THE AL FRANK FUND
[PHOTO OF AL FRANK]
PROSPECTUS
OCTOBER 2, 2000
THE AL FRANK FUND
465 FOREST AVENUE, SUITE I
LAGUNA BEACH, CA 92651
SHAREHOLDER SERVICES: (888) 263-6443
DAILY NAV: (877) 654-1325
www.alfrank.com
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THE AL FRANK FUND
PROSPECTUS
OCTOBER 2, 2000
THE AL FRANK FUND invests in value stocks for growth of capital.
This Prospectus contains basic information that you should know before you
invest. Please read it and keep it for future reference.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Goal and Strategy................................................... 3
Fund Performance.................................................... 4
Expense Table....................................................... 4
Investment Objective, Principal Strategies and Related Risks........ 4
Management of the Fund.............................................. 5
Investor Guide...................................................... 6
Services Available to Shareholders.................................. 8
How to Redeem Your Shares........................................... 8
Distributions and Taxes............................................. 9
Distribution Arrangements........................................... 10
Financial Highlights................................................ 11
Additional Information.............................................. Back Cover
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GOAL AND STRATEGY
WHAT IS THE FUND'S GOAL?
The Fund seeks growth of capital.
HOW WILL THE FUND TRY TO REACH ITS GOAL?
Al Frank Asset Management, Inc. (the Advisor) selects equity securities that it
believes are out of favor and undervalued. The Advisor then purchases the
securities and holds them until it believes that the securities have reached a
fair value or sells them when it believes a strong market sell signal has been
generated. The Advisor does not expect the Fund's annual turnover rate to exceed
25%.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
The value of your investment in the Fund will go up and down as the stocks in
the Fund's portfolio change in price. The prices of the stocks the Advisor
selects may fall. Also, the stock market may decline suddenly and for extended
periods adversely affecting the prices of the stocks held by the Fund.
By itself, the Fund is not a complete, balanced investment plan and no fund can
guarantee that it will achieve its goal. When you sell your shares, you may lose
money.
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FUND PERFORMANCE
The following performance information indicates some of the risks of investing
in the Fund. The bar chart shows the Fund's total return for calendar years 1998
(first year of operations) and 1999. The bar chart does not reflect sales
charges that you may pay to purchase Fund shares. If they were included, the
returns would be less than those shown. The table shows the Fund's average
return over time compared with broad-based market indices. Unlike the bar chart,
the table assumes that the maximum sales charge was paid. This past performance
is no guarantee of future results.
CALENDAR YEAR TOTAL RETURNS(%)*
1998 -9.30%
1999 60.42%
* The Fund's year-to-date return as of 6/30/00 was 11.07%.
During the period of time displayed in the bar chart, the Fund's best quarter
was Q2 1999, up 34.32%, and its worst quarter was Q3 1998, down 22.48%.
ADDITIONAL TOTAL RETURN INFORMATION
AS OF DECEMBER 31, 1999
1 Year Since Inception*
------ ----------------
The Al Frank Fund 51.60% 17.31%
Russell 2000 Index** 19.62% 7.49%
Wilshire 5000 Index*** 23.56% 21.95%
---------
* The Fund commenced operations on January 2, 1998.
** The Russell 2000 Index is a widely regarded small cap index of the 2,000
smallest stocks of the Russell 3000 Index which comprises the 3,000 largest
U.S. stocks as determined by total market capitalization. As the Index is
reformulated in June, several of the Russell 2000 stocks have much higher
market capitalizations than when assigned to the Index.
*** The Wilshire 5000 Index measures the performance of all U.S. headquartered
equity securities with readily available price data.
EXPENSE TABLE
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. There are two types of expenses involved: shareholder
transaction expenses, such as sales loads, and annual operating expenses, such
as investment advisory fees.
SHAREHOLDER TRANSACTION EXPENSES
(fees paid directly from your investment)
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) ........ 5.50%
Maximum Sales Load Imposed on
Reinvested Dividends...................... None
Deferred Sales Load.......................... None
ANNUAL OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Investment Advisory Fees..................... 1.00%
Rule 12b-1 Distribution Fee.................. 0.25%
Other Expenses............................... 2.35%
-----
Total Annual Fund Operating Expenses......... 3.60%
Expense Reimbursements*...................... (1.35)%
-----
Net Expenses................................. 2.25%
=====
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* The Advisor has contractually agreed to waive its fees and/or pay Fund
expenses in order to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 2.25%. This contract's term is
indefinite and may be terminated only by the Board of Trustees. The Advisor
is permitted to be reimbursed, subject to limitations, for fees it waives
and for Fund expenses it pays.
EXPENSE EXAMPLE
This Example will help you compare the cost of investing in the Fund with the
cost of investing in other mutual funds. It is based on the total annual
operating expenses shown above, and it assumes that these expenses will remain
the same over the time periods shown. It also assumes that you make a single
$10,000 investment in the Fund to start with and that you earn a 5% return each
year. Finally, it assumes that you redeem all of your shares at the end of each
of the time periods. Again, this Example is hypothetical, and your actual
expenses may be higher or lower.
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
$765 $1,213 $1,685 $2,981
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INVESTMENT OBJECTIVE, PRINCIPAL STRATEGIES AND RELATED RISKS
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The investment objective of the Fund is to seek growth of capital.
HOW DOES THE FUND SEEK TO ACHIEVE ITS OBJECTIVE?
The Advisor selects equity securities for the Fund's portfolio that it believes
are out of favor and undervalued, i.e., those trading for low fundamental
valuations relative to what the Advisor thinks their businesses will be worth
over the next five years. The Advisor then attempts to purchase the securities
and hold them until it believes that the securities have reached a fair value.
There is no assurance that the Fund's objective will be achieved. As prices of
common stocks and other securities fluctuate, the value of an investment in the
Fund will vary as the market value of its investment portfolio changes.
HOW DOES THE ADVISOR SELECT EQUITY SECURITIES FOR THE FUND'S PORTFOLIO?
The Advisor selects equity securities, consisting of common stocks and
securities having the characteristics of common stocks, such as convertible
securities, rights and warrants, on the basis of fundamental corporate analysis.
It screens a universe of more than 6,000 stocks in order to identify those with
low price-to-earnings, price-to-book value, price-to-cash flow and
price-to-revenues. The Advisor also uses technical analysis to anticipate
periods when the securities markets are either extremely undervalued and
oversold, or overvalued and overbought. When the Advisor believes the market is
undervalued, it may borrow money to leverage the Fund's portfolio, as described
below. When it believes the market is overvalued, it may take a temporary
defensive position or use options. The Fund's portfolio is expected to be highly
diversified, generally with more than 100 separate securities.
The Advisor sells a stock when its analysis indicates that it is fairly valued.
A stock is fairly valued if it has achieved, in the Advisor's opinion, an
attractive price to earnings ratio, price to book value or price to sales ratio,
or some other attractive fundamentally valued measure of the stock.
TEMPORARY DEFENSIVE INVESTMENT STRATEGIES.
For temporary defensive purposes, the Advisor may invest up to 100% of the
Fund's total assets in high-quality, short-term debt securities and money-market
instruments. These short-term debt securities and money-market instruments
include shares of other mutual funds, commercial paper, certificates of deposit,
bankers' acceptances, U.S. Government securities and repurchase agreements.
OTHER STRATEGIES.
The Advisor is authorized to use leverage (borrowing money) and to sell
securities short, but these strategies have not been used by the Advisor in the
past and the Advisor has no present intention to start using these strategies.
Additional risks are associated with borrowing money and selling stocks short.
More information about the associated risks, the mechanics of their employment
and the restrictions placed on their use can be found in the Statement of
Additional Information. Shareholders will be notified prior to any change in the
Advisor's current policies regarding these strategies.
MANAGEMENT OF THE FUND
THE ADVISOR.
The Fund's Advisor, Al Frank Asset Management, Inc., 465 Forest Avenue, Suite I,
Laguna Beach, California 92651, has provided asset management services to
individuals and institutional investors since 1977. The Advisor was established
and is partially controlled by its founder, Al Frank. Al Frank is Chief
Investment Strategist of Al Frank Asset Management and Co-Editor of the Prudent
Speculator, the nationally-known investment newsletter he founded in 1977. Mr.
Frank and John Buckingham, another member of the firm, are principally
responsible for the management of the Fund's portfolio. Mr. Buckingham has been
Executive Vice President and Director of Research of the Advisor since 1990,
having joined the firm in 1987. The Advisor also publishes a newsletter under
the name THE PRUDENT SPECULATOR. This publication has been in circulation for
over 23 years. The Advisor is wholly owned by AF Holdings, Inc., a
privately-owned Minnesota corporation.
The Advisor provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Advisor a monthly management fee
based upon the average daily net assets of the Fund at the annual rate of 1.00%.
During the last fiscal year, the Advisor waived its entire management fee of
$65,861.
FUND EXPENSES.
The Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce its fees and/or pay expenses of the Fund to
ensure that the Fund's aggregate annual operating expenses (excluding interest
and tax expenses) will not exceed 2.25% of the Fund's average daily net assets.
Any reduction in advisory fees or payment of expenses made by the Advisor may be
reimbursed by the Fund if the Advisor requests in subsequent fiscal years. This
reimbursement may be requested if the aggregate amount actually paid by the Fund
toward 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 for fee reductions and/or expense payments
made in the prior three fiscal years.
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(At startup, the Fund is permitted to look for longer periods of four and five
years.) Any such reimbursement will be reviewed by the Trustees. The Fund must
pay its current ordinary operating expenses before the Advisor is entitled to
any reimbursement of fees and/or expenses.
INVESTOR GUIDE
PRICING THE FUND'S SHARES.
The price of the Fund's shares is based on its net asset value. This 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 net asset value is calculated at the
close of regular trading of the New York Stock Exchange ("NYSE"), normally 4:00
p.m., Eastern time.
WHEN IS MONEY INVESTED IN THE FUND?
Any money received for investment in the Fund from an investor is invested as of
the next calculation of the Fund's net asset value, less the sales load (if
applicable), that is next calculated after the money is received (assuming the
check or wire correctly identifies the Fund and account). Orders received from
brokers are invested at the net asset value, less the sales load (if
applicable), next calculated after the order is received. A check or wire
received after the NYSE closes is invested as of the next calculation of the
Fund's net asset value.
WHAT IS THE PRICE YOU WILL PAY TO PURCHASE SHARES OF THE FUND?
When you invest in the Fund, you generally pay the "offering price" of the
Fund's shares. The offering price is the net asset value of a Fund share, plus a
front-end sales charge. The sales charge declines with the size of your
purchase, as shown below:
As a Percentage of As a Percentage of
Your Investment Offering Price Your Investment
--------------- -------------- ---------------
Less than $50,000 5.50% 5.82%
$50,000 to $249,999 5.00% 5.26%
$250,000 to $499,999 4.00% 4.17%
$500,000 and up 2.00% 2.04%
SALES CHARGE REDUCTIONS.
There are several ways you can combine multiple purchases of Fund shares to take
advantage of the breakpoints in the sales charge schedule. These can be combined
in any manner. Contact the Fund at (888) 263-6443 for details.
ACCUMULATION PRIVILEGE. This lets you add the value of Fund shares you and your
family already own to the amount of your next purchase of Fund shares for the
purposes of calculating the sales charge.
LETTER OF INTENT. This lets you purchase Fund shares over a 13-month period and
receive the same sales charge as if all the shares had been purchased at one
time.
OPENING AN ACCOUNT.
You may open a Fund account with $1,000 and add to your account at any time with
$100 or more. You may open a retirement plan account with $1,000 and add to your
account at any time with $100 or more. The minimum investment requirements may
be waived from time to time by the Fund.
HOW TO PURCHASE SHARES THROUGH AN AUTHORIZED BROKER OR INVESTMENT DEALER.
You may buy and sell Fund shares through certain brokers (and their authorized
agents) 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. Investment advisors or
financial planners may charge a management, consulting or other fee for their
services.
SUBSEQUENT INVESTMENTS.
You may purchase additional shares of the Fund through your broker. You can also
send a check, with the stub from an account statement, to the Fund at the
previously noted address. Please also write your account number on the check. If
you do not have a stub from an account statement, you can write your name,
address and account number on a separate piece of paper and enclose it with your
check. If you want to send additional money for investment by wire, it is
important for you to call the Fund at (888) 263-6443. You may also make
additional purchases through an investment broker or dealer, as described above.
HOW TO GET YOUR MONEY TO THE FUND.
CONTACT YOUR BROKER.
INVESTING DIRECTLY BY MAIL. If you do not have a broker or your broker is not
familiar with the Fund, you may invest
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directly by mail. Simply complete the Application Form and mail it with a check
(made payable to The Al Frank Fund) to the Fund's Shareholder Servicing Agent,
American Data Services, Inc., at the address below. In certain cases, you may be
assigned a broker to service your account.
The Al Frank Fund
P.O. Box 641265
Cincinnati, OH 45264-1265
INVESTING DIRECTLY BY OVERNIGHT DELIVERY. If you wish to send your Application
Form and check via an overnight delivery service (such as Federal Express) you
should use the following address:
The Al Frank Fund
c/o Firstar Bank, N.A.
Mutual Fund Custody Department
425 Walnut Street, M/L 6118, Sixth Floor
Cincinnati, OH 45202
(888) 263-6443
INVESTING DIRECTLY BY WIRE. Before sending a wire, you should call the Fund at
(888) 263-6443 between 9:00 a.m. and 5:00 p.m., Eastern time, on a day when the
NYSE is open for trading, in order to receive an account number. It is important
to call and receive this account number, because if your wire is sent without it
or without the name of the Fund, there may be a delay in investing the money you
wire. You should then ask your bank to wire money to:
Firstar Bank, N.A.
ABA # 0420-0001-3
for credit to The Al Frank Fund
DDA # 488877309
for further credit to [your name and account number]
Your bank may charge you a fee for sending a wire to the Fund.
OTHER INFORMATION.
PURCHASES AT NET ASSET VALUE. Shares of the Fund may be purchased at net asset
value (with no sales load) by officers, Trustees, Directors and full-time
employees of the Trust, the Advisor, the Administrator, the Distributor and
affiliates of such companies, by their family members, by persons and their
family members who are direct investment advisory clients of the Advisor,
registered representatives and employees of firms which have sales agreements
with the Distributor, 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;
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 of other intermediaries on
the books and records of the broker or agent; and 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" and by such other persons who are determined to
have acquired shares under circumstances not involving any sales expense to the
Fund or the Distributor. Shares may also be purchased at net asset value by
shareholders who take advantage of the reinvestment privilege, which is
discussed under "Reinvestment after Redemption," below.
Investors may purchase shares of the Fund at net asset value to the extent that
the investment represents the proceeds from the redemption, within the previous
60 days, of shares (the purchase price of which included a sales charge) of
another mutual fund. When making a purchase at net asset value pursuant to this
provision, the investor should forward to the Transfer Agent either (i) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of The Al Frank Fund, or (ii) a copy of the confirmation from the
other fund, showing the redemption transaction.
Investors who qualify to buy Fund shares at net asset value may be charged a fee
if they effect transactions in the Fund's shares through a broker or agent.
The Fund's Distributor may waive the minimum investment requirements for
purchases by certain group or retirement plans. All investments must be made in
U.S. dollars, and checks must be drawn on U.S. banks. Third-party checks will
not be accepted. A charge may be imposed if a check used to make an investment
does not clear. The Fund and its Distributor reserve the right to reject any
investment, in whole or in part. Federal tax law requires that investors or
their brokers 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 does not issue share certificates. All shares are held in
non-certificated form on the books of the Fund, for the account of the
shareholder. The Fund, under certain circumstances, may accept investments of
securities appropriate for the Fund's portfolio, in lieu of cash. Prior to
making such a purchase, you should call the Advisor to determine if such an
investment may be made. The Advisor may, at its own expense, pay third parties
for assistance in gathering assets for the Fund.
The daily Net Asset Value (NAV) can be obtained from The Al Frank Fund website
(www.alfrank.com) or by calling toll-free 877-654-1325.
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SERVICES AVAILABLE TO SHAREHOLDERS
RETIREMENT PLANS.
You may obtain prototype IRA plans from the Fund. Shares of the Fund are also
eligible investments for other types of retirement plans.
AUTOMATIC INVESTING BY CHECK.
You or your broker can arrange to make regular monthly investments in the Fund
using the Automatic Investment Plan. A check is automatically drawn on your
personal checking account each month for a predetermined amount (but not less
than $100), as if you had written it directly. Upon receipt of the withdrawn
funds, the Fund automatically invests the money in additional shares of the Fund
at the public offering price. Applications for this service are available from
the Fund. There is no charge by the Fund for this service. The Fund may
terminate or modify this privilege at any time, and shareholders may terminate
their participation by notifying their broker or the Shareholder Servicing Agent
in writing, sufficiently in advance of the next withdrawal.
AUTOMATIC WITHDRAWALS.
The Fund offers a Systematic Withdrawal Program whereby shareholders or their
brokers may request that a check drawn in a predetermined amount be sent to them
each month or calendar quarter. To start this Program, your account must have
Fund shares with a value of at least $10,000, and the minimum amount that may be
withdrawn each month or quarter is $50. This Program may be terminated or
modified by a shareholder or the 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.
HOW TO REDEEM YOUR SHARES
You or your broker 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.
REDEMPTIONS THROUGH BROKERS.
If you own your shares through a broker, you will have to contact your broker to
redeem your shares. The net asset value for a repurchase is that next calculated
after receipt of the order from the broker. The broker is responsible for
forwarding any documents required in connection with a redemption, including a
signature guarantee, and the Fund may cancel the order if these documents are
not received promptly. Your broker may charge you a fee for handling your
redemption transaction.
REDEMPTIONS FOR DIRECT ACCOUNTS.
If you own your shares directly in your name through the Fund's transfer agent,
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 on the account registration and sent to:
The Al Frank Fund
150 Motor Parkway, Suite 109
Hauppauge, NY 11788
SIGNATURE GUARANTEE. If you are redeeming directly (i.e., not through a broker),
and 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.
REDEMPTIONS BY TELEPHONE. If you have completed the Redemption by Telephone
portion of the Fund's Application Form and your Fund shares are held directly in
your name, you may redeem shares directly on any business day the NYSE is open
by calling the Fund's Shareholder Servicing Agent at (888) 263-6443 before 4:00
p.m. Eastern time. Redemption proceeds will be mailed or wired, at your
direction, on the next business day to the bank account you designated on the
Application Form. The minimum amount that may be wired is $1,000 (wire charges,
if any, will be deducted from redemption proceeds). Telephone redemptions cannot
be made for IRA accounts.
By using 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.
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Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity.
You may request telephone redemption privileges after your account is opened;
however, the authorization form will require a separate signature guarantee.
WHAT PRICE IS USED FOR A REDEMPTION?
The redemption price is the net asset value of the Fund's shares next determined
after shares are validly tendered for redemption. All signatures of account
holders must be included in the request, and a signature guarantee, if required,
must also be included for the request to be valid.
WHEN ARE REDEMPTION PAYMENTS MADE?
If you own your shares through a broker, the broker will credit your account
promptly in accordance with the broker's procedures. If you own your shares
directly (in your own name), 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. In addition,
for shares purchased directly, if shares were purchased by wire, payment of your
redemption proceeds for those shares will not be made until one business day
after your completed 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.
REINVESTMENT AFTER REDEMPTION.
If you redeem shares in your Fund account, you can reinvest within 90 days from
the date of redemption all or any part of the proceeds in shares of the Fund, at
net asset value, on the date the Transfer Agent receives your purchase request.
To take advantage of this option, send your reinvestment check along with a
written request to the Transfer Agent within 90 days from the date of your
redemption. Include your account number and a statement that you are taking
advantage of the "Reinvestment Privilege."
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, if
you hold your shares in your name directly with the Fund and due to redemptions
you have made, the total value of your account is reduced to less than $500, 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 the Fund
determines to make such a redemption, you will first be notified that the value
of your account is less than $500, and you will be allowed 30 days to make an
additional investment to bring the value of your account to at least $500 before
the Fund takes any action.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS.
Dividends from net investment income, if any, are normally declared and paid by
the Fund in December. Capital gains distributions, if any, are also normally
made in December, but the Fund may make an additional payment of dividends or
distributions if it deems it desirable at another time during any year.
Dividends and capital gain distributions (net of any required tax withholding)
are automatically reinvested in additional shares of the Fund at the net asset
value per share on the reinvestment date unless you have previously requested in
writing to the Shareholder Servicing Agent or on the new account application
form that payment be made in cash.
Any dividend or distribution paid by the Fund has the effect of reducing the net
asset value per share on the record date by the amount of the dividend or
distribution. You should note that a dividend or distribution paid on shares
purchased shortly before that dividend or distribution was declared will be
subject to income taxes even though the dividend or distribution represents, in
substance, a partial return of capital to you.
TAXES.
Distributions made by the Fund will be taxable to shareholders whether received
in shares (through dividend reinvestment) or in cash. Distributions derived from
net investment income, including net short-term capital gains, are taxable to
shareholders as ordinary income. Distributions designated as capital gains
dividends are taxable as long-term capital gains regardless of the length of
time you have owned your Fund shares. The maximum capital gains rate for
corporate shareholders is the same as the maximum tax rate for ordinary income.
Although distributions are generally taxable when received, certain
distributions made in January are taxable as if received the prior December. If
you redeem shares, part of your redemption proceeds may represent your allocable
share of the distributions made by the Fund relating to that tax year. You will
be informed annually of the amount and nature of the Fund's distributions. You
should consult
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your own tax advisors concerning federal, state and local taxation of
distributions from the Fund.
DISTRIBUTION ARRANGEMENTS
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. This rule allows the Fund to pay distribution
fees for the sale and distribution of its shares and for services provided to
its shareholders. The maximum amount of the fee authorized is 0.25% of the
Fund's average daily net assets annually, which is payable to the Advisor, as
Distribution Coordinator. In general, these fees are passed on to brokers to
compensate them for their ongoing servicing of Fund shareholders. Because these
fees are paid out of the Fund's assets on an on-going basis, over time these
fees will increase the cost of your investment in Fund shares and may cost you
more than paying other types of sales charges.
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FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance during the period shown. 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). The Fund's
financial statements are included in the Semi-Annual Report, which is available
upon request.
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year January 2, 1998*
Ended Ended through
June 30, 2000# December 31, 1999 December 31, 1998
-------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value, beginning of period............................ $14.55 $ 9.07 $10.00
------ ------ ------
Income from investment operations:
Net investment loss............................................ (0.07) (0.21) (0.08)
Net realized and unrealized gain / (loss) on investments....... 1.68 5.69 (0.85)
------ ------ ------
Total from investment operations................................ 1.61 5.48 (0.93)
------ ------ ------
Net asset value, end of period.................................. $16.16 $14.55 $ 9.07
====== ====== ======
Total return.................................................... 11.07%+ 60.42% (9.30%)+
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (thousands)........................... $11,896 $7,663 $7,042
Ratio of expenses to average net assets:
Before expense reimbursement................................... 2.44%** 3.60% 3.74%**
After expense reimbursement.................................... 2.25%** 2.20% 2.25%**
Ratio of net investment income / (loss) to average net assets:
After expense reimbursement.................................... 0.97%** (1.32%) (1.28%)**
Portfolio turnover rate......................................... 14.39%+ 19.00% 5.82%+
</TABLE>
# Unaudited.
* Commencement of operations.
** Annualized.
+ Not annualized.
11
<PAGE>
THE AL FRANK FUND,
A SERIES OF ADVISORS SERIES TRUST
FOR MORE INFORMATION
The Statement of Additional Information (SAI) includes additional information
about the Fund and 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 or write:
888-263-6443 (Shareholder Services)
877-654-1325 (Daily NAV)
The Al Frank Fund
c/o American Data Services, Inc.
150 Motor Parkway, Ste. 109
Hauppauge, NY 11788
The SAI and other Fund information may also be reviewed and copied at the SEC's
Public Reference Room in Washington, DC. Call 1-202-942-8090 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, upon payment of the
proper duplicating fees, by writing to the SEC's Public Reference Room,
Washington, DC 20549-0102 or by email at [email protected].
The Trust's SEC File Number is 811-07959.
<PAGE>
THE AL FRANK FUND
STATEMENT OF ADDITIONAL INFORMATION
Dated October 2, 2000
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated October 2, 2000, as may be amended
from time to time, of The Al Frank Fund (the "Fund"), a series of Advisors
Series Trust (the "Trust"). Al Frank Asset Management, Inc. (the "Advisor") is
the Advisor to the Fund. A copy of the prospectus may be obtained by writing to
the Fund at 465 Forest Avenue, Suite I, Laguna Beach, CA 92651; or by calling
888-263-6443.
TABLE OF CONTENTS
The Trust................................................................. B-2
Investment Policies....................................................... B-2
Management................................................................ B-12
Distribution Arrangements................................................. B-16
Portfolio Transactions and Brokerage...................................... B-16
Portfolio Turnover ....................................................... B-17
Purchase and Redemption of Fund Shares ................................... B-18
Net Asset Value........................................................... B-20
Taxation.................................................................. B-21
Dividends and Distributions............................................... B-24
Performance Information................................................... B-25
General Information....................................................... B-26
Appendix ................................................................. B-28
B-1
<PAGE>
THE TRUST
Advisors Series Trust (the "Trust") is an open-end management investment
company organized as a Massachusetts business trust. The Trust consists of
various series which represent separate investment portfolios. 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 POLICIES
This discussion below supplements information contained in the prospectus
as to investment policies of the Fund.
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in convertible securities and warrants. A convertible
security is a fixed- income security (a debt instrument or a preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in an issuer's capital
structure, but are usually subordinated to similar non-convertible securities.
While providing a fixed-income stream (generally higher in yield than the income
derivable from common stock but lower than that afforded by a similar
nonconvertible security), a convertible security also gives an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation of the issuing company depending upon a market price advance in the
convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
BANK CERTIFICATES OR DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The
Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
monies deposited in a commercial bank for a definite period of time and earning
a specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below.
B-2
<PAGE>
Such risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls, or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks are,
among other things, required to maintain specified levels of reserves, limited
in the amount which they can loan to a single borrower, and subject to other
regulations designed to promote financial soundness. However, such laws and
regulations do not necessarily apply to foreign bank obligations that the Fund
may acquire.
In addition to purchasing certificates of deposit and bankers' acceptances,
to the extent permitted under its investment objectives and policies stated
above and in its prospectus, the Fund may make interest-bearing time or other
interest-bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
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.
B-3
<PAGE>
INVESTMENT COMPANY SECURITIES
The Fund may invest in shares of other investment companies. The Fund may
invest in money market mutual funds in connection with its management of daily
cash positions. In addition to the advisory and operational fees a Fund bears
directly in connection with its own operation, the Fund would also bear its pro
rata portions of each other investment company's advisory and operational
expenses.
GOVERNMENT OBLIGATIONS
The Fund may make short-term investments in U.S. Government obligations.
Such obligations include Treasury bills, certificates of indebtedness, notes and
bonds, and issues of such entities as the Government National Mortgage
Association ("GNMA"), Export-Import Bank of the United States, Tennessee Valley
Authority, Resolution Funding Corporation, Farmers Home Administration, Federal
Home Loan Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks,
Federal Land Banks, Federal Housing Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation, and the Student
Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by the
full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
The Fund may invest in sovereign debt obligations of foreign countries. A
sovereign debtor's willingness or ability to repay principal and interest in a
timely manner may be affected by a number of factors, including its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which it may be
subject. Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to meet
such conditions could result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debt in a timely manner.
FOREIGN INVESTMENTS AND CURRENCIES
The Fund may invest in securities of foreign issuers, provided that they
are publicly traded in the United States.
DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs are
receipts typically issued in connection with a U.S. or foreign bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation.
B-4
<PAGE>
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
TAXES. The interest and dividends payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Fund's shareholders.
OPTIONS ON SECURITIES
PURCHASING PUT AND CALL OPTIONS. The Fund may purchase covered "put" and
"call" options with respect to securities which are otherwise eligible for
purchase by the Fund and with respect to various stock indices subject to
certain restrictions, not in excess of 5% of the Fund's total net assets. The
Fund will engage in trading of such derivative securities exclusively for
hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to sell the
underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Advisor perceives significant short-term risk but
substantial long-term appreciation for the underlying security. The put option
acts as an insurance policy, as it protects against significant downward price
movement while it allows full participation in any upward movement. If the Fund
is holding a security which it feels has strong fundamentals, but for some
reason may be weak in the near term, the Fund may purchase a put option on such
security, thereby giving itself the right to sell such security at a certain
strike price throughout the term of the option. Consequently, the Fund will
exercise the put only if the price of such security falls below the strike price
B-5
<PAGE>
of the put. The difference between the put's strike price and the market price
of the underlying security on the date the Fund exercises the put, less
transaction costs, will be the amount by which the Fund will be able to hedge
against a decline in the underlying security. If during the period of the option
the market price for the underlying security remains at or above the put's
strike price, the put will expire worthless, representing a loss of the price
the Fund paid for the put, plus transaction costs. If the price of the
underlying security increases, the profit the Fund realizes on the sale of the
security will be reduced by the premium paid for the put option less any amount
for which the put may be sold.
If the Fund purchases a call option, it acquires the right to purchase the
underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If the call option has been
purchased to hedge a short position of the Fund in the underlying security and
the price of the underlying security thereafter falls, the profit the Fund
realizes on the cover of the short position in the security will be reduced by
the premium paid for the call option less any amount for which such option may
be sold.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which the
Advisor believes there is an active secondary market to facilitate closing
transactions.
WRITING CALL OPTIONS. The Fund may write covered call options. A call
option is "covered" if the Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Custodian). The writer of
a call option receives a premium and gives the purchaser the right to buy the
security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer of
an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction will permit the cash or proceeds from the concurrent sale of
any securities subject to the option to be used for other investments of the
Fund. If the Fund desires to sell a particular security from its portfolio on
which it has written a call option, it will effect a closing transaction prior
to or concurrent with the sale of the security.
The Fund will realize a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option or
if the proceeds from the closing transaction are more than the premium paid to
purchase the option. The Fund will realize a loss from a closing transaction if
B-6
<PAGE>
the cost of the closing transaction is more than the premium received from
writing the option or if the proceeds from the closing transaction are less than
the premium paid to purchase the option. However, because increases in the
market price of a call option will generally reflect increases in the market
price of the underlying security, any loss to the Fund resulting from the
repurchase of a call option is likely to be offset in whole or in part by
appreciation of the underlying security owned by the Fund.
STOCK INDEX OPTIONS. The Fund may also purchase put and call options with
respect to the S&P 500 and other stock indices. Such options may be purchased as
a hedge against changes resulting from market conditions in the values of
securities which are held in the Fund's portfolio or which it intends to
purchase or sell, or when they are economically appropriate for the reduction of
risks inherent in the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create certain
risks that are not present with stock options generally. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular stock, whether the Fund will realize a gain or loss on the
purchase or sale of an option on an index depends upon movements in the level of
stock prices in the stock market generally rather than movements in the price of
a particular stock. Accordingly, successful use by the Fund of options on a
stock index would be subject to the Advisor's ability to predict correctly
movements in the direction of the stock market generally. This requires
different skills and techniques than predicting changes in the price of
individual stocks.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading of index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this were to occur, the Fund would not be able
to close out options which it had purchased, and if restrictions on exercise
were imposed, the Fund might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. It is the policy of the Fund to
purchase put or call options only with respect to an index which the Advisor
believes includes a sufficient number of stocks to minimize the likelihood of a
trading halt in the index.
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
than the underlying securities and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying securities themselves. There are also significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objective. In addition, a liquid secondary market for particular options may
be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options of underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or clearing corporation may not at all times be adequate to handle
current trading volume; or one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
B-7
<PAGE>
A decision as to whether, when and how to use options involves the exercise
of skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected events. The extent to
which the Fund may enter into options transactions may be limited by the
Internal Revenue Code of 1986 (the "Code") requirements for qualification of the
Fund as a regulated investment company. See "Dividends and Distributions" and
"Taxation."
DEALER OPTIONS. The Fund may engage in transactions involving dealer
options as well as exchange-traded options. Certain additional risks are
specific to dealer options. While the Fund might look to a clearing corporation
to exercise exchange-traded options, if the Fund were to purchase a dealer
option it would need to rely on the dealer from which it purchased the option to
perform if the option were exercised. Failure by the dealer to do so would
result in the loss of the premium paid by the Fund as well as loss of the
expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, the Fund may generally be able to realize
the value of a dealer option it has purchased only by exercising or reselling
the option to the dealer who issued it. Similarly, when the Fund writes a dealer
option, the Fund may generally be able to close out the option prior to its
expiration only by entering into a closing purchase transaction with the dealer
to whom the Fund originally wrote the option. While the Fund will seek to enter
into dealer options only with dealers who will agree to and which are expected
to be capable of entering into closing transactions with the Fund, there can be
no assurance that the Fund will at any time be able to liquidate a dealer option
at a favorable price at any time prior to expiration. Unless the Fund, as a
covered dealer call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or other assets) used
as cover until the option expires or is exercised. In the event of insolvency of
the other party, the Fund may be unable to liquidate a dealer option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. For example, because the
Fund must maintain a secured position with respect to any call option on a
security it writes, the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This requirement may
impair the Fund's ability to sell portfolio securities at a time when such sale
might be advantageous.
The Staff of the Securities and Exchange Commission (the "Commission") has
taken the position that purchased dealer options are illiquid securities. The
Fund may treat the cover used for written dealer options as liquid if the dealer
agrees that the Fund may repurchase the dealer option it has written for a
maximum price to be calculated by a predetermined formula. In such cases, the
dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option.
Accordingly, the Fund will treat dealer options as subject to the Fund's
limitation on illiquid securities. If the Commission changes its position on the
liquidity of dealer options, the Fund will change its treatment of such
instruments accordingly.
SPREAD TRANSACTIONS. The Fund may purchase covered spread options from
securities dealers. These covered spread options are not presently
exchange-listed or exchange-traded. The purchase of a spread option gives the
Fund the right to put securities that it owns at a fixed dollar spread or fixed
yield spread in relationship to another security that the Fund does not own, but
which is used as a benchmark. The risk to the Fund, in addition to the risks of
dealer options described above, is the cost of the premium paid as well as any
transaction costs. The purchase of spread options will be used to protect the
Fund against adverse changes in prevailing credit quality spreads, i.e., the
yield spread between high quality and lower quality securities. This protection
is provided only during the life of the spread options.
B-8
<PAGE>
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to its portfolio
securities. Pursuant to such agreements, the Fund acquires securities from
financial institutions such as banks and broker- dealers as are deemed to be
creditworthy by the Advisor, subject to the seller's agreement to repurchase and
the Fund's agreement to resell such securities at a mutually agreed upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio security). Securities subject
to repurchase agreements will be held by the Custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund will
suffer a loss to the extent that the proceeds from a sale of the underlying
securities are less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans under the 1940 Act.
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The Fund may purchase securities on a "when-issued," forward commitment or
delayed settlement basis. In this event, the Custodian will segregate liquid
assets equal to the amount of the commitment in a separate account. Normally,
the Custodian will set aside portfolio securities to satisfy a purchase
commitment. In such a case, the Fund may be required subsequently to segregate
additional assets in order to assure that the value of the account remains equal
to the amount of the Fund's commitment. It may be expected that the Fund's net
assets will fluctuate to a greater degree when it sets aside portfolio
securities to cover such purchase commitments than when it sets aside cash.
The Fund does not intend to engage in these transactions for speculative
purposes but only in furtherance of its investment objectives. Because the Fund
will segregate liquid assets to satisfy its purchase commitments in the manner
described, the Fund's liquidity and the ability of the Advisor to manage it may
be affected in the event the Fund's forward commitments, commitments to purchase
when- issued securities and delayed settlements ever exceeded 15% of the value
of its net assets.
The Fund will purchase securities on a when-issued, forward commitment or
delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss. When the Fund engages in when-issued, forward commitment
and delayed settlement transactions, it relies on the other party to consummate
the trade. Failure of such party to do so may result in the Fund's incurring a
loss or missing an opportunity to obtain a price credited to be advantageous.
The market value of the securities underlying a when-issued purchase,
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
B-9
<PAGE>
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities in an amount not exceeding
one-third of its total assets to financial institutions such as banks and
brokers if the loan is collateralized in accordance with applicable regulations.
Under the present regulatory requirements which govern loans of portfolio
securities, the loan collateral must, on each business day, at least equal the
value of the loaned securities and must consist of cash, letters of credit of
domestic banks or domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters of credit
must obligate a bank to pay amounts demanded by the Fund if the demand meets the
terms of the letter. Such terms and the issuing bank would have to be
satisfactory to the Fund. Any loan might be secured by any one or more of the
three types of collateral. The terms of the Fund's loans must permit the Fund to
reacquire loaned securities on five days' notice or in time to vote on any
serious matter and must meet certain tests under the Code.
SHORT SALES
Currently, the Fund does not engage in short selling, but the Board of
Trustees has authorized it to engage in short selling involving commitments (on
a daily marked-to-market basis) not to exceed 25% of its net assets. In a short
sale, the Fund sells a security which it does not own, in anticipation of a
decline in the market value of the security. To complete the sale, the Fund must
borrow the security (generally from the broker through which the short sale is
made) in order to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The Fund is said to have a "short position" in the securities
sold until it delivers them to the broker. The period during which the Fund has
a short position can range from one day to more than a year. Until the security
is replaced, the proceeds of the short sale are retained by the broker, and the
Fund is required to pay to the broker a negotiated portion of any dividends or
interest which accrue during the period of the loan. To meet current margin
requirements, the Fund is also required to deposit with the broker additional
cash or securities so that the total deposit with the broker is maintained daily
at 150% of the current market value of the securities sold short (100% of the
current market value if a security is held in the account that is convertible or
exchangeable into the security sold short within 90 days without restriction
other than the payment of money).
Short sales by the Fund create opportunities to increase the Fund's return
but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since the Fund in effect profits from a
decline in the price of the securities sold short without the need to invest the
full purchase price of the securities on the date of the short sale, the Fund's
net asset value per share will tend to increase more when the securities it has
sold short decrease in value, and to decrease more when the securities it has
sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions the Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell portfolio securities to raise the capital necessary to meet its
short sale obligations at a time when fundamental investment considerations
would not favor such sales.
B-10
<PAGE>
INVESTMENT RESTRICTIONS
The Trust (on behalf of the Fund) has adopted the following restrictions as
fundamental policies, which may not be changed without the favorable vote of the
holders of a "majority," as defined in the 1940 Act, of the outstanding voting
securities of the Fund. Under the 1940 Act, the "vote of the holders of a
majority of the outstanding voting securities" means the vote of the holders of
the lesser of (i) 67% of the shares of the Fund represented at a meeting at
which the holders of more than 50% of its outstanding shares are represented or
(ii) more than 50% of the outstanding shares of the Fund.
As a matter of fundamental policy, the Fund is diversified. The Fund's
investment objective is also fundamental.
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except that
(i) the Fund may borrow from banks in amounts not exceeding one-third of its
total assets (including the amount borrowed); and (ii) this restriction shall
not prohibit the Fund from engaging in options transactions or short sales;
2. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions and except that the Fund may borrow
money from banks to purchase securities;
3. Act as underwriter (except to the extent the Fund may be deemed to be an
underwriter in connection with the sale of securities in its investment
portfolio);
4. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities);
5. Purchase or sell real estate or interests in real estate or real estate
limited partnerships (although the Fund may purchase and sell securities which
are secured by real estate and securities of companies which invest or deal in
real estate);
6. Purchase or sell commodities or commodity futures contracts, except that
the Fund may purchase and sell foreign currency contracts in accordance with any
rules of the Commodity Futures Trading Commission;
7. Make loans of money (except for purchases of debt securities consistent
with the investment policies of the Fund and except for repurchase agreements);
or
8. Make investments for the purpose of exercising control or management.
The Fund observes the following restrictions as a matter of operating but
not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
The Fund may not:
1. Invest in the securities of other investment companies or purchase any
other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal law;
2. Invest in securities which are restricted as to disposition or otherwise
are illiquid or have no readily available market (except for securities which
are determined by the Board of Trustees to be liquid); or
3. Purchase or sell futures contracts.
B-11
<PAGE>
MANAGEMENT
The overall management of the business and affairs of the Trust is vested
with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day-to-day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their ages and positions with the
Trust, their business addresses and principal occupations during the past five
years are:
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
--------------------- -------- -------------------------------------------
<S> <C> <C>
Walter Auch, Sr.(Born 1921) Trustee Director, Nicholas-Applegate Mutual Funds, Brinson
6001 N. 62nd Place Funds (since 1994), Smith Barney Trak Fund, Pimco
Paradise Valley, AZ 85253 Advisors L.P., Banyan Realty Trust, Banyan Land Fund II
and Legend Properties.
Eric Banhazl (Born 1957)* Trustee, Executive Vice President, Investment Company
2025 E. Financial Way Assistant Administration LLC; President and Vice President, First
Glendora, CA 91740 Treasurer, Fund Distributors, Inc.; RNC Mutual Fund Group;
Treasurer, Guinness Flight Investment Funds, Inc. and
Professionally Managed Portfolios.
Donald O'Connor (Born 1936) Trustee Retired; formerly Executive Vice President and Chief
Taylor Avenue Operating Officer of ICI Mutual Insurance Company
Washington MD, 20744 (until January, 1997), Vice President, Operations,
Investment Company Institute (until June, 1993).
George Wofford III Trustee Vice President, Information Services, Federal Home Loan
(Born 1939) Bank of San Francisco (since March, 1993); formerly
305 Glendora Circle Director of Management Information Services, Morrison &
Danville, CA 94526 Foerster (law firm).
Steven J. Paggioli Vice Executive Vice President, Robert H. Wadsworth &
(Born 1950) President Associates, Inc. and Investment Company Administration
479 W. 22nd Street LLC; Vice President, First Fund Distributors, Inc.;
New York, NY 10011 President and Trustee, Professionally Managed
Portfolios; Trustee, Managers Funds
Robert H. Wadsworth Vice President, Robert H. Wadsworth & Associates, Inc.,
(Born 1940) President Investment Company Administration, LLC and First Fund
4455 E. Camelback Road Distributors, Inc.; Vice President, Professionally
Suite 261E Managed Portfolios; President, Guinness Flight
Phoenix, AZ 85018 Investment Funds, Inc.; Director, Germany Fund, Inc.,
New Germany Fund, Inc. and Central European Equity
Fund, Inc. and Deutsche Funds, Inc.
Thomas W. Marschel Vice Vice President, Investment Company Administration LLC;
(Born 1970) President Assistant Vice President, Investment Company
4455 E. Camelback Road Administration, LLC from October 1995 to January 2000;
Suite 261 E Fund Accounting Supervisor, SEI Fund Resources from
Phoenix, AZ 85018 January 1994 to October 1995
Chris O. Moser Secretary Employed by Investment Company Administration LLC
(Born 1949) (since July, 1996); formerly employed by Bank One, N.A.
4455 E. Camelback Road (from August, 1995 until July, 1996); O'Connor,
Suite 261E Cavanagh, Anderson, Killingsworth and Beshears (law
Phoenix, AZ 85018 firm) (until August, 1995).
</TABLE>
* denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
B-12
<PAGE>
NAME AND POSITION AGGREGATE COMPENSATION FROM THE TRUST*
----------------- --------------------------------------
Walter E. Auch, Sr., Trustee $12,000
Donald E. O'Connor, Trustee $12,000
George T. Wofford III, Trustee $12,000
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
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 ADVISOR
Subject to the supervision of the Board of Trustees, investment management
and related services are provided by the Advisor, pursuant to an Investment
Advisory Agreement (the "Advisory Agreement"). The Advisor is controlled by AFAM
Acquisition, Inc..
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
B-13
<PAGE>
responsible for the expenses of printing and distributing extra copies of the
Fund's prospectus, statement of additional information, and sales and
advertising materials (but not the legal, auditing or accounting fees attendant
thereto) to prospective investors (but not to existing shareholders); and the
costs of any special Board of Trustees meetings or shareholder meetings convened
for the primary benefit of the Advisor.
As compensation for the Advisor's services, the Fund pays it an advisory
fee at the rate specified in the prospectus. In addition to the fees payable to
the Advisor and the Administrator, the Fund is responsible for its operating
expenses, including: fees and expenses incurred in connection with the issuance,
registration and transfer of its shares; brokerage and commission expenses; all
expenses of transfer, receipt, safekeeping, servicing and accounting for the
cash, securities and other property of the Trust for the benefit of the Fund
including all fees and expenses of its custodian, shareholder services agent and
accounting services agent; interest charges on any borrowings; costs and
expenses of pricing and calculating its daily net asset value and of maintaining
its books of account required under the 1940 Act; taxes, if any; a pro rata
portion of expenditures in connection with meetings of the Fund's shareholders
and the Trust's Board of Trustees that are properly payable by the Fund;
salaries and expenses of officers and fees and expenses of members of the
Trust's Board of Trustees or members of any advisory board or committee who are
not members of, affiliated with or interested persons of the Advisor or
Administrator; insurance premiums on property or personnel of the Fund which
inure to its benefit, including liability and fidelity bond insurance; the cost
of preparing and printing reports, proxy statements, prospectuses and statements
of additional information of the Fund or other communications for distribution
to existing shareholders; legal, auditing and accounting fees; trade association
dues; fees and expenses (including legal fees) of registering and maintaining
registration of its shares for sale under federal and applicable state and
foreign securities laws; all expenses of maintaining and servicing shareholder
accounts, including all charges for transfer, shareholder recordkeeping,
dividend disbursing, redemption, and other agents for the benefit of the Fund,
if any; and all other charges and costs of its operation plus any extraordinary
and non-recurring expenses, except as otherwise prescribed in the Advisory
Agreement.
The Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce fees payable to it by the Fund and to pay Fund
operating expenses to the extent necessary to limit the Fund's aggregate annual
operating expenses (excluding interest and tax expenses) to the limit set forth
in the Expense Table (the "expense cap"). Any such reductions made by the
Advisor in its fees or payment of expenses which are the Fund's obligation are
subject to reimbursement by the Fund to the Advisor, if so requested by the
Advisor, in subsequent fiscal years if the aggregate amount actually paid by the
Fund toward the operating expenses for such fiscal year (taking into account the
reimbursement) does not exceed the applicable limitation on Fund expenses. The
Advisor is permitted to be reimbursed only for fee reductions and expense
payments made in the previous three fiscal years, except that it is permitted to
look back five years and four years, respectively, during the initial six years
and seventh year of the Fund's operations. Any such reimbursement is also
contingent upon the Board of Trustees' subsequent review and ratification of the
reimbursed amounts. Such reimbursement may not be paid prior to the Fund's
payment of current ordinary operating expenses.
B-14
<PAGE>
During the year ended December 31, 1999, the Advisor earned $65,861 in
advisory fees. The Advisor has contractually agreed to limit total fund
operating expenses to 2.25% of average net assets annually. As a result of that
limitation, during the year ended December 31, 1999, the Advisor waived the full
amount of its fee and paid fund operating expenses in the amount of $26,149.
During the year ended December 31, 1998, the Advisor earned $50,113 in advisory
fees of which, the Advisor waived the full amount of its fee and paid fund
operating expenses in the amount of $25,133.
Under the Advisory Agreement, the Advisor will not be liable to the Trust
or the Fund or any shareholder for any act or omission in the course of, or
connected with, rendering services or for any loss sustained by the Trust except
in the case of a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad faith or gross
negligence, or reckless disregard of its obligations and duties under the
Agreement.
The Advisory Agreement will remain in effect for a period not to exceed two
years. Thereafter, if not terminated, the Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of Trustees or by
the holders of a majority of the outstanding voting securities of the Fund at
any time without penalty, on 60 days written notice to the Advisor. The Advisory
Agreement also may be terminated by the Advisor on 60 days written notice to the
Trust. The Advisory Agreement terminates automatically upon its assignment (as
defined in the 1940 Act).
THE ADMINISTRATOR. The Administrator has agreed to be responsible for
providing such services as the Trustees may reasonably request, including but
not limited to (i) maintaining the Trust's books and records (other than
financial or accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Trust's insurance
relationships; (iii) preparing for the Trust (or assisting counsel and/or
auditors in the preparation of) all required tax returns, proxy statements and
reports to the Trust's shareholders and Trustees and reports to and other
filings with the Commission and any other governmental agency (the Trust
agreeing to supply or cause to be supplied to the Administrator all necessary
financial and other information in connection with the foregoing); (iv)
preparing such applications and reports as may be necessary to permit the offer
and sale of the shares of the Trust under the securities or "blue sky" laws of
the various states selected by the Trust (the Trust agreeing to pay all filing
fees or other similar fees in connection therewith); (v) responding to all
inquiries or other communications of shareholders, if any, which are directed to
the Administrator, or if any such inquiry or communication is more properly to
be responded to by the Trust's custodian, transfer agent or accounting services
agent, overseeing their response thereto; (vi) overseeing all relationships
between the Trust and any custodian(s), transfer agent(s) and accounting
services agent(s), including the negotiation of agreements and the supervision
of the performance of such agreements; and (vii) authorizing and directing any
B-15
<PAGE>
of the Administrator's directors, officers and employees who may be elected as
Trustees or officers of the Trust to serve in the capacities in which they are
elected. All services to be furnished by the Administrator under this Agreement
may be furnished through the medium of any such directors, officers or employees
of the Administrator.
For its services, the Administrator receives a monthly fee at the following
annual rate, subject to a $30,000 minimum:
FUND ASSET LEVEL FEE RATE
---------------- --------
First $50 million 0.20% of average daily net assets
Next $50 million 0.15% of average daily net assets
Next $50 million 0.10% of average daily net assets
Next $50 million, and thereafter 0.05% of average daily net assets
DISTRIBUTION ARRANGEMENTS
First Fund Distributors, Inc. (the "Distributor"), a corporation partly
owned by Messrs. Paggioli and Wadsworth, acts as the Fund's principal
underwriter in a continuous public offering of the Fund's shares. The
Distribution Agreement between the Fund and the Distributor continues in effect
from year to year if approved at least annually by (i) the Board of Trustees or
the vote of a majority of the outstanding shares of the Fund (as defined in the
1940 Act) and (ii) a majority of the Trustees who are not interested persons of
any such party, in each case cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement may be terminated without
penalty by the parties thereto upon sixty days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
The Fund has adopted a Distribution Plan in accordance with Rule 12b-1 (the
"Plan") under the 1940 Act. The Plan provides that the Fund will pay a fee to
the Advisor as Distribution Coordinator at an annual rate of up to 0.25% of the
average daily net assets of the Fund. The fee is paid to the Advisor as
reimbursement for, or in anticipation of, expenses incurred for distribution
related activity.
During the fiscal year ended December 31, 1999, the Fund paid $16,465 in
distribution fees, of which $5,537 was paid out as compensation to dealers,
$4,538 was paid out as compensation to sales personnel, $3,667 was for
reimbursement of printing expenses, $1,923 was for reimbursement of advertising
expenses, and $800 was for miscellaneous expenses.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that the Advisor shall be responsible for
broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Advisor shall not direct orders to an affiliated person of the
Advisor without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. The Advisor's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction, the
Advisor may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
B-16
<PAGE>
Subject to such policies as the Advisor and the Board of Trustees of the
Trust may determine, the Advisor shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of its having caused the Fund to pay a broker or dealer that provides
(directly or indirectly) brokerage or research services to the Advisor an amount
of commission for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction, if the Advisor determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Advisor's overall responsibilities with respect to
the Fund. The Advisor is further authorized to allocate the orders placed by it
on behalf of the Fund to such brokers or dealers who also provide research or
statistical material, or other services, to the Trust, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions as
the Advisor shall determine, and the Advisor shall report on such allocations
regularly to the Advisor and the Trust, indicating the broker-dealers to whom
such allocations have been made and the basis therefor. The Advisor is also
authorized to consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions, subject to the
requirements of best execution, I.E., that such brokers or dealers are able to
execute the order promptly and at the best obtainable securities price.
On occasions when the Advisor deems the purchase or sale of a security to
be in the best interest of the Fund as well as other clients of the Advisor, the
Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Advisor in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
Brokerage commissions paid by the Fund during the fiscal years ended
December 31, 1999 and 1998, totaled $15,972 and $35,541, respectively.
PORTFOLIO TURNOVER
Although the Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Advisor, investing
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% portfolio turnover rate would occur if all
the securities in the Fund's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to transaction costs and may result in a
greater number of taxable transactions. See "Portfolio Transactions and
Brokerage." For the fiscal years ended December 31, 1999 and 1998, the Fund had
a portfolio turnover rate of 19.00% and 5.82%, respectively.
B-17
<PAGE>
PURCHASE AND REDEMPTION OF FUND SHARES
The information provided below supplements the information contained in the
Fund's Prospectus regarding the purchase and redemption of Fund shares.
HOW TO BUY SHARES
You may purchase shares of the Fund from selected securities brokers,
dealers or financial intermediaries. Investors should contact these agents
directly for appropriate instructions, as well as information pertaining to
accounts and any service or transaction fees that may be charged by those
agents. Purchase orders through securities brokers, dealers and other financial
intermediaries are effected at the next-determined public offering price after
receipt of the order by such agent before the Fund's daily cutoff time. Orders
received after that time will be purchased at the next-determined public
offering price.
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Fund's shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Fund, and (iii) to reduce or waive the minimum
for initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
The public offering price of Fund shares is the net asset value, plus the
applicable sales charge. The Fund receives the net asset value. Shares are
purchased at the public offering price next determined after the Transfer Agent
receives your order in proper form. In most cases, in order to receive that
day's public offering price, the Transfer Agent must receive your order in
proper form before the close of regular trading on the New York Stock Exchange
("NYSE"). If you buy shares through your investment representative, the
representative must receive your order before the close of regular trading on
the NYSE to receive that day's public offering price. Orders are in proper form
only after funds are converted to U.S. funds. Orders paid by check and received
by 2:00 p.m., Eastern Time, will generally be available for the purchase of
shares the following business day.
If you are considering redeeming or transferring shares to another person
shortly after purchase, you should pay for those shares with a certified check
to avoid any delay in redemption or transfer. Otherwise the Fund may delay
payment until the purchase price of those shares has been collected or, if you
redeem by telephone, until 15 calendar days after the purchase date. To
eliminate the need for safekeeping, the Fund will not issue certificates for
your shares unless you request them.
REDUCED SALES CHARGES
The reduced sales charges, as noted in the Prospectus, apply to quantity
purchases made at one time by a "person," which means (i) an individual, (ii)
members of a family (i.e., an individual, spouse and children under age 21), or
(iii) a trustee or fiduciary of a single trust estate or a single fiduciary
account.
B-18
<PAGE>
Your may qualify for an immediate reduced sales charge on purchases by
completing the Letter of Intent section of the Application Form. You must 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 shares.
The reduced sales charges applicable to purchases apply on a cumulative
basis over any period time. Thus the value of all shares of the Fund owned by a
"person" taken at the current net asset value, can be combined with a current
purchase of shares to determine the rate of sales charge applicable to the
current purchase in order to receive the cumulative quantity reduction. When
opening a new account, the fact that you currently hold 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 Shareholders Servicing Agent
should be notified of current Fund holdings prior to the additional purchase of
shares.
HOW TO SELL SHARES
You can sell your Fund shares any day the NYSE is open for regular trading,
either directly to the Fund or through your investment representative. The Fund
will forward redemption proceeds or redeem shares for which it has collected
payment of the purchase price.
Payments to shareholders for shares of the Fund redeemed directly from the
Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the NYSE is restricted as determined by the SEC or
the NYSE is closed for other than weekends and holidays; (b) an emergency exists
as determined by the SEC making disposal of portfolio securities or valuation of
net assets of the Fund not reasonably practicable; or (c) for such other period
as the SEC may permit for the protection of the Fund's shareholders. At various
times, the Fund may be requested to redeem shares for which it has not yet
received confirmation of good payment; in this circumstance, the Fund may delay
the redemption until payment for the purchase of such shares has been collected
and confirmed to the Fund.
Send a signed letter of instruction to the Transfer Agent, along with any
certificates that represent shares you want to sell. The price you will receive
is the next net asset value calculated after the Fund receives your request in
proper form. In order to receive that day's net asset value, the Transfer Agent
must receive your request before the close of regular trading on the NYSE.
Your investment representative must receive your request before the close
of regular trading on the NYSE to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge you for its services. If you
sell shares having a net asset value of $100,000 a signature guarantee is
required.
B-19
<PAGE>
If you want your redemption proceeds sent to an address other than your
address as it appears on the Transfer Agent's records, a signature guarantee is
required. The Fund may require additional documentation for the sale of shares
by a corporation, partnership, agent or fiduciary, or a surviving joint owner.
Contact the Transfer Agent for details.
Upon receipt of any instructions or inquiries by telephone from a
shareholder or, if held in a joint account, from either party, or from any
person claiming to be the shareholder, the Fund or its agent is authorized,
without notifying the shareholder or joint account parties, to carry out the
instructions or to respond to the inquiries, consistent with the service options
chosen by the shareholder or joint shareholders in his or their latest Account
Application or other written request for services, including purchasing or
redeeming shares of the Fund and depositing and withdrawing monies from the bank
account specified in the Bank Account Registration section of the shareholder's
latest Account Application or as otherwise properly specified to the Fund in
writing.
During periods of unusual market changes and shareholder activity, you may
experience delays in contacting the Transfer Agent by telephone. In this event,
you may wish to submit a written redemption request, as described in the
Prospectus, or contact your investment representative. The Telephone Redemption
Privilege is not available if you were issued certificates for shares that
remain outstanding. The Telephone Redemption Privilege may be modified or
terminated without notice.
Subject to compliance with applicable regulations, the Fund has reserved
the right to pay the redemption price of its shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (approximately $250,000).
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is determined
as of the close of trading on the New York Stock Exchange (the "NYSE")
(generally 4:00 p.m. Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open on the following days: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor and the Trust's Valuation Committee pursuant to procedures approved by
or under the direction of the Board.
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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.
TAXATION
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986 as amended, (the "Code"), for each taxable year by complying with all
applicable requirements regarding the source of its income, the diversification
of its assets, and the timing of its distributions. The Fund's policy is to
distribute to its shareholders all of its investment company taxable income and
any net realized capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes based on net income. However, the
Board may elect to pay such excise taxes if it determines that payment is, under
the circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
B-21
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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
B-22
<PAGE>
tax returns. If not more than 50% in value of the Fund's total assets at the end
of its fiscal year is invested in stock or securities of foreign corporations,
the Fund will not be entitled under the Code to pass through to its shareholders
their pro rata share of the foreign taxes paid by the Fund. In this case, these
taxes will be taken as a deduction by the Fund.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
The use of hedging strategies, such as entering into futures contracts and
forward contracts and purchasing options, involves complex rules that will
determine the character and timing of recognition of the income received in
connection therewith by the Fund. Income from foreign currencies (except certain
gains therefrom that may be excluded by future regulations) and income from
transactions in options, futures contracts and forward contracts derived by the
Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
For accounting purposes, when the Fund purchases an option, the premium
paid by the Fund is recorded as an asset and is subsequently adjusted to the
current market value of the option. Any gain or loss realized by the Fund upon
the expiration or sale of such options held by the Fund generally will be
capital gain or loss.
Any security, option, or other position entered into or held by the Fund
that substantially diminishes the Fund's risk of loss from any other position
held by the Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of the Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are subject
to Section 1256 of the Code ("Section 1256 Contracts") and that are held by the
Fund at the end of its taxable year generally will be required to be "marked to
market" for federal income tax purposes, that is, deemed to have been sold at
market value. Sixty percent of any net gain or loss recognized on these deemed
sales and 60% of any net gain or loss realized from any actual sales of Section
1256 Contracts will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by the Fund. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency denominated
payables and receivables and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60/40 rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of the Fund's
gain or loss on the sale or other disposition of shares of a foreign corporation
may, because of changes in foreign currency exchange rates, be treated as
ordinary income or loss under Section 988 of the Code rather than as capital
gain or loss.
A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize gain or loss
for income tax purposes on the difference, if any, between the adjusted basis of
the securities tendered to the fund and the purchase price of the Fund's shares
acquired by the shareholder.
B-23
<PAGE>
Section 475 of the Code requires that a "dealer" in securities must
generally "mark to market" at the end of its taxable year all securities which
it owns. The resulting gain or loss is treated as ordinary (and not capital)
gain or loss, except to the extent allocable to periods during which the dealer
held the security for investment. The "mark to market" rules do not apply,
however, to a security held for investment which is clearly identified in the
dealer's records as being held for investment before the end of the day in which
the security was acquired. The IRS has issued guidance under Section 475 that
provides that, for example, a bank that regularly originates and sells loans is
a dealer in securities, and subject to the "mark to market" rules. Shares of the
Fund held by a dealer in securities will be subject to the "mark to market"
rules unless they are held by the dealer for investment and the dealer property
identifies the shares as held for investment.
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends during such six-month period. All or a portion
of a loss realized upon the redemption of shares may be disallowed to the extent
shares are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the prospectuses are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Fund. The law firm of Paul, Hastings, Janofsky & Walker
LLP has expressed no opinion in respect thereof. Nonresident aliens and foreign
persons are subject to different tax rules, and may be subject to withholding of
up to 30% on certain payments received from the Fund. Shareholders are advised
to consult with their own tax advisers concerning the application of foreign,
federal, state and local taxes to an investment in the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund will receive income in the form of dividends and interest earned
on its investments in securities. This income, less the expenses incurred in its
operations, is the Fund's net investment income, substantially all of which will
be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon the
amount of net investment income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
The Fund also may derive capital gains or losses in connection with sales
or other dispositions of its portfolio securities. Any net gain the Fund may
realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
B-24
<PAGE>
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders. For more information
concerning applicable capital gains tax rates, see your tax advisor.
Any dividend or distribution paid by the Fund reduces the Fund's net asset
value per share on the date paid by the amount of the dividend or distribution
per share. Accordingly, a dividend or distribution paid shortly after a purchase
of shares by a shareholder would represent, in substance, a partial return of
capital (to the extent it is paid on the shares so purchased), even though it
would be subject to income taxes.
Dividends and other distributions will be made in the form of additional
shares of the Fund unless the shareholder has otherwise indicated. Investors
have the right to change their elections with respect to the reinvestment of
dividends and distributions by notifying the Transfer Agent in writing, but any
such change will be effective only as to dividends and other distributions for
which the record date is seven or more business days after the Transfer Agent
has received the written request.
PERFORMANCE INFORMATION
TOTAL RETURN
Average annual total return quotations used in the Fund's advertising and
promotional materials are calculated according to the following formula:
n
P(1 + T) = ERV
where "P" equals a hypothetical initial payment of $1000; "T" equals average
annual total return; "n" equals the number of years; and "ERV" equals the ending
redeemable value at the end of the period of a hypothetical $1000 payment made
at the beginning of the period.
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication. Average annual
total return, or "T" in the above formula, is computed by finding the average
annual compounded rates of return over the period that would equate the initial
amount invested to the ending redeemable value. Average annual total return
assumes the reinvestment of all dividends and distributions.
The average annual total return for the Fund for the periods ended June 30,
2000 are as follows:
One Year 34.55%
From Inception 18.51%
(January 2, 1998)
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<PAGE>
OTHER INFORMATION
Performance data of the Fund quoted in advertising and other promotional
materials represents past performance and is not intended to predict or
guarantee future results. The return and principal value of an investment in the
Fund will fluctuate, and an investor's redemption proceeds may be more or less
than the original investment amount. In advertising and promotional materials
the Fund may compare its performance with data published by Lipper Analytical
Services, Inc. ("Lipper") or CDA Investment Technologies, Inc. ("CDA"). The Fund
also may refer in such materials to mutual fund performance rankings and other
data, such as comparative asset, expense and fee levels, published by Lipper or
CDA. Advertising and promotional materials also may refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals including, but not limited to, THE WALL STREET JOURNAL, MONEY
MAGAZINE, FORBES, BUSINESS WEEK, FINANCIAL WORLD and BARRON'S.
GENERAL INFORMATION
Advisors Series Trust is an open-end management investment company
organized as a Delaware business trust under the laws of the State of Delaware
on October 3, 1996. The Trust currently consists of 23 effective series of
shares of beneficial interest, par value of 0.01 per share. The Declaration of
Trust permits the Trustees to issue an unlimited number of full and fractional
shares of beneficial interest and to divide or combine the shares into a greater
or lesser number of shares without thereby changing the proportionate beneficial
interest in the Fund. Each share represents an interest in the Fund
proportionately equal to the interest of each other share. Upon the Fund's
liquidation, all shareholders would share pro rata in the net assets of the Fund
available for distribution to shareholders.
The Declaration of Trust does not require the issuance of stock
certificates. If stock certificates are issued, they must be returned by the
registered owners prior to the transfer or redemption of shares represented by
such certificates.
If they deem it advisable and in the best interest of shareholders, the
Board of Trustees may create additional series of shares which differ from each
other only as to dividends. The Board of Trustees has created two series of
shares, and may create additional series in the future, which have separate
assets and liabilities. Income and operating expenses not specifically
attributable to a particular Fund are be allocated fairly among the Funds by the
Trustees, generally on the basis of the relative net assets of each Fund.
Rule 18f-2 under the 1940 Act provides that as to any investment company
which has two or more series outstanding and as to any matter required to be
submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
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<PAGE>
The Fund's principal underwriter is First Fund Distributors, Inc., 4455 E.
Camelback Road, Suite 261E, Phoenix, AZ 85018.
The Fund's custodian, Firstar Bank, 425 Walnut Street, Cincinnati, Ohio
45202 is responsible for holding the Fund's assets. American Data Services, P.O.
Box 5536, Hauppauge, NY 11788 acts as the Fund's transfer agent and accounting
services agent. The Fund's independent accountants, PricewaterhouseCoopers, LLP,
555 Fifth Avenue, New York, NY 10017, assist in the preparation of certain
reports to the Securities and Exchange Commission and the Fund's tax returns.
The Boards of the Trust, the Advisor and the Distributor have adopted Codes
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 or held by the Funds.
The Fund is a diversified series of the Trust.
Shares of the Fund owned by the Trustees and officers as a group were less
than 1% at August 1, 2000.
As of September 24, 2000, the following additional persons owned of record
and/or beneficially more than 5% of the Fund's outstanding voting securities:
National Investors, 55Water Street, New York, NY - 10.33%
Charles Schwab & Co., Inc., 101 Montgomery Street,
San Francisco, CA 94104-4122 - 41.05%.
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<PAGE>
APPENDIX
Description of Ratings
MOODY'S INVESTORS SERVICE, INC.: CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Moody's applies numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa through B in its corporate bond rating system. The
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.
STANDARD & POOR'S RATINGS GROUP: CORPORATE BOND RATINGS
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
Plus (+) or Minus (-)--The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are assessments of the issuer's ability to
repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1--highest quality; Prime 2--high
quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
B-28
