THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Trading Symbol: HWPSX
3550 North Central Avenue, Suite 1800
Phoenix, AZ 85012
(800) 495-7999
SHAREHOLDER SERVICES AND FUND LITERATURE
(800) 576-8229
PROSPECTUS
September 29, 2000
The Heritage West Preferred Securities Income Fund seeks a high rate of current
income by investing primarily in preferred securities.
This Prospectus contains basic information that you should know before you
invest. Please read and keep if for future reference.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Objective of the Fund Section 1
Expense Table Section 2
How the Fund Will Try to Reach Its Investment Objective Section 3
Principal Investment Risks Section 4
Management of the Fund Section 5
Investor Guide Section 6
Services Available to Shareholders Section 7
How to Redeem Your Shares Section 8
Distributions and Taxes Section 9
Financial Highlights Section 10
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 1 September 29, 2000
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INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGY
The Heritage West Preferred Securities Income Fund (the "Fund") seeks a high
rate of current income. The Fund invests primarily in preferred stocks and
securities having similar characteristics (together referred to as "preferred
securities"). Preferred securities typically declare and pay dividends or
interest quarterly or monthly. The Fund's investment advisor, Heritage West
Advisors, LLC (the "Advisor") seeks (i) to purchase preferred securities,
including convertible preferred stocks, that are priced advantageously relative
to their expected current dividend or interest payable rate and (ii) to sell
preferred securities after the dividend or interest has been earned (or is fully
reflected in the securities' market price) so as to "capture" either dividends
or interest as income, or a short-term capital gain.
PRINCIPAL RISKS OF INVESTING IN THE FUND
The risk exists that you could lose money on your investment in the Fund.
Interest rate and credit risk are also associated with the Advisor's strategy.
If interest rates increase, the value of the Fund's fixed income securities,
including preferred stocks, and high yield equivalents, will tend to decrease.
Conversely, if interest rates decrease, the value of preferred securities will
tend to increase. In addition, if the credit rating issued by S&P or Moody's for
a particular security is lowered during the time a preferred security is in the
Fund's portfolio, the preferred security will likely decline in value.
The Fund may invest in preferred securities and similar securities which are
below investment grade. These securities usually offer higher yields than
higher-rated securities but are also subject to greater risk than higher-rated
securities. Lower-rated or unrated securities are more likely to react to
developments affecting market and credit risks than are higher-rated securities
which react primarily to movements in interest rates. In the past, economic
downturns or increases in interest rates have caused a higher incidence of
default by issuers of lower-rated, high yield securities.
In some cases, securities in the Fund's portfolio may be highly speculative, and
may have poor prospects for reaching investment grade. To the extent an issuer
defaults during the time the Fund owns its securities, the Fund may incur
additional expenses in order to enforce its rights or to participate in a
restructuring of the preferred security. In addition, the prices of lower-rated
securities generally tend to be more volatile and the market less liquid than
those of higher-rated securities. Consequently, the Fund may at times experience
difficulty in liquidating its investments at the desired times and prices.
Additional risks are associated with the Fund's high turnover rate and its
ability to borrow money for temporary or emergency purposes. Please see a
description of these risks in the "How the Fund Will Try to Reach Its Investment
Objective" section of this Prospectus.
FUND PERFORMANCE
The following performance information indicates some of the risks of investing
in the Fund. The bar chart shows the Fund's total return for the last calendar
year. The bar chart does not reflect sales charges that you may pay to purchase
Fund shares. If they were included, the return would be less than that shown.
The table shows the Fund's average returns over time compared with a broad-based
market index that includes stocks of companies similar to those considered for
purchase by the Fund. Unlike the bar chart, the table assumes that the maximum
sales charge was paid.
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 1 (Cont.) September 29, 2000
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Calendar Year Total Return (%)*
1999 -7.28%
* The Fund's year-to-date return as of June 30, 2000 was 4.73%
During the period shown in the bar chart, the Fund's lowest quarterly return was
-5.34% for the quarter ended 12/31/99. The Fund's highest quarterly return was
3.35% for the quarter ended 12/31/98.
Average Annual Total Returns as of December 31, 1999
Since
Inception on
One Year 6/24/98
-------- -------
Heritage West Preferred Securities Income Fund -11.29% -3.94%
Merrill Lynch Perpetual Preferred Index** -3.68% -2.12%
** THE MERRILL LYNCH PERPETUAL PREFERRED INDEX IS A MARKET CAPITALIZATION
WEIGHTED INDEX THAT INCLUDES PERPETUAL-PAYMENT PREFERRED ISSUES. QUALITY RANGE
IS BBB3 - AAA BASED ON COMPOSITE MOODY AND S&P RATINGS. ISSUES MUST HAVE AT
LEAST $30 MILLION IN SHARES OUTSTANDING AT THE END OF EACH MONTH. BOTH DIVIDEND
AND PRICE RETURN ARE CALCULATED DAILY BASED ON AN ACCRUED SCHEDULE AND EXCHANGE
PRICING. PRICES ARE TAKEN AT APPROXIMATELY 3 PM E.T. THE INDEX IS NOT AVAILABLE
FOR DIRECT INVESTMENT AND DOES NOT INCUR EXPENSES.
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 2 September 29, 2000
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FEES AND EXPENSES OF THE FUND
The table shown below describes the fees and expenses that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES
Maximum Sales Load Imposed on Purchases
(As a Percentage of Offering Price) 4.50%
Maximum Sales Load on Reinvested Dividends None
Deferred Sales Load None
Redemption Fee (1) 1.00%
ANNUAL FUND OPERATING EXPENSES
(Expenses that are Deducted from Fund Assets)
Management Fees 1.00%
Other Expenses 1.98%
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Total Annual Fund Operating Expenses 2.98%
Fee Waiver and/or Expense Reimbursement (2) (0.98%)
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Net Expenses 2.00%
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(1) A 1.00% redemption fee, payable to the Fund, will be assessed on shares
purchased and held for less than one year.
(2) The Advisor has contractually agreed to waive its fees and/or pay Fund
expenses in order to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 2.00%. This contract's term is
indefinite and may be terminated only by the Board of Trustees. The Advisor
is permitted to be reimbursed, subject to limitations, for fees it waives
and for Fund expenses it pays.
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 2 (Cont.) September 29, 2000
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EXAMPLE
This example is intended to help you compare the cost 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, that
dividends and distributions are reinvested 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:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$644 $1,049 $1,479 $2,672
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 3 September 29, 2000
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HOW THE FUND WILL TRY TO REACH ITS INVESTMENT OBJECTIVE
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The investment objective of the Fund is to achieve a high rate of current
income. The Fund attempts to achieve its investment objective by primarily
buying and selling preferred securities. There can be no assurance that the Fund
will achieve its investment objective.
WHAT IS PREFERRED STOCK?
Like common stock, preferred stock represents a part of the equity ownership of
a corporation or trust. Preferred stock derives its name from the fact that it
has preference and priority over common stock in dividends, in liquidation or in
other matters. Preferred stocks typically make predetermined fixed dividend
payments and thus share many of the same characteristics of bonds, which
typically make predetermined fixed interest payments. The rights of the holder
of preferred stock, however, are subordinate to those of bondholders.
SECURITIES HAVING CHARACTERISTICS OF PREFERRED STOCKS
"Preferred-type" securities that the Fund may purchase include, among others,
Monthly/Quarterly Income Debt Securities (MIDS(TM)/QUIDS(TM)), Preferred Trust
Securities, Quarterly Income Capital Securities (QUICS), Quarterly Interest
Bonds (QUIBs(TM)), Monthly/Quarterly Income Preferred Shares (MIPS/QUIPS) and
Trust Originated Preferred Securities (TOPRS) and Trust Preferred Securities.
Some of these securities are debt securities that pay a fixed amount of interest
to security holders on a monthly or quarterly basis. Generally, these securities
are unsecured and subordinated to other debt of the same issuer. This means that
no specific asset or collateral exists to support repayment of principal or
interest to security holders and that the rights to interest and principal
payments of holders of these securities rank below payments owed to holders of
more senior debt. In the event of bankruptcy, insolvency, dissolution or any
other restructuring, holders of senior debt securities of the issuer will be
paid principal and interest due before holders of subordinated debt securities.
Holders of the issuer's equity in the form of preferred or common stock will
receive payments after all debtholders' claims have been satisfied.
PREFERRED SECURITIES -- THEIR DIVIDEND/INTEREST CYCLES
Preferred securities typically declare and pay dividends or interest quarterly
(sometimes monthly). Because shares change hands daily, the issuing corporations
or trusts set a date known as the "record date" to establish a roster of
recipients who are entitled to the next dividend or interest payment. The
securities markets then set an "ex-date" (usually two business days) prior to
the record date; purchasers of preferred securities on the "ex-date" will not,
under normal circumstances, receive the current dividend or interest amount when
it is paid. In order to maintain an orderly market, securities markets adjust
the price of shares downward by the amount of the dividend or interest amount on
the "ex-date." The effect of this action is to create no particular advantage to
earning the dividend/interest on one day, versus paying less for the security by
the amount of the payment on the next day.
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 3 (Cont.) September 29, 2000
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WHAT ARE THE ADVISOR'S PRINCIPAL INVESTMENT STRATEGIES?
The Advisor seeks to exploit inefficiencies in preferred securities' markets.
One of the strategies employed by the Advisor involves trading around
ex-dividend and interest payment dates of preferred securities which have
historically made regular payments. Substantially all of these preferred
securities are traded on a national securities exchange. The Advisor seeks (i)
to purchase preferred securities (including convertible preferred stocks) that
are priced advantageously relative to their expected current dividend or
interest payment and (ii) to sell preferred securities after the payment has
been earned (or is fully reflected in the securities' market price) so as to
"capture" either dividends or interest as income, or a short-term capital gain.
In deciding when to purchase and sell specific preferred securities, the Advisor
may seek to take advantage of other market anomalies that will generate
additional trading returns for the Fund. By owning a preferred security only
during the portion of its dividend or interest payment cycle in which the
payment is captured, the Fund may capture additional payments during the year
from other preferred securities with different payment cycles. The Advisor seeks
to minimize credit risk by evaluating the financial condition of each issuer
prior to purchasing its preferred security and by holding a diversified
portfolio of preferred securities. However, when employing the ex-dividend or
interest payment date trading strategy, preferred securities are selected
primarily for their immediate-term trading characteristics and payment capture
potential. In rare events, in order to capture a payment, a security may need to
be held by the Fund for more than one year. When a security that has been held
by the Fund for one year or more is sold, a long-term capital gain may be
realized and will be distributable to shareholders.
By trading preferred securities around their dividend or interest payment cycle,
the Advisor believes it can obtain a higher return, even after trading costs are
factored in, than an investor would obtain from simply buying and holding
preferred securities. The Advisor will seek to keep the Fund fully invested at
all times.
In addition to employing a dividend and interest capture trading strategy, the
Advisor may choose to:
* Hold preferred securities to recoup any unrealized capital loss incurred
due to a price decline in the security;
* Capture a dividend or interest payment but continue to hold the security to
realize a capital gain;
* Exploit price differentials in the preferred securities market by
purchasing preferred securities specifically to realize a capital gain;
* Purchase preferred securities to be held over more than one quarter in
order to receive the dividend or interest distributed by the preferred
securities;
* Purchase adjustable rate preferred securities for defensive purposes during
a period of rising interest rates;
* Purchase MIPS in lieu of U.S. Government Treasury Bills for the purpose of
earning income over a short term period of time;
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 3 (Cont.) September 29, 2000
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* Purchase convertible preferred securities for their capital appreciation
potential; and
* In the event the supply of preferred securities in the marketplace is
inadequate to meet the Fund's demand, the Advisor may purchase a limited
amount of income producing common stocks (generally less than 35% of the
Fund's net assets). Examples of these may include utility stocks and Real
Estate Investment Trusts (REITs). The Adviser may also purchase these
securities if it believes that these investments offer the opportunity for
a high yield return or a short term capital gain.
The Advisor uses a proprietary computer system and associated data to select the
preferred securities utilized in the conduct of its investment strategy.
RATINGS
Most preferred securities are rated by rating agencies, such as Standard &
Poor's Corporation ("S&P") and Moody's Investors Service ("Moody's"). These
ratings reflect the agencies' assessment of the capacity and willingness of an
issuer to pay preferred stock dividends or interest and any applicable sinking
fund obligations. The Fund will not invest in a preferred security rated lower
than "B-" by S&P or "B3" by Moody's, or in a security which is not rated by S&P
or Moody's unless the security is considered by the Advisor to be comparable in
quality to a security rated "B-" or "B3" or better by S&P or Moody's. More
information about ratings is included in the Statement of Additional Information
(the "SAI").
7
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 4 September 29, 2000
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PRINCIPAL INVESTMENT RISKS
BROKERAGE TRANSACTIONS AND PORTFOLIO TURNOVER
The Fund will have a high rate of portfolio turnover each year as a result of
its strategy of buying and selling preferred securities to capture dividends and
interest payments; the turnover rate is not expected to exceed 800%. A high rate
of turnover increases the portfolio brokerage costs incurred by the Fund and
will generate taxable income if the Advisor's strategy is successful. Because of
the Advisor's principal investment strategy, this turnover rate is generally
much higher than that of other funds. If the Advisor is unable to obtain low
transaction costs for the Fund, this high turnover rate will lower the Fund's
return to investors. The Advisor intends to execute portfolio transactions
primarily through brokers from which it is able to obtain reduced commission
rates, including its affiliated broker-dealer, in order to minimize trading
costs. The Advisor may also consider other factors in determining which brokers
or dealers to use for the Fund's portfolio transactions, which are more fully
discussed in the SAI. Provided the Fund receives prompt execution at competitive
prices, the Advisor may also consider the sale of Fund shares as a factor in
selecting broker-dealers for the Fund's portfolio transactions. However, in any
event, the Advisor will always seek best execution.
WHAT DOES THE FUND USE FOR TEMPORARY DEFENSIVE INVESTMENTS?
For temporary defensive purposes, the Advisor may invest up to 100% of the
Fund's total assets in high quality, short-term debt securities and money market
instruments. These short-term debt securities and money market instruments
include shares of money market mutual funds, commercial paper, certificates of
deposit, bankers' acceptances, U.S. Government securities, money market funds
and repurchase agreements.
BORROWING MONEY
The Fund may borrow money from time to time for temporary, extraordinary or
emergency purposes or for clearance of transactions in amounts up to one-third
of the value of its total assets at the time of such borrowing. The use of
borrowing by the Fund involves special risk considerations. While the Fund's
assets fluctuate in value, the interest obligation resulting from borrowing will
be fixed by the terms of the Fund's agreement with its lender. The net asset
value per share of the Fund will tend to increase more when its portfolio
securities increase in value and to decrease more when its portfolio assets
decrease in value than would otherwise be the case if the Fund did not borrow
money. In addition, interest costs on borrowings may fluctuate with changing
market rates of interest and may partially offset or exceed the return earned on
borrowed funds. Under adverse market conditions, the Fund might have to sell
portfolio securities to meet interest or principal payments at a time when
fundamental investment considerations would not favor such sales.
8
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 5 September 29, 2000
--------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
The Board of Trustees of the Advisors Series Trust establishes the Fund's
policies and supervises and reviews the management of the Fund.
THE ADVISOR, PORTFOLIO MANAGER AND DISTRIBUTOR
Heritage West Advisors, LLC, 3550 North Central Avenue , Suite 1800, Phoenix, AZ
85012, is the Fund's Advisor and has provided, together with its predecessor
organizations, asset management services using its dividend capture strategy
since 1994. The Advisor was established and is controlled by Craig O. Jolly, who
is principally responsible for the management of the Fund's portfolio. Heritage
West Securities, Inc., an affiliate of the Advisor, is the Fund's Distributor.
Since its founding in 1992, Mr. Jolly has been president and controlling
stockholder.
The Advisor provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Advisor a monthly management fee
based upon the average daily net assets of the Fund at the annual rate of 1.00%.
During the fiscal year ended May 31, 2000, the Advisor waived its entire
management fee.
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 6 September 29, 2000
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INVESTOR GUIDE
HOW TO PURCHASE SHARES OF THE FUND
There are several ways to purchase shares of the Fund. An Application Form,
which accompanies this Prospectus, is used if you send money directly to the
Fund by mail or by wire. If you have questions about how to invest, or about how
to complete the Application Form, please call an account representative at (800)
576-8229.
YOU MAY SEND MONEY TO THE FUND BY MAIL
If you wish to invest by mail, simply complete the Application Form and mail it
with a check (made payable to The Heritage West Preferred Securities Income
Fund) to the Fund's Shareholder Servicing Agent at the following address:
The Heritage West
Preferred Securities Income Fund
c/o ICA Fund Services Corp.
4455 E. Camelback Rd.
Suite 261E
Phoenix, AZ 85018-2848
If you wish, you may also send your Application Form and check via an overnight
delivery service (such as FedEx) to the address shown above.
YOU MAY WIRE MONEY TO THE FUND
To place an order by wire, you should call the Fund's Shareholder Servicing
Agent at (800) 576-8229, on a day when the New York Stock Exchange ("NYSE") is
open for trading.
You should then ask your bank to wire money to:
Firstar Bank, N.A. Cinti/Trust
ABA# 0420-000103
Attn.: The Heritage West
Preferred Securities Income Fund
For credit to The Heritage West
Preferred Securities Income fund
DDA # 488920661
For further credit to [your name & account number]
Your bank may charge you a fee for sending a wire to the Fund.
10
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 6 (Cont.) September 29, 2000
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YOU MAY PURCHASE SHARES THROUGH AN INVESTMENT BROKER
You may buy and sell shares of the Fund through certain brokers (and their
agents, together "Brokers") that have made arrangements with the Fund. An order
placed with such a Broker is treated as if it were placed directly with the
Fund, and will be executed at the next share price calculated by the Fund. Your
shares will be held in a pooled account in the Broker's name, and the Broker
will maintain your individual ownership information. The Fund may pay the Broker
for maintaining these records as well as providing other shareholder services.
In addition, the Broker may charge you a fee for handling your order. The Broker
is responsible for processing your order correctly and promptly, keeping you
advised of the status of your individual account, confirming your transactions
and ensuring that you receive copies of the Fund's Prospectus.
NET ASSET VALUE PURCHASES THROUGH INVESTMENT ADVISORS OR FINANCIAL PLANNERS
Investment advisors or financial planners may charge a management, consulting or
other fee for their services.
Investment advisors and financial planners placing trades for their own accounts
or for accounts of their clients and clients of such investment advisors or
financial planners placing trades for their own accounts may be able to place
these trades with the Fund at net asset value if the accounts are linked to the
master account of such investment advisor or financial planner on the books and
records of the broker or agent. Additionally, retirement and deferred
compensation plans and trusts used to fund those plans, including, but not
limited to, those defined in section 401(a), 403(b), or 457 of the Internal
Revenue Code and "rabbi trusts" may also purchase at net asset value.
MINIMUM INVESTMENTS
The minimum initial investment in the Fund is $5,000. The minimum subsequent
investment is $500. However, if you are investing in an Individual Retirement
Account ("IRA"), or you are starting an Automatic Investment Plan (see Section
7), the minimum initial and subsequent investments are $2,000 and $250,
respectively.
SUBSEQUENT INVESTMENTS
You may purchase additional shares of the Fund by sending a check, with the stub
from an account statement, to the Fund at the address on this page. Please write
your account number on the check. (If you do not have a stub from an account
statement, you can write your name, address and account number on a separate
piece of paper and enclose it with your check.) If you want to send additional
money for investment by wire, it is important for you to call the Fund's
Shareholder Servicing Agent at (800) 576-8229. You may also make additional
purchases through an investment dealer, as described above.
11
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 6 (Cont.) September 29, 2000
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WHAT IS THE PRICE YOU PAY FOR EACH SHARE OF THE FUND?
When you invest in the Fund, you pay the "offering price" of a share. The
offering price of shares is the net asset value (the "NAV") per share. plus a
sales charge that is based on the amount purchased, as described in the table
shown below.
Sales Charge as Sales Charge
as a Percentage of as a Percentage of
Amount of Purchase Offering Price Net Asset Value
------------------ -------------- ---------------
Up to $49,999 4.50% 4.71%
$50,000 to $99,999 4.00% 4.17%
$100,000 to $249,999 3.50% 3.63%
$250,000 to $499,999 2.50% 2.56%
$500,000 to $999,999 2.00% 2.04%
$1,000,000 or more* None None
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* The Advisor will pay selling dealers an additional amount from the
Advisor's own resources as supplemental distribution assistance. To the
extent that the investment remains with the Fund, the Advisor will pay a
total of 0.90% on the amount of the purchase on a quarterly basis over the
immediate 24 month period following the date of the initial purchase.
Letter of Intent - An investor may qualify for an immediate reduced sales charge
on purchases by completing the Letter of Intent section on the Application Form.
The investor will state an intention to purchase, during the next 13 months a
specified amount of shares which, if made at one time, would qualify for a
reduced sales charge.
Rights of Accumulation - The reduced sales charges applicable to purchases apply
on a cumulative basis over any period of time. Thus the value of all shares of
the Fund owned by an investor (including the investor's own account, IRA
account, or other account), taken at current NAV, can be combined with a current
purchase of shares to determine the rate of sales charge applicable to the
current purchase in order to receive the cumulative quantity reduction. When
opening an additional account, the fact that the investor currently holds shares
of the Fund must be indicated on the Application Form in order to receive the
cumulative quantity discount. For subsequent purchases, the Fund's Shareholder
Servicing Agent ((800) 576-8226) should be notified of current Fund holdings
prior to the purchase of additional shares.
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 6 (Cont.) September 29, 2000
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Purchases at Net Asset Value - Shares of the Fund may be purchased at NAV by (i)
officers, Trustees, directors and full time employees of the Trust, the Advisor,
the Administrator and affiliates of those companies, or by their family members;
(ii) registered representatives and employees of firms which have selling
agreements with the Distributor; (iii) investment advisors, financial planners
or other intermediaries who place trades for their own accounts or the accounts
of their clients and who charge a management, consulting or other fee for their
services; (iv) clients of such investment advisors, financial planners or other
intermediaries who place trades for their own accounts if the accounts are
linked to the master account of such investment advisor, financial planner or
other intermediary on the books and records of the broker or agent; and (v) by
such other investors who are determined to have acquired shares under
circumstances not involving any sales expense to the Fund or Distributor. The
Distributor has the right to decide whether a purchase may be made at net asset
value.
If an investment is made at NAV that meets any of the referenced requirements,
the Advisor will pay supplemental distribution assistance of up to 0.90%, out of
its own resources, to any dealer who has executed a selling agreement with the
Distributor through which the purchase is made. Additionally, the Advisor, at
its discretion, may pay a "finder's fee" of up to 0.90% to any person who has
assisted the Advisor or Distributor in securing additional investments in the
Fund. To the extent that the investment remains with the Fund, this fee (and the
fee associated with the supplemental distribution assistance noted above) will
generally be split and paid on a quarterly basis over the immediate 24 month
period following the date of the initial purchase.
The Fund's NAV per share is calculated by dividing the value of the Fund's total
assets, less its liabilities, by the number of its shares outstanding. In
calculating the net asset value, portfolio securities are valued using current
market values, if available. Securities for which market quotations are not
readily available are valued at fair values determined in good faith by or under
the supervision of the Board of Trustees of the Trust. The fair value of
short-term obligations with remaining maturities of 60 days or less is their
amortized cost. The NAV is calculated at the close of regular trading of the
NYSE, generally 4:00 P.M., Eastern time.
WHEN IS MONEY INVESTED IN THE FUND?
Any money received for investment in the Fund from an investor, whether sent by
check or by wire, is invested at the offering price of the Fund which is next
calculated after the order is received (assuming the check or wire correctly
identifies the Fund and account). Orders received from brokers are invested at
the offering price next calculated after the order is received. It is the
responsibility of the broker to place your order promptly. A check or wire
received after the NYSE closes is invested as of the next day's calculation of
the Fund's offering price.
OTHER INFORMATION
All investments must be made in U.S. dollars and checks must be drawn on U.S.
banks. Third party checks will not be accepted. A charge may be imposed if a
check used to make an investment does not clear. The Fund and the Distributor
reserve the right to reject any investment, in whole or in part. Federal tax law
requires that investors provide a certified taxpayer identification number and
other certifications on opening an account in order to avoid backup withholding
of taxes. See the Application Form for more information about backup
withholding. The Fund is not required to issue share certificates; all shares
are normally held in non-certificated form on the books of the Fund for the
account of the shareholder. The Fund, under certain circumstances, may accept
investments of securities appropriate for the Fund's portfolio in lieu of cash.
Prior to making such a purchase, you should call the Advisor to determine if
such an investment may be made. The Advisor may, at its own expense, pay third
parties for assistance in gathering assets for the Fund.
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THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 7 September 29, 2000
--------------------------------------------------------------------------------
SERVICES AVAILABLE TO SHAREHOLDERS
RETIREMENT PLANS
You may invest in the Fund through an IRA or other retirement plan. Applications
may be obtained from the Fund.
AUTOMATIC INVESTING BY CHECK
You may make regular monthly investments in the Fund using the Automatic
Investment Plan. A check is automatically drawn on your personal checking
account each month for a predetermined amount (but not less than $250), as if
you had written it directly. Upon receipt of the withdrawn funds, the Fund
automatically invests the money in additional shares of the Fund at the current
offering price. Applications for this service are available from the Fund's
Shareholder Servicing Agent. There is no charge by the Fund for this service.
The Fund may terminate or modify this privilege at any time, and shareholders
may terminate their participation by notifying the Shareholder Servicing Agent
in writing, sufficiently in advance of the next withdrawal.
AUTOMATIC WITHDRAWALS
The Fund offers an Automatic Withdrawal Program whereby shareholders may request
that a check drawn in a predetermined amount be sent to them each month or
calendar quarter. To start this Program, your account must have Fund shares with
a value of at least $10,000. The minimum amount that may be withdrawn each month
or quarter is $50. This Program may be terminated or modified by a shareholder
or the Fund at any time without charge or penalty. A withdrawal under the
Systematic Withdrawal Program involves a redemption of shares of the Fund and
may result in a gain or loss for federal income tax purposes. In addition, if
the amount withdrawn exceeds the dividends credited to your account, the account
ultimately may be depleted.
14
<PAGE>
THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 8 September 29, 2000
--------------------------------------------------------------------------------
HOW TO REDEEM YOUR SHARES
You have the right to redeem all or any portion of your shares of the Fund at
their net asset value on each day the NYSE is open for trading. You will be
charged a 1.00% redemption fee, payable to the Fund, on shares redeemed within
one year of the purchase date. The fee will be applied on a first-in, first-out
basis. The redemption fee is intended to compensate the Fund for the increased
expenses to longer-term shareholders and the disruptive effect on the portfolio
caused by short-term investors.
REDEMPTION IN WRITING
You may redeem your shares by simply sending a written request to the Fund. You
should give your account number and state whether you want all or part of your
shares redeemed. The letter should be signed by all of the shareholders whose
names appear in the account registration. You should send your redemption
request to:
The Heritage West
Preferred Securities Income Fund
c/o ICA Fund Services Corp.
4455 E. Camelback Rd.
Suite 261E
Phoenix, AZ 85018-2848
SIGNATURE GUARANTEE
If the value of the shares you wish to redeem exceeds $100,000, the signatures
on the redemption request must be guaranteed by an "eligible guarantor
institution." These institutions include banks, broker-dealers, credit unions
and savings institutions. A broker-dealer guaranteeing a signature must be a
member of a clearing corporation or maintain net capital of at least $100,000.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which
participates in a signature guarantee program. A notary public is not an
acceptable guarantor.
REDEMPTION BY TELEPHONE
If you complete the Redemption by Telephone portion of the Fund's Application
Form, you may redeem shares on any business day the NYSE is open by calling the
Fund's Shareholder Servicing Agent at (800) 576-8229 before 4:00 P.M. Eastern
time. Redemption proceeds will be mailed or wired, at your direction, on the
next business day to the bank account you designated on the Application Form.
The minimum amount that may be wired is $1,000 (wire charges, if any, will be
deducted from redemption proceeds). Telephone redemptions cannot be made for IRA
accounts.
By establishing telephone redemption privileges, you authorize the Fund and its
Shareholder Servicing Agent to act upon the instruction of any person who makes
the telephone call to redeem shares from your account and transfer the proceeds
to the bank account designated in the Application Form. The Fund and the
Shareholder Servicing Agent will use procedures to confirm that redemption
instructions received by telephone are genuine, including recording of telephone
instructions and requiring a form of personal identification before acting on
these instructions. If these normal identification procedures are followed,
neither the Fund nor the Shareholder Servicing Agent will be liable for any
loss, liability, or cost which results from acting upon instructions of a person
believed to be a shareholder with respect to the telephone redemption privilege.
The Fund may change, modify, or terminate these privileges at any time upon at
least 60 days notice to shareholders.
15
<PAGE>
THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 8 (Cont.) September 29, 2000
--------------------------------------------------------------------------------
You may request telephone redemption privileges after your account is opened;
however, the authorization form will require a separate signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity.
WHAT PRICE IS USED FOR A REDEMPTION?
The redemption price is the NAV of the Fund's shares less the redemption fee (if
applicable), next determined after shares are validly tendered for redemption.
All signatures of account holders must be included in the request, and a
signature guarantee, if required, must also be included for the request to be
valid.
WHEN ARE REDEMPTION PAYMENTS MADE?
As noted above, redemption payments for telephone redemptions are sent on the
day after the telephone call is received. Payments for redemptions sent in
writing are normally made promptly, but no later than seven days after the
receipt of a request that meets requirements described above. However, the Fund
may suspend the right of redemption under certain extraordinary circumstances in
accordance with rules of the Securities and Exchange Commission.
If shares were purchased by wire, they cannot be redeemed until the day after
the Application Form is received. If shares were purchased by check and then
redeemed shortly after the check is received, the Fund may delay sending the
redemption proceeds until it has been notified that the check used to purchase
the shares has been collected, a process which may take up to 15 days. This
delay may be avoided by investing by wire or by using a certified or official
bank check to make the purchase.
REPURCHASES FROM DEALERS
The Fund may accept orders to repurchase shares from an investment dealer on
behalf of a dealer's customers. The net asset value for a repurchase is the net
asset value next calculated after receipt of the order from the dealer. The
dealer is responsible for forwarding any documents required in connection with a
redemption, including a signature guarantee, promptly, and the Fund may cancel
the order if these documents are not received promptly.
OTHER INFORMATION ABOUT REDEMPTIONS
A redemption may result in recognition of a gain or loss for federal income tax
purposes. Due to the relatively high cost of maintaining smaller accounts, the
shares in your account (unless it is a retirement plan or Uniform Gifts or
Transfers to Minors Act account) may be redeemed by the Fund if, due to
redemptions you have made, the total value of your account is reduced to less
than $500. If the Fund determines to make such an involuntary redemption, you
will first be notified that the value of your account is less than $500, and you
will be allowed 30 days to make an additional investment to bring the value of
your account to at least $500 before the Fund takes any action.
16
<PAGE>
THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 9 September 29, 2000
--------------------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income and net short-term capital gains from
preferred securities, if any, are normally declared and paid by the Fund
quarterly. Capital gains, excluding net short-term capital gains from preferred
securities, if any, are normally distributed in December, but the Fund may make
an additional payment of dividends or distributions if it deems it desirable at
any other time during any year.
Dividends are automatically paid in cash, and capital gain distributions are
automatically reinvested in additional shares of the Fund at their net asset
value per share, unless you have previously requested otherwise on the Fund's
Application Form or in writing to the Shareholder Servicing Agent. Alternative
distribution options include (i) having all dividends and distributions paid in
cash, and (ii) having all dividends and distributions reinvested.
Any dividend or distribution paid by the Fund has the effect of reducing the net
asset value per share on the record date by the amount of the dividend or
distribution. You should note that a dividend or distribution paid on shares
purchased shortly before that dividend or distribution was declared will be
subject to income taxes even though the dividend or distribution represents, in
substance, a partial return of capital to you.
TAXES
Distributions derived from net investment income, including net short-term
capital gains, are taxable to shareholders as ordinary income. On the
"ex-dividend date" for a stock held by the Fund, the price of the stock normally
declines in the amount of the dividend. The Fund's strategy of buying and
selling stocks to capture dividends, which results in high portfolio turnover,
is intended to generate high current income. Such income may be realized either
in the form of dividends or short-term capital gains. A portion of dividends may
qualify for the dividends-received deduction for corporations, but the Advisor
will not necessarily attempt to maximize this deduction in the management of the
Fund's portfolio. Distributions made by the Fund will be taxable to shareholders
whether received in shares (through dividend reinvestment) or in cash. If the
Fund's income and capital gain distributions exceed its taxable net investment
income and net capital gains, all or a portion of those distributions may be
treated as a return of capital to you. Although a return of capital is not
taxed, it will reduce the cost basis of your shares.
Distributions designated as capital gains dividends are taxable as capital gains
regardless of the length of time shares of the Fund have been held. Although
distributions are generally taxable when received, certain distributions made in
January are taxable as if received the prior December. You will be informed
annually of the amount and nature of the Fund's distributions. Additional
information about taxes is set forth in the Statement of Additional Information.
You should consult your own advisors concerning federal, state and local
taxation of distributions from the Fund.
17
<PAGE>
THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 10 September 29, 2000
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance during its past fiscal periods. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information for the year ended May 31, 2000, has been audited by
PricewaterhouseCoopers LLP, and by other independent accountants for the period
ended prior to May 31, 2000, PricewaterhouseCoopers LLP's report, along with the
Fund's financial statements, are included in the Fund's annual report, which is
available upon request.
For a capital share outstanding throughout the period
June 24,1998*
Year Ended Through
May 31, 2000 May 31, 1999
--------- ---------
Net asset value, beginning of period $ 12.22 $ 12.25
--------- ---------
Income from investment operations:
Net investment income 0.76 0.83
Net realized and unrealized loss on investments (1.46) 0.06
--------- ---------
Total from investment operations (0.70) 0.89
--------- ---------
Less distributions:
From net investment income (0.97) (0.92)
Return of capital (0.25) --
--------- ---------
Total distributions (1.22) (0.92)
Net asset value, end of period $ 10.30 $ 12.22
========= =========
Total return# (5.93)% 7.63%++
Ratios/supplemental data:
Net assets, end of period (thousands) $ 5,449 $ 6,250
Ratio of expenses to average net assets:
Before expense reimbursement 2.98% 3.82%+
After expense reimbursement 1.97% 1.98%+
Ratio of net investment income to average net assets:
After expense reimbursement 7.19% 7.48%+
Portfolio turnover rate 63.36% 253.59%
* Commencement of operations
+ Annualized
++ Not annualized
# Does not include sales load
18
<PAGE>
THE HERITAGE WEST
PREFERRED SECURITIES INCOME FUND
Prospectus - Section 10 (Cont.) September 29, 2000
--------------------------------------------------------------------------------
FOR MORE INFORMATION
The Statement of Additional Information (SAI) includes additional information
about the Fund which is incorporated by reference into this Prospectus.
The Fund's annual and semi-annual reports to shareholders contain additional
information about the Fund's investments. The annual report includes a
discussion of the market conditions and investment strategies which
significantly affected the Fund's performance during its last fiscal year.
The SAI and shareholder reports are available free upon request. To request them
or other information, or to ask any questions, please call:
SHAREHOLDER SERVICES AND FUND LITERATURE
(800) 576-8229
or write to:
The Heritage West
Preferred Securities Income Fund
c/o ICA Fund Services Corp.
4455 E. Camelback Rd.
Suite 261E
Phoenix, AZ 85018-2848
Trading Symbol: HWPSX
The SAI and other Fund information may also be reviewed and copied at the SEC's
Public Reference Room in Washington, DC. Call 1-202-942-8090 for information
about its operations.
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, for duplicating
fees, by writing to the SEC's Public Reference Section, Washington, DC
20549-0203 or by electronic request at: [email protected].
The Fund's SEC file number is 811-07959
19
<PAGE>
THE HERITAGE WEST PREFERRED SECURITIES INCOME FUND
Statement of Additional Information
Dated September 29, 2000
This Statement of Additional Information (the "SAI") is not a Prospectus, and it
should be read in conjunction with the Prospectus dated September 29, 2000, as
may be amended from time to time, of The Heritage West Preferred Securities
Income Fund (the "Fund"), a series of Advisors Series Trust (the "Trust").
Heritage West Advisors, LLC, (the "Advisor") is the Advisor to the Fund. A copy
of the Fund's Prospectus may be obtained from the Fund at 3550 North Central
Avenue, Suite 1800, Phoenix, AZ 85012; telephone (800) 596-1213.
TABLE OF CONTENTS
The Trust....................................................................B-2
Investment Objective and Policies............................................B-2
Management of the Fund.......................................................B-8
Control Persons and Principal Holders of Securities..........................B-9
Distribution Agreement......................................................B-12
Portfolio Transactions and Brokerage........................................B-12
Net Asset Value.............................................................B-13
Taxation....................................................................B-14
Dividends and Distributions.................................................B-17
Performance Information.....................................................B-17
General Information.........................................................B-19
Appendix....................................................................B-21
B-1
<PAGE>
THE TRUST
Advisors Series Trust is an open-end, 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 18 series of shares
of beneficial interest, par value $0.01 per share. This SAI relates only to the
Fund.
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 Fund. The Prospectus of the Fund 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 Fund is to achieve a high rate of current
income by investing primarily in preferred securities. There is no assurance
that the Fund will achieve its objective. The discussion below supplements
information contained in the prospectus as to investment policies of the Fund.
PREFERRED STOCK
In addition to the information about preferred stock contained in the
prospectus, preferred stock usually has preference in dividends, and holders of
preferred stock generally are entitled to receive a specified dividend
(expressed either in dollars per share or as a percentage of the par value of
the stock) before dividends may be distributed to common stockholders. Preferred
stock may be either cumulative or noncumulative. A cumulative dividend
preference means that if a dividend is omitted, it must be declared and paid
before a dividend can be paid to holders of common stock.
While a preference with respect to dividends is the most common privilege
of preferred stock, there are other preferences which may also by applicable to
an issue. These include a preference on liquidation and in voting. Preferred
stocks are also frequently convertible into the issuer's common stock, and they
may be redeemed after a certain date at the option of the corporation. There are
also variations in dividend preferences, including the possibility, in some
cases, of participation in earnings.
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in convertible preferred stocks and warrants. A
convertible preferred stock may be converted at a stated price within a
specified period of time into a certain quantity of the common stock of the same
or a different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
gives an investor the opportunity, through its conversion feature, to
participate in the capital appreciation of the issuing company depending upon a
market price advance in the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible preferred stock, warrants do not pay a fixed dividend.
Investments in warrants involve certain risks, including the possible lack of a
liquid market for resale of the warrants, potential price fluctuations as a
result of speculation or other factors, and failure of the price of the
underlying security to reach or have reasonable prospects of reaching a level at
which the warrant can be prudently exercised (in which event the warrant may
expire without being exercised, resulting in a loss of the Fund's entire
investment therein).
RISKS OF INVESTING IN LOWER-RATED, HIGH-YIELD PREFERRED SECURITIES
As set forth in the prospectus, the Fund may invest a portion of its net
assets in preferred Securities which may be rated below "baa" by Moody's or
"BBB" by S&P or below investment grade by other recognized rating agencies, or
in unrated securities of comparable quality under certain circumstances. These
lower-rated, high yield preferred Securities are subject to greater market
fluctuations and risk of loss of income and principal than higher rated
Securities for a variety of reasons, including the following:
B-2
<PAGE>
SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES. The economy and interest
rates affect lower rated securities differently from other securities. For
example, the prices of lower rated securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic changes or individual corporate developments.
Also, during an economic downturn or substantial period of rising interest
rates, highly leveraged issuers may experience financial stress which would
adversely affect their ability to service their obligations, to meet projected
business goals, and to obtain additional financing. Periods of economic
uncertainty and changes can be expected to result in increased volatility of
market prices of lower rated preferred Securities and the Fund's asset values.
LIQUIDITY AND VALUATION. To the extent that there is no established retail
secondary market, there may be thin trading of lower rated preferred Securities,
and this may impact the Advisor's ability to value these preferred Securities
and the Fund's assets and hinder the Fund's ability to dispose of these
Securities. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of lower rated
preferred Securities, especially in a thinly traded market.
CREDIT RATINGS. Credit ratings primarily evaluate the likelihood of payment
of dividends, not the market value risk of preferred Securities. Also, since
credit rating agencies may fail to timely change the credit ratings to reflect
subsequent events, the Advisor must monitor the issuers of lower rated preferred
Securities in the Fund's portfolio to determine if the issuers will have
sufficient cash flow and profits to meet dividends, and to assure the
Securities' liquidity so the Fund can meet redemption requests. The Fund will
dispose of a portfolio security in an orderly manner when its rating has been
downgraded below C.
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
BANK CERTIFICATES OR DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The
Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks are,
among other things, required to maintain specified levels of reserves, limited
in the amount which they can loan to a single borrower, and subject to other
B-3
<PAGE>
regulations designed to promote financial soundness. However, such laws and
regulations do not necessarily apply to foreign bank obligations that the Fund
may acquire.
In addition to purchasing certificates of deposit and bankers' acceptances,
to the extent permitted under its investment objectives and policies stated
above and in its prospectus, the Fund may make interest-bearing time or other
interest-bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The
Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's, or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Advisor to be of comparable quality.
These rating symbols are described in the Appendix.
Corporate obligations include bonds and notes issued by corporations to
finance longer-term credit needs than supported by commercial paper. While such
obligations generally have maturities of ten years or more, the Fund may
purchase corporate obligations which have remaining maturities of one year or
less from the date of purchase and which are rated "AA" or higher by S&P or "Aa"
or higher by Moody's.
INVESTMENT COMPANY SECURITIES
The Fund may invest in shares of other investment companies. The Fund may
invest in money market mutual funds in connection with its management of daily
cash positions. In addition to the advisory and operational fees a fund bears
directly in connection with its own operation, the Fund would also bear its pro
rata portions of each other investment company's advisory and operational
expenses.
GOVERNMENT OBLIGATIONS
The Fund may make short-term investments in U.S. Government obligations.
Such obligations include Treasury bills, certificates of indebtedness, notes and
bonds, and issues of such entities as the Government National Mortgage
Association ("GNMA"), Export-Import Bank of the United States, Tennessee Valley
Authority, Resolution Funding Corporation, Farmers Home Administration, Federal
Home Loan Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks,
Federal Land Banks, Federal Housing Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation, and the Student
Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by the
full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
The Fund may invest in sovereign debt obligations of foreign countries. A
sovereign debtor's willingness or ability to repay principal and interest in a
timely manner may be affected by a number of factors, including its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
B-4
<PAGE>
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which it may be
subject. Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to meet
such conditions could result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debt in a timely manner.
FOREIGN INVESTMENTS
The Fund may invest in securities of foreign issuers, provided that they
are publicly traded in the United States and denominated in U.S. dollars.
DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), which are receipts typically issued in connection
with a U.S. or foreign bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
TAXES. The interest and dividends payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Fund's shareholders.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to its portfolio
securities. Pursuant to such agreements, the Fund acquires securities from
financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor, subject to the seller's agreement to repurchase and
the Fund's agreement to resell such securities at a mutually agreed upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio security). Securities subject
to repurchase agreements will be held by the Custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund will
suffer a loss to the extent that the proceeds from a sale of the underlying
securities are less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans under the 1940 Act.
B-5
<PAGE>
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The Fund may purchase securities on a "when-issued," forward commitment or
delayed settlement basis. In this event, the Custodian will set aside cash or
liquid portfolio securities equal to the amount of the commitment in a separate
account. Normally, the Custodian will set aside portfolio securities to satisfy
a purchase commitment. In such a case, the Fund may be required subsequently to
place additional assets in the separate account in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash.
The Fund does not intend to engage in these transactions for speculative
purposes but only in furtherance of its investment objectives. Because the Fund
will set aside cash or liquid portfolio securities to satisfy its purchase
commitments in the manner described, the Fund's liquidity and the ability of the
Advisor to manage it may be affected in the event the Fund's forward
commitments, commitments to purchase when-issued securities and delayed
settlements ever exceeded 15% of the value of its net assets.
The Fund will purchase securities on a when-issued, forward commitment or
delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss. When the Fund engages in when-issued, forward commitment
and delayed settlement transactions, it relies on the other party to consummate
the trade. Failure of such party to do so may result in the Fund's incurring a
loss or missing an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities in an amount not exceeding one
third of its total assets to financial institutions such as banks and brokers if
the loan is collateralized in accordance with applicable regulations. Under the
present regulatory requirements which govern loans of portfolio securities, the
loan collateral must, on each business day, at least equal the value of the
loaned securities and must consist of cash, letters of credit of domestic banks
or domestic branches of foreign banks, or securities of the U.S. Government or
its agencies. To be acceptable as collateral, letters of credit must obligate a
bank to pay amounts demanded by the Fund if the demand meets the terms of the
letter. Such terms and the issuing bank would have to be satisfactory to the
Fund. Any loan might be secured by any one or more of the three types of
collateral. The terms of the Fund's loans must permit the Fund to reacquire
loaned securities on five days' notice or in time to vote on any serious matter
and must meet certain tests under the Code.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. The Advisor will monitor the amount of
illiquid securities in the Fund's portfolio, under the supervision of the
Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
B-6
<PAGE>
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the Commission under the Securities
Act, the Trust's Board of Trustees may determine that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
RISKS OF INVESTING IN SMALL COMPANIES
The Fund may purchase securities of companies with market capitalization as
low as $25 million. Additional risks of such investments include the markets on
which such securities are frequently traded. In many instances the securities of
smaller companies are traded only over-the-counter or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, the securities of smaller
companies may be subject to greater and more abrupt price fluctuations. When
making large sales, the Fund may have to sell portfolio holdings at discounts
from quoted prices or may have to make a series of small sales over an extended
period of time due to the trading volume of smaller company securities.
Investors should be aware that, based on the foregoing factors, an investment in
the Fund may be subject to greater price fluctuations than an investment in a
fund that invests exclusively in larger, more established companies. The
Advisor's research efforts may also play a greater role in selecting securities
for the Fund than in a fund that invests in larger, more established companies.
INVESTMENT RESTRICTIONS
The 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.
The Fund may not:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives 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.
4. Purchase securities on margin, participate on a joint basis 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.),
B-7
<PAGE>
6. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall no 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. With respect to 75% of its total assets, invest more than 5% of its
total assets in securities of a single issuer or hold more than 10% of
the voting securities of such issuer, except that this restriction
does not apply to investment in the securities of the U.S. Government,
its agencies or instrumentalities.
8. 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 investments in the securities of the U.S.
Government, its agencies or instrumentalities.
The Fund observes the following policies which are not deemed fundamental and
which may be changed without shareholder vote. The Fund may not:
1. Invest in any issuers for purposes of exercising control or
management.
2. Invest in securities of other investment companies except as permitted
under the 1940 Act.
3. 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.
4. Invest in foreign currency contracts.
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 the Fund will not be considered a violation. If the value of the
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.
MANAGEMENT OF THE FUND
The overall management of the business and affairs of the Trust is vested
with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day to day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their birth dates and positions
with the Trust, their business addresses and principal occupations during the
past five years are:
<TABLE>
<CAPTION>
Position with Principal Occupation
Name and Address The Trust During Past Five Years
---------------- --------- ----------------------
<S> <C> <C>
WALTER E. AUCH, SR. (born 1921) Trustee Business Consultant and Director,
6001 N. 62nd Place Nicholas-Applegate Institutional Mutual Funds,
Paradise Valley, AZ 85153 Salomon Smith Barney Trak Funds and Concert
Series, Pimco Advisors L.P., Banyan Strategic
Realty Trust, Legend Properties and Senele Grou
ERIC M. BANHAZL* (born 1957) Trustee, President Executive Vice President, Investment Company
2020 E. Financial Way and Treasurer Administration, LLC; Vice President, First Fund
Glendora, CA 91741 Distributors, Inc.; Treasurer, Guinness Flight
Investment Funds, Inc.
</TABLE>
B-8
<PAGE>
<TABLE>
<CAPTION>
Position with Principal Occupation
Name and Address The Trust During Past Five Years
---------------- --------- ----------------------
<S> <C> <C>
DONALD E. O'CONNOR (born 1936) Trustee Retired; formerly Executive Vice President and
1700 Taylor Avenue Chief Operating Officer of ICI Mutual Insurance
Fort Washington, MD 20744 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.
GEORGE T. WOFFORD III (born 1939) Trustee Senior Vice President, Information Services,
305 Glendora Circle Federal Home Loan Bank of San Francisco.
Danville, CA 94526
STEVEN J. PAGGIOLI (born 1950) Vice President Executive Vice President, Investment Company
915 Broadway, Suite 1605 Administration, LLC; Vice President, First Fund
New York, NY 10010 Distributors, Inc.; President and Trustee,
Professionally Managed Portfolios; Trustee,
Managers Funds Trust.
ROBERT H. WADSWORTH (born 1940) Vice President President, Robert H. Wadsworth & Associates,
4455 E. Camelback Rd. Suite 261-E Inc., Investment Company Administration, LLC and
Phoenix, AZ 85018 First Fund Distributors, Inc.; Vice President,
Professionally Managed Portfolios; President,
Guiness Flight Investment Funds, Inc.; Director,
Germany Fund, Inc., New Germany Fund, Inc.,
Central European Equity Fund, Inc. and Deutsche
Funds, Inc.
THOMAS W. MARSCHEL (born 1970) Vice President Vice President, Investment Company
4455 E. Camelback Rd. Suite 261-E Administration, LLC; Assistant Vice President,
Phoenix, AZ 85018 Investment Company Administration, LLC from
October 1995 to January 2000; Fund Accounting
Supervisor with SEI Fund Resources from January
1994 to October 1995.
CHRIS O. MOSER (born 1949) Secretary Employed by Investment Company Administration,
4455 E. Camelback Rd. Suite 261-E LLC (since July 1996); Formerly employed by Bank
Phoenix, AZ 85018 One, N.A. (From August 1995 until July 1996;
O'Connor, Cavanagh, Anderson, Killingsworth and
Beshears (law firm) (until August 1995)
</TABLE>
* denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
Set forth below is the annual rate of compensation received by the following
Trustees from all Funds of the Trust. This total amount is allocated equally
among the funds in the Trust.
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
Compensation indicated is for the calendar-year ended December 31, 1999.
Currently, each Independent Trustee receives $12,000 per year in fees, plus
$1,500 for each meeting attended and is reimbursed for expenses. This amount is
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<PAGE>
allocated among the portfolios of the Trust. The Trust has no pension or
retirement plan. No other entity affiliated with the Trust pays any compensation
to the Trustees. The Trust has no pension or retirement plan. No other entity
affiliated with the Trust pays any compensation to the Trustees.
PRINCIPAL SHAREHOLDERS
Shares of the Fund owned by the Trustees and officers as a group were less
than 1% at September 7, 2000.
As of September 7, 2000, the following persons owned of record and/or
beneficially more than 5% of the Fund's outstanding voting securities:
First Clearing Corporation, Dr. Fred L. Shapiro IRA, Wheat First Securities
As Custodian, 3490 Fairway Lane, Minnetonka, MN 55305; 5.99% record.
THE ADVISOR
Subject to the supervision of the Board of Trustees, investment management
and related services are provided by the Advisor, pursuant to an Investment
Advisory Agreement (the "Advisory Agreement").
Under the Advisory Agreement, the Advisor agrees to invest the assets of
the Fund in accordance with the investment objectives, policies and restrictions
of the Fund as set forth in the Fund's and Trust's governing documents,
including, without limitation, the Trust's Agreement and Declaration of Trust
and By-Laws; the Fund's prospectus, statement of additional information, and
undertakings; and such other limitations, policies and procedures as the
Trustees of the Trust may impose from time to time in writing to the Advisor. In
providing such services, the Advisor shall at all times adhere to the provisions
and restrictions contained in the federal securities laws, applicable state
securities laws, the Code, and other applicable law.
Without limiting the generality of the foregoing, the Advisor has agreed to
(i) furnish the Fund with advice and recommendations with respect to the
investment of the Fund's assets, (ii) effect the purchase and sale of portfolio
securities; (iii) manage and oversee the investments of the Fund, subject to the
ultimate supervision and direction of the Trust's Board of Trustees; (iv) vote
proxies and take other actions with respect to the Fund's securities; (v)
maintain the books and records required to be maintained with respect to the
securities in the Fund's portfolio; (vi) furnish reports, statements and other
data on securities, economic conditions and other matters related to the
investment of the Fund's assets which the Trustees or the officers of the Trust
may reasonably request; and (vii) render to the Trust's Board of Trustees such
periodic and special reports as the Board may reasonably request. The Advisor
has also agreed, at its own expense, to maintain such staff and employ or retain
such personnel and consult with such other persons as it shall from time to time
determine to be necessary to the performance of its obligations under the
Advisory Agreement. Personnel of the Advisor may serve as officers of the Trust
provided they do so without compensation from the Trust. Without limiting the
generality of the foregoing, the staff and personnel of the Advisor shall be
deemed to include persons employed or retained by the Advisor to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Advisor or the Trust's Board of Trustees may desire and reasonably request.
With respect to the operation of the Fund, the Advisor has agreed to be
responsible for the expenses of printing and distributing extra copies of the
Fund's prospectus, statement of additional information, and sales and
advertising materials (but not the legal, auditing or accounting fees attendant
thereto) to prospective investors (but not to existing shareholders); and the
costs of any special Board of Trustees meetings or shareholder meetings convened
for the primary benefit of the Advisor.
As compensation for the Advisor's services, the Advisor is entitled to
receive from the 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. In addition to the fees payable to the Advisor and
the Administrator, the Trust is responsible for its operating expenses,
including: fees and expenses incurred in connection with the issuance,
registration and transfer of its shares; brokerage and commission expenses; all
expenses of transfer, receipt, safekeeping, servicing and accounting for the
B-10
<PAGE>
cash, securities and other property of the Trust for the benefit of the Fund
including all fees and expenses of its custodian, shareholder services agent and
accounting services agent; interest charges on any borrowings; costs and
expenses of pricing and calculating its daily net asset value and of maintaining
its books of account required under the 1940 Act; taxes, if any; a pro rata
portion of expenditures in connection with meetings of the Fund's shareholders
and the Trust's Board of Trustees that are properly payable by the Fund;
salaries and expenses of officers and fees and expenses of members of the
Trust's Board of Trustees or members of any advisory board or committee who are
not members of, affiliated with or interested persons of the Advisor or
Administrator; insurance premiums on property or personnel of the Fund which
inure to its benefit, including liability and fidelity bond insurance; the cost
of preparing and printing reports, proxy statements, prospectuses and statements
of additional information of the Fund or other communications for distribution
to existing shareholders; legal, auditing and accounting fees; trade association
dues; fees and expenses (including legal fees) of registering and maintaining
registration of its shares for sale under federal and applicable state and
foreign securities laws; all expenses of maintaining and servicing shareholder
accounts, including all charges for transfer, shareholder recordkeeping,
dividend disbursing, redemption, and other agents for the benefit of the Fund,
if any; and all other charges and costs of its operation plus any extraordinary
and non-recurring expenses, except as otherwise prescribed in the Advisory
Agreement.
The Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce fees payable to it by the Fund and to pay Fund
operating expenses to the extent necessary to limit the Fund's aggregate annual
operating expenses (excluding interest and tax expenses) to the limit set forth
in the Expense Table (the "expense cap"). Any such reductions made by the
Advisor in its fees or payment of expenses which are the Fund's obligation are
subject to reimbursement by the Fund to the Advisor, if so requested by the
Advisor, in subsequent fiscal years if the aggregate amount actually paid by the
Fund toward the operating expenses for such fiscal year (taking into account the
reimbursement) does not exceed the applicable limitation on Fund expenses. The
Advisor is permitted to be reimbursed only for fee reductions and expense
payments made in the previous three fiscal years, but is permitted to look back
five years and four years, respectively, during the initial sixth 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 Advisor is controlled by Craig O. Jolly.
During the years ended May 31, 2000 and 1999, the Advisor earned $63,602
and $39,380, respectively, in advisory fees. The Advisory has contractually
agreed to limit total fund operating expenses to 2.00% of average net assets
annually. As a result of that limitation, during the years ended May 31, 2000
and 1999, the Advisor waived the full amount of its fee and reimbursed the Fund
an additional $194 and $34,368, respectively, in expenses.
Under the Advisory Agreement, the Advisor will not be liable to the Trust
or the Fund or any shareholder for any act or omission in the course of, or
connected with, rendering services or for any loss sustained by the Trust except
in the case of a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad faith or gross
negligence, or reckless disregard of its obligations and duties under the
Agreement.
The Advisory Agreement will remain in effect for a period not to exceed two
years. Thereafter, if not terminated, the Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of Trustees or by
the holders of a majority of the outstanding voting securities of the Fund at
any time without penalty, on 60 days written notice to the Advisor. The Advisory
Agreement also may be terminated by the Advisor on 60 days written notice to the
Trust. The Advisory Agreement terminates automatically upon its assignment (as
defined in the 1940 Act).
B-11
<PAGE>
THE ADMINISTRATOR
Pursuant to an Administration Agreement (the "Administration Agreement"),
Investment Company Administration, LLC is the administrator of the Fund (the
"Administrator"). The Administrator provides certain administrative services to
the Fund, including, among other responsibilities, coordinating the negotiation
of contracts and fees with, and the monitoring of performance and billing of,
the Fund's 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 Fund 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 Fund, 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 Fund, the
determination of investment policy, or for any matter pertaining to the
distribution of Fund shares.
Under the Administration Agreement, the Administrator is permitted to
render administrative services to others. The Fund's Administration Agreement
will continue in effect from year to year only if such continuance is
specifically approved at least annually by the Board of Trustees of the Trust 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 Administration
Agreement or "interested persons" (as defined in the 1940 Act) of any such
party. The Administration Agreement is terminable without penalty by the Trust
on behalf of the 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, including a majority of the Trustees who are not "interested
persons" (as defined in the 1940 Act) of the Trust, or by the Advisor on 60
days' written notice, and will automatically terminate in the event of their
"assignment" (as defined in the 1940 Act). The Administration Agreement also
provide 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 Fund, 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 fee monthly at the following
annual rate, subject to a $30,000 minimum:
Fund asset level Fee rate
---------------- --------
First $50 million 0.20% of average daily net assets
Next $50 million 0.15% of average daily net assets
Next $50 million 0.10% of average daily net assets
Next $50 million, and thereafter 0.05% of average daily net assets
FOR THE YEARS ENDED MAY 31, 2000 AND 1999, THE ADMINISTRATOR RECEIVED FEES OF
$30,082 AND $27,862, RESPECTIVELY.
DISTRIBUTION AGREEMENT
The Trust has entered into a Distribution Agreement (the "Distribution
Agreement") with Heritage West Securities, Inc. (the "Distributor"), pursuant to
which the Distributor acts as the Fund's exclusive underwriter, provides certain
administration services and promotes and arranges for the sale of the Fund's
shares. The Distributor is an affiliate of the Advisor and received commissions
in the sale of Fund shares of $2,172 for the year ended May 31, 2000.
CODE OF ETHICS. The Boards of the Trust, the Advisor and the Distributor
have each adopted a Code of Ethics under Rule 17j-1 of the 1940 Act. These Codes
permit, subject to certain conditions, personnel of the Advisor and Distributor
to invest in securities that may be purchased by the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that the Advisor shall be responsible for
broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Advisor shall not direct orders to an affiliated person of the
Advisor without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. The Advisor's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction, the
Advisor may take the following into consideration: the best net price available;
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<PAGE>
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of Trustees of the
Trust may determine, the Advisor shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of its having caused the Fund to pay a broker or dealer that provides
(directly or indirectly) brokerage or research services to the Advisor an amount
of commission for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction, if the Advisor determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Advisor's overall responsibilities with respect to
the Fund. The Advisor is further authorized to allocate the orders placed by it
on behalf of the Fund to such brokers or dealers who also provide research or
statistical material, or other services, to the Trust, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions as
the Advisor shall determine, and the Advisor shall report on such allocations
regularly to the Advisor and the Trust, indicating the broker-dealers to whom
such allocations have been made and the basis therefor. The Advisor is also
authorized to consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions, subject to the
requirements of best execution, I.E., that such brokers or dealers are able to
execute the order promptly and at the best obtainable securities price.
On occasions when the Advisor deems the purchase or sale of a security to
be in the best interest of the Fund as well as other clients of the Advisor, the
Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Advisor in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
The Fund expects that all, or substantially all, of its portfolio brokerage
transactions will be executed by Heritage West Securities, its Distributor,
which is an affiliate of its Advisor. The Distributor has negotiated commission
rates with the broker-dealer which clears its brokerage transactions for it and
intends to pass these rates through to the Fund without any mark-up or other
profit for the Distributor.
Brokerage commissions paid by the Fund during the years ended May 31, 2000
and 1999 were $5,803 and $4,302, respectively. 100% of the $5,803 brokerage
commissions were paid to the Distributor during the year ended May 31, 2000.
Portfolio turnover for the Fund during the years ended May 31, 2000 and
1999 were 63.36% and 253.59%, respectively.
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is determined
as of the close of trading on the New York Stock Exchange (the "NYSE")
(generally 4:00 p.m. Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
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<PAGE>
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor and the Trust's Valuation Committee pursuant to procedures approved by
or under the direction of the Board.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded on
securities exchanges are valued at the last sale price on the exchange on which
such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Advisor to be the
primary market. Securities primarily traded in the NASDAQ National Market System
for which market quotations are readily available shall be valued at the last
sale price on the day of valuation, or if there has been no sale on such day, at
the mean between the bid and asked prices. Over-the-counter ("OTC") securities
which are not traded in the NASDAQ National Market System shall be valued at the
most recent trade price. Securities and assets for which market quotations are
not readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60 days
are valued at current market prices, as discussed above. Short-term securities
with 60 days or less remaining to maturity are, unless conditions indicate
otherwise, amortized to maturity based on their cost to the Fund if acquired
within 60 days of maturity or, if already held by the Fund on the 60th day,
based on the value determined on the 61st day.
An option that is written by the Fund is generally valued at the last sale
price or, in the absence of the last sale price, the last offer price. An option
that is purchased by the Fund is generally valued at the last sale price or, in
the absence of the last sale price, the last bid price. If an options exchange
closes after the time at which the Fund's net asset value is calculated, the
last sale or last bid and asked prices as of that time will be used to calculate
the net asset value.
All other assets of the Fund are valued in such manner as the Board in good
faith deems appropriate to reflect their fair value.
DEALER COMMISSIONS
The Distributor pays a portion of the sales charges imposed on purchases of
Fund shares to retail dealers, as follows:
Portion of Sales
Charge Retained
Your investment by Dealers
--------------- ----------
Up to $49,999 4.25%
$50,000 to $99,999 3.75
$100,000 to $249,999 3.25
$250,000 to $499,000 2.25
$500,000 to $999,999 0.90
$1,000,000 or more None
TAXATION
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, (the "Code"), for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its
assets, and the timing of its distributions. The Fund's policy is to distribute
to its shareholders all of its investment company taxable income and any net
realized capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes based on net income. However, the Board may
elect to pay such excise taxes if it determines that payment is, under the
circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
B-14
<PAGE>
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains by
the Fund will be taxable to shareholders whether made in cash or reinvested by
the Fund in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carry-overs from the eight prior taxable years
will be applied against capital gains. Shareholders receiving a distribution
from the Fund in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of the Fund on the reinvestment date. Fund distributions also
will be included in individual and corporate shareholders' income on which the
alternative minimum tax may be imposed.
The Fund or the securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("IRS") with respect to distributions and payments made
to the shareholder. In addition, the Fund will be required to withhold federal
income tax at the rate of 31% on taxable dividends, redemptions and other
payments made to accounts of individual or other non-exempt shareholders who
have not furnished their correct taxpayer identification numbers and certain
required certifications on the New Account application or with respect to which
the Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions, as
stated in the prospectuses. In order to avoid the payment of any federal excise
tax based on net income, the Fund must declare on or before December 31 of each
year, and pay on or before January 31 of the following year, distributions at
least equal to 98% of its ordinary income for that calendar year and at least
98% of the excess of any capital gains over any capital losses realized in the
one-year period ending October 31 of that year, together with any undistributed
amounts of ordinary income and capital gains (in excess of capital losses) from
the previous calendar year.
The Fund may receive dividend distributions from U.S. corporations. To the
extent that the Fund receives such dividends and distributes them to its
shareholders, and meets certain other requirements of the Code, corporate
shareholders of the Fund may be entitled to the "dividends received" deduction.
Availability of the deduction is subject to certain holding period and
debt-financing limitations.
If more than 50% in value of the total assets of the Fund at the end of its
fiscal year is invested in stock or securities of foreign corporations, the Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by the Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of the Fund's
foreign source income (including any foreign income taxes paid by the Fund), and
(ii) entitled either to deduct their share of such foreign taxes in computing
their taxable income or to claim a credit for such taxes against their U.S.
income tax, subject to certain limitations under the Code, including certain
holding period requirements. In this case, shareholders will be informed in
writing by the Fund at the end of each calendar year regarding the availability
of any credits on and the amount of foreign source income (including or
excluding foreign income taxes paid by the Fund) to be included in their income
tax returns. If not more than 50% in value of the Fund's total assets at the end
of its fiscal year is invested in stock or securities of foreign corporations,
the Fund will not be entitled under the Code to pass through to its shareholders
their pro rata share of the foreign taxes paid by the Fund. In this case, these
taxes will be taken as a deduction by the Fund.
B-15
<PAGE>
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
The use of hedging strategies, such as entering into futures contracts and
forward contracts and purchasing options, involves complex rules that will
determine the character and timing of recognition of the income received in
connection therewith by the Fund. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) and income from
transactions in options, futures contracts and forward contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by the Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by the Fund
that substantially diminishes the Fund's risk of loss from any other position
held by the Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of the Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are subject
to Section 1256 of the Code ("Section 1256 Contracts") and that are held by the
Fund at the end of its taxable year generally will be required to be "marked to
market" for federal income tax purposes, that is, deemed to have been sold at
market value. Sixty percent of any net gain or loss recognized on these deemed
sales and 60% of any net gain or loss realized from any actual sales of Section
1256 Contracts will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by the Fund. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency denominated
payables and receivables and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60/40 rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of the Fund's
gain or loss on the sale or other disposition of shares of a foreign corporation
may, because of changes in foreign currency exchange rates, be treated as
ordinary income or loss under Section 988 of the Code rather than as capital
gain or loss.
A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize a gain or
loss for income tax purposes on the difference, if any, between the adjusted
basis of the securities tendered to the Fund and the purchase price of the
Fund's shares acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must
generally "mark to market" at the end of its taxable year all securities which
it owns. The resulting gain or loss is treated as an ordinary (and not capital)
gain or loss, except to the extent allocable to periods during which the dealer
held the security for investment. The "mark to market" rules do not apply,
however, to a security held for investment which is clearly identified in the
dealer's records as being held for investment before the end of the day in which
the security was acquired. The IRS has issued guidance under Section 475 that
provides that, for example, a bank that regularly originates and sells loans is
a dealer in securities, and subject to the "mark to market" rules. Shares of the
Fund held by a dealer in securities will be subject to the "mark to market"
rules unless they are held by the dealer for investment and the dealer property
identifies the shares as held for investment.
B-16
<PAGE>
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends during such six-month period. All or a portion
of a loss realized upon the redemption of shares may be disallowed to the extent
shares are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the prospectuses are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Fund. The law firm of Paul, Hastings, Janofsky & Walker
LLP has expressed no opinion in respect thereof. Nonresident aliens and foreign
persons are subject to different tax rules, and may be subject to withholding of
up to 30% on certain payments received from the Fund. Shareholders are advised
to consult with their own tax advisers concerning the application of foreign,
federal, state and local taxes to an investment in the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund will receive income in the form of dividends and interest earned
on its investments in securities. This income, less the expenses incurred in its
operations, is the Fund's net investment income, substantially all of which will
be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon the
amount of net investment income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
The Fund also may derive capital gains or losses in connection with sales
or other dispositions of its portfolio securities. Any net gain the Fund may
realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders. For more information
concerning applicable capital gains tax rates, see your tax advisor.
Any dividend or distribution paid by the Fund reduces the Fund's net asset
value per share on the date paid by the amount of the dividend or distribution
per share. Accordingly, a dividend or distribution paid shortly after a purchase
of shares by a shareholder would represent, in substance, a partial return of
capital (to the extent it is paid on the shares so purchased), even though it
would be subject to income taxes.
Dividends and other distributions will be made in the form of additional
shares of the Fund unless the shareholder has otherwise indicated. Investors
have the right to change their elections with respect to the reinvestment of
dividends and distributions by notifying the Transfer Agent in writing, but any
such change will be effective only as to dividends and other distributions for
which the record date is seven or more business days after the Transfer Agent
has received the written request.
B-17
<PAGE>
PERFORMANCE INFORMATION
From time to time, the 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. The Fund may also advertise
aggregate and average total return information over different periods of time.:
The Fund's total return may be compared to relevant indices, including
Standard & Poor's 500 Composite Stock Index and indices published by Lipper
Analytical Services, Inc. From time to time, evaluations of the 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 Fund will
fluctuate over time, and any presentation of the 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.
The 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" equals a hypothetical initial payment of $1000; "T" equals average
annual total return; "n" equals the number of years; and "ERV" equals the ending
redeemable value at the end of the period of a hypothetical $1000 payment made
at the beginning of the period.
The Fund's average annual total return for periods ending May 31, 2000 are as
follows*:
One Year: -10.16%
Since Inception: -1.72%
(June 24, 1998)
* Certain fees of the Fund have been waived from inception through May 31,
2000. Accordingly, the Fund's return figures are higher than they would have
been had such fees not been waived.
YIELD
Annualized yield quotations used in the Fund's advertising and promotional
materials are calculated by dividing the Fund's investment income for a
specified thirty-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
YIELD = 2 [(a-b + 1)6 - 1]
---
cd
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends and "d" equals the maximum offering price per share on the
last day of the period.
Except as noted below, in determining net investment income earned during
the period ("a" in the above formula), the Fund calculates interest earned on
each debt obligation held by it during the period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the period or,
if the obligation was purchased during the period, the purchase price plus
accrued interest; (2) dividing the yield to maturity by 360 and multiplying the
resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the Fund, net investment income is then determined by
totaling all such interest earned.
B-18
<PAGE>
For purposes of these calculations, the maturity of an obligation with one
or more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.
GENERAL INFORMATION
Advisors Series Trust is an open-end management investment company
organized as a Delaware business trust under the laws of the State of Delaware
on October 3, 1996. The Trust currently consists of 16 effective series of
shares of beneficial interest, par value of $0.01 per share. The Declaration of
Trust permits the Trustees to issue an unlimited number of full and fractional
shares of beneficial interest and to divide or combine the shares into a greater
or lesser number of shares without thereby changing the proportionate beneficial
interest in the Fund. Each share represents an interest in the Fund
proportionately equal to the interest of each other share. Upon the Fund's
liquidation, all shareholders would share pro rata in the net assets of the Fund
available for distribution to shareholders.
The Declaration of Trust does not require the issuance of stock
certificates. If stock certificates are issued, they must be returned by the
registered owners prior to the transfer or redemption of shares represented by
such certificates.
If they deem it advisable and in the best interest of shareholders, the
Board of Trustees may create additional series of shares which differ from each
other only as to dividends. The Board of Trustees has created several series of
shares, and may create additional series in the future, which have separate
assets and liabilities. Income and operating expenses not specifically
attributable to a particular Fund are be allocated fairly among the Funds by the
Trustees, generally on the basis of the relative net assets of each Fund.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but,
under abnormal conditions that make payment in cash unwise, the Fund may make
payment partly in its portfolio securities with a current amortized cost or
market value, as appropriate, equal to the redemption price. Although the Fund
does not anticipate that it will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trust has elected to be governed by the
provisions of Rule 18f-1 under the Investment Company Act, which require that
the Fund pay in cash all requests for redemption by any shareholder of record
limited in amount, however, during any 90-day period, to the lesser of $250,000
or 1% of the value of the Fund's net assets at the beginning of such period.
Rule 18f-2 under the 1940 Act provides that as to any investment company
which has two or more series outstanding and as to any matter required to be
submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
SHAREHOLDER RIGHTS. Shares issued by the Fund have no preemptive,
conversion, or subscription rights. Shareholders have equal and exclusive rights
as to dividends and distributions as declared by the Fund and to the net assets
of the Fund upon liquidation or dissolution. The Fund, as a separate series of
the Trust, votes separately on matters affecting only the Fund (e.g., approval
of the Investment Advisory Agreement); all series of the Trust vote as a single
class on matters affecting all series jointly or the Trust as a whole (e.g.,
election or removal of Trustees). Voting rights are not cumulative, so that the
holders of more than 50% of the shares voting in any election of Trustees can,
if they so choose, elect all of the Trustees. While the Trust is not required
and does not intend to hold annual meetings of shareholders, such meetings may
be called by the Trustees at their discretion, or upon demand by the holders of
10% or more of the outstanding shares of the Trust for the purpose of electing
or removing Trustees.
B-19
<PAGE>
The Fund's principal underwriter is Heritage West Securities Corporation,
7373 N. Scottsdale Rd., Suite D-201, Scottsdale, AZ 85253.
The Fund's custodian, Firstar Institutional Custody Services, 425 Walnut
Street, Cincinnati, OH 45020, is responsible for holding the Fund's assets. ICA
Fund Services Corp., 4455 East Camelback Road, Suite 261-E, Phoenix, AZ 85018,
acts as the Fund's accounting and shareholder services agent. The Fund's
independent accountants, PricewaterhouseCoopers, LLP, 1177 Avenue of the
Americas, New York, NY 10036 , assist in the preparation of certain reports to
the Securities and Exchange Commission and the Fund's tax returns.
The validity of the Fund's shares has been passed on by Paul, Hastings,
Janofsky & Walker LLP, 345 California Street, San Francisco, CA 94104.
B-20
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE RATINGS
PREFERRED STOCK
A variation of Moody's bond rating symbols is used in the quality ranking
of preferred stock. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stock occupies a junior position to bonds within a
particular capital structure and that these securities are rated within the
universe of preferred stocks.
"aaa" An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
"aa" An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
"a" An issue which is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater then in the "aaa"
and "aa" classification, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
"baa" An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
"ba" An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
"b" An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small. Note: Moody's
applies numerical modifiers 1, 2, and 3 in each rating classification: the
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
DEBT RATINGS - TAXABLE DEBT
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa and Aa
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
B-21
<PAGE>
SHORT-TERM TAXABLE DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
Prime-1-- Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: Leading market positions in well-established industries; High
rates of return on funds employed; Conservative capitalization structure with
moderate reliance on debt and ample asset protection; Broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
Well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POOR'S CORPORATION RATINGS
PREFERRED STOCK
A Standard & Poor's preferred stock rating is an assessment of the capacity
and willingness of an issuer to pay preferred stock dividends and any applicable
sinking fund obligations. A preferred stock rating differs from a bond rating
inasmuch as it is assigned to an equity issue, which is intrinsically different
from, and subordinated to, a debt issue. Therefore, to reflect this difference,
the preferred stock rating symbol will normally not be higher than the debt
rating symbol assigned to, or that would be assigned to, the senior debt of the
same issuer.
Preferred stock ratings are based on the following considerations:
1. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation;
2. Nature of, and provisions of, the issue;
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
AAA - This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA -- A preferred stock issue rated AA also qualifies as a high-quality,
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A - An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB - An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
B-22
<PAGE>
BB, B, CCC - Preferred stock rated BB, B, and CCC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
preferred stock obligations. BB indicates the lowest degree of speculation and
CCC the highest. While such issues will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
To provide more detailed indications of preferred stock quality, ratings
from AA to CCC may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
LONG TERM DEBT
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1.
B-23
