THE AMERICAN TRUST ALLEGIANCE FUND
One Court Street
Lebanon, New Hampshire 03766
www.allegiancefund.com
Trading Symbol: ATAFX
PROSPECTUS
The American Trust Allegiance Fund (the "Fund") is a mutual fund with the
investment objective of capital appreciation. The Fund attempts to achieve its
objective by investing in equity securities.
This Prospectus sets forth basic information about the Fund that
prospective investors should know before investing. It should be read and kept
for future reference.
The Securities and Exchange Commission has not approved or disapproved of these
securities or passed on the adequacy or accuracy of this Prospectus. Any
representation to the contrary is a criminal offense.
JUNE 27, 2000
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Table of Contents
Fund Overview............................................................... 2
Fund Performance............................................................ 3
Fund Expenses............................................................... 3
Investment Objective, Strategies
and Related Risks.......................................................... 4
Investment Advisor.......................................................... 6
How to Purchase Shares of the Fund.......................................... 7
Services Available to Shareholders.......................................... 9
How to Redeem Your Shares................................................... 10
Distributions and Taxes..................................................... 13
Financial Highlights........................................................ 15
FUND OVERVIEW
The Fund seeks capital appreciation by investing in stocks that the Advisor,
American Trust Company, expects will appreciate in value over the long term. The
Advisor purchases stock with the intention of holding them for a minimum of
three years.
The Advisor expects that the Fund's portfolio will usually consist predominantly
of large and mid-capitalization stocks.
The Fund avoids investments in companies that have significant involvement in
the tobacco, pharmaceuticals, biotechnology, medical diagnostic services and
products, gambling and liquor industries.
PRINCIPAL RISKS OF INVESTING IN THE FUND
The risk exists that you could lose money on your investment in the Fund. This
could happen if any of the following events happen:
* The stock market goes down
* Large or mid-capitalization stocks fall out of favor with the stock market
* Companies in which the Fund invests do not grow, grow more slowly than
anticipated, or fall in value
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FUND PERFORMANCE
The following performance information indicates some of the risks and returns of
investing in the Fund. The bar chart shows how the Fund's total return has
varied from year to year. The table shows the Fund's average return over time
compared with a broad-based market index. Past performance is no guarantee of
future results.
CALENDAR YEAR TOTAL RETURNS*
1998 1999
---- ----
36.87% 38.03%
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* The Fund's year-to-date total return as of March 31, 2000 was 16.19%.
During the period of time displayed in the bar chart, the Fund's best quarter
was Q4, 1999, up 31.09% and its worst quarter was Q3, 1998, down 8.80%.
AVERAGE ANNUAL TOTAL RETURN
AS OF DECEMBER 31, 1999
Since
1 Year Inception*
------ ----------
American Trust Allegiance Fund 38.03% 35.72%
S&P 500 Composite Stock Price Index** 21.03% 25.40%
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* The inception date of the Fund was March 11, 1997.
** The S&P 500 Composite Stock Price Index is an unmanaged
capitalization-weighted index of 500 stocks designed to represent the broad
domestic economy.
FUND EXPENSES
The following table shows the fees and expenses you may pay if you buy and hold
shares of the Fund. The Fund does not charge you for buying or selling shares of
the Fund.
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ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Investment Advisory Fees 0.95%
Other Expenses 0.80%
-----
Total Annual Fund Operating Expenses 1.75%
Expense reimbursements (1) (0.30)%
-----
Actual operating expenses 1.45%
=====
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(1) The Advisor has contractually agreed to waive its fees and/or pay Fund
expenses in order to limit the Fund's total annual operating expenses
(excluding interest and tax expenses) to 1.45%. This contract's term is
indefinite and may be terminated only by the Board of Trustees. The Advisor
is permitted to be reimbursed, subject to limitations, for fees it waives
and for Fund expenses it pays.
EXPENSE EXAMPLE
This Example will help you compare the cost of investing in the Fund with
the cost of investing in other mutual funds. It is based on the annual
operating expenses shown above, and it assumes that these expenses will
remain the same over the time periods shown. It also assumes that you make
a single $10,000 investment in the Fund to start with and that you earn a
5% return each year. Finally, for each period, it assumes that you redeem
all of your shares at the end of that period. Again, this Example is
hypothetical, and your actual expenses may be higher or lower.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$147 $458 $790 $1,729
Investment Objective, Strategies And Related Risks
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The investment objective of the Fund is to seek capital appreciation.
HOW DOES THE FUND SEEK TO ACHIEVE ITS OBJECTIVE?
The Advisor selects stocks for the Fund's portfolio that it expects will
appreciate in value over the long term. The Advisor uses a "bottom up"
approach to stock investing and does not attempt to forecast the U.S.
economy, interest rates, inflation or the U.S. stock market. It focuses on
finding companies that meet its financial criteria, include a history of
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consistent earnings and revenue growth, or strong prospects of earnings and
revenue growth, and a strong balance sheet. The Advisor purchases the
securities of a company with the intention of holding them for a minimum of
three years, subject to changes in fundamentals, such as marked
deceleration in earnings growth, decline in revenues or deterioration of
the balance sheet, or a change in a company's valuation or competitive
position. Companies should demonstrate leadership, operating momentum and
strong prospects for annual growth rates of 15% or better. Normally, the
companies in which the Fund invests represent the eight major economic or
market sectors.
The Fund avoids investments in companies that have significant involvement
in the tobacco, pharmaceuticals, biotechnology, medical diagnostic services
and products, gambling and liquor industries. While a company may conduct
operations in one of these areas, the Fund will not invest in such a
company unless current revenues from these industries represent less than
5% of the total revenues of the company. The majority of companies in which
the Fund invests will have no operations in these industries.
The Advisor expects that the Fund's portfolio will generally consist
predominantly of large and mid-capitalization stocks, but in some market
environments small capitalization stocks may constitute a large portion of
the Fund's portfolio. A small capitalization stock is considered to be one
which has a market capitalization of less than $500 million at the time of
investment. To the extent that the Fund does invest in small capitalization
stocks, there is the risk that its portfolio will be less marketable and
may be subject to greater fluctuations in price than a portfolio holding
stocks of larger issuers. Small capitalization stocks often pay no
dividends, but income is not a primary goal of the Fund.
There is, of course, no assurance that the Fund's objective will be
achieved. Because prices of common stocks and other securities fluctuate,
the value of an investment in the Fund will vary as the market value of its
investment portfolio changes.
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OTHER SECURITIES THE FUND MIGHT PURCHASE.
Under normal market conditions, the Fund will invest at least 85% of its
total assets in common stocks. If the Advisor believes that market
conditions warrant a temporary defensive posture, the Fund may invest
without limit in high quality, short-term debt securities and money market
instruments. These short-term debt securities and money market instruments
include commercial paper, certificates of deposit, bankers' acceptances,
shares of money market mutual funds, U.S. Government securities and
repurchase agreements.
If the Fund takes a defensive posture, the Fund may not reach its
investment objective. For example, should the market advance during this
period, the Fund may not participate as much as it would have if it had
been more fully invested.
Discussed below are the principal risks of investing in the Fund that may
adversely affect the Fund's net asset value or total return.
MARKET RISK.
The risk that the market value of a security may move up and down,
sometimes rapidly and unpredictably. These fluctuations may cause a
security to be worth less than the price originally paid for it, or less
than it was worth at an earlier time. Market risk may affect a single
issuer, industry, sector of the economy or the market as a whole.
In addition, the stocks of large and mid-capitalization companies could
fall out of favor with investors.
MANAGEMENT RISK.
The risk that a strategy used by the Advisor may fail to produce the
intended result.
INVESTMENT ADVISOR
The Fund's Advisor, American Trust Company, One Court Street, Lebanon, New
Hampshire 03766 is dedicated primarily to providing investment management
services to individuals, charitable organizations, foundations and corporations.
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The Advisor provides investment management services to individual and
institutional accounts with an aggregate value in excess of $297 million. Paul
H. Collins and Jeffrey M. Harris, CFA, are principally responsible for the
management of the Fund's portfolio. Mr. Collins (who controls the Advisor) has
been active in the investment field professionally for 24 years. Mr. Collins has
been President of the Advisor and has been managing portfolios of clients of the
Advisor since its founding in 1991. Mr. Harris, Senior Vice President of the
Advisor, has been active in the investment field professionally for 22 years,
managing portfolios for more than the last five years, and managing portfolios
of clients of the Advisor since he became associated with the Advisor in 1995.
The Advisor provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Advisor a monthly management fee
based upon its average daily net assets. For the fiscal year ended February 29,
2000, the Advisor received advisory fees of 0.65% of the Fund's average daily
net assets, net of waiver.
HOW TO PURCHASE SHARES OF THE FUND
There are several ways to purchase shares of the Fund. An Application Form,
which accompanies this Prospectus, is used if you send money directly to the
Fund by mail or wire. If you have questions about how to invest, or about how to
complete the Application Form, please call an account representative at (800)
385-7003.
YOU MAY SEND MONEY TO THE FUND BY MAIL.
If you wish to invest by mail, simply complete the Application Form and
mail it with a check (made payable to American Trust Allegiance Fund) to
the Fund's Shareholder Servicing Agent:
American Trust Allegiance Fund
P.O. Box 640947
Cincinnati, OH 45264-0947
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YOU MAY WIRE MONEY TO THE FUND.
Before sending a wire, you should call the Fund at (800) 385-7003 between
9:00 a.m. and 5:00 p.m., Eastern time, on a day when the New York Stock
Exchange (the "NYSE") is open for trading, in order to receive an account
number. It is important to call and receive this account number, because if
your wire is sent without it or without the name of the Fund, there may be
a delay in investing the money you wire. You should then ask your bank to
wire money to:
Firstar Bank, N.A.
ABA # 0420-0001-3
for credit to The American Trust Allegiance Fund DDA #486444854
for further credit to [your name and account number]
Your bank may charge you a fee for sending a wire to the Fund.
YOU MAY PURCHASE SHARES THROUGH AN INVESTMENT BROKER.
You may buy and sell shares of the Fund through certain brokers (and their
agents, together "brokers") that have made arrangements with the Fund. An
order placed with such a broker is treated as if it were placed directly
with the Fund, and will be executed at the next share price calculated by
the Fund. Your shares will be held in a pooled account in the broker's
name, and the broker will maintain your individual ownership information.
The Advisor may pay the broker for maintaining these records as well as
providing other shareholder services. In addition, the broker may charge
you a fee for handling your order. The broker is responsible for processing
your order correctly and promptly, keeping you advised of the status of
your individual account, confirming your transactions and ensuring that you
receive copies of the Fund's prospectus.
MINIMUM INVESTMENTS.
The minimum initial investment in the Fund is $2,500. The minimum
subsequent investment is $250. However, if you are investing in an
Individual Retirement Account ("IRA"), or you are starting an Automatic
Investment Plan (see below), the minimum initial and subsequent investments
are $1,000 and $100, respectively.
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SUBSEQUENT INVESTMENTS.
You may purchase additional shares of the Fund by sending a check, with the
stub from an account statement, to the Fund at the address above. Please
also write your account number on the check. (If you do not have a stub
from an account statement, you can write your name, address and account
number on a separate piece of paper and enclose it with your check.) If you
want to invest additional money by wire, it is important for you to call
the Fund at (800) 385-7003.
WHEN IS MONEY INVESTED IN THE FUND?
Any money received for investment in the Fund, whether sent by check or by
wire, is invested at the net asset value of the Fund which is next
calculated after the money is received (assuming the check or wire
correctly identifies the Fund and account). The net asset value is
calculated at the close of regular trading on the NYSE, normally 4:00 p.m.,
Eastern time. A check or wire received after the NYSE closes is invested as
of the next calculation of the Fund's net asset value.
WHAT IS THE PRICE OF THE FUND?
The Fund's net asset value per share, or price per share, is calculated by
dividing the value of the Fund's total assets, less its liabilities, by the
number of its shares outstanding. The Fund's assets are the market value of
securities held in its portfolio, plus any cash and other assets. The
Fund's liabilities are fees and expenses it owes. The number of Fund shares
outstanding is the amount of shares which have been issued to shareholders.
The price you will pay to buy Fund shares or the amount you will receive
when you sell your Fund shares is based on the net asset value next
calculated after your order is received and accepted.
SERVICES AVAILABLE TO SHAREHOLDERS
RETIREMENT PLANS.
You may obtain prototype IRA plans from the Fund. Shares of the Fund are
also eligible investments for other types of retirement plans.
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AUTOMATIC INVESTMENT PLAN.
You may make regular monthly investments in the Fund using the Automatic
Investment Plan. An Automatic Clearing House (ACH) debit is drawn
electronically against your account at a Financial Institution of your
choice. Upon receipt of the withdrawn funds, the Fund automatically invests
the money in additional shares of the Fund at the next calculated net asset
value. There is no charge by the Fund for this service. The Fund may
terminate or modify this privilege at any time, and you may terminate your
participation by notifying American Data Services, Inc. in writing,
sufficiently in advance of the next withdrawal. The minimum monthly
investment amount is $100.
AUTOMATIC WITHDRAWALS.
The Fund offers an Automatic Withdrawal Plan whereby you may request that a
check drawn in a predetermined amount be sent to you each month or calendar
quarter. To start this Plan, your account must have Fund shares with a
value of at least $10,000, and the minimum amount that may be withdrawn
each month or quarter is $50. The Plan may be terminated or modified by you
or the Fund at any time without charge or penalty. A withdrawal under the
Automatic Withdrawal Plan involves a redemption of shares of the Fund, and
may result in a gain or loss for federal income tax purposes. In addition,
if the amount withdrawn exceeds the dividends credited to your account, the
account ultimately may be depleted.
HOW TO REDEEM YOUR SHARES
You have the right to redeem all or any portion of your shares of the Fund
at their next calculated net asset value on each day the NYSE is open for
trading.
REDEMPTION IN WRITING.
You may redeem your shares by simply sending a written request to the Fund.
You should give your account number and state whether you want all or part
of your shares redeemed. The letter should be signed by all of the
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shareholders whose names appear in the account registration. You should
send your redemption request to:
American Trust Allegiance Fund
c/o America Data Services, Inc.
150 Motor Parkway, Suite 109
Hauppauge, NY 11788
SIGNATURE GUARANTEE.
If the value of the shares you wish to redeem exceeds $100,000, the
signatures on the redemption request must be guaranteed by an "eligible
guarantor institution." These institutions include banks, broker-dealers,
credit unions and savings institutions. A broker-dealer guaranteeing a
signature must be a member of a clearing corporation or maintain net
capital of at least $100,000. Credit unions must be authorized to issue
signature guarantees. Signature guarantees will be accepted from any
eligible guarantor institution which participates in a signature guarantee
program. A notary public is not an acceptable guarantor.
REDEMPTION BY TELEPHONE.
If you complete the Redemption by Telephone portion of the Fund's
Application Form, you may redeem shares on any business day the NYSE is
open by calling the Fund's Shareholder Servicing Agent at (800) 385-7003
before the close of trading on the NYSE. Redemption proceeds will be mailed
or wired, at your direction, on the next business day to the Financial
Institution account you designated on the Application Form. The minimum
amount that may be wired is $1,000 (wire charges, if any, will be deducted
from redemption proceeds). Telephone redemptions cannot be made for
Retirement Plan Accounts.
By establishing telephone redemption privileges, you authorize the Fund and
its Shareholder Servicing Agent to act upon the instruction of any person
who makes the telephone call to redeem shares from your account and
transfer the proceeds to the Financial Institution account designated in
the Application Form. The Fund and the Shareholder Servicing Agent will use
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procedures to confirm that redemption instructions received by telephone
are genuine, including recording of telephone instructions and requiring a
form of personal identification before acting on these instructions. If
these normal identification procedures are followed, neither the Fund nor
the Shareholder Servicing Agent will be liable for any loss, liability, or
cost which results from acting upon instructions of a person believed to be
a shareholder with respect to the telephone redemption privilege. The Fund
may change, modify, or terminate these privileges at any time upon at least
60-days' notice to shareholders.
You may request telephone redemption privileges after your account is
opened; however, the authorization form will require a separate signature
guarantee. Shareholders may experience delays in exercising telephone
redemption privileges during periods of abnormal market activity. If this
occurs, you may make your redemption request in writing.
WHEN ARE REDEMPTION PAYMENTS MADE?
Redemption payments for telephone redemptions are sent on the day after the
telephone call is received. Payments for redemptions requested in writing
are normally made promptly, but no later than seven days after the receipt
of a valid request. However, the Fund may suspend the right of redemption
under certain extraordinary circumstances in accordance with rules of the
Securities and Exchange Commission.
If shares were purchased by wire, payment of your redemption proceeds for
those shares will not be made until the day after the Application Form is
received. If shares were purchased by check and then redeemed shortly after
the check is received, the Fund may delay sending the redemption proceeds
until it has been notified that the check used to purchase the shares has
been collected, a process which may take up to 15 days. This delay can be
avoided by investing by wire or by using a certified or official bank check
to make the purchase.
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OTHER INFORMATION ABOUT REDEMPTIONS.
A redemption may result in recognition of a gain or loss for federal income
tax purposes. Due to the relatively high cost of maintaining smaller
accounts, the shares in your account (unless it is a retirement plan or
Uniform Gifts or Transfers to Minors Act account) may be redeemed by the
Fund if, due to redemptions you have made, the total value of your account
is reduced to less than $500. If the Fund determines to make such an
involuntary redemption, you will first be notified that the value of your
account is less than $500, and you will be allowed 30 days to make an
additional investment to bring the value of your account to at least $500
before the Fund takes any action.
DISTRIBUTION AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income, if any, are normally declared and
paid by the Fund in December. Capital gain distributions, if any, are also
normally made in December, but the Fund may make an additional payment of
dividends or capital gain distributions if it deems it desirable at another
time during any year.
Dividends and capital gain distributions (net of any required tax
withholding) are automatically reinvested in additional shares of the Fund
at the net asset value per share on the reinvestment date unless you have
previously requested in writing to the Shareholder Servicing Agent or on
the Application Form that payment be made in cash.
Any dividend or capital gain distribution paid by the Fund has the effect
of reducing the net asset value per share on the record date by the amount
of the dividend or capital gain distribution. You should note that a
dividend or capital gain distribution paid on shares purchased shortly
before that dividend or capital gain distribution was declared will be
subject to income taxes even though the dividend or capital gain
distribution represents, in substance, a partial return of capital to you.
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Taxes
Distributions made by the Fund will be taxable to shareholders whether
received in shares (through dividend reinvestment) or in cash.
Distributions derived from net investment income, including net short-term
capital gains, are taxable to shareholders as ordinary income.
Distributions designated as capital gain dividends are taxable as capital
gains regardless of the length of time shares of the Fund have been held.
You should consult your own advisors concerning federal, state and local
taxation of distributions from the Fund.
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FIANANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance during its prior fiscal periods. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned
on an investment in the Fund (assuming reinvestment of all dividends and
distributions). The information has been audited by PricewaterhouseCoopers
LLP for the year ended February 29, 2000, and by other independent
accountants for the period prior to February 29, 2000. Pricewaterhouse
Coopers LLP's report and the Fund's financial statements are included in
the Fund's annual report which is available upon request.
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Year Year 3/11/97*
Ended Ended through
2/29/00 2/28/99 2/28/98
------- ------- -------
Net asset value, beginning of period $ 16.93 $ 13.48 $ 10.00
-------- -------- -------
Income from investment operations:
Net investment loss (0.11) (0.07) (0.03)
Net realized and unrealized gain
on investments 8.74 3.74 3.51
-------- -------- -------
Total from investment operations 8.63 3.67 3.48
-------- -------- -------
Less distributions:
From net realized gain 0.00 (0.22) 0.00
-------- -------- -------
Total distributions 0.00 (0.22) 0.00
-------- -------- -------
Net asset value, end of period $ 25.56 $ 16.93 $ 13.48
======== ======== =======
Total return 50.97% 27.47% 34.80%+
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 36,932 $ 13,329 $ 6,360
Ratio of expenses to average net assets:
Before expense reimbursement 1.75% 2.30% 4.04%**
After expense reimbursement 1.45% 1.45% 1.45%**
Ratio of net investment loss to average
net assets After expense reimbursement (0.73)% (0.57)% (0.42)%**
Portfolio turnover rate 39.81% 40.99% 27.65%
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* Commencement of operations.
** Annualized.
+ Not annualized.
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The American Trust Allegiance Fund,
a series of Advisors Series Trust
For More Information
The Statement of Additional Information (SAI) for the Fund includes additional
information about the Fund, which is incorporated by reference into this
Prospectus.
The Fund's annual and semi-annual reports to shareholders contains additional
information about the Fund's investments. The annual report includes a
discussion of the market conditions and investment strategies which
significantly affected the Fund's performance during its last fiscal year.
The SAI and shareholder reports are available free upon request. To request them
or other information, or to ask any questions, please call or write:
1-800-385-7003
The American Trust Allegiance Fund
c/o American Data Services, Inc.
150 Motor Parkway, Suite 109
Hauppauge, NY 11788
The SAI and other Fund information may also be reviewed and copied at the SEC's
Public Reference Room in Washington, DC. Call 1-202-942-8090 for information
about the Room's operations.
Reports and other Fund information are also available on the SEC's Internet site
at www.sec.gov. Copies of this information may be obtained, for duplicating
fees, by writing to the SEC's Public Reference Room, Washington, DC 10549-0102
or by electronic request to the following e-mail address: [email protected].
The Trust's SEC File Number is 811-07959.
<PAGE>
THE AMERICAN TRUST ALLEGIANCE FUND
Statement of Additional Information
Dated June 27, 2000
This Statement of Additional Information is not a prospectus, and it should be
read in conjunction with the prospectus dated June 27, 2000, as may be revised
from time to time, of The American Trust Allegiance Fund (the "Fund"), a series
of Advisors Series Trust (the "Trust"). American Trust Company (the "Advisor")
is the Advisor to the Fund. A copy of the prospectus may be obtained from the
Fund at One Court Street, Lebanon, NH 03766 or by calling (800) 385-7003.
TABLE OF CONTENTS
The Trust ................................................................. B-2
Investment Objective and Policies ......................................... B-2
Management ................................................................ B-6
Portfolio Transactions and Brokerage ...................................... B-10
Portfolio Turnover ........................................................ B-10
Purchase and Redemption of Fund Shares .................................... B-11
Net Asset Value ........................................................... B-12
Taxation .................................................................. B-13
Dividends and Distributions ............................................... B-15
Performance Information ................................................... B-16
General Information ....................................................... B-17
Appendix .................................................................. B-19
B-1
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THE TRUST
Advisors Series Trust (the "Trust") is an open-end management investment
company organized as a Massachusetts business trust. The trust consists of
various series which represent separate investment p 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 ob the
information contained in the Registration Statement filed with the SEC. Copies
of such information may be obtained from the SEC upon payment of the prescribed
fee.
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to seek capital appreciation. The
Fund is diversified, which under applicable federal law 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 discussion supplements the discussion of the Fund's
investment objective and policies set forth in the Prospectus. There is no
assurance that the Fund will achieve its objective.
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
BANK CERTIFICATES OR DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The
Fund may acquire certificates of deposit, bankers' acceptances and time
deposits. Certificates of deposit are negotiable certificates issued against
funds deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic or foreign banks or financial
institutions which at the time of purchase have capital, surplus and undivided
profits in excess of $100 million (including assets of both domestic and foreign
branches), based on latest published reports, or less than $100 million if the
principal amount of such bank obligations are fully insured by the U.S.
Government. If the Fund holds instruments of foreign banks or financial
institutions, it may be subject to additional investment risks that are
different in some respects from those incurred by a fund which invests only in
debt obligations of U.S. domestic issuers. See "Foreign Investments" below. Such
risks include future political and economic developments, the possible
imposition of withholding taxes by the particular country in which the issuer is
located on interest income payable on the securities, the possible seizure or
nationalization of foreign deposits, the possible establishment of exchange
controls or the adoption of other foreign governmental restrictions which might
adversely affect the payment of principal and interest on these securities.
Domestic banks and foreign banks are subject to different governmental
regulations with respect to the amount and types of loans which may be made and
interest rates which may be charged. In addition, the profitability of the
banking industry depends largely upon the availability and cost of funds for the
purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks are,
among other things, required to maintain specified levels of reserves, limited
in the amount which they can loan to a single borrower, and subject to other
regulations designed to promote financial soundness. However, such laws and
regulations do not necessarily apply to foreign bank obligations that the Fund
may acquire.
B-2
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In addition to purchasing certificates of deposit and bankers' acceptances,
to the extent permitted under its investment objectives and policies stated
above and in its prospectus, the Fund may make interest-bearing time or other
interest-bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
SAVINGS ASSOCIATION OBLIGATIONS. The Fund may invest in certificates of
deposit (interest-bearing time deposits) issued by savings banks or savings and
loan associations that have capital, surplus and undivided profits in excess of
$100 million, based on latest published reports, or less than $100 million if
the principal amount of such obligations is fully insured by the U.S.
Government.
COMMERCIAL PAPER, SHORT-TERM NOTES AND OTHER CORPORATE OBLIGATIONS. The
Fund may invest a portion of its assets in commercial paper and short-term
notes. Commercial paper consists of unsecured promissory notes issued by
corporations. Issues of commercial paper and short-term notes will normally have
maturities of less than nine months and fixed rates of return, although such
instruments may have maturities of up to one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher by Standard & Poor's ("S&P"), "Prime-1" by
Moody's Investors Service, Inc. ("Moody's"), or similarly rated by another
nationally recognized statistical rating organization or, if unrated, will be
determined by the Advisor to be of comparable quality. These rating symbols are
described in the Appendix.
MONEY MARKET FUNDS
The Fund may invest in shares of other investment companies. The Fund may
invest in money market mutual funds in connection with its management of daily
cash positions. In addition to the advisory and operational fees a Fund bears
directly in connection with its own operation, the Fund would also bear its pro
rata portions of each other investment company's advisory and operational
expenses.
GOVERNMENT OBLIGATIONS
The Fund may make short-term investments in U.S. Government obligations.
Such obligations include Treasury bills, certificates of indebtedness, notes and
bonds, and issues of such entities as the Government National Mortgage
Association ("GNMA"), Export-Import Bank of the United States, Tennessee Valley
Authority, Resolution Funding Corporation, Farmers Home Administration, Federal
Home Loan Banks, Federal Intermediate Credit Banks, Federal Farm Credit Banks,
Federal Land Banks, Federal Housing Administration, Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation, and the Student
Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by the
full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
FOREIGN INVESTMENTS AND CURRENCIES
The Fund may invest in securities of foreign issuers that are publicly
traded in the United States. The Fund may also invest up to 5% of its total
assets in depositary receipts.
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DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs"), Global
Depositary Receipts ("GDRs") or other forms of depositary receipts. DRs are
receipts typically issued in connection with a U.S. or foreign bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest and dividends payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to the Fund's shareholders.
In considering whether to invest in the securities of a foreign company,
the Advisor considers such factors as the characteristics of the particular
company, differences between economic trends and the performance of securities
markets within the U.S. and those within other countries, and also factors
relating to the general economic, governmental and social conditions of the
country or countries where the company is located. The extent to which the Fund
will be invested in foreign companies and countries and depository receipts will
fluctuate from time to time within the limitations described in the prospectus,
depending on the Advisor's assessment of prevailing market, economic and other
conditions.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to its portfolio
securities. Pursuant to such agreements, the Fund acquires securities from
financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor, subject to the seller's agreement to repurchase and
the Fund's agreement to resell such securities at a mutually agreed upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio security). Securities subject
to repurchase agreements will be held by the Custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund will
suffer a loss to the extent that the proceeds from a sale of the underlying
securities are less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans under the 1940 Act.
B-4
<PAGE>
BORROWING
The Fund is authorized to borrow money from time to time for temporary,
extraordinary or emergency purposes or for clearance of transactions in amounts
up to 5% of the value of its total assets at the time of such borrowings.
RISKS OF INVESTING IN SMALL COMPANIES
As stated in the prospectus, the Fund may invest in securities of small
companies. Additional risks of such investments include the markets on which
such securities are frequently traded. In many instances the securities of
smaller companies are traded only over-the-counter or on a regional securities
exchange, and the frequency and volume of their trading is substantially less
than is typical of larger companies. Therefore, the securities of smaller
companies may be subject to greater and more abrupt price fluctuations. When
making large sales, the Fund may have to sell portfolio holdings at discounts
from quoted prices or may have to make a series of small sales over an extended
period of time due to the trading volume of smaller company securities.
Investors should be aware that, based on the foregoing factors, an investment in
the Fund may be subject to greater price fluctuations than an investment in a
fund that invests exclusively in larger, more established companies. The
Advisor's research efforts may also play a greater role in selecting securities
for the Fund than in a fund that invests in larger, more established companies.
INVESTMENT RESTRICTIONS
The Trust (on behalf of the Fund) has adopted the following restrictions as
fundamental policies, which may not be changed without the favorable vote of the
holders of a "majority," as defined in the 1940 Act, of the outstanding voting
securities of the Fund. Under the 1940 Act, the "vote of the holders of a
majority of the outstanding voting securities" means the vote of the holders of
the lesser of (i) 67% of the shares of the Fund represented at a meeting at
which the holders of more than 50% of its outstanding shares are represented or
(ii) more than 50% of the outstanding shares of the Fund.
As a matter of fundamental policy, the Fund is diversified; I.E., as to 75%
of the value of a its total assets: (i) no more than 5% of the value of its
total assets may be invested in the securities of any one issuer (other than
U.S. Government securities); and (ii) the Fund's position in any single issuer
may not represent more than 10% of such issuer's voting securities. The Fund's
investment objective is also fundamental.
In addition, the Fund may not:
1. Issue senior securities, borrow money or pledge its assets, except that
(i) the Fund may borrow on an unsecured basis from banks for temporary or
emergency purposes or for the clearance of transactions in amounts not exceeding
5% of its total assets (including the amount borrowed), provided that it will
not make investments while borrowings in excess of 5% of the value of its total
assets are outstanding;
2. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions;
3. Act as underwriter (except to the extent the Fund may be deemed to be an
underwriter in connection with the sale of securities in its investment
portfolio);
4. Invest 25% or more of its total assets, calculated at the time of
purchase and taken at market value, in any one industry (other than U.S.
Government securities);
5. Purchase or sell real estate or interests in real estate or real estate
limited partnerships (although the Fund may purchase and sell securities which
are secured by real estate and securities of companies which invest or deal in
real estate);
B-5
<PAGE>
6. Purchase or sell commodities or commodity futures contracts;
7. Make loans of money (except for purchases of debt securities consistent
with the investment policies of the Fund and except for repurchase agreements);
or
8. Make investments for the purpose of exercising control or management.
The Fund observes the following restrictions as a matter of operating but
not fundamental policy, pursuant to positions taken by federal regulatory
authorities:
The Fund may not:
1. Invest in the securities of other investment companies or purchase any
other investment company's voting securities or make any other investment in
other investment companies except to the extent permitted by federal law; or
2. Invest in securities which are restricted as to disposition or otherwise
are illiquid or have no readily available market (except for securities which
are determined by the Board of Trustees to be liquid).
MANAGEMENT
The overall management of the business and affairs of the Trust is vested
with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day to day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their birth dates and positions
with the Trust, their business addresses and principal occupations during the
past five years are:
WALTER E. AUCH, SR. (born 1921) Trustee
6001 N. 62nd Place, Paradise Valley, AZ 85153. Business Consultant and Director,
Nicholas-Applegate Institutional Mutual Funds, Salomon Smith Barney Trak Funds
and Concert Series, Pimco Advisors L.P., Banyan Strategic Realty Trust, Legend
Properties and Senele Group.
ERIC M. BANHAZL* (born 1957) Trustee, President and Treasurer
2020 E. Financial Way, Glendora, CA 91741. Executive Vice President, Investment
Company Administration, LLC; Vice President, First Fund Distributors, Inc.;
Treasurer, Guinness Flight Investment Funds, Inc.
DONALD E. O'CONNOR (born 1936) Trustee
1700 Taylor Avenue, Fort Washington, MD 20744. Retired; formerly Executive Vice
President and Chief Operating Officer of ICI Mutual Insurance Company (until
January, 1997); Vice President, Operations, Investment Company Institute (until
June, 1993); Independent Director, The Parnassus Fund, The Parnassus Income
Fund, and Allegiance Investment Trust.
GEORGE T. WOFFORD III (born 1939) Trustee
305 Glendora Circle, Danville, CA 94526. Senior Vice President, Information
Services, Federal Home Loan Bank of San Francisco.
STEVEN J. PAGGIOLI (born 1950) Vice President
915 Broadway, Suite 1605, New York, NY 10010. Executive Vice President,
Investment Company Administration, LLC; Vice President, First Fund Distributors,
Inc.; President and Trustee, Professionally Managed Portfolios; Trustee,
Managers Funds Trust.
B-6
<PAGE>
ROBERT H. WADSWORTH (born 1940) Vice President
4455 E. Camelback Rd. Suite 261-E, Phoenix, AZ 85018. President, Robert H.
Wadsworth & Associates, Inc., Investment Company Administration, LLC and First
Fund Distributors, Inc.; Vice President, Professionally Managed Portfolios;
President, Guiness Flight Investment Funds, Inc.; Director, Germany Fund, Inc.,
New Germany Fund, Inc., Central European Equity Fund, Inc. and Deutsche Funds,
Inc.
CHRIS O. MOSER (born 1949) Secretary
4455 E. Camelback Rd. Suite 261-E, Phoenix, AZ 85018. Employed by Investment
Company Administration, LLC (since July 1996); Formerly employed by Bank One,
N.A. (From August 1995 until July 1996; O'Connor, Cavanagh, Anderson,
Killingsworth and Beshears (law firm) (until August 1995).
----------
* denotes Trustee who is an "interested person" of the Trust under the 1940
Act.
NAME AND POSITION AGGREGATE COMPENSATION FROM THE TRUST
----------------- -------------------------------------
Walter E. Auch, Sr., Trustee $12,000
Donald E. O'Connor, Trustee $12,000
George T. Wofford III, Trustee $12,000
Compensation indicated is for the calendar-year ended December 31, 1999.
Currently, each Independent Trustee receives an annual retainer of $12,000 plus
$1,500 for each meeting attended.
THE ADVISOR
Subject to the supervision of the Board of Trustees, investment management
and related services are provided by the Advisor, pursuant to an Investment
Advisory Agreement (the "Advisory Agreement").
Under the Advisory Agreement, the Advisor agrees to invest the assets of
the Fund in accordance with the investment objectives, policies and restrictions
of the Fund as set forth in the Fund's and Trust's governing documents,
including, without limitation, the Trust's Agreement and Declaration of Trust
and By-Laws; the Fund's prospectus, statement of additional information, and
undertakings; and such other limitations, policies and procedures as the
Trustees of the Trust may impose from time to time in writing to the Advisor. In
providing such services, the Advisor shall at all times adhere to the provisions
and restrictions contained in the federal securities laws, applicable state
securities laws, the Internal Revenue Code of 1986 (the "Code"), and other
applicable law.
Without limiting the generality of the foregoing, the Advisor has agreed to
(i) furnish the Fund with advice and recommendations with respect to the
investment of the Fund's assets, (ii) effect the purchase and sale of portfolio
securities; (iii) manage and oversee the investments of the Fund, subject to the
ultimate supervision and dof the Trust's Board of Trustees; (iv) vote proxies
and take other actions with respect to the Fund's securities; (v) maintain the
books and records required to be maintained with respect to the securities in
the Fund's portfolio; (vi) furnish reports, statements and other data on
securities, economic conditions and other matters related to the investment of
the Fund's assets which the Trustees or the officers of the Trust may reasonably
request; and (vii) render to the Trust's Board of Trustees such periodic and
special reports as the Board may reasonably request. The Advisor has also
agreed, at its own expense, to maintain such staff and employ or retain such
personnel and consult with such other persons as it shall from time to time
determine to be necessary to the performance of its obligations under the
Advisory Agreement. Personnel of the Advisor may serve as officers of the Trust
provided they do so without compensation from the Trust. Without limiting the
generality of the foregoing, the staff and personnel of the Advisor shall be
deemed to include persons employed or retained by the Advisor to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Advisor or the Trust's Board of Trustees may desire and reasonably request.
B-7
<PAGE>
With respect to the operation of the Fund, the Advisor has agreed to be
responsible for the expenses of printing and distributing extra copies of the
Fund's prospectus, statement of additional information, and sales and
advertising materials (but not the legal, auditing or accounting fees attendant
thereto) to prospective investors (but not to existing shareholders); and the
costs of any special Board of Trustees meetings or shareholder meetings convened
for the primary benefit of the Advisor.
As compensation for the Advisor's services, the Fund pays it an advisory
fee at the rate specified in the prospectus. In addition to the fees payable to
the Advisor and the Administrator, the Trust is responsible for its operating
expenses, including: fees and expenses incurred in connection with the issuance,
registration and transfer of its shares; brokerage and commission expenses; all
expenses of transfer, receipt, safekeeping, servicing and accounting for the
cash, securities and other property of the Trust for the benefit of the Fund
including all fees and expenses of its custodian, shareholder services agent and
accounting services agent; interest charges on any borrowings; costs and
expenses of pricing and calculating its daily net asset value and of maintaining
its books of account required under the 1940 Act; taxes, if any; a pro rata
portion of expenditures in connection with meetings of the Fund's shareholders
and the Trust's Board of Trustees that are properly payable by the Fund;
salaries and expenses of officers and fees and expenses of members of the
Trust's Board of Trustees or members of any advisory board or committee who are
not members of, affiliated with or interested persons of the Advisor or
Administrator; insurance premiums on property or personnel of the Fund which
inure to its benefit, including liability and fidelity bond insurance; the cost
of preparing and printing reports, proxy statements, prospectuses and statements
of additional information of the Fund or other communications for distribution
to existing shareholders; legal, auditing and accounting fees; trade association
dues; fees and expenses (including legal fees) of registering and maintaining
registration of its shares for sale under federal and applicable state and
foreign securities laws; all expenses of maintaining and servicing shareholder
accounts, including all charges for transfer, shareholder recordkeeping,
dividend disbursing, redemption, and other agents for the benefit of the Fund,
if any; and all other charges and costs of its operation plus any extraordinary
and non-recurring expenses, except as otherwise prescribed in the Advisory
Agreement.
The Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce fees payable to it by the Fund and to pay Fund
operating expenses to the extent necessary to limit the Fund's aggregate annual
operating expenses (excluding interest and tax expenses) to the limit set forth
in the Expense Table (the "expense cap"). Any such reductions made by the
Advisor in its fees or payment of expenses which are the Fund's obligation are
subject to reimbursement by the Fund to the Advisor, if so requested by the
Advisor, in subsequent fiscal years if the aggregate amount actually paid by the
Fund toward the operating expenses for such fiscal year (taking into account the
reimbursement) does not exceed the applicable limitation on Fund expenses. The
Advisor is permitted to be reimbursed only for fee reductions and expense
payments made in the previous three fiscal years, but is permitted to look back
five years and four years, respectively, during the initial six years and
seventh year of the Fund's operations. Any such reimbursement is also contingent
upon Board of Trustees' subsequent review and ratification of the reimbursed
amounts. Such reimbursement may not be paid prior to the Fund's payment of
current ordinary operating expenses.
During the period beginning March 11, 1997 (commencement of investment
operations) and ending February 28, 1998, the Advisor earned $34,946 in advisory
fees. The Advisor voluntarily agreed to limit total Fund operating expenses to
1.45% of average net assets annually. As a result of that limitation, the
Advisor waived the full amount to its fee and paid Fund operating expenses in
the amount of $60,728. During the fiscal year ended February 28, 1999, the
Advisor earned $88,383 in advisory fees. The Advisor agreed to limit total Fund
operating expenses to 1.45% of average net assets annually. As a result of that
limitation, the Advisor waived $79,291 of its fee. During the fiscal year ended
February 29, 2000, the Advisor earned $205,744 in advisory fees. The Advisor
agreed to limit total Fund operating expenses to 1.45% of average net assets
annually. As a result of that limitation, the Advisor waived $64,883 of its fee.
The Advisor is controlled by Paul H. Collins, its President.
B-8
<PAGE>
Under the Advisory Agreement, the Advisor will not be liable to the Trust
or the Fund or any shareholder for any act or omission in the course of, or
connected with, rendering services or for any loss sustained by the Trust except
in the case of a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad faith or gross
negligence, or reckless disregard of its obligations and duties under the
Agreement.
The Advisory Agreement will remain in effect for a period not to exceed two
years. Thereafter, if not terminated, the Advisory Agreement will continue
automatically for successive annual periods, provided that such continuance is
specifically approved at least annually (i) by a majority vote of the
Independent Trustees cast in person at a meeting called for the purpose of
voting on such approval, and (ii) by the Board of Trustees or by vote of a
majority of the outstanding voting securities of the Fund.
The Advisory Agreement is terminable by vote of the Board of Trustees or by
the holders of a majority of the outstanding voting securities of the Fund at
any time without penalty, on 60 days written notice to the Advisor. The Advisory
Agreement also may be terminated by the Advisor on 60 days written notice to the
Trust. The Advisory Agreement terminates automatically upon its assignment (as
defined in the 1940 Act).
THE ADMINISTRATOR. The Administrator has agreed to be responsible for
providing such services as the Trustees may reasonably request, including but
not limited to (i) maintaining the Trust's books and records (other than
financial or accounting books and records maintained by any custodian, transfer
agent or accounting services agent); (ii) overseeing the Trust's insurance
relationships; (iii) preparing for the Trust (or assisting counsel and/or
auditors in the preparation of) all required tax returns, proxy statements and
reports to the Trust's shareholders and Trustees and reports to and other
filings with the Securities and Exchange Commission and any other governmental
agency (the Trust agreeing to supply or cause to be supplied to the
Administrator all necessary financial and other information in connection with
the foregoing); (iv) preparing such applications and reports as may be necessary
to permit the sale of shares of the Trust in various states selected by the
Trust (the Trust agreeing to pay all filing fees or other similar fees in
connection therewith); (v) responding to all inquiries or other communications
of shareholders, if any, which are directed to the Administrator, or if any such
inquiry or communication is more properly to be responded to by the Trust's
custodian, transfer agent or accounting services agent, overseeing their
response thereto; (vi) overseeing all relationships between the Trust and any
custodian(s), transfer agent(s) and accounting services agent(s), including the
negotiation of agreements and the supervision of the performance of such
agreements; and (vii) authorizing and directing any of the Administrator's
directors, officers and employees who may be elected as Trustees or officers of
the Trust to serve in the capacities in which they are elected. All services to
be furnished by the Administrator under this Agreement may be furnished through
the medium of any such directors, officers or employees of the Administrator.
For its services, the Administrator receives a fee monthly at the following
annual rate, subject to a $30,000 minimum:
FUND ASSET LEVEL FEE RATE
---------------- --------
First $50 million 0.20% of average daily net assets
Next $50 million 0.15% of average daily net assets
Next $50 million 0.10% of average daily net assets
Next $50 million, and thereafter 0.05% of average daily net assets
For the fiscal year ended February 29, 2000, the Fund paid the
Administrator $43,444 in fees.
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.
B-9
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that the Advisor shall be responsible for
broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Advisor shall not direct orders to an affiliated person of the
Advisor without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. The Advisor's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction, the
Advisor may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aof the portfolio execution services offered.
Subject to such policies as the Advisor and the Board of Trustees of the
Trust may determine, the Advisor shall not be deemed to have acted unlawfully or
to have breached any duty created by this Agreement or otherwise solely by
reason of its having caused the Fund to pay a broker or dealer that provides
(directly or indirectly) brokerage or research services to the Advisor an amount
of commission for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction, if the Advisor determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research
services provided by such broker or dealer, viewed in terms of either that
particular transaction or the Advisor's overall responsibilities with respect to
the Fund. The Advisor is further authorized to allocate the orders placed by it
on behalf of the Fund to such brokers or dealers who also provide research or
statistical material, or other services, to the Trust, the Advisor, or any
affiliate of either. Such allocation shall be in such amounts and proportions as
the Advisor shall determine, and the Advisor shall report on such allocations
regularly to the Advisor and the Trust, indicating the broker-dealers to whom
such allocations have been made and the basis therefor. The Advisor is also
authorized to consider sales of shares of the Fund as a factor in the selection
of brokers or dealers to execute portfolio transactions, subject to the
requirements of best execution, I.E., that such brokers or dealers are able to
execute the order promptly and at the best obtainable securities price.
On occasions when the Advisor deems the purchase or sale of a security to
be in the best interest of the Fund as well as other clients of the Advisor, the
Advisor, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or sold in order to obtain the most
favorable price or lower brokerage commissions and the most efficient execution.
In such event, allocation of the securities so purchased or sold, as well as the
expenses incurred in the transaction, will be made by the Advisor in the manner
it considers to be the most equitable and consistent with its fiduciary
obligations to the Fund and to such other clients.
Brokerage commissions paid on portfolio transactions during the period
beginning March 11, 1997 and ending February 28, 1998, totaled $43,559.
Brokerage commissions paid during the fiscal years ending February 28, 1999 and
February 29, 2000 totaled $28,351 and $19,908, respectively.
PORTFOLIO TURNOVER
Although the Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Adviser, 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 eof securities whose maturities at
the time of acquisition were one year or less, were sold and either repurchased
or replaced within one year. A high rate of portfolio turnover (100% or more)
generally leads to higher transaction costs and may result in a greater number
of taxable transactions. See "Portfolio Transactions and Brokerage." For the
fiscal years ended February 28, 1999 and February 29, 2000, the Fund had a
portfolio turnover rate of 40.99% and 39.81%, respectively.
B-10
<PAGE>
PURCHASE AND REDEMPTION OF FUND SHARES
The information provided below supplements the information contained in the
Fund's Prospectus regarding the purchase and redemption of Fund shares.
HOW TO BUY SHARES
You may purchase shares of the Fund from selected securities brokers,
dealers or financial intermediaries. Investors should contact these agents
directly for appropriate instructions, as well as information pertaining to
accounts and any service or transaction fees that may be charged by those
agents. Purchase orders through securities brokers, dealers and other financial
intermediaries are effected at the next-determined net asset value after receipt
of the order by such agent before the Fund's daily cutoff time. Orders received
after that time will be purchased at the next-determined net asset value.
The public offering price of Fund shares is the net asset value. The Fund
receives the net asset value. Shares are purchased at the public offering price
next determined after the Transfer Agent receives your order in proper form. In
most cases, in order to receive that day's public offering price, the Transfer
Agent must receive your order in proper form before the close of regular trading
on the New York Stock Exchange ("NYSE"). If you buy shares through your
investment representative, the representative must receive your order before the
close of regular trading on the NYSE to receive that day's public offering
price. Orders are in proper form only after funds are converted to U.S. funds.
Orders paid by check and received by 2:00 p.m., Eastern Time, will generally be
available for the purchase of shares the following business day.
If you are considering redeeming or transferring shares to another person
shortly after purchase, you should pay for those shares with a certified check
to avoid any delay in redemption or transfer. Otherwise the Fund may delay
payment until the purchase price of those shares has been collected or, if you
redeem by telephone, until 15 calendar days after the purchase date. To
eliminate the need for safekeeping, the Fund will not issue cfor your shares
unless you request them.
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Fund's shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Fund, and (iii) to reduce or waive the minimum
for initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
HOW TO SELL SHARES
You can sell your Fund shares any day the NYSE is open for regular trading,
either directly to the Fund or through your investment representative. The Fund
will forward redemption proceeds or redeem shares for which it has collected
payment of the purchase price.
Payments to shareholders for shares of the Fund redeemed directly from the
Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the NYSE is restricted as determined by the SEC or
the NYSE is closed for other than weekends and holidays; (b) an emergency exists
as determined by the SEC making disposal of portfolio securities or valuation of
net assets of the Fund not reasonably practicable; or (c) for such other period
as the SEC may permit for the protection of the Fund's shareholders. At various
times, the Fund may be requested to redeem shares for which it has not yet
received confirmation of good payment; in this circumstance, the Fund may delay
the redemption until payment for the purchase of such shares has been collected
and confirmed to the Fund.
B-11
<PAGE>
Send a signed letter of instruction to the Transfer Agent, along with any
certificates that represent shares you want to sell. The price you will receive
is the next net asset value calculated after the Fund receives your request in
proper form. In order to receive that day's net asset value, the Transfer Agent
must receive your request before the close of regular trading on the NYSE.
Your investment representative must receive your request before the close
of regular trading on the NYSE to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge you for its services. If you
sell shares having a net asset value of $100,000 a signature guarantee is
required.
If you want your redemption proceeds sent to an address other than your
address as it appears on the Transfer Agent's records, a signature guarantee is
required. The Fund may require additional documentation for the sale of shares
by a corporation, partnership, agent or fiduciary, or a surviving joint owner.
Contact the Transfer Agent for details.
Upon receipt of any instructions or inquiries by telephone from a
shareholder or, if held in a joint account, from either party, or from any
person claiming to be the shareholder, the Fund or its agent is authorized,
without notifying the shareholder or joint account parties, to carry out the
instructions or to respond to the inquiries, consistent with the service options
chosen by the shareholder or joint shareholders in his or their latest Account
Application or other written request for services, including purchasing or
redeeming shares of the Fund and depositing and withdrawing monies from the bank
account specified in the Bank Account Registration section of the shareholder's
latest Account Application or as otherwise properly specified to the Fund in
writing.
During periods of unusual market changes and shareholder activity, you may
experience delays in contacting the Transfer Agent by telephone. In this event,
you may wish to submit a written redemption request, as described in the
Prospectus, or contact your investment representative. The Telephone Redemption
Privilege is not available if you were issued certificates for shares that
remain outstanding. The Telephone Redemption Privilege may be modified or
terminated without notice.
Subject to compliance with applicable regulations, the Fund has reserved
the right to pay the redemption price of its shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder received a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (approximately $250,000).
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is determined
as of the close of trading on the New York Stock Exchange ("NYSE") (generally
4:00 p.m. Eastern time) each business day on which the NYSE is open. The NYSE
annually announces the days on which it will not be open for trading. The most
recent announcement indicates that it will not be open on the following days:
New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, the NYSE may close on days not included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
B-12
<PAGE>
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor and the Trust's Valuation Committee pursuant to procedures approved by
or under the direction of the Board.
The Fund's securities, including ADRs, EDRs and GDRs, which are traded on
securities exchanges are valued at the last sale price on the exchange on which
such securities are traded, as of the close of business on the day the
securities are being valued or, lacking any reported sales, at the mean between
the last available bid and asked price. Securities that are traded on more than
one exchange are valued on the exchange determined by the Advisor to be the
primary market. Securities primarily traded in the NASDAQ National Market System
for which market quotations are readily available shall be valued at the last
sale price on the day of valuation, or if there has been no sale on such day, at
the mean between the bid and asked prices. Over-the-counter ("OTC") securities
which are not traded in the NASDAQ National Market System shall be valued at the
most recent trade price. Securities and assets for which market quotations are
not readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60 days
are valued at current market prices, as discussed above. Short-term securities
with 60 days or less remaining to maturity are, unless conditions indicate
otherwise, amortized to maturity based on their cost to the Fund if acquired
within 60 days of maturity or, if already held by the Fund on the 60th day,
based on the value determined on the 61st day.
All other assets of the Fund are valued in such manner as the Board in good
faith deems appropriate to reflect their fair value.
TAXATION
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), for each taxable year by complying with all
applicable requirements regarding the source of its income, the diversification
of its assets, and the timing of its distributions. The Fund's policy is to
distribute to its shareholders all of its investment company taxable income and
any net realized capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes based on net income. However, the
Board may elect to pay such excise taxes if it determines that payment is, under
the circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock and securities, gains from the
sale or other disposition of sor 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 CIf the Fund is unable to meet certain requirements of the
Code, it may be subject to taxation as a corporation.
B-13
<PAGE>
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.
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 ron 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.
B-14
<PAGE>
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.
A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize gain or loss
for income tax purposes on the difference, if any, between the adjusted basis of
the securities tendered to the Fund and the purchase price of the Fund's shares
acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must
generally "mark to market" at the end of its taxable year all securities which
it owns. The resulting gain or loss is treated as ordinary (and not capital)
gain or loss, except to the extent allocable to periods during which the dealer
held the security for investment. The "mar to market" rules do not apply,
however, to a security held for investment which is clearly identified in the ds
records as being held for investment before the end of the day in which the
security was acquired. The IRS has issued guidance under Section 475 that
provides that, for example, a bank that regularly originates and sells loans is
a dealer in securities, and subject to the "mark to market" rules. Shares of the
Fund held by a dealer in securities will be subject to the "mark to market"
rules unless they are held by the dealer for investment and the dealer property
identifies the shares as held for investment.
Redemptions 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.
B-15
<PAGE>
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.
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 aa 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
TOTAL RETURN
Average annual total return quotations used in the Fund's advertising and
promotional materials are calculated according to the following formula:
n
P(1 + T) = ERV
where "P" equals a hypothetical initial payment of $1,000; "T" equals average
annual total return; "n" equals the number of years; and "ERV" equals the ending
redeemable value at the end of the period of a hypothetical $1000 payment made
at the beginning of the period.
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication. Average annual
total return, or "T" in the above formula, is computed by finding the average
annual compounded rates of return over the period that would equate the initial
amount invested to the ending redeemable value. Average annual total return
assumes the reinvestment of all dividends and distributions.
Average annual total return for the Fund for the periods ending February
29, 2000 are as follows*:
One Year 50.97%
Since Inception** 37.81%
----------
* Certain fees and expenses of the Fund have been reimbursed from inception
through February 29, 2000. Accordingly, the Fund's return figures are
higher than they would have been had such fees and expenses not been
reimbursed.
** The Fund commenced operations on March 11, 1997.
B-16
<PAGE>
YIELD
Annualized yield quotations used in the Fund's advertising and promotional
materials are calculated by dividing the Fund's investment income for a
specified thirty-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
6
YIELD = 2 [(a-b + 1) - 1]
---
cd
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends and "d" equals the maximum offering price per share on the
last day of the period.
Except as noted below, in determining net investment income earned during
the period ("a" in the above formula), the Fund calculates interest earned on
each debt obligation held by it during the period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued ion the last business day of the period or, if the
obligation was purchased during the period, the purchase price plus accrued
interest; (2) dividing the yield to maturity by 360 and multiplying the
resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the Fund, net investment income is then determined by
totaling all such interest earned.
For purposes of these calculations, the maturity of an obligation with one
or more call provisions is assumed to be the next date on which the obligation
reasonably can be expected to be called or, if none, the maturity date.
OTHER INFORMATION
Performance data of the Fund quoted in advertising and other promotional
materials represents past performance and is not intended to predict or
guarantee future results. The return and principal value of an investment in the
Fund will fluctuate, and an investor's redemption proceeds may be more or less
than the original investment amount. In advertising and promotional materials
the Fund may compare its performance with data published by Lipper Analytical
Services, Inc. ("Lipper") or CDA Investment Technologies, Inc. ("CDA"). The Fund
also may refer in such materials to mutual fund performance rankings and other
data, such as comparative asset, expense and fee levels, published by Lipper or
CDA. Advertising and promotional materials also may refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals including, but not limited to, THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD and BARRON'S.
GENERAL INFORMATION
Advisors Series Trust is an open-end management investment company
organized as a Delaware business trust under the laws of the State of Delaware
on October 3, 1996. The Trust currently consists of 16 effective series of
shares of beneficial interest, par value of $0.01 per share. The Declaration of
Trust permits the Trustees to issue an unlimited number of full and fractional
shares of beneficial interest and to divide or combine the shares into a greater
or lesser number of shares without thereby changing the proportionate beneficial
interest in the Fund. Each share represents an interest in the Fund
proportionately equal to the interest of each other share. Upon the 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.
B-17
<PAGE>
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 iwil make any part of a redemption payment in
securities, if such payment were made, an investor may incur brokerage costs in
converting such securities to cash. The Trust has elected to be governed by the
provisions of Rule 18f-1 under the Investment Company Act, which require that
the Fund pay in cash all requests for redemption by any shareholder of record
limited in amount, however, during any 90-day period to the lesser of $250,000
or 1% of the value of the Fund's net assets at the beginning of such period.
Rule 18f-2 under the 1940 Act provides that as to any investment company
which has two or more series outstanding and as to any matter required to be
submitted to shareholder vote, such matter is not deemed to have been
effectively acted upon unless approved by the holders of a "majority" (as
defined in the Rule) of the voting securities of each series affected by the
matter. Such separate voting requirements do not apply to the election of
Trustees or the ratification of the selection of accountants. The Rule contains
special provisions for cases in which an advisory contract is approved by one or
more, but not all, series. A change in investment policy may go into effect as
to one or more series whose holders so approve the change even though the
required vote is not obtained as to the holders of other affected series.
The Fund's principal underwriter is First Fund Distributors, Inc., 4455 E.
Camelback Rd., Suite 261-E, Phoenix, AZ 85018.
The Fund's custodian, Firstar Institutional Custody Services, 425 Walnut
Street, Cincinnati, Ohio 45202, is responsible for holding the Fund's assets.
American Data Services, Inc., 150 Motor Parkway, Huntington, NY 11755 acts as
the Fund's accounting services agent. The Fund's independent accountants,
PricewaterhouseCoopers LLP., 1177 Avenue of the Americas, New York, NY 10036,
assist in the preparation of certain reports to the Securities and Exchange
Commission and the Fund's tax returns.
Shares of he Fund owned by the Trustees and officers as a group were less
than 1% at May 31, 2000.
On May 31, 2000, Corestate Bank, N.A. William N. Lane Trust, American Trust
Co-Trustee, FC 1-9-22, 530 Walnut Street, Philadelphia, PA 19106 owned of record
12.81% of the Fund's outstanding voting securities.
The validity of the Fund's shares has been passed on by Paul, Hastings,
Janofsky & Walker LLP, 345 California Street, San Francisco, CA 94104.
B-18
<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.
B-19
<PAGE>
STANDARD & POOR'S CORPORATION: CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA--Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A--Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
COMMERCIAL PAPER RATINGS
Moody's commercial paper ratings are assessments of the issuer's ability to
repay punctually promissory obligations. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers: Prime 1--highest quality; Prime 2--higher
quality; Prime 3--high quality.
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment. Ratings are graded into four categories, ranging
from "A" for the highest quality obligations to "D" for the lowest.
Issues assigned the highest rating, A, are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers "1", "2" and "3" to indicate the relative degree of safety. The
designation A-1 indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. A "+" designation is applied to those issues
rated "A-1" which possess extremely strong safety characteristics. Capacity for
timely payment on issues with the designation "A-2" is strong. However, the
relative degree of safety is not as high as for issues designated A-1. Issues
carrying the designation "A-3" have a satisfactory capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effect of changes in
circumstances than obligations carrying the higher designations.
B-19
