchanges guarantee
performance of the contracts as between the clearing members of the exchange.
The Funds intend to comply with CFTC regulations and avoid "commodity pool
operator" or "commodity trading advisor" status. These regulations require that
a Fund use futures and options positions (a) for "bona fide hedging purposes"
(as defined in the regulations) or (b) for other purposes so long as aggregate
initial margins and premiums required in connection with non-hedging positions
do not exceed 5% of the liquidation value of the Fund's portfolio. The Funds
currently do not intend to engage in transactions in futures contracts or
options thereon for speculation, but will engage in such transactions only for
bona fide hedging purposes.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.
There are several risks in using stock index futures contracts as hedging
devices. First, all participants in the futures market are subject to initial
margin and variation margin requirements. Rather than making additional
variation margin payments, investors may close the contracts through offsetting
transactions which could distort the normal relationship between the index or
security and the futures market. Second, the margin requirements in the futures
market are lower than margin requirements in the securities market, and as a
result the futures market may attract more speculators than does the securities
market. Increased participation by speculators in the futures market may also
cause temporary price distortions. Because of possible price distortion in the
futures market and because of imperfect correlation between movements in stock
indices or securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements in the
value of the futures contracts and movements in the value of securities subject
to the hedge. With respect to stock index futures contracts, the risk of
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the securities included in the applicable stock index. It is
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possible that a Fund might sell stock index futures contracts to hedge its
portfolio against a decline in the market, only to have the market advance and
the value of securities held in the Fund's portfolio decline. If this occurred,
the Fund would lose money on the contracts and also experience a decline in the
value of its portfolio securities. While this could occur, the Adviser believes
that over time the value of a Fund's portfolio should tend to move in the same
direction as the market indices and will attempt to reduce this risk, to the
extent possible, by entering into futures contracts on indices whose movements
they believe will have a significant correlation with movements in the value of
the Fund's portfolio securities sought to be hedged.
Successful use of futures contracts by a Fund is subject to the ability of the
Adviser to predict correctly movements in the direction of the market. If a Fund
has hedged against the possibility of a decline in the value of the stocks held
in its portfolio and stock prices increase instead, the Fund would lose part or
all of the benefit of the increased value of its security 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, but will not necessarily, be at increased prices which reflect the rising
market. A Fund may have to sell securities at a time when it may be
disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. A Fund may elect to close some or all of its
contracts prior to expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position held by the Fund. A Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain. Positions in futures contracts may be closed
only on an exchange or board of trade providing a secondary market for such
futures contracts. Although the Funds intend to enter into futures contracts
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 will
exist for any particular contract at any particular time.
In addition, most domestic futures exchanges and boards of trade 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 contract, no trades may be made 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. It is possible that futures contract
prices could move 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. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, a Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, 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 being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
RISKS AND SPECIAL CONSIDERATIONS OF OPTIONS ON FUTURES CONTRACTS. The use of
options on stock index futures contracts also involves additional risk. Compared
to the purchase or sale of futures contracts, the purchase of call or put
options on futures contracts involves less potential risk to a Fund because the
maximum amount at risk is the premium paid for the options (plus transactions
costs). The writing of a call option on a futures contract generates a premium
which may partially offset a decline in the value of the Fund's portfolio
assets. By writing a call option, a Fund becomes obligated to sell a futures
contract, which may have a value higher than the exercise price. Conversely, the
writing of a put option on a futures contract generates a premium, but the Fund
becomes obligated to purchase a futures contract, which may have a value lower
than the exercise price. Thus, the loss incurred by a Fund in writing options on
futures contracts may exceed the amount of the premium received.
The effective use of options strategies is dependent, among other things, on a
Fund's ability to terminate options positions at a time when the Adviser deems
it desirable to do so. Although a Fund will enter into an option position only
if the Adviser believes that a liquid secondary market exists for such option,
there is no assurance that the Fund will be able to effect closing transactions
at any particular time or at an acceptable price. A Fund's transactions
involving options on futures contracts will be conducted only on recognized
exchanges.
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The Funds' purchase or sale of put or call options on futures contracts will be
based upon predictions as to anticipated market trends by the Adviser, which
could prove to be inaccurate. Even if the expectations of the Adviser are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Funds' portfolio securities.
Investments in futures contracts and related options by their nature tend to be
more short-term than other equity investments made by the Funds. The Funds'
ability to make such investments, therefore, may result in an increase in the
Funds' portfolio activity and thereby may result in the payment of additional
transaction costs.
REPURCHASE AGREEMENTS. The Funds may enter into repurchase agreements. Under
such agreements, the seller of the security agrees to repurchase it at a
mutually agreed upon time and price. The repurchase price may be higher than the
purchase price, the difference being income to the Funds, or the purchase and
repurchase prices may be the same, with interest at a stated rate due to the
Funds together with the repurchase price on repurchase. In either case, the
income to the Funds is unrelated to the interest rate on the U.S. Government
security itself. Such repurchase agreements will be made only with banks with
assets of $500 million or more that are insured by the Federal Deposit Insurance
Corporation or with Government securities dealers recognized by the Federal
Reserve Board and registered as broker-dealers with the Securities and Exchange
Commission ("SEC") or exempt from such registration. The Funds will generally
enter into repurchase agreements of short durations, from overnight to one week,
although the underlying securities generally have longer maturities. A Fund may
not enter into a repurchase agreement with more than seven days to maturity if,
as a result, more than 15% of the value of its net assets would be invested in
illiquid securities including such repurchase agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government security subject to the repurchase agreement. It is not clear
whether a court would consider the U.S. Government security acquired by a Fund
subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the U.S. Government security before its repurchase under a repurchase
agreement, a Fund could encounter delays and incur costs before being able to
sell the security. Delays may involve loss of interest or a decline in price of
the U.S. Government security. If a court characterizes the transaction as a loan
and the Fund has not perfected a security interest in the U.S. Government
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor of the seller. As an unsecured creditor,
a Fund would be at the risk of losing some or all of the principal and income
involved in the transaction. As with any unsecured debt instrument purchased for
the Funds, the Advisor seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the other party, in this case
the seller of the U.S. Government security.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, the Funds
will always receive as collateral for any repurchase agreement to which they are
a party securities acceptable to the Advisor, the market value of which is equal
to at least 100% of the amount invested by the Funds plus accrued interest, and
the Funds will make payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its Custodian. If the
market value of the U.S. Government security subject to the repurchase agreement
becomes less than the repurchase price (including interest), the Funds will
direct the seller of the U.S. Government security to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement will equal or exceed the repurchase price. It is possible that the
Funds could be unsuccessful in seeking to impose on the seller a contractual
obligation to deliver additional securities.
SHORT-TERM INVESTMENTS
The Funds may invest in any of the following securities and instruments:
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CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The Funds may
hold 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 Funds will be
dollar-denominated obligations of domestic banks, savings and loan associations
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.
In addition to buying certificates of deposit and bankers' acceptances, the
Funds also 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.
COMMERCIAL PAPER AND SHORT-TERM NOTES. A 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. 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 Standard & Poor's Ratings Group, "Prime-1" or
"Prime-2" by Moody's Investors Service, Inc., 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.
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.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following investment restrictions that may not be
changed without approval by a "majority of the outstanding shares" of the Fund
which, as used in this SAI, means the vote of the lesser of (a) 67% or more of
the shares of the Fund represented at a meeting, if the holders of more than 50%
of the outstanding shares of the Fund are present or represented by proxy, or
(b) more than 50% of the outstanding shares of the Fund.
Each Fund is diversified. This means that as to 75% of each Fund's total assets
(1) no more than 5% may be in the securities of a single issuer, (2) neither
Fund may hold more than 10% of the outstanding voting securities of a single
issuer.
In addition, neither Fund may:
(1) Make loans to others, except (a) through the purchase of debt securities in
accordance with its investment objective and policies, or (b) to the extent the
entry into a repurchase agreement is deemed to be a loan.
(2) Borrow money, except for temporary or emergency purposes. Any such
borrowings will be made only if immediately thereafter there is an asset
coverage of at least 300% of all borrowings.
(3) Mortgage, pledge or hypothecate any of its assets except in connection with
any borrowings.
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(4) Purchase securities on margin, participate on a joint or joint and several
basis in any securities trading account, or underwrite securities. (Does not
preclude the Fund from obtaining such short-term credit as may be necessary for
the clearance of purchases and sales of its portfolio securities.)
(5) Purchase real estate, commodities or commodity contracts. (As a matter of
operating policy, the Board of Trustees may authorize the Fund in the future to
engage in certain activities regarding futures contracts for bona fide hedging
purposes; any such authorization will be accompanied by appropriate notification
to shareholders.)
(6) Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges or (b) entering into options, futures
or repurchase transactions.
(7) Invest 25% or more of the market value of its assets in the securities of
companies engaged in any one industry, except that this restriction does not
apply to investment in the securities of the U.S. Government, its agencies or
instrumentalities.
Each Fund observes the following policies, which are not deemed fundamental and
which may be changed without shareholder vote. A Fund may not:
(8) Invest in any issuer for purposes of exercising control or management.
(9) Invest in securities of other investment companies except as permitted under
the 1940 Act.
(10) Invest, in the aggregate, more than 15% of its net assets in securities
with legal or contractual restrictions on resale, securities which are not
readily marketable and repurchase agreements with more than seven days to
maturity.
If a percentage or rating restriction on investment or use of assets set forth
herein or in the Prospectus is adhered to at the time a transaction is effected,
later changes in percentage resulting from any cause other than actions by a
Fund will not be considered a violation. If the value of a Fund's holdings of
illiquid securities at any time exceeds the percentage limitation applicable at
the time of acquisition due to subsequent fluctuations in value or other
reasons, the Board of Trustees will consider what actions, if any, are
appropriate to maintain adequate liquidity.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Pursuant to the Investment Advisory Agreement, the Advisor determines which
securities are to be purchased and sold by the Funds and which broker-dealers
will be used to execute the Funds' portfolio transactions. Purchases and sales
of securities in the over-the-counter market will be executed directly with a
"market-maker" unless, in the opinion of the Advisor, a better price and
execution can otherwise be obtained by using a broker for the transaction.
Purchases of portfolio securities for the Funds also may be made directly from
issuers or from underwriters. Where possible, purchase and sale transactions
will be made through dealers (including banks) which specialize in the types of
securities which the Funds will be holding, unless better executions are
available elsewhere. Dealers and underwriters usually act as principal for their
own account. Purchases from underwriters will include a concession paid by the
issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one broker, dealer or underwriter are comparable, the order may be
allocated to a broker, dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Advisor will use its best efforts to
choose a broker-dealer capable of providing the services necessary to obtain the
most favorable price and execution available. The full range and quality of
services available will be considered in making these determinations, such as
the size of the order, the difficulty of execution, the operational facilities
of the firm involved, the firm's risk in positioning a block of securities, and
other factors. In those instances where it is reasonably determined that more
than one broker-dealer can offer the most favorable price and execution
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available, consideration may be given to those broker-dealers which furnish or
supply research and statistical information to the Advisor that it may lawfully
and appropriately use in its investment advisory capacities, as well as provide
other services in addition to execution services. The Advisor considers such
information, which is in addition to and not in lieu of the services required to
be performed by it under its Agreement with the Funds, to be useful in varying
degrees, but of indeterminable value. Portfolio transactions may be placed with
broker-dealers who sell shares of the Funds subject to rules adopted by the
National Association of Securities Dealers, Inc.
While it is the Funds' general policy to seek first to obtain the most favorable
price and execution available, in selecting a broker-dealer to execute portfolio
transactions for the Funds, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Funds r to the
Advisor, even if the specific services are not directly useful to the Funds and
may be useful to the Advisor in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, the
Funds may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Advisor to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer. The standard of reasonableness
is to be measured in light of the Advisor's overall responsibilities to the
Funds.
Investment decisions for the Funds are made independently from those of other
client accounts or mutual funds managed or advised by the Advisor. Nevertheless,
it is possible that at times identical securities will be acceptable for both
the Funds and one or more of such client accounts. In such event, the position
of the Funds and such client account(s) in the same issuer may vary and the
length of time that each may choose to hold its investment in the same issuer
may likewise vary. However, to the extent any of these client accounts seeks to
acquire the same security as a Fund at the same time, the Fund may not be able
to acquire as large a portion of such security as it desires, or it may have to
pay a higher price or obtain a lower yield for such security. Similarly, a Fund
may not be able to obtain as high a price for, or as large an execution of, an
order to sell any particular security at the same time. If one or more of such
client accounts simultaneously purchases or sells the same security that a Fund
is purchasing or selling, each day's transactions in such security will be
allocated between the Fund and all such client accounts in a manner deemed
equitable by the Advisor, taking into account the respective sizes of the
accounts and the amount being purchased or sold. It is recognized that in some
cases this system could have a detrimental effect on the price or value of the
security insofar as the Fund is concerned. In other cases, however, it is
believed that the ability of a Fund to participate in volume transactions may
produce better executions for the Fund.
The Funds do not place securities transactions through brokers solely for
selling shares of the Funds, although the Funds may consider the sale of shares
as a factor in allocating brokerage. However, as stated above, broker-dealers
who execute brokerage transactions may effect purchases of shares of the Funds
for their customers.
PORTFOLIO TURNOVER
Although the Funds generally will not invest for short-term trading purposes,
portfolio securities may be sold without regard to the length of them they have
been held when, in the opinion of the Advisor, investment considerations warrant
such action. Portfolio turnover rate is calculated by dividing (1) the lesser of
purchases or sales of portfolio securities for the fiscal year by (2) the
monthly average of the value of portfolio securities owned during the fiscal
year. A 100% turnover rate would occur if all the securities in the Fund's
portfolio, with the exception of securities whose maturities at the time of
acquisition were one year or less, were sold and either repurchased or replaced
within one year. A high rate of portfolio turnover (100% or more) generally
leads to higher transaction costs and may result in a greater number of taxable
transactions. It is anticipated that annual portfolio turnover rates will be
approximately 80% for the Large Cap Fund and 100% for the Small Cap Fund.
DETERMINATION OF NET ASSET VALUE
As noted in the Prospectus, the net asset value and offering price of shares of
each Fund will be determined once daily as of the close of public trading on the
New York Stock Exchange ("NYSE") (normally 4:00 p.m. Eastern time) on each day
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that the NYSE is open for trading. The Funds do not expect to determine the net
asset value of their shares on any day when the NYSE is not open for trading
even if there is sufficient trading in their portfolio securities on such days
to materially affect the net asset value per share. However, the net asset value
of Fund shares may be determined on days the NYSE is closed or at times other
than 4:00 p.m. if the Board of Trustees decides it is necessary.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded on
securities exchanges are valued at the last sale price on the exchange on which
such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Advisor to be the
primary market. Securities primarily traded in the NASDAQ National Market System
for which market quotations are readily available shall be valued at the last
sale price on the day of valuation, or if there has been no sale on such day, at
the mean between the bid and asked prices. Over-the-counter ("OTC") securities
which are not traded in the NASDAQ National Market System shall be valued at the
most recent trade price. Securities and assets for which market quotations are
not readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Board.
The net asset value per share of each Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
As of the date of this SAI, the NYSE is open for trading every weekday except
for the following holidays: New Year's Day, Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
PURCHASE AND REDEMPTION OF FUND SHARES
The information provided below supplements the information contained in the
Funds' Prospectus regarding the purchase and redemption of Fund shares.
HOW TO BUY SHARES
Fund shares are purchased at the net asset value next determined after the
Transfer Agent receives your order in proper form. In most cases, in order to
receive that day's public offering price, the Transfer Agent must receive your
order in proper form before the close of regular trading on the New York Stock
Exchange ("NYSE"), currently 4:00 p.m. Orders are in proper form only after
investment money is converted to U.S. dollars. Orders paid by check and received
by 4:00 p.m., Eastern Time, will generally be available for the purchase of
shares the following business day.
If you are considering redeeming or transferring shares to another person
shortly after purchase, you should pay for those shares with a certified check
to avoid any delay in redemption or transfer. Otherwise the Fund may delay
payment until the purchase price of those shares has been collected, which may
take up to 15 calender days. To eliminate the need for safekeeping, the Fund
will not issue certificates for your shares unless you request them.
The Trust reserves the right in its sole discretion (1) to suspend the continued
offering of the Funds' shares, (2) to reject purchase orders in whole or in part
when in the judgment of the Advisor or the Distributor such rejection is in
the best interest of the Funds, and (3) to reduce or waive the minimum for
initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Funds'
shares.
Selected securities brokers, dealers or financial intermediaries may offer
shares of the Funds. Investors should contact these agents directly for
appropriate instructions, as well as information pertaining to accounts and any
service or transaction fees that may be charged by those agents. Purchase orders
through securities brokers, dealers and other financial intermediaries are
effected at the next-determined net asset value after receipt of the order by
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such agent before the Funds' daily cutoff time, currently the close of regular
NYSE trading. Orders received after that time will be purchased at the
next-determined net asset value.
HOW TO SELL SHARES
You can sell your Fund shares any day the NYSE is open for regular trading,
either directly to the Fund or through your investment representative. The Fund
will forward redemption proceeds or redeem shares for which it has collected
payment of the purchase price.
Payments to shareholders for shares of a Fund redeemed directly from the Fund
will be made as promptly as possible but no later than seven days after receipt
by the Fund's Transfer Agent of the written request in proper form, with the
appropriate documentation as stated in the Prospectus, except that a Fund may
suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the NYSE is restricted as determined by the SEC or
the NYSE is closed for other than weekends and holidays; (b) an emergency exists
as determined by the SEC making disposal of portfolio securities or valuation of
net assets of the Fund not reasonably practicable; or (c) for such other period
as the SEC may permit for the protection of the Funds' shareholders. At various
times, a Fund may be requested to redeem shares for which it has not yet
received confirmation of good payment; in this circumstance, the Fund may delay
the redemption until payment for the purchase of such shares has been collected
and confirmed to the Fund.
SELLING SHARES DIRECTLY TO THE FUND
Send a signed letter of instruction to the Transfer Agent, along with any
certificates that represent shares you want to sell. The price you will receive
is the next net asset value calculated after the Fund receives your request in
proper form. In order to receive that day's net asset value, the Transfer Agent
must receive your request before the close of regular trading on the NYSE.
SELLING SHARES THROUGH YOUR INVESTMENT REPRESENTATIVE
Your investment representative must receive your request before the close of
regular trading on the NYSE to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge you for its services. If you
sell shares having a net asset value of $100,000 or more, a signature guarantee
is required.
If you want your redemption proceeds sent to an address other than your address
as it appears on the Transfer Agent's records, a signature guarantee is
required. The Funds may require additional documentation for the sale of shares
by a corporation, partnership, agent or fiduciary, or a surviving joint owner.
Contact the Transfer Agent for details.
Signature guarantees may be obtained from a bank, broker-dealer, credit union
(if authorized under state law), securities exchange or association, clearing
agency or savings institution. A notary public cannot provide a signature
guarantee.
DELIVERY OF PROCEEDS
The Funds generally send you payment for your shares the business day after your
request is received in proper form, assuming the Funds have collected payment of
the purchase price of your shares. Under unusual circumstances, the Funds may
suspend redemptions, or postpone payment for more than seven days, as permitted
by federal securities law.
TELEPHONE REDEMPTIONS
Telephone transaction privileges are made available to shareholders
automatically upon opening an account unless the privilege is declined in the
Account Application. Upon receipt of any instructions or inquiries by telephone
from a shareholder or, if held in a joint account, from either party, or from
any person claiming to be the shareholder, the Funds or their agent is
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authorized, without notifying the shareholder or joint account parties, to carry
out the instructions or to respond to the inquiries, consistent with the service
options chosen by the shareholder or joint shareholders in his or their latest
Account Application or other written request for services, including purchasing
or redeeming shares of the Funds and depositing and withdrawing monies from the
bank account specified in the Bank Account Registration section of the
shareholder's latest Account Application or as otherwise properly specified to
the Funds in writing.
The Transfer Agent will employ these and other reasonable procedures to confirm
that instructions communicated by telephone are genuine; if such procedures are
observed, neither the Funds nor their agents will be liable for any loss,
liability, cost or expense arising out of any redemption request, including any
fraudulent or unauthorized request. For information, consult the Transfer Agent.
During periods of unusual market changes and shareholder activity, you may
experience delays in contacting the Transfer Agent by telephone. In this event,
you may wish to submit a written redemption request, as described in the
Prospectus, or contact your investment representative. The Telephone Redemption
Privilege is not available if you were issued certificates for shares that
remain outstanding. The Telephone Redemption Privilege may be modified or
terminated without notice.
REDEMPTIONS-IN-KIND
Subject to compliance with applicable regulations, each Fund has reserved the
right to pay the redemption price of its shares, either totally or partially, by
a distribution in kind of readily marketable portfolio securities (instead of
cash). The securities so distributed would be valued at the same amount as that
assigned to them in calculating the net asset value for the shares being sold.
If a shareholder received a distribution in kind, the shareholder could incur
brokerage or other charges in converting the securities to cash. The Trust has
filed an election under Rule 18f-1 committing to pay in cash all redemptions by
a shareholder of record up to amounts specified by the rule (approximately
$250,000).
MANAGEMENT
The overall management of the business and affairs of the Trust is vested with
its Board of Trustees. The Board approves all significant agreements between the
Trust and persons or companies furnishing services to it, including the
agreements with the Manager, Advisor, Administrator, Custodian and Transfer
Agent. The day to day operations of the Trust are delegated to its officers,
subject to the Funds' investment objectives and policies and to general
supervision by the Board of Trustees.
The Trustees and officers of the Trust, their birth dates and positions with the
Trust, their business addresses and principal occupations during the past five
years are:
WALTER E. AUCH, SR. (born 1921) Trustee
6001 N. 62nd Place, Paradise Valley, AZ 85153. Business Consultant and Director,
Nicholas-Applegate Institutional Mutual Funds, Salomon Smith Barney Trak Funds
and Concert Series, Pimco Advisors L.P., Banyan Strategic Realty Trust, Legend
Properties and Senele Group.
ERIC M. BANHAZL* (born 1957) Trustee, President and Treasurer
2020 E. Financial Way, Glendora, CA 91741. Executive Vice President, Investment
Company Administration, LLC; Vice President, First Fund Distributors, Inc.;
Treasurer, Guinness Flight Investment Funds, Inc.
DONALD E. O'CONNOR (born 1936) Trustee
1700 Taylor Avenue, Fort Washington, MD 20744. Retired; formerly Executive Vice
President and Chief Operating Officer of ICI Mutual Insurance Company (until
January, 1997); Vice President, Operations, Investment Company Institute (until
June, 1993); Independent Director, The Parnassus Fund, The Parnassus Income
Fund, and Allegiance Investment Trust.
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GEORGE T. WOFFORD III (born 1939) Trustee
305 Glendora Circle, Danville, CA 94526. Senior Vice President, Information
Services, Federal Home Loan Bank of San Francisco.
STEVEN J. PAGGIOLI (born 1950) Vice President
915 Broadway, Suite 1605, New York, NY 10010. Executive Vice President,
Investment Company Administration, LLC; Vice President, First Fund Distributors,
Inc.; President and Trustee, Professionally Managed Portfolios; Trustee, The
Managers Funds.
ROBERT H. WADSWORTH (born 1940) Vice President
4455 E. Camelback Rd. Suite 261-E, Phoenix, AZ 85018. President, Robert H.
Wadsworth & Associates, Inc., Investment Company Administration, LLC and First
Fund Distributors, Inc.; Vice President, Professionally Managed Portfolios;
President, Guinness Flight Investment Funds, Inc.; Director, Germany Fund, Inc.,
New Germany Fund, Inc., Central European Equity Fund, Inc. and Deutsche Funds,
Inc.
CHRIS O. MOSER (born 1949) Secretary
4455 E. Camelback Rd. Suite 261-E, Phoenix, AZ 85018. Employed by Investment
Company Administration, LLC (since July 1996); Formerly employed by Bank One,
N.A. (From August 1995 until July 1996; O'Connor, Cavanagh, Anderson,
Killingsworth and Beshears (law firm) (until August 1995).
* denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
NAME AND POSITION AGGREGATE COMPENSATION FROM THE TRUST
- ----------------- -------------------------------------
Walter E. Auch, Sr., Trustee $12,000
Donald E. O'Connor, Trustee $12,000
George T. Wofford III, Trustee $12,000
The Trust has no pension or retirement plan. No other entity affiliated with the
Trust pays any compensation to the Trustees.
THE ADVISOR
Chartwell Investment Partners acts as investment advisor to the Funds pursuant
to an Investment Advisory Agreement (the "Advisory Agreement"). Subject to such
policies as the Board of Trustees may determine, the Advisor is responsible for
investment decisions for the Funds. Pursuant to the terms of the Advisory
Agreement, the Advisor provides the Funds with such investment advice and
supervision as it deems necessary for the proper supervision of the Funds'
investments. The Advisor continuously provides investment programs and determine
from time to time what securities shall be purchased, sold or exchanged and what
portion of the Funds' assets shall be held uninvested.
The Advisor furnishes, at its own expense, all services, facilities and
personnel necessary in connection with managing the investments and effecting
portfolio transactions for the Funds. The Advisory Agreement will continue in
effect from year to year only if such continuance is specifically approved at
least annually by the Board of Trustees or by vote of a majority of each Fund's
outstanding voting securities and by a majority of the Trustees who are not
parties to the Advisory Agreement or interested persons of any such party, at a
meeting called for the purpose of voting on such Advisory Agreement.
Pursuant to the terms of the Advisory Agreement, the Advisor is permitted to
render services to others. The Advisory Agreement is terminable without penalty
by the Trust on behalf of a Fund on not more than 60 days', nor less than 30
days', written notice when authorized either by a majority vote of the Fund's
shareholders or by a vote of a majority of the Board of Trustees of the Trust,
or by the Advisor on not more than 60 days', nor less than 30 days', written
notice, and will automatically terminate in the event of its "assignment" (as
defined in the 1940 Act). The Advisory Agreement provides that the Advisor under
such agreement shall not be liable for any error of judgment or mistake of law
or for any loss arising out of any investment or for any act or omission in the
execution of portfolio transactions for the Funds, except for wilful
misfeasance, bad faith or gross negligence in the performance of its duties, or
by reason of reckless disregard of its obligations and duties thereunder.
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In the event the operating expenses of a Fund, including all investment advisory
and administration fees, but excluding brokerage commissions and fees, taxes,
interest and extraordinary expenses such as litigation, for any fiscal year
exceed the Fund's expense limitation, the Advisor shall reduce its advisory fee
(which fee is described below) to the extent of its share of such excess
expenses. The amount of any such reduction to be borne by the Advisor shall be
deducted from the monthly advisory fee otherwise payable with respect to the
Fund during such fiscal year; and if such amounts should exceed the monthly fee,
the Advisor shall pay to the Fund its share of such excess expenses no later
than the last day of the first month of the next succeeding fiscal year.
In consideration of the services provided by the Advisor pursuant to the
Advisory Agreement, the Advisor is entitled to receive from each Fund an
investment advisory fee computed daily and paid monthly based on a rate equal to
a percentage of the Fund's average daily net assets specified in the Prospectus.
However, the Advisor may voluntarily agree to waive a portion of the fees
payable to it on a month-to-month basis.
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.
THE ADMINISTRATOR
Pursuant to an Administration Agreement (the "Administration Agreement"),
Investment Company Administration, LLC is the administrator of the Funds (the
"Administrator"). The Administrator provides certain administrative services to
the Funds, including, among other responsibilities, coordinating the negotiation
of contracts and fees with, and the monitoring of performance and billing of,
the Funds' independent contractors and agents; preparation for signature by an
officer of the Trust of all documents required to be filed for compliance by the
Trust and the Funds with applicable laws and regulations excluding those of the
securities laws of various states; arranging for the computation of performance
data, including net asset value and yield; responding to shareholder inquiries;
and arranging for the maintenance of books and records of the Funds, and
providing, at its own expense, office facilities, equipment and personnel
necessary to carry out its duties. In this capacity, the Administrator does not
have any responsibility or authority for the management of the Funds, the
determination of investment policy, or for any matter pertaining to the
distribution of Fund shares.
The Administration Agreement is terminable without penalty by the Trust on
behalf of the Fund or by the Administrator on 60 days' written notice (as
defined in the 1940 Act). The Administration Agreement also provides that
neither the Administrator or its personnel shall be liable for any error of
judgment or mistake of law or for any act or omission in the administration of
the Funds, except for willful misfeasance, bad faith or gross negligence in the
performance of its or their duties or by reason of reckless disregard of its or
their obligations and duties under the Administration Agreement.
For its services, the Administrator receives a monthly fee from each Fund at the
following annual rate, subject to a $30,000 annual minimum:
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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 AGREEMENT
The Trust has entered into a Distribution Agreement (the "Distribution
Agreement") with First Fund Distributors, Inc. (the "Distributor"), pursuant to
which the Distributor acts as the Funds' underwriter, provides certain
administration services and promotes and arranges for the sale of the Funds'
shares. The Distributor is an affiliate of the Administrator.
The Distribution Agreement will continue in effect with respect to a Fund only
if such continuance is specifically approved at least annually by the Board of
Trustees or by vote of a majority of the Fund's outstanding voting securities
and, in either case, by a majority of the Trustees who are not parties to the
Distribution Agreement or "interested persons" (as defined in the 1940 Act) of
any such party. The Distribution Agreement is terminable without penalty by the
Trust on behalf of a Fund on 60 days' written notice when authorized either by a
majority vote of the Fund's shareholders or by vote of a majority of the Board
of Trustees of the Trust, including a majority of the Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust, or by the
Distributor on 60 days' written notice, and will automatically terminate in the
event of its "assignment" (as defined in the 1940 Act). The Distribution
Agreement also provides that neither the Distributor nor its personnel shall be
liable for any act or omission in the course of, or connected with, rendering
services under the Distribution Agreement, except for willful misfeasance, bad
faith, gross negligence or reckless disregard of its obligations or duties.
DIVIDENDS AND DISTRIBUTIONS
Each 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 a 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 Funds do not pay
"interest" or guarantee any fixed rate of return on an investment in its shares.
Each Fund also may derive capital gains or losses in connection with sales or
other dispositions of its portfolio securities. Any net gain a 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 a Fund realizes a net gain on
transactions involving investments held more than the period required for
long-term 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 a 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 Funds 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.
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TAX MATTERS
Each series of the Trust is treated as a separate entity for federal income tax
purposes. Each Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 (the
"Code"), provided it complies with all applicable requirements regarding the
source of its income, diversification of its assets and timing of distributions.
Each Fund's policy is to distribute to its shareholders all of its investment
company taxable income and any net realized long-term 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. To comply with the requirements, each Fund must also distribute (or be
deemed to have distributed) by December 31 of each calendar year (i) at least
98% of its ordinary income for such year, (ii) at least 98% of the excess of its
realized capital gains over its realized capital losses for the 12-month period
ending on October 31 during such year and (iii) any amounts from the prior
calendar year that were not distributed and on which the Fund paid no federal
income tax.
Net investment income consists of interest and dividend income, less expenses.
Net realized capital gains for a fiscal period are computed by taking into
account any capital loss carryforward of a Fund.
Distributions of net investment income and net short-term capital gains are
taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent a Fund designates the amount
distributed as a qualifying dividend. This designated amount cannot, however,
exceed the aggregate amount of qualifying dividends received by a Fund for its
taxable year. In view of the Funds' investment policies, it is expected that
dividends from domestic corporations will be part of the Funds' gross income and
that, accordingly, part of the distributions by the Funds may be eligible for
the dividends-received deduction for corporate shareholders. However, the
portion of a Fund's gross income attributable to qualifying dividends is largely
dependent on that Fund's investment activities for a particular year and
therefore cannot be predicted with any certainty. The deduction may be reduced
or eliminated if the Fund shares held by a corporate investor are treated as
debt-financed or are held for less than 46 days.
Any long-term capital gain distributions are taxable to shareholders as
long-term capital gains regardless of the length of time shares have been held.
Capital gains distributions are not eligible for the dividends-received
deduction referred to in the previous paragraph. Distributions of any net
investment income and net realized capital gains will be taxable as described
above, whether received in shares or in cash. Shareholders who choose to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share on the reinvestment date. Distributions are generally taxable
when received. However, distributions declared in October, November or December
to shareholders of record on a date in such a month and paid the following
January are taxable as if received on December 31. Distributions are includable
in alternative minimum taxable income in computing a shareholder's liability for
the alternative minimum tax.
A redemption of Fund shares may result in recognition of a taxable gain or loss.
Any loss realized upon a redemption of shares within six months from the date of
their purchase will be treated as a long-term capital loss to the extent of any
amounts treated as distributions of long-term capital gains during such
six-month period. Any loss realized upon a redemption may be disallowed under
certain wash sale rules to the extent shares of the same Funds are purchased
(through reinvestment of distributions or otherwise) within 30 days before or
after the redemption.
Under the Code, the Funds will be required to report to the Internal Revenue
Service ("IRS") all distributions of taxable income and capital gains as well as
gross proceeds from the redemption of Fund shares, except in the case of exempt
shareholders, which includes most corporations. Pursuant to the backup
withholding provisions of the Code, distributions of any taxable income and
capital gains and proceeds from the redemption of Fund shares may be subject to
withholding of federal income tax at the rate of 31 percent in the case of
non-exempt shareholders who fail to furnish the Funds with their taxpayer
identification numbers and with required certifications regarding their status
B-18
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under the federal income tax law. If the withholding provisions are applicable,
any such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Corporate and other exempt shareholders should provide the Funds with their
taxpayer identification numbers or certify their exempt status in order to avoid
possible erroneous application of backup withholding. The Funds reserve the
right to refuse to open an account for any person failing to provide a certified
taxpayer identification number.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Funds, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the Prospectus have been prepared
by Fund management, and counsel to the Funds has expressed no opinion in respect
thereof.
PERFORMANCE INFORMATION
From time to time, each Fund may state its total return in advertisements and
investor communications. Total return may be stated for any relevant period as
specified in the advertisement or communication. Any statements of total return
will be accompanied by information on the Fund's average annual compounded rate
of return over the most recent four calendar quarters and the period from the
Fund's inception of operations. A Fund may also advertise aggregate and average
total return information over different periods of time.
A Fund's total return may be compared to any relevant indices, such as the
Standard & Poor's 500 Composite Stock Index, Russell 2000 Index and indices
published by Lipper Analytical Services, Inc. From time to time, evaluations of
a Fund's performance by independent sources may also be used in advertisements
and in information furnished to present or prospective investors in the Fund.
Investors should note that the investment results of the Funds will fluctuate
over time, and any presentation of a Fund's total return for any period should
not be considered as a representation of what an investment may earn or what an
investor's total return may be in any future period.
Each Fund's average annual compounded rate of return is determined by reference
to a hypothetical $1,000 investment that includes capital appreciation and
depreciation for the stated period, according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial purchase order of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at
the end of the period
Aggregate total return is calculated in a similar manner, except that the
results are not annualized.
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress through periodic
reports. Financial statements certified by independent public accountants will
be submitted to shareholders at least annually.
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<PAGE>
Firstar Bank, 425 Walnut St., Cincinnati, OH 45202 acts as Custodian of the
securities and other assets of the Fund. The Custodian does not participate in
decisions relating to the purchase and sale of securities by the Fund. ICA Fund
Services, 4455 E. Camelback Rd., Ste. 261-E, Phoenix, AZ 85018 acts as the
Fund's transfer and shareholder service agent.
Price WaterhouseCoopers LLP, 1177 Avenue of The Americas, New York, NY 10036 are
the independent auditors for the Fund.
Morgan, Lewis & Bockius, 1800 M St. NW, Washington, DC 230036 is counsel to the
Fund.
Paul, Hastings, Janofsky & Walker, LLP ,345 California St., San Francisco, CA
94104 is counsel to the Trust.
With respect to certain funds, the Trust may offer more than one class of
shares. The Trust has reserved the right to create and issue additional series
or classes. Each share of a series or class represents an equal proportionate
interest in that series or class with each other share of that series or class.
Currently, the Funds have only one class of shares.
The shares of each series or class participate equally in the earnings,
dividends and assets of the particular series or class. Expenses of the Trust
which are not attributable to a specific series or class are allocated amount
all the series in a manner believed by management of the Trust to be fair and
equitable. Shares have no pre-emptive or conversion rights. Shares when issued
are fully paid and non-assessable, except as set forth below. Shareholders are
entitled to one vote for each share held. Shares of each series or class
generally vote together, except when required under federal securities laws to
vote separately on matters that only affect a particular class, such as the
approval of distribution plans for a particular class.
The Trust is not required to hold annual meetings of shareholders but will hold
special meetings of shareholders of a series or class when, in the judgment of
the Trustees, it is necessary or desirable to submit matters for a shareholder
vote. Shareholders have, under certain circumstances, the right to communicate
with other shareholders in connection with requesting a meeting of shareholders
for the purpose of removing one or more Trustees. Shareholders also have, in
certain circumstances, the right to remove one or more Trustees without a
meeting. No material amendment may be made to the Trust's Declaration of Trust
without the affirmative vote of the holders of a majority of the outstanding
shares of each portfolio affected by the amendment. The Trust's Declaration of
Trust provides that, at any meeting of shareholders of the Trust or of any
series or class, a Shareholder Servicing Agent may vote any shares as to which
such Shareholder Servicing Agent is the agent of record and which are not
represented in person or by proxy at the meeting, proportionately in accordance
with the votes cast by holders of all shares of that portfolio otherwise
represented at the meeting in person or by proxy as to which such Shareholder
Servicing Agent is the agent of record. Any shares so voted by a Shareholder
Servicing Agent will be deemed represented at the meeting for purposes of quorum
requirements. Shares have no preemptive or conversion rights. Shares, when
issued, are fully paid and non-assessable, except as set forth below. Any series
or class may be terminated (i) upon the merger or consolidation with, or the
sale or disposition of all or substantially all of its assets to, another
entity, if approved by the vote of the holders of two-thirds of its outstanding
shares, except that if the Board of Trustees recommends such merger,
consolidation or sale or disposition of assets, the approval by vote of the
holders of a majority of the series' or class' outstanding shares will be
sufficient, or (ii) by the vote of the holders of a majority of its outstanding
shares, or (iii) by the Board of Trustees by written notice to the series' or
class' shareholders. Unless each series and class is so terminated, the Trust
will continue indefinitely.
The Trust's Declaration of Trust also provides that the Trust shall maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the Trust, its shareholders, Trustees,
officers, employees and agents covering possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance existed and the Trust itself was unable to meet its obligations.
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APPENDIX
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have
a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have
a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
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