STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 8, 2000
AS AMENDED AUGUST 24, 2000
VAN DEVENTER & HOCH AMERICAN VALUE FUND
655 N. CENTRAL AVENUE, SUITE 1550
GLENDALE, CA 91230
This Statement of Additional Information ("SAI") is not a prospectus, and it
should be read in conjunction with the Prospectus dated August 8, 2000, as may
be revised, of the Van Deventer & Hoch American Value Fund (the "Fund"), a
series of Advisors Series Trust (the "Trust"). Van Deventer & Hoch (the
"Advisor") is the advisor to the Fund. A copy of the Fund's Prospectus may be
obtained by calling 1-800-576-8229.
TABLE OF CONTENTS
The Trust ................................................................ B-2
Investment Objective and Policies ........................................ B-2
Investment Restrictions .................................................. B-10
Management ............................................................... B-12
Investment Advisory and Other Services ................................... B-13
Portfolio Transactions and Brokerage ..................................... B-15
Portfolio Turnover ....................................................... B-17
Determination of Net Asset Value ......................................... B-17
Purchase and Redemption of Shares ........................................ B-19
Taxation ................................................................. B-20
Dividends and Distributions .............................................. B-22
Performance Information .................................................. B-23
General Information ...................................................... B-24
Financial Statements ..................................................... B-25
Appendix ................................................................. B-26
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THE TRUST
Advisors Series Trust (the "Trust") is an open-end management investment
company organized as a Delaware business trust. The Trust may consist 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.
Prior to August 10, 2000, the Fund was a series of Allegiance Investment
Trust and its name was Allegiance American Value Fund. (Prior to May 7, 1999,
Allegiance American Value Fund was a series of the Trust and was named the Van
Deventer & Hoch American Value Fund, but was not the accounting successor of
that reorganization.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek to provide investors with
long-term capital appreciation and current income. The Fund is diversified,
which under the Investment Company Act of 1940 ("1940 Act") means that as to 75%
of its total assets, no more than 5% may be invested in the securities of a
single issuer and that it may hold no more than 10% of the voting securities of
a single issuer. The following information supplements the discussion of the
Fund's investment objective and policies as set forth in its Prospectus. There
can be no guarantee that the Fund's objective will be attained.
EQUITY SECURITIES. The equity securities in which the Fund invests
generally consist of common stock, preferred stock and securities convertible
into or exchangeable for common or preferred stock. Under normal market
conditions, at least 65% of the value of the Fund's total assets will be
invested in the equity securities of U.S. companies. The Fund may invest in
companies without regard to market capitalization, although it generally does
not expect to invest in companies with market capitalizations of less than $200
million. The securities in which the Fund invests are expected to be either
listed on an exchange or traded in an over-the-counter market.
SMALL COMPANIES. Some of the securities in which the Fund may invest may be
of smaller companies. The securities of smaller companies often trade less
frequently and in more limited volume, and may be subject to more abrupt or
erratic price movements, than securities of larger, more established companies.
Such companies may have limited product lines, markets or financial resources,
or may depend on a limited management group.
PREFERRED STOCK. A preferred stock is a blend of the characteristics of a
bond and common stock. It can offer the higher yield of a bond and has priority
over common stock in equity ownership, but does not have the seniority of a bond
and, unlike common stock, its participation in the issuer's growth may be
limited. Preferred stock has preference over common stock in the receipt of
dividends and in any residual assets after payment to creditors should the
issuer by dissolved. Although the dividend is set at a fixed annual rate, in
some circumstances it can be changed or omitted by the issuer.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities,
which are securities generally offering fixed interest or dividend yields which
may be converted either at a stated price or stated rate for common or preferred
stock. Although to a lesser extent than with fixed-income securities generally,
the market value of convertible securities tends to decline as interest rates
increase, and increase as interest rates decline. Because of the conversion
feature, the market value of convertible securities also tends to vary with
fluctuations in the market value of the underlying common or preferred stock.
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FOREIGN SECURITIES. The Fund may invest up to 20% of its total assets in
foreign securities, including Depositary Receipts, which are described below.
The Fund expects that its investments in foreign issuers, if any, will generally
be in companies which generate substantial revenues from U.S. operations and
which are listed on U.S. securities exchanges. Since foreign securities are
normally denominated and traded in foreign currencies, the values of the Fund's
foreign investments may be influenced by currency exchange rates and exchange
control regulations. There may be less information publicly available about
foreign issuers than U.S. issuers, and they are not generally subject to
accounting, auditing and financial reporting standards and practices comparable
to those in the U.S. Foreign securities may be less liquid and more volatile
than comparable U.S. securities. Foreign settlement procedures and trade
regulations may involve certain expenses and risks. One risk would be the delay
in payment or delivery of securities or in the recovery of the Fund's assets
held abroad. It is possible that nationalization or expropriation of assets,
imposition of currency exchange controls, taxation by withholding Fund assets,
political or financial instability and diplomatic developments could affect the
value of the Fund's investments in certain foreign countries. Foreign laws may
restrict the ability to invest in certain issuers or countries and special tax
considerations will apply to foreign securities. The risks can increase if the
Fund invests in emerging market securities.
DEPOSITARY RECEIPTS. American Depositary Receipts ("ADRs") are securities,
typically issued by a U.S. financial institution, that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer.
European Depositary Receipts ("EDRs"), which are sometimes referred to as
Continental Depositary Receipts ("CDRs"), are securities, typically issued by a
non-U.S. financial institution, that evidence ownership interests in a security
or a pool of securities issued by either a U.S. or foreign issuer. ADRs, EDRs
and CDRs may be available for investment through "sponsored" or "unsponsored"
facilities. A sponsored facility is established jointly by the issuer of the
security underlying the receipt and a depositary, whereas an unsponsored
facility may be established by a depositary without participation by the issuer
of the receipt's underlying security. Holders of an unsponsored depositary
receipt generally bear all the costs of the unsponsored facility and the
depositary of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the issuer of the deposited
security or to pass voting rights through to the holders of the receipts in
respect to the deposited securities.
OTHER INVESTMENT COMPANIES. Apart from being able to invest all of its
investable assets in another investment company having substantially the same
investment objectives and policies, the Fund may invest up to 10% of its total
assets in shares of other investment companies when consistent with its
investment objective and policies, subject to applicable regulatory limitations.
As a shareholder in an investment company, the Fund bears its ratable share of
that investment company's expenses, including advisory and administration fees.
These fees are in addition to the advisory and other fees charged to
shareholders of the Fund. Additional fees may be charged by other investment
companies.
CORPORATE REORGANIZATIONS. The Fund may invest in securities for which a
tender or exchange offer has been made or announced and in securities of
companies for which a merger, consolidation, liquidation or similar
reorganization proposal has been announced if, in the judgment of its Advisor,
there is a reasonable prospect of capital appreciation significantly greater
than the added portfolio turnover expenses inherent in the short-term nature of
such transactions. In general, securities that are the subject of a tender or
exchange offer or proposal sell at a premium to their historic market price
immediately prior to the announcement of the offer or proposal. The increased
market price of these securities may also discount what the stated or appraised
value of the security would be if the contemplated action were approved or
consummated. These investments may be advantageous when the discount
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significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective portfolio company as a result of the contemplated transaction; or
fails adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The principal
risk is that such offers or proposals may not be consummated within the time and
under the terms contemplated at the time of investment, in which case, unless
such offers or proposals are replaced by equivalent or increased offers or
proposals which are consummated, the Fund may sustain a loss. The evaluation of
these contingencies requires unusually broad knowledge and experience on the
part of the Advisor who must appraise not only the value of the issuer and its
component businesses as well as the assets or securities to be received as a
result of the contemplated transaction, but also the financial resources and
business motivation of the offer or as well as the dynamics of the business
climate when the offer or proposal is in progress. Investments in reorganization
securities may tend to increase the turnover ratio of the Fund and increase its
brokerage and other transaction expenses.
ILLIQUID SECURITIES. The Fund may not invest more than 15% of the value of
its net assets in securities that at the time of purchase have legal or
contractual restrictions on resale or are otherwise illiquid. The Advisor will
monitor the amount of illiquid securities in the Fund's portfolio, under the
supervision of the Trust's Board of Trustees, to ensure compliance with the
Fund's investment restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might be unable
to sell restricted or other illiquid securities promptly or at reasonable prices
and might thereby experience difficulty satisfying redemption requests within
seven days. The Fund might also have to register such restricted securities in
order to sell them, resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not reflect the actual liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the SEC under the Securities Act,
the Trust's Board of Trustees may determine that such securities are not
illiquid securities despite their legal or contractual restrictions on resale.
In all other cases, however, securities subject to restrictions on resale will
be deemed illiquid.
WARRANTS AND RIGHTS. The Fund may invest up to 5% of the total value of its
assets (at the time of investment) in warrants or rights (other than those
acquired in units or attached to other securities) which entitle the holder to
buy equity securities at a specific price during or at the end of a specific
period of time. Warrants basically are options to purchase equity securities at
a specified price for a specific period of time. Their prices do not necessarily
move parallel to the prices of the underlying securities. Rights are similar to
warrants but normally have a shorter duration and are distributed directly by
the issuer to shareholders. Rights and warrants have no voting rights, receive
no dividends and have no rights with respect to the assets of the issuer.
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SECURITIES LOANS. The Fund is permitted to lend its securities to
broker-dealers and other institutional investors in order to generate additional
income. Such loans of portfolio securities may not exceed one-third of the value
of the Fund's total assets. In connection with such loans, the Fund will receive
collateral consisting of cash, cash equivalents, U.S. Government securities or
irrevocable letters of credit issued by financial institutions. Such collateral
will be maintained at all times in an amount equal to at least 102% of the
current market value plus accrued interest of the securities loaned. The Fund
can increase its income through the investment of such collateral. The Fund
continues to be entitled to the interest payable or any dividend-equivalent
payments received on a loaned security and, in addition, to receive interest on
the amount of the loan. However, the receipt of any dividend-equivalent payments
by the Fund on a loaned security from the borrower will not qualify for the
dividends-received deduction. Such loans will be terminable at any time upon
specified notice. The Fund might experience risk of loss if the institutions
with which it has engaged in portfolio loan transactions breach their agreements
with the Fund. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delays in receiving additional
collateral or in the recovery of the securities or possible loss of rights in
the collateral should the borrower experience financial difficulty. Loans will
be made only to firms deemed by the Advisor to be of good standing and will not
be made unless, in the judgment of the Advisor, the consideration to be earned
from such loans justifies the risk.
BORROWING MONEY. The Fund is authorized to borrow money from time to time
for temporary, extraordinary or emergency purposes or for clearance of
transactions in amounts not to exceed 33-1/3% of the value of its total assets
at the time of such borrowings. The use of borrowing by the Fund involves
special risk considerations that may not be associated with other funds having
similar objectives and policies. Since substantially all of the Fund's assets
fluctuate in value, while the interest obligation resulting from a borrowing
will be fixed by the terms of the Fund's agreement with its lender, the net
asset value per share of the Fund will tend to increase more when its portfolio
securities increase in value and to decrease more when its portfolio assets
decrease in value than would otherwise be the case if the Fund did not borrow
funds. In addition, interest costs on borrowings may fluctuate with changing
market rates of interest and may partially offset or exceed the return earned on
borrowed funds. Under adverse market conditions, the Fund might have to sell
portfolio securities to meet interest or principal payments at a time when
fundamental investment considerations would not favor such sales. The Fund is
required to designate specific liquid assets with its custodian equal to the
amount it has borrowed.
FORWARD COMMITMENTS. The Fund pay purchase securities for delivery at a
future date. In order to invest the Fund's assets immediately, while awaiting
delivery of securities purchased on a forward commitment basis, short-term
obligations that offer same-day settlement and earnings will normally be
purchased. When a commitment to purchase a security on a forward commitment
basis is made, procedures are established consistent with the General Statement
of Policy of the SEC concerning such purchases. Since that policy currently
recommends that an amount of the Fund's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, a
separate account of the Fund consisting of liquid assets equal to the amount of
the Fund's commitments will be established at the Fund's custodian bank. For the
purpose of determining the adequacy of the securities in the account, the
deposited securities will be valued at market value. If the market value of such
securities declines, additional liquid assets will be placed in the account
daily so that the value of the account will equal the amount of such commitments
by the Fund.
Although it is not intended that such purchases would be made for
speculative purposes, purchases of securities on a forward commitment basis may
involve more risk than other types of purchases. Securities purchased on a
forward commitment basis and the securities held in the Fund's portfolio are
subject to changes in value based upon the public's perception of the issuer and
changes, real or anticipated, in the level of interest rates. Purchasing
securities on a forward commitment basis can involve the risk that the yields
available in the market when the delivery takes place may actually be higher or
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lower than those obtained in the transaction itself. On the settlement date of
the forward commitment transaction, the Fund will meet its obligations from then
available cash flow, sale of securities held in the separate account, sale of
other securities or, although it would not normally expect to do so, from sale
of the forward commitment securities themselves (which may have a value greater
or lesser than the Fund's payment obligations). The sale of securities to meet
such obligations may result in the realization of capital gains or losses.
To the extent the Fund engages in forward commitment transactions, it will
do so for the purpose of acquiring securities consistent with its investment
objective and policies and not for the purpose of investment leverage, and
settlement of such transactions will be within 90 days from the trade date.
REPURCHASE AGREEMENTS. The Fund will enter into repurchase agreements only
with member banks of the Federal Reserve System and securities dealers believed
creditworthy, and only if fully collateralized by securities in which the Fund
is permitted to invest. Under the terms of a typical repurchase agreement, the
Fund would acquire an underlying instrument for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase the instrument and the Fund to resell the instrument at a fixed price
and time, thereby determining the yield during the Fund's holding period. This
procedure results in a fixed rate of return insulated from market fluctuations
during such period. A repurchase agreement is subject to the risk that the
seller may fail to repurchase the security. Repurchase agreements are considered
under the 1940 Act to be loans collateralized by the underlying securities. All
repurchase agreements entered into by the Fund will be fully collateralized at
all times during the period of the agreement in that the value of the underlying
security will be at least equal to 102% of the amount of the loan, including the
accrued interest thereon, and the Fund or its custodian or sub-custodian will
have possession of the collateral, which the Board of Trustees believes will
give it a valid, perfected security interest in the collateral. Whether a
repurchase agreement is the purchase and sale of a security or a collateralized
loan has not been conclusively established. This might become an issue in the
event of the bankruptcy of the other party to the transaction. In the event of
default by the seller under a repurchase agreement construed to be a
collateralized loan, the underlying securities would not be owned by the Fund,
but would only constitute collateral for the seller's obligation to pay the
repurchase price. Therefore, the Fund may suffer time delays and incur costs in
connection with the disposition of the collateral. The Board of Trustees
believes that the collateral underlying repurchase agreements may be more
susceptible to claims of the seller's creditors than would be the case with
securities owned by the Fund. Repurchase agreements maturing in more than seven
days are treated as illiquid for purposes of the Fund's restrictions on
purchases of illiquid securities. Repurchase agreements are also subject to the
risks described below with respect to stand-by commitments.
INVESTMENT GRADE DEBT SECURITIES. Investment grade debt securities are
securities rated in the category BBB or higher by Standard & Poor's Ratings
Group ("S&P"), or Baa or higher by Moody's Investors Service, Inc. ("Moody's")
or the equivalent by another nationally recognized securities rating
organization, or, if unrated, determined by the Advisor to be of comparable
quality. Such debt securities are regarded as having an adequate capacity to
repay principal and pay interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to repay principal and pay interest
for bonds in this category than for higher rated categories. For descriptions of
the securities ratings, see the Appendix.
OPTIONS. The Fund may for hedging purposes and in order to generate
additional income, write call options on a covered basis, provided that the
aggregate value of such options may not exceed 10% of the Fund's net assets as
of the time the Fund enters into such options.
The purchaser of a call option has the right to buy, and the writer (in
this case the Fund) of a call option has the obligation to sell, an underlying
security at a specified exercise price during a specified option period. The
advantage to the Fund of writing covered calls is that the Fund receives a
premium for writing the call, which is additional income. However, if the
security rises in value and the call is exercised, the Fund may not participate
fully in the market appreciation of the security.
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During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the option
period or at such earlier time at which the writer effects a closing purchase
transaction.
A closing purchase transaction is one in which the Fund, when obligated as
a writer of an option, terminates its obligation by purchasing an option of the
same series as the option previously written. A closing purchase transaction
cannot be effected with respect to an option once the Fund writing the option
has received an exercise notice for such option. Closing purchase transactions
will ordinarily be effected to realize a profit on an outstanding call option,
to prevent an underlying security from being called, to permit the sale of the
underlying security or to enable the Fund to write another call option on the
underlying security with either a different exercise price or different
expiration date or both. The Fund may realize a net gain or loss from a closing
purchase transaction depending upon whether the net amount of the original
premium received on the call option is more or less than the cost of effecting
the closing purchase transaction. Any loss incurred in a closing purchase
transaction may be partially or entirely offset by the premium received from a
sale of a different call option on the same underlying security. Such a loss may
also be wholly or partially offset by unrealized appreciation in the market
value of the underlying security. Conversely, a gain resulting from a closing
purchase transaction could be offset in whole or in part by a decline in the
market value of the underlying security.
If a call option expires unexercised, the Fund will realize a short-term
capital gain in the amount of the premium on the option, less the commission
paid. Such a gain, however, may be offset by depreciation in the market value of
the underlying security during the option period. If a call option is exercised,
the Fund will realize a gain or loss from the sale of the underlying security
equal to the difference between (a) the cost of the underlying security and (b)
the proceeds of the sale of the security, plus the amount of the premium on the
option, less the commission paid.
The market value of a call option generally reflects the market price of
the underlying security. Other principal factors affecting market value include
supply and demand, interest rates, the price volatility of the underlying
security and the time remaining until the expiration date.
The Fund will write call options only on a covered basis, which means that
the Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, the
Fund would be required to continue to hold a security which it might otherwise
wish to sell, or deliver a security it would want to hold. Options written by
the Fund will normally have expiration dates between one and nine months from
the date written. The exercise price of a call option may be below, equal to or
above the current market value of the underlying security at the time the option
is written.
The Fund may also purchase put and call options. Put options are purchased
to hedge against a decline in the value of securities held in the Fund's
portfolio. If such a decline occurs, the put options will permit the Fund to
sell the securities underlying such options at the exercise price, or to close
out the options at a profit. The premium paid for a put or a call option plus
any transaction costs will reduce the benefit, if any, realized by the Fund upon
exercise of the option, and, unless the price of the underlying security rises
or declines sufficiently, the option may expire worthless to the Fund. In
addition, in the event that the price of the security in connection with which
an option was purchased moves in a direction favorable to the Fund, the benefits
realized by the Fund as a result of such favorable movement will be reduced by
the amount of the premium paid for the option and related transaction costs.
OPTIONS ON FUTURES CONTRACTS. The Fund may also, subject to any applicable
laws, purchase and write options on futures contracts for hedging purposes only.
The holder of a call option on a futures contract has the right to purchase the
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futures contract, and the holder of a put option on a futures contract has the
right to sell the futures contract, in either case at a fixed exercise price up
to a stated expiration date or, in the case of certain options, on a stated
date. Options on futures contracts, like futures contracts, are traded on
contract markets.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the securities deliverable on exercise of the
futures contract. The Fund will receive an option premium when it writes the
call, and, if the price of the futures contract at expiration of the option is
below the option exercise price, the Fund will retain the full amount of this
option premium, which provides a partial hedge against any decline that may have
occurred in the Fund's portfolio holdings. Similarly, the writing of a put
option on a futures contract constitutes a partial hedge against increasing
prices of the securities deliverable upon exercise of the futures contract. If
the Fund writes an option on a futures contract and that option is exercised,
the Fund may incur a loss, which loss will be reduced by the amount of the
option premium received, less related transaction costs. The Fund's ability to
hedge effectively through transactions in options on futures contracts depends
on, among other factors, the degree of correlation between changes in the value
of securities held by the Fund and changes in the value of its futures
positions. This correlation cannot be expected to be exact, and the Fund bears a
risk that the value of the futures contract being hedged will not move in the
same amount, or even in the same direction, as the hedging instrument. Thus it
may be possible for the Fund to incur a loss on both the hedging instrument and
the futures contract being hedged.
The ability of the Fund to engage in options and futures strategies depends
also upon the availability of a liquid market for such instruments. There can be
no assurance that such a liquid market will exist for such instruments.
OPTIONS ON STOCK INDICES. The Fund may engage in transactions involving
options on stock indices. A stock index assigns relative values to the common
stocks included in the index, and the index fluctuates with changes in the
market values of the underlying common stocks. The Fund will not engage in
transactions in options on stock indices for speculative purposes but only to
protect appreciation attained, to offset capital losses and to take advantage of
the liquidity available in the option markets. The aggregate premium paid on all
options on stock indices will not exceed 5% of the total assets of the Fund.
Options on stock indices are similar to options on stocks but have
different delivery requirements. Stock options provide the right to take or make
delivery of the underlying stock at a specified price. A stock index option
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the amount by which the fixed exercise price of the option exceeds (in
the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of exercise, multiplied by (ii) a fixed "index
multiplier." Receipt of this cash amount will depend upon the closing level of
the stock index upon which the option is based being greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the option.
The amount of cash received will be equal to such difference between the closing
price of the index and exercise price of the option expressed in dollars times a
specified multiple. The writer of the option is obligated, in return for the
option premium received, to make delivery of this amount. Gain or loss to the
Fund on transactions in stock index options will depend on price movements in
the stock market generally (or in a particular industry or segment of the
market) rather than price movements of individual securities.
As with stock options, the Fund may offset its position in stock index
options prior to expiration by entering into a closing transaction on an
exchange or it may let the option expire unexercised.
A stock index fluctuates with changes in the market values of the stock
included in the index. Some stock index options are based on a broad market
index such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index, or a narrower market index such as the Standard & Poor's 100. Indices are
also based on an industry or market segment such as the AMEX Oil and Gas Index
or the Computer and Business Equipment Index. Options on stock indices are
currently traded on the following exchanges, among others: The Chicago Board
Options Exchange, New York Stock Exchange and American Stock Exchange.
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The Fund's ability to hedge effectively all or a portion of its securities
through transactions in options on stock indices depends on the degree to which
price movements in the underlying index correlate with price movements in the
securities held by the Fund. Since the Fund will not duplicate all of the
components of an index, the correlation will not be exact. Consequently, the
Fund bears the risk that the prices of the securities being hedged will not move
in the same amount as the hedging instrument. It is also possible that there may
be a negative correlation between the index or other securities underlying the
hedging instrument and the hedged securities which would result in a loss on
both such securities and the hedging instrument.
Positions in stock index options may be closed out only on an exchange
which provides a secondary market. There can be no assurance that a liquid
secondary market will exist for any particular stock index option. Thus, it may
not be possible to close such an option. The inability to close options
positions could have an adverse impact on the Fund's ability to effectively
hedge its securities. The Fund will enter into an option position only if there
appears to the Advisor of the Fund, at the time of investment, to be a liquid
secondary market for such options.
FUTURES CONTRACTS. Subject to applicable laws, the Fund may enter into bond
and interest rate futures contracts. The Fund intends to use futures contracts
only for bona fide hedging purposes. Futures contracts provide for the future
sale by one party and purchase by another party of a specified amount of a
specified security at a specified future time and at a specified price. A "sale"
of a futures contract entails a contractual obligation to deliver the underlying
securities called for by the contract, and a "purchase" of a futures contract
entails a contractual obligation to acquire such securities, in each case in
accordance with the terms of the contract. Futures contracts must be executed
through a futures commission merchant, or brokerage firm, which is a member of
an appropriate exchange designated as a "contract market" by the Commodity
Futures Trading Commission ("CFTC").
When the Fund purchases or sells a futures contract, the Trust must
allocate assets of the Fund as an initial deposit on the contract. The initial
deposit may be as low as approximately 5 percent or less of the value of the
contract. The futures contract is marked to market daily thereafter and the Fund
may be required to pay or entitled to receive additional "variation margin,"
based on decrease or increase in the value of the futures contract.
Futures contracts call for the actual delivery or acquisition of
securities, or in the case of futures contracts based on indices, the making or
acceptance of a cash settlement at a specified future time. However, the
contractual obligation is usually fulfilled before the date specified in the
contract by closing out the futures contract position through the purchase or
sale, on a commodities exchange, of an identical futures contract. Positions in
futures contracts may be closed out only if a liquid secondary market for such
contract is available, and there can be no assurance that such a liquid
secondary market will exist for any particular futures contract.
The Fund's ability to hedge effectively through transactions in futures
contracts depends on, among other factors, the Advisor's judgment as to the
expected price movements in the securities underlying the futures contracts. In
addition, it is possible in some circumstances that the Fund would have to sell
securities from its portfolio to meet "variation margin" requirements at a time
when it may be disadvantageous to do so.
SHORT-TERM INVESTMENTS
BANK OBLIGATIONS. Bank obligations include certificates of deposit, time
deposits (including Eurodollar time deposits), and bankers' acceptances and
other short-term debt obligations issued by domestic banks, foreign subsidiaries
or foreign branches of domestic banks, domestic and foreign branches of foreign
banks, domestic savings and loan associations, and other banking institutions.
The Fund has established certain minimum credit quality standards for bank
obligations in which they invest.
B-9
<PAGE>
The Fund is not prohibited from investing in obligations of banks that are
clients of the Distributor. However, the purchase of shares of the Fund by such
banks or by their customers will not be a consideration in determining which
bank obligations the Fund will purchase.
BANKERS' ACCEPTANCES. A banker's acceptance is a bill of exchange or time
draft drawn on and accepted by a commercial bank. It is used by corporations to
finance the shipment and storage of goods and to furnish dollar exchange.
Maturities are generally six months or less.
CERTIFICATES OF DEPOSIT. A certificate of deposit is a negotiable
interest-bearing instrument with a specific maturity. Certificates of deposit
are issued by banks and savings and loan institutions in exchange for the
deposit of funds and normally can be traded in the secondary market before
maturity.
COMMERCIAL PAPER. Commercial paper is the term used to designate unsecured
short-term promissory notes issued by corporations and other entities.
Maturities on these issues vary from one to 270 days. For a description of
commercial paper ratings, see the Appendix.
INVESTMENT RESTRICTIONS
The Fund has adopted the following investment restrictions that may not be
changed without approval by a "majority of the outstanding shares" of the Fund
which, as used in this SAI, means the vote of the lesser of (a) 67% or more of
the shares of the Fund represented at a meeting, if the holders of more than 50%
of the outstanding shares of the Fund are present or represented by proxy, or
(b) more than 50% of the outstanding shares of the Fund.
The Fund may not:
(1) purchase any securities which would cause more than 25% of the total
assets of the Fund to be invested in the securities of one or more issuers
conducting their principal business activities in the same industry. This
limitation does not apply to investments in obligations issued or guaranteed by
the U.S. Government or its agencies and instrumentalities and repurchase
agreements involving such securities. For purposes of this limitation (i)
utility companies will be divided according to their services; for example, gas,
gas transmission, electric and telephone will each be considered a separate
industry; (ii) financial service companies will be classified according to the
end users of their services; for example, automobile finance, bank finance and
diversified finance will each be considered a separate industry; (iii)
supranational entities will be considered to be a separate industry; and (iv)
loan participations are considered to be issued by both the issuing bank and the
underlying corporate borrower. Otherwise, for purposes of this restriction, the
Fund generally relies on the U.S. Office of Management and Budget's Standard
Industrial Classifications.
(2) make loans, except that the Fund may: (a) purchase or hold debt
instruments in accordance with its investment objectives and policies; (b) enter
into repurchase agreements; and (c) engage in securities lending in an aggregate
amount to exceed 30% of its total assets.
(3) acquire more than 10% of the voting securities of any one issuer
(except securities issued or guaranteed by the United States, its agencies or
instrumentalities and repurchase agreements involving such securities) or invest
more than 5% of the total assets of the Fund in the securities of an issuer
(except securities issued or guaranteed by the United States, its agencies or
instrumentalities and repurchase agreements involving such securities); provided
that the foregoing limitation shall not apply to 25% of the total assets of the
Fund.
B-10
<PAGE>
(4) borrow, except that the Fund may borrow money from banks and may enter
into reverse repurchase agreements, in either case in an amount not to exceed
33-1/3% of the Fund's total assets and then only as a temporary measure for
extraordinary or emergency purposes (which may include the need to meet
shareholder redemption requests). This borrowing provision is included solely to
facilitate the orderly sale of Fund securities to accommodate heavy redemption
requests if they should occur and is not for investment purposes. The Fund will
not purchase any securities for its portfolio at any time at which its
borrowings equal or exceed 10% of its total assets (taken at market value), and
any interest paid on such borrowings will reduce income. Transactions that are
fully collateralized in a manner that does not involve the prohibited issuance
of a "senior security" within the meaning of Section 18(f) of the 1940 Act shall
not be regarded as borrowings for the purpose of this restriction.
(5) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments but this shall not prevent the Fund
from (a) purchasing or selling options and futures contracts or from investing
in securities or other instruments backed by physical commodities or (b)
engaging in forward purchases or sales of foreign currencies or securities;
(6) pledge, mortgage or hypothecate assets except to secure temporary
borrowings permitted by (4) above.
(7) purchase or sell real estate, including real estate limited partnership
interests, commodities and commodities contracts, but excluding interests that
are secured by interests in real estate. However, subject to its permitted
investments, the Fund may invest in companies that invest in real estate,
commodities or commodities contracts. The Fund may invest in futures contracts
and options thereon to the extent described in the Prospectus and elsewhere in
this SAI.
(8) act as underwriter of any securities of other issuers, except as it may
be deemed and underwriter under federal securities laws in selling a security
held by the Fund.
(9) issue any senior securities, as defined in the 1940 Act, except that
this restriction shall be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, (b) entering into permissible
repurchase and dollar roll transactions, or (c) entering into other borrowed as
permitted by rule, regulation or order of the SEC.
The Fund observes the following policies, which are not deemed fundamental
and which may be changed without shareholder vote. The Fund may not:
(1) invest in the securities of other investment companies or purchase any
other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal law.
(2) invest more than 15% of its net assets in securities which are
restricted as to disposition or otherwise are illiquid or have no readily
available market (except for securities which are determined by the Board of
Trustees to be liquid).
(3) borrow money from banks to purchase securities..
If a percentage restriction set forth in the prospectus or in this SAI is
adhered to at the time of investment, a subsequent increase or decrease in a
percentage resulting from a change in the values of assets will not constitute a
violation of that restriction, except with respect to borrowing or the purchase
of restricted or illiquid securities.
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 Funds
6001 N. 62nd Place (since 1994), Smith Barney Trak Fund, Banyan Realty Trust,
Paradise Valley, AZ 85253 Banyan Land Fund II and Legend Properties.
Eric Banhazl (Born 1957)* Trustee, Senior Vice President, Investment Company Administration LLC;
2025 E. Financial Way President and Vice President, First Fund Distributors, Inc.; Assistant Treasurer,
Glendora, CA 91740 Treasurer RNC Mutual Fund Group; Treasurer, Guinness Flight Investment
Funds, Inc. and Professionally Managed Portfolios.
Donald O'Connor (Born 1936) Trustee Retired; formerly Executive Vice President and Chief Operating
1700 Taylor Avenue Officer of ICI Mutual Insurance Company (until January, 1997),
Fort Washington, MD 20744 Vice President, Operations, Investment Company Institute (until
June, 1993).
George Wofford III Trustee Vice President, Information Services, Federal Home Loan Bank of
(Born 1939) San Francisco (since March, 1993); formerly Director of
305 Glendora Circle Management Information Services, Morrison & Foerster (law firm).
Danville, CA 94526
Steven J. Paggioli Vice Executive Vice President, Robert H. Wadsworth & Associates, Inc.
(Born 1950) President and Investment Company Administration LLC; Vice President,
479 W. 22nd Street First Fund Distributors, Inc.; President and Trustee,
New York, NY 10011 Professionally Managed Portfolios; Director, Managers Funds, Inc.
Robert H. Wadsworth Vice President, Robert H. Wadsworth & Associates, Inc., Investment
(Born 1940) President Company Administration, LLC and First Fund Distributors, Inc.;
4455 E. Camelback Road Vice President, Professionally Managed Portfolios; President,
Suite 261E Guinness Flight Investment Funds, Inc.; Director, Germany Fund,
Phoenix, AZ 85018 Inc., New Germany Fund, Inc. and Central European Equity Fund,
Inc. and Deutsche Funds, Inc.
Thomas W. Marschel Vice Vice President, Investment Company Administration, LLC;
(Born 1970) President Assistant Vice President, Investment Company Administration, LLC
4455 E. Camelback Road from October 1995 to January 2000; Fund Accounting Supervisor
Suite 261E with SEI Fund Resources from January 1994 to October 1995.
Phoenix, AZ 85018
Chris O. Moser (Born 1949) Secretary Employed by Investment Company Administration LLC (since
4455 E. Camelback Road July, 1996); formerly employed by Bank One, N.A. (from August,
Suite 261E until July, 1996); O'Connor, Cavanagh, Anderson,
Phoenix, AZ 85018 Killingsworth and Beshears (law firm) (August 1995).
</TABLE>
----------
* denotes Trustee who is an "interested person" of the Trust under the 1940 Act.
B-12
<PAGE>
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.
Shares of the Fund owned by the Trustees and officers as a group were less than
1% at August 10, 2000.
Prior to August 10, 2000, the Fund was a series of Allegiance Investment
Trust. For the Fund's fiscal year ended October 31, 1999, all series of the
Allegiance Investment Trust paid Mr. Meno T. Lake and Mr. Donald E. O'Connor,
Trustees of Allegiance Investment Trust, a total of $7,500 each in compensation.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISOR
The Trust has entered into an Investment Advisory Agreement ("Advisory
Agreement") with Van Deventer & Hoch with respect to the Fund. Van Deventer &
Hoch is referred to in this SAI as the "Advisor." The Advisor is entitled to
receive investment advisory fees, which are accrued daily and payable monthly,
at the annual rate of 0.70% of the Fund's average daily net assets.
The continuance of the Advisory Agreement, after the first two years, must
be specifically approved at least annually (i) by the vote of the Trustees, and
(ii) by the vote of a majority of the Trustees who are neither parties to the
Advisory Agreement nor "interested persons" of any party thereto, cast in person
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement will terminate automatically if it is assigned, and is terminable at
any time without penalty by the Trustees of the Trust or with respect to the
Fund, by a majority of the outstanding shares of the Fund, on not less than 30
nor more than 60 days' written notice to the Advisor, or by the Advisor on 90
days' written notice to the Trust.
The Advisory Agreement provides that neither the Advisor nor its personnel
shall be liable (1) for any error of judgment or mistake of law; (2) for any
loss arising out of any investment; or (3) for any act or omission in the
execution of security transactions for the Trust or the Fund, except that the
Advisor and its personnel shall not be protected against any liability to the
Trust, the Fund or its shareholders by reason of willful misfeasance, bad faith
or gross negligence on its or their part in the performance of its or their
duties or from reckless disregard of its or their obligations or duties
thereunder.
For the period May 7, 1999 through October 31, 1999 (the fiscal year end),
the Fund paid the Advisor $40,379 in advisory fees.
DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor") and the Trust are parties
to a distribution agreement ("Distribution Agreement"). The Distributor has its
principal business offices at 4455 East Camelback Road, Suite 261E, Phoenix,
Arizona 85018. The Distribution Agreement is renewable annually and may be
terminated by the Distributor or by the Trustees of the Trust who are not
interested persons and have no financial interest in the Plans or any related
agreement ("Qualified Trustees") by a majority vote of the outstanding shares of
the Fund upon not more than 60 days' written notice by either party.
Pursuant to Rule 12b-1 under the 1940 Act, the Trust, on behalf of the
Fund, has adopted a distribution plan (the "Plan"). The Plan provided that the
Fund will pay the Advisor, as the Distribution Coordinator, a fee calculated
daily and paid monthly at an annual rate of up to 0.25% of the average daily net
assets of the of the Fund. The Advisor can use these fees to compensate
broker/dealers and service providers (including each Advisor and its affiliates)
which provide administrative and/or distribution services to holders of these
shares or their customers who beneficially own these shares.
B-13
<PAGE>
The Plan was in accordance with the provisions of Rule 12b-1 under the 1940
Act, which regulates circumstances under which an investment company may,
directly or indirectly, bear expenses relating to the distribution of its
shares. Continuance of the Plan must be approved annually by a majority of the
Trustees of the Trust and by a majority of the Qualified Trustees. The Plan
requires that quarterly written reports of money spent under such Plan and of
the purposes of such expenditures be furnished to and reviewed by the Trustees.
Expenditures may include (1) the cost of prospectuses, reports to shareholders,
sales literature and other materials for potential investors; (2) advertising;
(3) expenses incurred in connection with the promotion and sale of the Fund's
shares, including the Advisor's expenses for travel, communication, and
compensation and benefits for sales personnel; and (4) any other expenses
reasonably incurred in connection with the distribution and marketing of the
shares subject to approval of a majority of the Qualified Trustees. The Plan may
not be amended to materially increase the amount that may be spent under the
Plan without approval by a majority of the outstanding shares of the Fund. All
material amendments of the Plan require approval by a majority of the Trustees
of the Trust and of the Qualified Trustees.
From time to time, the Advisor may provide incentive compensation to its
own employees and employees of banks, broker-dealers and investment counselors
in connection with the sale of shares of the Fund. Promotional incentives such
as cash or other compensation, including merchandise, airline vouchers, trips
and vacation packages will be offered uniformly to all program participants and
may be predicated upon the amount of shares of the Fund sold by the participant,
subject to applicable legal requirements.
ADMINISTRATIVE SERVICES
The Trust, on behalf of the Fund, has entered into an Administrative
Services Agreement with the Advisor (the "Administrative Services Agreement").
The Fund pays the Advisor an Administrative Services Fee of 0.70% of its daily
average net assets, accrued daily and paid monthly. The fee payable to the
Advisor by the Fund under the Administrative Services Agreement is the only fee
or expense payable by the Fund for the following ordinary services: all
administrative services, primarily by retaining the Subadministrator, as
described below, custody and transfer agency services by retaining the Custodian
and Transfer Agent named below, and all other ordinary services and operating
expenses (other than brokerage commissions, dealer mark-ups, taxes, interest and
extraordinary items).
The Administrative Services Fee paid to the Advisor effectively limits the
Fund's operating expenses. The Advisor may potentially earn greater profits
under the Administrative Services Agreement if assets of the Fund grow
sufficiently large to reduce actual operating expenses to less than the
Advisor's Administrative Services Fee. The Board of Trustees will consider the
level of profitability of the Administrative Services Fee in its decision to
renew the Advisory Agreement.
The Fund paid $20,189 in Administrative Services Fee for the period May 7,
1999 to October 31, 1999.
B-14
<PAGE>
THE SUBADMINISTRATOR
The Advisor and Investment Company Administration, L.L.C. (the
"Subadministrator") are parties to a subadministration agreement (the
"Subadministration Agreement") with respect to the Fund. The Subadministration
Agreement provides that the Subadministrator shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which the Subadministration Agreement relates, except a loss
that results from willful misfeasance, bad faith or gross negligence on the part
of the Subadministrator in the performance of its duties or from reckless
disregard by it of its duties and obligations under the Subadministration
Agreement. The Subadministration Agreement renews each year unless terminated
according to its terms. The Advisor pays the Subadministrator's fee out of the
Administrative Services Fee.
Under the Subadministration Agreement, the Subadministrator provides
administrative services to the Fund, including, among other responsibilities,
coordinating the negotiation of contracts and fees with, and the monitoring of
performance and billing of, the Fund's independent contractors and agents;
preparation for signature by an officer of the Trust of all documents required
to be filed for compliance by the Trust and the Fund with applicable laws and
regulations excluding those of the securities laws of various states; arranging
for the computation or performance of data; and arranging for the maintenance of
books and records of the Fund, and providing, at its own expense, office
facilities, equipment and personnel necessary to carry out its business. In this
capacity, the Subadministrator does not have any responsibility or authority for
the management of the Fund, the determination of investment policy, or for any
matter pertaining to the distribution of Fund shares.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Specific decisions to purchase or sell securities for the Fund are made by
the portfolio manager who is an employee of the Advisor and who is appointed and
supervised by senior officers of the Advisor. Changes in the Fund's investments
are reviewed by the Board of Trustees of the Trust. The portfolio manager may
serve other clients of the Advisor in a similar capacity.
Under the advisory agreement, the Advisor uses its best efforts to seek to
execute portfolio transactions at prices which, under the circumstances, result
in total costs or proceeds being the most favorable to the Fund. In assessing
the best overall terms available for any transaction, the Advisor considers all
factors it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and execution capability of
the broker or dealer, research services provided to the Advisor, and the
reasonableness of the commissions, if any, both for the specific transaction and
on a continuing basis. The Advisor is not required to obtain the lowest
commission or the best net price for the Fund on any particular transaction, and
is not required to execute any order in a fashion preferential to other accounts
it manages.
Debt securities are traded principally in the over-the-counter market
through dealers acting on their own account and not as brokers. In the case of
securities traded in the over-the-counter market (where no stated commissions
are paid but the prices include a dealer's markup or markdown), the Advisor
normally seeks to deal directly with the primary market makers unless, in its
opinion, best execution is available elsewhere. In the case of securities
purchased from underwriters, the cost of such securities generally includes a
fixed underwriting commission or concession. From time to time, soliciting
dealer fees are available to the Advisor on the tender of the Fund's portfolio
securities in so-called tender or exchange offers. Such soliciting dealer fees
are in effect recaptured for the Fund by the Advisor. At present, no other
recapture arrangements are in effect.
B-15
<PAGE>
Under the advisory agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934, the Advisor may cause the Fund to pay a
broker-dealer which provides brokerage and research services to the Advisor, the
Fund and/or other accounts for which the Advisor exercises investment discretion
an amount of commission for effecting a securities transaction for the Fund in
excess of the amount other broker-dealers would have charged for the transaction
if the Advisor determines in good faith that the greater commission is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker-dealer viewed in terms of either a particular
transaction or its overall responsibilities to accounts over which the Advisor
exercises investment discretion. Not all of such services are useful or of value
in advising the Fund. The Advisor reports to the Board of Trustees regarding
overall commissions paid by the Fund and their reasonableness in relation to the
benefits to the Fund. The term "brokerage and research services" includes advice
as to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or of purchasers or
sellers of securities, furnishing analyses and reports concerning issues,
industries, securities, economic factors and trends, portfolio strategy and the
performance of accounts, and effecting securities transactions and performing
functions incidental thereto such as clearance and settlement.
The management fees that the Fund pays to the Advisor will not be reduced
as a consequence of the Advisor's receipt of brokerage and research services. To
the extent the Fund's portfolio transactions are used to obtain such services,
the brokerage commissions paid by the Fund will exceed those that might
otherwise be paid by an amount which cannot be presently determined. Such
services generally would be useful and of value to the Advisor serving one or
more of its other clients and, conversely, such services obtained by the
placement of brokerage business of other clients generally would be useful to
the Advisor in carrying out its obligations to the Fund. While such services are
not expected to reduce the expenses of the Advisor, the Advisor would, through
use of the services, avoid the additional expenses which would be incurred if
the Advisor should attempt to develop comparable information through its own
staff.
In certain instances, there may be securities that are suitable for the
Fund as well as one or more of the Advisor's other clients. Investment decisions
for the Fund and for other clients are made with a view to achieving their
respective investment objectives. It may develop that the same investment
decision is made for more than one client or that a particular security is
bought or sold for only one client even though it might be held by, or bought or
sold for, other clients. Likewise, a particular security may be bought for one
or more clients when one or more clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment advisor, particularly when the same security is
suitable for the investment objectives of more than one client. When the Fund or
other clients are simultaneously engaged in the purchase or sale of the same
security, the securities are allocated among clients in a manner believed to be
equitable to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned. However, it is believed that the ability of the Fund to participate
in volume transactions will generally produce better executions for the Fund.
It is not anticipated that any portfolio transactions will be executed with
the Advisor or the Shareholder Servicing Agent, or with any affiliate of the
Advisor or a Shareholder Servicing Agent, acting either as principal or as
broker.
For the period May 7, 1999 through October 31, 1999 (the fiscal year end),
the Fund paid $9,418 in brokerage commissions.
B-16
<PAGE>
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, investment
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in the Fund's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to transaction costs and may result in a
greater number of taxable transactions. See "Portfolio Transactions and
Brokerage." For the period May 7, 1999 through October 31, 1999 (the fiscal year
end), the Fund had a portfolio turnover rate of 25.16%.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets,
which include accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
The net asset value of the shares of the Fund is determined on each day on
which the New York Stock Exchange ("NYSE") is open. This determination is made
once during each such day, as of 4:00 P.M.(Eastern Time) or earlier when trading
closes earlier. It is expected that the NYSE will be closed on Saturdays and
Sundays and for New Year's Day, Martin Luther King, Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas. The Fund may, but does not expect to, determine the net asset value
of its shares on any day when the NYSE is not open for trading if there is
sufficient trading in their portfolio securities on such days to affect
materially the per-share net asset value.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the NYSE. In addition,
trading in and valuation of foreign securities may not take place on every day
in which the NYSE is open for trading. Furthermore, trading takes place in
various foreign markets on days in which the NYSE is not open for trading and on
which the Fund's net asset value is not calculated. Occasionally, events
affecting the values of such securities in U.S. dollars on a day on which the
Fund calculates its net asset value may occur between the times when such
securities are valued and the close of the NYSE that will not be reflected in
the computation of the Fund's net asset value unless the Board or its delegates
deem that such events would materially affect the net asset value, in which case
an adjustment would be made.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor pursuant to procedures approved by or under the direction of the Board.
The Fund's securities, including ADRs, EDRs and CDRs, which are traded on
securities exchanges or on the over-the-counter market 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 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.
B-17
<PAGE>
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.
Corporate debt securities, mortgage-related securities and asset-backed
securities held by the Fund are valued on the basis of valuations provided by
dealers in those instruments, by an independent pricing service, approved by the
appropriate Board, or at fair value as determined in good faith by procedures
approved by the Board. Any such pricing service, in determining value, will use
information with respect to transactions in the securities being valued,
quotations from dealers, market transactions in comparable securities, analyses
and evaluations of various relationships between securities and
yield-to-maturity information.
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. The value of a futures
contract equals the unrealized gain or loss on the contract that is determined
by marking the contract to the current settlement price for a like contract on
the valuation date of the futures contract if the securities underlying the
futures contract experience significant price fluctuations after the
determination of the settlement price. When a settlement price cannot be used,
futures contracts will be valued at their fair market value as determined by or
under the direction of the Board.
If any securities held by the Fund are restricted as to resale or do not
have readily available market quotations, the Advisor determines their fair
value, following procedures approved by the Board. The Trustee periodically
reviews such valuations and valuation procedures. The fair value of such
securities is generally determined as the amount which the Fund could reasonably
expect to realize from an orderly disposition of such securities over a
reasonable period of time. The valuation procedures applied in any specific
instance are likely to vary from case to case. However, consideration is
generally given to the financial position of the issuer and other fundamental
analytical data relating to the investment and to the nature of the restrictions
on disposition of the securities (including any registration expenses that might
be borne by the Fund in connection with such disposition). In addition, specific
factors are also generally considered, such as the cost of the investment, the
market value of any unrestricted securities of the same class (both at the time
of purchase and at the time of valuation), the size of the holding, the prices
of any recent transactions or offers with respect to such securities and any
available analysts' reports regarding the issuer.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
All other assets of the Fund are valued in such manner as the Board in good
faith deems appropriate to reflect their fair value.
B-18
<PAGE>
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are sold on a continuous basis and may be purchased from
the Distributor or a broker-dealer or financial institution that has an
agreement with the Distributor. Purchases may be made Monday through Friday,
except on certain holidays. Shares are purchased at net asset value the next
time it is calculated after your investment is received and accepted by the
Distributor.
On any business day, shareholders may redeem all or a portion of their
shares. If the shares being redeemed were purchased by check, telephone or
through an automatic investment program, the Fund may delay the mailing of the
redemption check for up to 10 business days after purchase to allow the purchase
to clear. The redemption will be processed at net asset value the next time it
is calculated after the redemption request in good order is received. A
redemption is treated as a sale for tax purposes, and could result in taxable
gain or loss in a non-tax-sheltered account.
The Fund reserves the right to suspend the right of redemption and/or to
postpone the date of payment upon redemption for any period on which trading on
the NYSE is restricted, or during the existence of an emergency (as determined
by the SEC by rule or regulation upon application by the Fund pursuant to
Section 22(e) of the 1944 Act) as a result of which disposal or valuation of the
Fund's securities is not reasonably practicable, or for such other periods as
the SEC has permitted by order. The Fund also reserves the right to suspend
sales of its shares for any period during which the NYSE, the Advisor, the
Administrator or the Custodian is not open for business.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may direct the shareholder servicing agent to send him or her
regular monthly, quarterly, or semi-annual payments, as designated on the
Account Application and based upon the value of his or her account. Each payment
under a Systematic Withdrawal Plan ("SWP") must be at least $100, except in
certain limited circumstances. Such payments are drawn from the proceeds of the
redemption of shares held in the shareholder's account (which would be a return
of principal and, if reflecting a gain, would be taxable). To the extent that
redemptions for such periodic withdrawals exceed dividend income reinvested in
the account, such redemptions will reduce, and may eventually exhaust, the
number of shares in the shareholder's account. All dividend and capital gain
distributions for an account with a SWP will be reinvested in additional full
and fractional shares of the Fund at the net asset value in effect at the close
of business on the record date for such distributions.
To initiate a SWP, shares having an aggregate value of at least $5,000 must
be held on deposit by the shareholder servicing agent. The shareholder, by
written instruction to the shareholder servicing agent, may deposit into the
account additional Fund shares, change the payee, or change the dollar amount of
each payment. The shareholder servicing agent may charge the account for
services rendered and expenses incurred beyond those normally assumed by the
Fund with respect to the liquidation of shares.
No charge is currently assessed against the account, but one could be
instituted by the shareholder servicing agent on 60 days' notice in writing to
the shareholder in the event that the Fund ceases to assume the cost of these
services. The Fund may terminate any SWP for an account if the value of the
account falls below $5,000 as a result of share redemptions (other than as a
result of a SWP). Any such plan may be terminated at any time by either the
shareholder or the Fund.
B-19
<PAGE>
TAXATION
The Fund intends to qualify 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 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% or the voting securities of the issuer, and (ii) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains by
the Fund will be taxable to shareholders whether made in cash or reinvested by
the Fund in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carry-overs from the eight prior taxable years
will be applied against capital gains. Shareholders receiving a distribution
from the Fund in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of the Fund on the reinvestment date. Fund distributions also
will be included in individual and corporate shareholders' income on which the
alternative minimum tax may be imposed.
The Fund or the securities dealer effecting a redemption of the Fund's
shares by a shareholder will be required to file information reports with the
Internal Revenue Service ("IRS") with respect to distributions and payments made
to the shareholder. In addition, the Fund will be required to withhold federal
income tax at the rate of 31% on taxable dividends, redemptions and other
payments made to accounts of individual or other non-exempt shareholders who
have not furnished their correct taxpayer identification numbers and certain
required certifications on the New Account application or with respect to which
the Fund or the securities dealer has been notified by the IRS that the number
furnished is incorrect or that the account is otherwise subject to withholding.
The Fund intends to declare and pay dividends and other distributions, as
stated in the prospectus. 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.
B-20
<PAGE>
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.
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 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.
B-21
<PAGE>
Redemptions 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 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 with respect to such shares during such six-month period.
All or a portion of a loss realized upon the redemption of shares of the Fund
may be disallowed to the extent shares of the Fund 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 Prospectus are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Fund. The law firm of Paul, Hastings, Janofsky & Walker
LLP has expressed no opinion in respect thereof. Nonresident aliens and foreign
persons are subject to different tax rules, and may be subject to withholding of
up to 30% on certain payments received from the Fund. Shareholders are advised
to consult with their own tax advisers concerning the application of foreign,
federal, state and local taxes to an investment in the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund will receive income in the form of dividends and interest earned
on its investments in securities. This income, less the expenses incurred in its
operations, is the Fund's net investment income, substantially all of which will
be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon the
amount of net investment income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
The Fund also may derive capital gains or losses in connection with sales
or other dispositions of its portfolio securities. Any net gain the Fund may
realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term 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. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held more than 18 months.
The maximum capital gains rate for corporate shareholders is the same as the
maximum tax rate for ordinary income.
B-22
<PAGE>
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 of 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 tot he 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
AVERAGE ANNUAL TOTAL RETURN. From time to time, the Fund may advertise its
total return. The Fund's total return refers to the average compounded rate of
return on a hypothetical investment for designated time periods (including, but
not limited to, the period from which the Fund commenced operations through the
specified date), and assumes that the entire investment is redeemed at the end
of each period. Any statements of total return for the Fund will be accompanied
by information on the Fund's average annual compounded rate of return over the
most recent four calendar quarters and the period from the Fund's inception of
operations. The Fund may also advertise aggregate and average total return
information over different periods of time. The Fund's "average annual total
return" figures are computed according to a formula prescribed by the SEC
expressed as follows:
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5- or 10-year
period at the end of each respective period (or
fractional portion thereof), assuming reinvestment of
all dividends and distributions and complete redemption
of the hypothetical investment at the end of the
measuring period.
AGGREGATE TOTAL RETURN. The Fund's "aggregate total return" figure
represents the cumulative change in the value of an investment in the Fund for
the specified period and are computed by the following formula prescribed by the
SEC:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a l-, 5- or 10-year
period at the end of a l-, 5- or 10-year period (or
fractional portion thereof), assuming reinvestment of all
dividends and distributions and complete redemption of
the hypothetical investment at the end of the measuring
period.
B-23
<PAGE>
The Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Fund's performance for any specified period in the future.
In addition, because performance will fluctuate, it may not provide a basis for
comparing an investment in the Fund with certain bank deposits or other
investments that pay a fixed yield for a stated period of time. Investors
comparing the Fund's performance with that of other investment companies should
give consideration to the quality and maturity of the respective investment
companies' portfolio securities.
The Fund's performance may from time to time be compared to that of other
mutual funds tracked by mutual fund rating services, broad groups of comparable
mutual funds or unmanaged indices, which may assume investment of dividends but
generally do not reflect deductions for administrative and management costs. In
reports and other communications to shareholders or in advertising and sales
literature. The Fund may also show the historical performance of other
investment vehicles or groups of other mutual funds, and may compare tax
equivalent yields to taxable yields. Any given "performance" or performance
comparison should not be considered as representative of any performance in the
future. In addition, there may be differences between the Fund and the various
indexes and reporting services which may be quoted by the Fund.
The Fund's return from inception (May 7, 1999) through October 31, 1999 was
-12.43%.
GENERAL INFORMATION
Advisors Series Trust is an open-end management investment company
organized as a Delaware business trust under the laws of the State of Delaware
on October 3, 1996. The Trust currently consists of 16 effective series of
shares of beneficial interest, par value of $0.01 per share. The Declaration of
Trust permits the Trustees to issue an unlimited number of full and fractional
shares of beneficial interest and to divide or combine the shares into a greater
or lesser number of shares without thereby changing the proportionate beneficial
interest in the Fund. Each share represents an interest in the Fund
proportionately equal to the interest of each other share. Upon the Trust'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 one series of
shares, and may create additional series in the future, which have separate
assets and liabilities. In the event more than one series were created, income
and operating expenses not specifically attributable to a particular Fund would
be allocated fairly among the Funds by the Trustees, generally on the basis of
the relative net assets of each Fund.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed, but,
under abnormal conditions that make payment in cash unwise, the Fund may make
payment partly in its portfolio securities with a current amortized cost or
market value, as appropriate, equal to the redemption price. Although the Fund
does not anticipate that it will make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trust has elected to be governed by the
provisions of Rule 18f-1 under the 1944 Act, which require that the Fund pay in
cash all requests for redemption by any shareholder of record limited in amount,
however, during any 90-day period to the lesser of $250,000 or 1% of the value
of the Fund's net assets at the beginning of such period.
B-24
<PAGE>
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.
UMB Bank, N.A., 928 Grand Blvd., Kansas City, MO 64106, acts as Custodian
of the securities and other assets of the Fund. ICA Fund Services Corp., 4455
East Camelback Rd., Ste. 261-E, Phoenix, AZ 85018, acts as the Fund's transfer
and shareholder service agent. The Custodian and Transfer Agent do not
participate in decisions relating to the purchase and sale of securities by the
Fund.
PricewaterhouseCoopers, LLP, 1177 Avenue of the Americas, New York, NY
10036, is the independent auditors for the Fund.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th Floor,
San Francisco, California 94104, is legal counsel to the Fund.
On June 30, 2000, the following persons owned of record and/or beneficially
more than 5% of the Fund's outstanding voting securities:
Charles Schwab & Co., Inc., Englewood, CO 80112 - 68.46%
Donald Grannis, Pasadena, CA 91105 - 9.19%
Grace M. Byrnes Grandchildrens Trust, Manhattan Beach, CA 90266- 5.67%
CODES OF ETHICS. The Boards of the Trust, the Advisor and the Distributor
have each adopted a Code of Ethics under Rule 17j-1 of the 1940 Act. These Codes
permit, subject to certain conditions, personnel of the Advisor and Distributor
to invest in securities that may be purchased by the Fund.
FINANCIAL STATEMENTS
The annual report for the Fund for the period May 7, 1999 through October
31, 1999 and the Fund's semi-annual report for the six-month period ended April
30, 2000 are separate documents supplied with this SAI and the financial
statements, accompanying notes and, for the annual report, report of independent
accountants, appearing therein are incorporated by reference in this SAI.
B-25
<PAGE>
APPENDIX
DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.: CORPORATE BOND RATINGS
Aaa-Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" to both the Aaa and Aa
rating classifications. The modifier "1" indicates that the security ranks in
the higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
period of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S CORPORATION: CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
B-26
<PAGE>
COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are assessments of the issuer's ability to
repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1--highest quality; Prime 2--higher
quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
B-27
