SEGALL BRYANT & HAMILL
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MID CAP FUND
PROSPECTUS
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August 28, 2000
<PAGE>
SEGALL BRYANT & HAMILL
MID CAP FUND
10 South Wacker Drive, Suite 2150
Chicago, Illinois 60606
www.sbhic.com
Investment Advisor: (312) 474-4122
Shareholder Services: (toll-free) (877) 829-8413
Table of Contents
Overview ............................................................. 2
Performance of the Fund .............................................. 3
Fees and Expenses of the Fund ........................................ 3
Management of the Fund ............................................... 4
Account Information .................................................. 4
How to Invest ........................................................ 5
Earnings and Taxes ................................................... 8
Financial Highlights ................................................. 9
For More Information ................................................ Back Cover
More detailed information on all subjects covered in this prospectus is
contained in the fund's Statement of Additional Information ("SAI"). Investors
seeking more in-depth explanations of the contents of this prospectus should
request the SAI and review it before purchasing shares.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
Prospectus
August 28, 2000
<PAGE>
SEGALL BRYANT & HAMILL MID CAP FUND
OVERVIEW
INVESTMENT
OBJECTIVES
The Fund seeks as its primary investment objective the growth of capital by
investing in MEDIUM-CAPITALIZATION ("mid-cap") companies. Its secondary
objective is to provide current income. The objectives of the Fund may be
changed only with shareholder approval.
PRINCIPAL
INVESTMENT
STRATEGIES
The Fund invests at least 65% of its assets in the common stocks of domestic
companies whose shares have a stock market value ("market capitalization") of
between $1 billion and $15 billion.
The Advisor uses "bottom up" fundamental research to identify
attractively-priced companies with strong or improving return on investment
whose profitability is reasonably expected to lead to an increase in the
company's security price. In addition, the Advisor purchases securities of
companies that it considers to be under-valued and that are attractive long-term
prospects. The Advisor looks for companies that are dominant in their industry,
have a high return on capital, a growth record that is 50% greater than
projected earnings of the Russell Midcap Index and a sustainable operating
advantage over their competition.
PRINCIPAL RISKS
OF INVESTING
You may lose money by investing in the Fund. Other principal risks you should
consider include:
MARKET DECLINE. A company's stock price or the overall stock market may
experience a sudden decline.
MARKET FLUCTUATION. Because mid-cap stocks trade less frequently and in more
limited volume, mid-cap stock prices may fluctuate more than large-cap stocks.
DEFENSIVE INVESTMENTS. At the discretion of the Advisor, the Fund may invest up
to 100% of its assets in cash, cash equivalents, and high quality, short-term
debt securities and money market instruments for temporary defensive purposes.
During such a period, the Fund may not reach its investment objectives. 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.
WHO MAY WANT TO INVEST
The Fund is intended for investors who:
* Are willing to hold their shares for a long period of time (e.g. in
preparation for retirement);
* Are diversifying their investment portfolio by investing in a mutual fund
that concentrates in mid-cap companies; and/or
* Are willing to accept higher short-term risk in exchange for a higher
potential for a long-term total return. SEGALL BRYANT & HAMILL MID CAP FUND
2
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SEGALL BRYANT & HAMILL MID CAP FUND
PERFORMANCE OF THE FUND
Because the Fund has been in operation for less than a full calendar year,
its total return bar chart and performance table have not been included.
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment) .............................. None
TOTAL ANNUAL FUND OPERATING EXPENSES
(expenses are deducted from Fund assets)
Investment Advisory Fees . ............................................. 0.75%
Distribution (12b-1) Fees .............................................. 0.25%
Other Expenses ......................................................... 1.51%
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Total Annual Fund Operating Expenses ................................... 2.51%
Advisory Fee Waiver and/or Fund Expense Absorption* .................... (1.11)%
-----
Net Expenses ........................................................... 1.40%
=====
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* The Advisor has contractually agreed to waive its fees and/or absorb
expenses of the Fund to ensure that Total Annual Operating Expenses do not
exceed 1.40%. This contract's term is indefinite and may be terminated only
by the Board of Trustees of the Fund. If the Advisor waives any of its fees
or pays Fund expenses, the Fund may reimburse the Advisor in future years.
EXAMPLE
This Example is intended to help you compare the costs of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Example also assumes that your investment has a 5% return each
year, that dividends and distributions are reinvested and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these asumptions your costs would be:
One Year ............................................................... $ 142
Three Years ............................................................ $ 442
Five Years ............................................................. $ 764
Ten Years .............................................................. $1,674
3
<PAGE>
SEGALL BRYANT & HAMILL MID CAP FUND
MANAGEMENT OF THE FUND
THE INVESTMENT ADVISOR
The registered investment advisor of the Fund is Segall Bryant & Hamill, 10
South Wacker Drive, Suite 2150, Chicago, Illinois 60606. The Advisor has
provided asset management services to individual and institutional investors
since 1994. As of June 30, 2000, the Advisor managed approximately $2.6 billion
in assets. 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. For the fiscal year ended April 30, 2000, the Advisor waived
all advisory fees due from the Fund.
THE PORTFOLIO MANAGER
Mr. David Kalis is principally responsible for the portfolio management of
the Fund. Mr. Kalis has served as portfolio manager of the Fund since April 1,
1999, the Fund's inception date. Prior to becoming portfolio manager of the
Fund, Mr. Kalis managed the mid-cap accounts used in the Advisor's composites
since 1996. Prior to joining the Advisor in 1996, Mr. Kalis served as an analyst
and portfolio manager at Cole Taylor Investment Management since 1994.
ACCOUNT INFORMATION
HOW THE FUND'S SHARES ARE PRICED
Shares are priced at net asset value ("NAV"). The NAV is calculated by
adding the values of all securities and other assets of the Fund, subtracting
the liabilities and dividing the net amount by the number of outstanding shares.
In calculating the NAV, the Fund's securities are valued using current market
values, if available. Securities for which market quotations are not readily
available are valued at their fair market value determined in good faith by or
under the supervision of the Board of Trustees of the Advisors Series Trust.
WHEN THE FUND'S SHARES ARE PRICED
The NAV is calculated after the close of trading on the New York Stock
Exchange ("NYSE"), every day that the NYSE is open. The NAV is not calculated on
days that the NYSE is closed for trading. If the Fund receives your order by the
close of trading on the NYSE, you can purchase shares at the price calculated
for that day. The NYSE usually closes at 4 p.m., Eastern time, on weekdays,
except for holidays. If your order and payment are received after the NYSE has
closed, your shares will be priced at the next NAV calculated after receipt of
your order. For further information, please see the section, "HOW TO INVEST" and
the SAI.
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. The Distribution Plan permits the Fund to pay
for the sale and distribution of its shares at an annual rate of 0.25% of the
Fund's average annual net assets.
Because these fees are paid out of the Fund's assets on an on-going basis,
over time these fees will increase the cost of your investment in the Fund and
may cost you more than paying other types of sales charges.
4
<PAGE>
SEGALL BRYANT & HAMILL MID CAP FUND
HOW TO INVEST
OPENING A NEW ACCOUNT
You may purchase shares of the Fund by mail, by wire or through your
investment broker. An Account Application accompanies this Prospectus. Please
use the Account Application when purchasing by mail or wire. If you have any
questions or need further information about how to purchase shares, you may call
an account representative of the Fund toll-free at (877) 829-8413. A Fund
Prospectus and Account Application are also available on the Internet at
www.sbhic.com.
PURCHASING SHARES BY MAIL
Please complete the attached Account Application and mail it with a
personal check, payable to the SEGALL BRYANT & HAMILL MID CAP FUND to the Fund's
Shareholder Servicing Agent, American Data Services, Inc. at the following
address:
Segall Bryant & Hamill Mid Cap Fund
c/o American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788-0132
You may not send Account Applications via overnight delivery to a United
States Postal Services post office box. If you wish to use an overnight delivery
service, send your Account Application and check to the Fund's custodian at the
following address:
Segall Bryant & Hamill Mid Cap Fund
c/o Firstar Bank, N.A.
Mutual Fund Custody Department
425 Walnut Street, M.L. 6118, Sixth Floor
Cincinnati, Ohio 45202
PURCHASING SHARES BY WIRE
To purchase shares by wire, you must have a wire account number. Please
call the Fund toll-free at (877) 829-8413 between 9:00 a.m. and 5:00 p.m.
Eastern time, on a day when the NYSE is open for trading, in order to receive
this account number. If you send your purchase by wire without the account
number, your order will be delayed. You will be asked to fax your Application
Form.
Once you have the account number, your bank or other financial institution
may send the wire to the Fund's Custodian with the following instructions:
Firstar Bank, N.A. Cinti/Trust
ABA # 0420-0001-3
For credit to: Segall Bryant & Hamill Mid Cap Fund
DDA # 488921321
For further credit to [your name and account number]
Your bank or financial institution may charge a fee for sending the wire to
the Fund.
PURCHASING THROUGH AN INVESTMENT BROKER
Your may buy and sell shares through the Fund's approved brokers and their
agents (together "Brokers"). An order placed with a Broker is treated as if it
were placed directly with the Fund, and will be executed at the next share price
calculated by the Fund. Your Broker will hold your shares in a pooled account in
the Broker's name. The Fund may pay the Broker to maintain your individual
ownership information, for maintaining other required records, and for providing
other shareholder services. The Broker may charge you a fee to handle your
order. The Broker is responsible for process-
5
<PAGE>
SEGALL BRYANT & HAMILL MID CAP FUND
HOW TO INVEST, Continued
ing your order correctly and promptly, keeping you advised of the status of your
account, confirming your transactions and ensuring that you receive copies of
the Fund's prospectus.
Please contact your Broker to see if they are an approved broker of the
Fund and for additional information.
MINIMUM INVESTMENTS
Your initial purchase must be at least $1,000. However, if you are
purchasing shares through an Individual Retirement Account ("IRA"), or you are
starting an Automatic Investing Plan, as described below, your initial purchase
must be at least $250. Exceptions may be made at the Fund's discretion.
ADDITIONAL INVESTMENTS
Additional purchases may be made for $100 or more. Exceptions may be made
at the Fund's discretion. You may purchase additional shares of the Fund by
sending a check, with the stub from your account statement, to the Fund at the
addresses listed above. Please ensure that you include your account number on
the check. If you do not have the stub from your account statement, include your
name, address and account number on a separate statement.
You may also make additional purchases by wire or through a Broker. Please
follow the procedures described above under the headings, "PURCHASING SHARES BY
WIRE" or "PURCHASING SHARES THROUGH AN INVESTMENT BROKER."
MINIMUM ACCOUNT BALANCE
Due to the relatively high cost of managing small accounts, if the value of
your account falls below $500, the Fund may redeem your shares. However, the
Fund will give you 30 days' written notice to give you time to add to your
account and avoid involuntary redemption of your shares. The Board of Trustees
believes this policy to be in the best interest of all shareholders.
SELLING YOUR SHARES
You may sell some or all of your Fund shares on days that the NYSE is open
for trading. Your redemption may result in realized gain or loss for tax
purposes. Your shares will be sold at the next NAV calculated for the Fund after
receiving your order. You may sell your shares by mail, wire or through a
Broker.
SELLING YOUR SHARES BY MAIL
You may redeem your shares by sending a written request to the Fund. You
must give your account number and state the number of shares you wish to sell.
You must sign the written request. If the account is in the name of more than
one person, each shareholder must sign the written request. Send your written
request to the Fund at:
Segall Bryant & Hamill Mid Cap Fund
c/o American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788-0132
Payment of your redemption proceeds will normally be made promptly, but no
later than seven days after the receipt of a written request that meets the
requirements described above. If you did not purchase your shares with a
certified check, the Fund may delay payment of your redemption proceeds until
your check has cleared, which may take up to 15 days.
If the dollar amount of your redemption exceeds $100,000, you must obtain a
signature guarantee (NOT A NOTARIZATION), available from many commercial banks,
savings associations, stock brokers and other NASD member firms. In unusual
circumstances, the Fund may temporarily suspend the processing of sell requests,
or postpone payment of proceeds for up to seven days as permitted by federal
securities laws.
6
<PAGE>
SEGALL BRYANT & HAMILL MID CAP FUND
HOW TO INVEST, Continued
SELLING YOUR SHARES BY TELEPHONE
If you completed the "Redemption by Telephone" section of the Fund's
Account Application, you may sell your shares by calling the Shareholder
Servicing Agent toll-free at (877) 829-8413. Your redemption will be mailed or
wired according to your instructions, on the next business day to the bank
account you designated on your Account Application. The minimum wire amount is
$1,000. Your bank or financial institution may charge a fee for receiving the
wire from the Fund. Telephone redemptions may not be made for IRA accounts.
The Fund will take steps to confirm that a telephone redemption is
authentic. This may include tape recording the telephone instructions, or
requiring a form of personal identification before acting on those instructions.
The Fund reserves the right to refuse telephone instructions if it cannot
reasonably confirm the telephone instructions. The Fund may be liable for losses
from unauthorized or fraudulent telephone transactions only if these reasonable
procedures are not followed.
You may request telephone redemption privileges after your account is
opened. However, the authorization form requires a separate signature guarantee
(NOT A NOTARIZATION). The Fund may modify or terminate your telephone privileges
after giving you 60 days' notice. Please be aware that you may experience delays
in redeeming your shares by telephone during periods of abnormal market
activity. If this occurs, you may make your redemption request in writing. The
Fund may postpone payment of proceeds for up to seven days, as permitted by
federal securities laws.
AUTOMATIC INVESTMENT PLAN
You may make regular monthly investments in the Fund using the Automatic
Investment Plan. You may arrange for your bank or financial institution to
transfer a predetermined amount (not less than $100). When the Fund receives the
transfer, the Fund will invest the amount in additional shares of the Fund at
the next calculated NAV. You may request an Application for the Automatic
Investment Plan by calling the Fund toll-free at (877) 829-8413. The Fund may
modify or terminate this Plan at any time. You may terminate your participation
in this Plan by calling the Fund.
AUTOMATIC WITHDRAWAL PLAN
You may request that a predetermined amount be sent to you each month or
quarter. Your account must have a value of at least $10,000 for you to be
eligible to participate in the Automatic Withdrawal Plan. The minimum withdrawal
amount is $50. You may request an Application for the Automatic Withdrawal Plan
by calling the Fund toll-free at (877) 829-8413. The Fund may modify or
terminate this Plan at any time. You may terminate your participation in this
Plan by calling the Fund.
OTHER POLICIES
The Fund may waive the minimum investment requirements for purchases by
certain groups or retirement plans. All investments must be made in U.S. funds,
and checks must be drawn on U.S. banks. Third party checks are not accepted. The
Fund may charge you if your check is returned for insufficient funds. The Fund
reserves the right to reject any investment, in whole or in part. The IRS
requires that you provide the Fund or your Broker with a taxpayer identification
number and other information upon opening an account. You must specify whether
you are subject to backup withholding. Otherwise, you may be subject to backup
withholding at a rate of 31%.
7
<PAGE>
SEGALL BRYANT & HAMILL MID CAP FUND
EARNINGS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Income dividends and capital gain distributions are normally declared and
paid by the Fund to its shareholders in De-cember of each year. The Fund may
also make periodic dividend payments and distributions at other times in its
discretion.
Unless you invest through a tax-advantaged account, you may owe taxes on
the dividends and distributions. Dividends and distributions are automatically
reinvested in additional shares of the Fund unless you make a written request to
the Fund that you would like to receive dividends and distributions made in
cash.
TAXES
The Fund is required by Internal Revenue Service rules to distribute
substantially all of its net investment income, and capital gains, if any, to
shareholders. Capital gains may be taxable at different rates depending upon the
length of time a Fund holds its assets. You will be notified at least annually
about the tax consequences of distributions made each year. The Fund's dividends
and distributions, whether received in cash or reinvested, may be taxable. Any
redemption of a Fund's shares will be treated as a sale and any gain on the
transaction may be taxable. Additional information about tax issues relating to
the Fund may be found in the SAI. Please consult your tax advisor about the
potential tax consequences of investing in the Fund.
8
<PAGE>
SEGALL BRYANT & HAMILL MID CAP FUND
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance during the past periods shown. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned on an investment in
the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers, LLP for the year ended
April 30, 2000, and by other independent accountants for the period ended April
30, 1999. PricewaterhouseCoopers, 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
<TABLE>
<CAPTION>
April 1, 1999*
Year ended Through
April 30, 2000 April 30, 1999
-------- -------
<S> <C> <C>
Net asset value, beginning of period $ 13.14 $ 12.49
-------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (0.11) --
Net realized and unrealized gain on investments 1.99 0.65
-------- -------
Total from investment operations 1.88 0.65
-------- -------
LESS DISTRIBUTIONS:
Dividends from net realized gain (0.65) --
-------- -------
Net asset value, end of period $ 14.37 $ 13.14
======== =======
Total return 14.93% 5.20%++
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 10,190 $ 8,433
RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Before expense reimbursement 2.51% 7.35%+
After expense reimbursement 1.40% 1.34%+
RATIO OF NET INVESTMENT LOSS TO AVERAGE NET ASSETS:
After expense reimbursement (0.78)% (0.23)%+
Portfolio turnover rate 114.39% 18.02%++
</TABLE>
* Commencement of operations.
+ Annualized.
++ Not Annualized.
9
<PAGE>
SEGALL BRYANT & HAMILL MID CAP FUND
A Series of Advisors Series Trust
For More Information
Shareholder Services: (Toll-free) (877)-829-8413
www.sbhic.com
The Statement of Additional Information (SAI) for the Fund includes additional
information about the Fund and is incorporated by reference into this
Prospectus.
The Fund's annual and semi-annual reports to shareholders contain additonal
information about the Fund's investments. The annual report includes a
discussion of the market conditions and the 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 questions, please call toll-free (877)-829-8413
or write to the Fund:
Segall Bryant & Hamill Mid Cap Fund
c/o American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788
The SAI and other Fund information may also be reviewed and copied at the SEC's
Public Reference Room in Washington, D.C. 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, D.C. 10549-0102
or by electronic request to the following e-mail address: [email protected].
(The Fund's SEC File No. is 911-07959)
<PAGE>
SEGALL BRYANT & HAMILL MID CAP FUND
STATEMENT OF ADDITIONAL INFORMATION
Dated August 28, 2000
This Statement of Additional Information ("SAI") is not a prospectus, and it
should be read in conjunction with the prospectus dated August 28, 2000, as may
be revised from time to time, of the Segall Bryant & Hamill Mid Cap Fund (the
"Fund"), a series of Advisors Series Trust (the "Trust"). Segall Bryant & Hamill
(the "Advisor") is the Advisor to the Fund. A copy of the prospectus may be
obtained from the Fund c/o American Data Services, Inc., P.O. Box 5536,
Hauppauge, NY 11788-0132 or by calling toll free at 877-829-8413.
TABLE OF CONTENTS
The Trust ............................................................... B-2
Investment Objectives and Policies ...................................... B-2
Management .............................................................. B-16
Distribution Plan ....................................................... B-19
Portfolio Transactions and Brokerage .................................... B-20
Portfolio Turnover ...................................................... B-21
Purchase and Redemption of Fund Shares .................................. B-21
Net Asset Value ......................................................... B-23
Taxation ................................................................ B-24
Dividends and Distributions ............................................. B-27
Performance Information ................................................. B-28
General Information ..................................................... B-29
Appendix ................................................................ B-31
B-1
<PAGE>
THE TRUST
Advisors Series Trust (the "Trust") is an open-end management investment
company organized as a Massachusetts business trust. The trust consists of
various series which represent separate investment portfolios. This SAI relates
only to the Fund.
The Trust is registered with the SEC as a management investment company.
Such a registration does not involve supervision of the management or policies
of the Fund. The Prospectus of the Fund and this SAI omit certain 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 OBJECTIVES AND POLICIES
The investment objective of the Fund is to seek growth of capital with
income as a secondary objective. 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.
Prior to April 1, 1999, the Fund was called the Segall Bryant & Hamill
Growth & Income Fund.
PREFERRED STOCK
The Fund may invest in preferred stocks. A preferred stock is a blend of
the characteristics of a bond and common stock. It can offer the higher yield of
a bond and has priority over common stock in equity ownership, but does not have
the seniority of a bond and, unlike common stock, its participation in the
issuer's growth may be limited. Preferred stock has preference over common stock
in the receipt of dividends and in any residual assets after payment to
creditors should the issuer be dissolved. Although the dividend is set at a
fixed annual rate, in some circumstances it can be changed or omitted by the
issuer.
CONVERTIBLE SECURITIES AND WARRANTS
The Fund may invest in convertible securities and warrants. A convertible
security is a fixed-income security (a debt instrument or a preferred stock)
which may be converted at a stated price within a specified period of time into
a certain quantity of the common stock of the same or a different issuer.
Convertible securities are senior to common stocks in an issuer's capital
structure, but are usually subordinated to similar non-convertible securities.
While providing a fixed income stream (generally higher in yield than the income
derivable from common stock but lower than that afforded by a similar
nonconvertible security), a convertible security also affords an investor the
opportunity, through its conversion feature, to participate in the capital
appreciation attendant upon a market price advance in the convertible security's
underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
B-2
<PAGE>
DEBT SECURITIES
Because the market value of debt obligations ("bonds") can be expected to
vary inversely to changes in interest rates, investing in bonds may provide an
opportunity for capital growth when interest rates are expected to decline. The
success of such a strategy depends on the Advisor's ability to accurately
forecast changes in interest rates. The market value of bonds may be expected to
vary depending upon, among other factors, interest rates, the ability of the
issuer to repay principal and interest, any change in investment rating and
general economic conditions. The Fund may invest in bonds rated at least Baa by
Moody's Investors Service, Inc. ("Moody's) or BBB by , or, if unrated, are
deemed to be of comparable quality by the Advisor. Bonds in these rating
categories, although considered investment grade, are more likely to have a
reduced ability to make principal and interest payments than is the case with
higher grade bonds. If a change in credit quality after purchase by the Fund
causes the bond to no longer be investment grade, the Fund will sell the
security, if necessary, to keep its holdings of below investment grade
securities to 5% or less of the Fund's net assets. Corporate bond ratings are
described in the Appendix.
RISKS OF INVESTING IN DEBT SECURITIES
There are a number of risks generally associated with an investment in debt
securities (including convertible securities). Yields on short-, intermediate-,
and long-term securities depend on a variety of factors, including the general
condition of the money and bond markets, the size of a particular offering, the
maturity of the obligation, and the rating of the issue.
Debt securities with longer maturities tend to produce higher yields and
are generally subject to potentially greater capital appreciation and
depreciation than obligations with short maturities and lower yields. The market
prices of debt securities usually vary, depending upon available yields. An
increase in interest rates will generally reduce the value of such portfolio
investments, and a decline in interest rates will generally increase the value
of such portfolio investments.
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
CERTIFICATES OF 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, savings and loan
associations or financial institutions which, at the time of purchase, have
capital, surplus and undivided profits in excess of $100 million (including
assets of both domestic and foreign branches), based on latest published
reports, or less than $100 million if the principal amount of such bank
obligations are fully insured by the U.S. Government. 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
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purpose of financing lending operations under prevailing money market
conditions. General economic conditions as well as exposure to credit losses
arising from possible financial difficulties of borrowers play an important part
in the operations of the banking industry.
As a result of federal and state laws and regulations, domestic banks are,
among other things, required to maintain specified levels of reserves, limited
in the amount which they can loan to a single borrower, and subject to other
regulations designed to promote financial soundness. However, such laws and
regulations do not necessarily apply to foreign bank obligations that the Fund
may acquire.
In addition to purchasing certificates of deposit and bankers' acceptances,
to the extent permitted under its investment objectives and policies stated
above and in its prospectus, the Fund may make interest-bearing time or other
interest-bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
COMMERCIAL PAPER AND SHORT-TERM NOTES. The Fund may invest a portion of its
assets in commercial paper and short-term notes. Commercial paper consists of
unsecured promissory notes issued by corporations. Issues of commercial paper
and short-term notes will normally have maturities of less than nine months and
fixed rates of return, although such instruments may have maturities of up to
one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's, or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Advisor to be of comparable quality.
These rating symbols are described in the Appendix.
INVESTMENT COMPANIES. The Fund may invest in shares of other investment
companies. The Fund may invest in money market mutual funds in connection with
its management of daily cash positions. In addition to the advisory and
operational fees a Fund bears directly in connection with its own operation, the
Fund would also bear its pro rata portions of each other investment company's
advisory and operational expenses.
GOVERNMENT OBLIGATIONS. The Fund may make short-term investments in U.S.
Government obligations. Such obligations include Treasury bills, certificates of
indebtedness, notes and bonds, and issues of such entities as the Government
National Mortgage Association ("GNMA"), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers Home
Administration, Federal Home Loan Banks, Federal Intermediate Credit Banks,
Federal Farm Credit Banks, Federal Land Banks, Federal Housing Administration,
Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage
Corporation, and the Student Loan Marketing Association.
Some of these obligations, such as those of the GNMA, are supported by the
full faith and credit of the U.S. Treasury; others, such as those of the
Export-Import Bank of United States, are supported by the right of the issuer to
borrow from the Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the agency's
obligations; still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the instrumentality. No
assurance can be given that the U.S. Government would provide financial support
to U.S. Government-sponsored instrumentalities if it is not obligated to do so
by law.
The Fund may invest in sovereign debt obligations of foreign countries. A
sovereign debtor's willingness or ability to repay principal and interest in a
timely manner may be affected by a number of factors, including its cash flow
situation, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt
service burden to the economy as a whole, the sovereign debtor's policy toward
principal international lenders and the political constraints to which it may be
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subject. Emerging market governments could default on their sovereign debt. Such
sovereign debtors also may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to reduce principal
and interest arrearages on their debt. The commitments on the part of these
governments, agencies and others to make such disbursements may be conditioned
on a sovereign debtor's implementation of economic reforms and/or economic
performance and the timely service of such debtor's obligations. Failure to meet
such conditions could result in the cancellation of such third parties'
commitments to lend funds to the sovereign debtor, which may further impair such
debtor's ability or willingness to service its debt in a timely manner.
FOREIGN INVESTMENTS AND CURRENCIES
The Fund may invest up to 20% of its TOTAL NET ASSETS in securities of
foreign issuers that are not publicly traded in the United States. The Fund may
also invest in depositary receipts, purchase and sell foreign currency on a spot
or cash basis and enter into forward currency contracts (see "Forward Currency
Contracts," below).
DEPOSITARY RECEIPTS. Depositary Receipts ("DRs") include American
Depositary Receipts ("ADRs") and 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 US economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
MARKET CHARACTERISTICS. The Advisor expects that many foreign securities in
which the Fund invest will be purchased in over-the-counter markets or on
exchanges located in the countries in which the principal offices of the issuers
of the various securities are located, if that is the best available market.
Foreign exchanges and markets may be more volatile than those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets, and the Fund's foreign securities may be less liquid and more
volatile than U.S. securities. Moreover, settlement practices for transactions
in foreign markets may differ from those in United States markets, and may
include delays beyond periods customary in the United States. Foreign security
trading practices, including those involving securities settlement where Fund
assets may be released prior to receipt of payment or securities, may expose the
Fund to increased risk in the event of a failed trade or the insolvency of a
foreign broker- dealer.
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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.
COSTS. To the extent that the Fund invests in foreign securities, its
expense ratio is likely to be higher than those of investment companies
investing only in domestic securities, since the cost of maintaining the custody
of foreign securities is higher.
EMERGING MARKETS. Some of the securities in which the Fund may invest may
be located in developing or emerging markets, which entail additional risks,
including less social, political and economic stability; smaller securities
markets and lower trading volume, which may result in less liquidity and greater
price volatility; national policies that may restrict the Fund's investment
opportunities, including restrictions on investment in issuers or industries, or
expropriation or confiscation of assets or property; and less developed legal
structures governing private or foreign investment.
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.
OPTIONS AND FUTURES STRATEGIES
The Fund may purchase put and call options and engage in the writing of
covered call options and secured put options, and employ a variety of other
investment techniques. Specifically, the Fund may engage in the purchase and
sale of stock index future contracts, interest rate futures contracts, and
options on such futures, all as described more fully below. Such investment
policies and techniques may involve a greater degree of risk than those inherent
in more conservative investment approaches.
OPTIONS ON SECURITIES. To hedge against adverse market shifts, the Fund may
purchase put and call options on securities held in its portfolio. In addition,
the Fund may seek to increase its income in an amount designed to meet operating
expenses or may hedge a portion of its portfolio investments through writing
(that is, selling) "covered" put and call options. A put option provides its
purchaser with the right to compel the writer of the option to purchase from the
option holder an underlying security at a specified price at any time during or
at the end of the option period. In contrast, a call option gives the purchaser
the right to buy the underlying security covered by the option from the writer
of the option at the stated exercise price. A covered call option contemplates
that, for so long as the Fund is obligated as the writer of the option, it will
own (1) the underlying securities subject to the option or (2) securities
convertible into, or exchangeable without the payment of any consideration for,
the securities subject to the option. The value of the underlying securities on
which covered call options will be written at any one time by the Fund will not
exceed 25% of the Fund's net assets. The Fund will be considered "covered" with
respect to a put option it writes if, so long as it is obligated as the writer
of a put option, it segregates cash or liquid high-grade debt obligations that
are acceptable to the appropriate regulatory authority.
The Fund may purchase options on securities that are listed on securities
exchanges or that are traded over-the-counter ("OTC"). As the holder of a put
option, the Fund has the right to sell the securities underlying the option and
as the holder of a call option, the Fund has the right to purchase the
securities underlying the option, in each case at the option's exercise price at
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any time prior to, or on, the option's expiration date. The Fund may choose to
exercise the options it holds, permit them to expire or terminate them prior to
their expiration by entering into closing sale transactions. In entering into a
closing sale transaction, the Fund would sell an option of the same series as
the one it has purchased.
The Fund receives a premium when it writes call options, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, the Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. The Fund receives a premium when
it writes put options, which increases the Fund's return on the underlying
security in the event the option expires unexercised or is closed out at a
profit. By writing a put, the Fund limits its opportunity to profit from an
increase in the market value of the underlying security above the exercise price
of the option for as long as the Fund's obligation as writer of the option
continues. Thus, in some periods, the Fund will receive less total return and in
other periods greater total return from its hedged positions than it would have
received from its underlying securities if unhedged.
In purchasing a put option, the Fund seeks to benefit from a decline in the
market price of the underlying security, whereas in purchasing a call option,
the Fund seeks to benefit from an increase in the market price of the underlying
security. If an option purchased is not sold or exercised when it has remaining
value, or if the market price of the underlying security remains equal to or
greater than the exercise price, in the case of a put, or remains equal to or
below the exercise price, in the case of a call, during the life of the option,
the Fund will lose its investment in the option. For the purchase of an option
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price, in the case of a put, and must increase
sufficiently above the exercise price, in the case of a call, to cover the
premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
OTC OPTIONS. OTC options differ from exchange-traded options in several
respects. They are transacted directly with dealers and not with a clearing
corporation, and there is a risk of non-performance by the dealer. However, the
premium is paid in advance by the dealer. OTC options are available for a
greater variety of securities and foreign currencies, and in a wider range of
expiration dates and exercise prices than exchange-traded options. Since there
is no exchange, pricing is normally done by reference to information from a
market maker, which information is carefully monitored or caused to be monitored
by the Adviser and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily
only by entering into a closing transaction. In the case of OTC options, there
can be no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, the Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which it originally wrote the option. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security or foreign currency until the option expires or the
option is exercised. Therefore, the writer of a covered OTC call option may not
be able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, the writer of a covered OTC put option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of an OTC
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
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The Fund may purchase and write OTC put and call options in negotiated
transactions. The staff of the Securities and Exchange Commission has previously
taken the position that the value of purchased OTC options and the assets used
as "cover" for written OTC options are illiquid securities and, as such, are to
be included in the calculation of the Fund's 15% limitation on illiquid
securities. However, the staff has eased its position somewhat in certain
limited circumstances. The Fund will attempt to enter into contracts with
certain dealers with which it writes OTC options. Each such contract will
provide that the Fund has the absolute right to repurchase the options it writes
at any time at a repurchase price which represents the fair market value, as
determined in good faith through negotiation between the parties, but which in
no event will exceed a price determined pursuant to a formula contained in the
contract. Although the specific details of such formula may vary among
contracts, the formula will generally be based upon a multiple of the premium
received by the Fund for writing the option, plus the amount, if any, of the
option's intrinsic value. The formula will also include a factor to account for
the difference between the price of the security and the strike price of the
option. If such a contract is entered into, the Fund will count as illiquid only
the initial formula price minus the option's intrinsic value.
The Fund will enter into such contracts only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York. Moreover,
such primary dealers will be subject to the same standards as are imposed upon
dealers with which the Fund enters into repurchase agreements.
SECURITIES INDEX OPTIONS. In seeking to hedge all or a portion of its
investment, the Fund may purchase and write put and call options on securities
indices listed on securities exchanges, which indices include securities held in
the Fund's portfolio.
A securities index measures the movement of a certain group of stocks or
debt securities by assigning relative values to the securities included in the
index. Options on securities indexes are generally similar to options on
specific securities. Unlike options on specific securities, however, options on
securities indexes do not involve the delivery of an underlying security; the
option in the case of an option on a stock index represents the holder's right
to obtain from the writer in cash a fixed multiple of the amount by which the
exercise price exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying stock index on the exercise date.
When the Fund writes an option on a securities index, it will segregate
assets in an amount equal to the market value of the option, and will maintain
while the option is open.
Securities index options are subject to position and exercise limits and
other regulations imposed by the exchange on which they are traded. If the Fund
writes a securities index option, it may terminate its obligation by effecting a
closing purchase transaction, which is accomplished by purchasing an option of
the same series as the option previously written. The ability of the Fund to
engage in closing purchase transactions with respect to securities index options
depends on the existence of a liquid secondary market. Although the Fund
generally purchases or writes securities index options only if a liquid
secondary market for the options purchased or sold appears to exist, no such
secondary market may exist, or the market may cease to exist at some future
date, for some options. No assurance can be given that a closing purchase
transaction can be effected when the Fund desires to engage in such a
transaction.
RISKS RELATING TO PURCHASE AND SALE OF OPTIONS ON STOCK INDICES. Purchase
and sale of options on stock indices by the Fund are subject to certain risks
that are not present with options on securities. Because the effectiveness of
purchasing or writing stock index options as a hedging technique depends upon
the extent to which price movements in the Fund's portfolio correlate with price
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss on the purchase or writing of an
option on an index depends upon movements in the level of stock prices in the
stock market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by the Fund of options on indexes will be subject to
the ability of the Adviser to correctly predict movements in the direction of
the stock market generally or of a particular industry. This requires different
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skills and techniques than predicting changes in the price of individual stocks.
In the event the Advisor is unsuccessful in predicting the movements of an
index, the Fund could be in a worse position than had no hedge been attempted.
Index prices may be distorted if trading of certain stocks included in the
index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. However, it will be the Fund's
policy to purchase or write options only on indices which include a sufficient
number of stocks so that the likelihood of a trading halt in the index is
minimized.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may purchase
and sell stock index futures contracts. The purpose of the acquisition or sale
of a futures contract by the Fund is to hedge against fluctuations in the value
of its portfolio without actually buying or selling securities. The futures
contracts in which the Fund may invest have been developed by and are traded on
national commodity exchanges. Stock index futures contracts may be based upon
broad-based stock indices such as the S&P 500 or upon narrow-based stock
indices. A buyer entering into a stock index futures contract will, on a
specified future date, pay or receive a final cash payment equal to the
difference between the actual value of the stock index on the last day of the
contract and the value of the stock index established by the contract. The Fund
may assume both "long" and "short" positions with respect to futures contracts.
A long position involves entering into a futures contract to buy a commodity,
whereas a short position involves entering into a futures contract to sell a
commodity.
The purpose of trading futures contracts is to protect the Fund from
fluctuations in value of its investment securities without necessarily buying or
selling the securities. Because the value of the Fund's investment securities
will exceed the value of the futures contracts sold by the Fund, an increase in
the value of the futures contracts could only mitigate, but not totally offset,
the decline in the value of the Fund's assets. No consideration is paid or
received by the Fund upon trading a futures contract. Upon trading a futures
contract, the Fund will be required to segregate an amount of cash, short-term
Government Securities or other U.S. dollar-denominated, high-grade, short-term
money market instruments equal to approximately 1% to 10% of the contract amount
(this amount is subject to change by the exchange on which the contract is
traded and brokers may charge a higher amount). This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit on the
contract that is returned to the Fund upon termination of the futures contract,
assuming that all contractual obligations have been satisfied; the broker will
have access to amounts in the margin account if the Fund fails to meet its
contractual obligations. Subsequent payments, known as "variation margin," to
and from the broker, will be made daily as the price of the currency or
securities underlying the futures contract fluctuates, making the long and short
positions in the futures contract more or less valuable, a process known as
"marking-to-market." At any time prior to the expiration of a futures contract,
the Fund may elect to close a position by taking an opposite position, which
will operate to terminate the Fund's existing position in the contract.
Each short position in a futures or options contract entered into by the
Fund is secured by the Fund's ownership of underlying securities. The Fund does
not use leverage when it enters into long futures or options contracts; the Fund
segregates, with respect to each of its long positions, cash or money market
instruments having a value equal to the underlying commodity value of the
contract.
The Fund may trade stock index futures contracts to the extent permitted
under rules and interpretations adopted by the Commodity Futures Trading
Commission (the "CFTC"). U.S. futures contracts have been designed by exchanges
that have been designated as "contract markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm, that is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange.
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The Fund intends to comply with CFTC regulations and avoid "commodity pool
operator" status. These regulations require that the Fund use futures and
options positions (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. There are several risks in using stock index futures contracts as
hedging devices. First, all participants in the futures market are subject to
initial margin and variation margin requirements. Rather than making additional
variation margin payments, investors may close the contracts through offsetting
transactions which could distort the normal relationship between the index or
security and the futures market. Second, the margin requirements in the futures
market are lower than margin requirements in the securities market, and as a
result the futures market may attract more speculators than does the securities
market. Increased participation by speculators in the futures market may also
cause temporary price distortions. Because of possible price distortion in the
futures market and because of imperfect correlation between movements in stock
indices or securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to stock index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable stock index. It is
possible that the Fund might sell stock index futures contracts to hedge its
portfolio against a decline in the market, only to have the market advance and
the value of securities held in the Fund's portfolio decline. If this occurred,
the Fund would lose money on the contracts and also experience a decline in the
value of its portfolio securities. While this could occur, the Advisor believes
that over time the value of the Fund's portfolio will tend to move in the same
direction as the market indices and will attempt to reduce this risk, to the
extent possible, by entering into futures contracts on indices whose movements
they believe will have a significant correlation with movements in the value of
the Fund's portfolio securities sought to be hedged.
Successful use of futures contracts by the Fund is subject to the ability
of the Advisor to predict correctly movements in the direction of interest rates
or the market. If the Fund has hedged against the possibility of a decline in
the value of the stocks held in its portfolio or an increase in interest rates
adversely affecting the value of fixed-income securities held in its portfolio
and stock prices increase or interest rates decrease instead, the Fund would
lose part or all of the benefit of the increased value of its security which it
has hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market or decline in interest rates. The Fund may have to sell
securities at a time when it may be disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. The Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position held by the Fund. The Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain. Positions in futures contracts may be closed
only on an exchange or board of trade providing a secondary market for such
futures contracts. Although the Fund intends to enter into futures contracts
only on exchanges or boards of trade where there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular contract at any particular time.
In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
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price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
RISKS AND SPECIAL CONSIDERATIONS OF OPTIONS ON FUTURES CONTRACTS. The use
of options on interest rate and stock index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transactions costs). The writing of a call option on a futures
contract generates a premium which may partially offset a decline in the value
of the Fund's portfolio assets. By writing a call option, the Fund becomes
obligated to sell a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium, but the Fund becomes obligated to purchase a futures
contract, which may have a value lower than the exercise price. Thus, the loss
incurred by the Fund in writing options on futures contracts may exceed the
amount of the premium received.
The effective use of options strategies is dependent, among other things,
on the Fund's ability to terminate options positions at a time when the Advisor
deems it desirable to do so. Although the Fund will enter into an option
position only if the Advisor believes that a liquid secondary market exists for
such option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Fund's
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
The Fund's purchase or sale of put or call options on futures contracts
will be based upon predictions as to anticipated interest rates or market trends
by the Advisor, which could prove to be inaccurate. Even if the expectations of
the Advisor are correct, there may be an imperfect correlation between the
change in the value of the options and of the Fund's portfolio securities.
Investments in futures contracts and related options by their nature tend
to be more short-term than other equity investments made by the Fund. The Fund's
ability to make such investments, therefore, may result in an increase in the
Fund's portfolio activity and thereby may result in the payment of additional
transaction costs.
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. For example, the Fund might purchase a
particular currency or enter into a forward currency contract to preserve the
U.S. dollar price of securities it intends to or has contracted to purchase.
Alternatively, it might sell a particular currency on either a spot or forward
basis to hedge against an anticipated decline in the dollar value of securities
it intends to or has contracted to sell. Although this strategy could minimize
the risk of loss due to a decline in the value of the hedged currency, it could
also limit any potential gain from an increase in the value of the currency.
B-11
<PAGE>
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with respect to its portfolio
securities. Pursuant to such agreements, the Fund acquires securities from
financial institutions such as banks and broker-dealers as are deemed to be
creditworthy by the Advisor, subject to the seller's agreement to repurchase and
the Fund's agreement to resell such securities at a mutually agreed upon date
and price. The repurchase price generally equals the price paid by the Fund plus
interest negotiated on the basis of current short-term rates (which may be more
or less than the rate on the underlying portfolio security). Securities subject
to repurchase agreements will be held by the Custodian or in the Federal
Reserve/Treasury Book-Entry System or an equivalent foreign system. The seller
under a repurchase agreement will be required to maintain the value of the
underlying securities at not less than 102% of the repurchase price under the
agreement. If the seller defaults on its repurchase obligation, the Fund will
suffer a loss to the extent that the proceeds from a sale of the underlying
securities are less than the repurchase price under the agreement. Bankruptcy or
insolvency of such a defaulting seller may cause the Fund's rights with respect
to such securities to be delayed or limited. Repurchase agreements are
considered to be loans under the Investment Company Act (the "1940 Act").
WHEN-ISSUED SECURITIES, FORWARD COMMITMENTS AND DELAYED SETTLEMENTS
The Fund may purchase securities on a "when-issued," forward commitment or
delayed settlement basis. In this event, the Custodian will designate liquid
assets equal to the amount of the commitment. In such a case, the Fund may be
required subsequently to designate additional assets in order to assure that the
value of the account remains equal to the amount of the Fund's commitment. It
may be expected that the Fund's net assets will fluctuate to a greater degree
when it sets aside portfolio securities to cover such purchase commitments than
when it sets aside cash.
The Fund does not intend to engage in these transactions for speculative
purposes but only in furtherance of its investment objectives. Because the Fund
will designate assets to satisfy its purchase commitments in the manner
described, the Fund's liquidity and the ability of the Advisor to manage it may
be affected in the event the Fund's forward commitments, commitments to purchase
when-issued securities and delayed settlements ever exceeded 15% of the value of
its net assets.
The Fund will purchase securities on a when-issued, forward commitment or
delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, the Fund may
dispose of or renegotiate a commitment after it is entered into, and may sell
securities it has committed to purchase before those securities are delivered to
the Fund on the settlement date. In these cases the Fund may realize a taxable
capital gain or loss. When the Fund engages in when-issued, forward commitment
and delayed settlement transactions, it relies on the other party to consummate
the trade. Failure of such party to do so may result in the Fund incurring a
loss or missing an opportunity to obtain an advantageous price.
The market value of the securities underlying a when-issued purchase, a
forward commitment to purchase securities, or a delayed settlement and any
subsequent fluctuations in their market value is taken into account when
determining the market value of the Fund starting on the day the Fund agrees to
purchase the securities. The Fund does not earn interest on the securities it
has committed to purchase until they are paid for and delivered on the
settlement date.
B-12
<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
not to exceed 33-1/3% of the value of its total assets at the time of such
borrowings. The use of borrowing by the Fund involves special risk
considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all of the Fund's assets fluctuate
in value, while the interest obligation resulting from a borrowing will be fixed
by the terms of the Fund's agreement with its lender, the net asset value per
share of the Fund will tend to increase more when its portfolio securities
increase in value and to decrease more when its portfolio assets decrease in
value than would otherwise be the case if the Fund did not borrow funds. In
addition, interest costs on borrowings may fluctuate with changing market rates
of interest and may partially offset or exceed the return earned on borrowed
funds. Under adverse market conditions, the Fund might have to sell portfolio
securities to meet interest or principal payments at a time when fundamental
investment considerations would not favor such sales. The Fund is required to
designate specific liquid assets with its custodian equal to the amount it has
borrowed.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities in an amount not exceeding 33%
of its total assets to financial institutions such as banks and brokers if the
loan is collateralized in accordance with applicable regulations. Under the
present regulatory requirements which govern loans of portfolio securities, the
loan collateral must, on each business day, at least equal the value of the
loaned securities and must consist of cash, letters of credit of domestic banks
or domestic branches of foreign banks, or securities of the U.S. Government or
its agencies. To be acceptable as collateral, letters of credit must obligate a
bank to pay amounts demanded by the Fund if the demand meets the terms of the
letter. Such terms and the issuing bank would have to be satisfactory to the
Fund. Any loan might be secured by any one or more of the three types of
collateral. The terms of the Fund's loans must permit the Fund to reacquire
loaned securities on five days' notice or in time to vote on any serious matter
and must meet certain tests under the Internal Revenue Code (the "Code").
SHORT SALES
The Fund is authorized to make short sales of securities. In a short sale,
the Fund sells a security which it does not own, in anticipation of a decline in
the market value of the security. To complete the sale, the Fund must borrow the
security (generally from the broker through which the short sale is made) in
order to make delivery to the buyer. The Fund is then obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. The Fund is said to have a "short position" in the securities sold
until it delivers them to the broker. The period during which the Fund has a
short position can range from as little as one day to more than a year. Until
the security is replaced, the proceeds of the short sale are retained by the
broker, and the Fund is required to pay to the broker a negotiated portion of
any dividends or interest which accrue during the period of the loan. To meet
current margin requirements, the Fund is also required to deposit with the
broker additional cash or securities so that the total deposit with the broker
is maintained daily at 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
Short sales by the Fund create opportunities to increase the Fund's return
but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since the Fund in effect profits from a
decline in the price of the securities sold short without the need to invest the
full purchase price of the securities on the date of the short sale, the Fund's
net asset value per share will tend to increase more when the securities it has
B-13
<PAGE>
sold short decrease in value, and to decrease more when the securities it has
sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions the Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell portfolio securities to raise the capital necessary to meet its
short sale obligations at a time when fundamental investment considerations
would not favor such sales.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of the value of its net assets in
securities that at the time of purchase have legal or contractual restrictions
on resale or are otherwise illiquid. The Advisor will monitor the amount of
illiquid securities in the Fund's portfolio, under the supervision of the
Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might be unable
to dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemption requests
within seven days. The Fund might also have to register such restricted
securities in order to dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the SEC under the Securities Act,
the Trust's Board of Trustees may determine that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid.
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. Except with respect to
borrowing, and illiquid securities, changes in values of the Fund's assets will
not cause a violation of the following investment restrictions so long as
percentage requirements are observed by the Fund at the time it purchases any
security.
B-14
<PAGE>
As a matter of fundamental policy, the Fund's investment objectives are
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
33-1/3% 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; and (ii) this restriction shall not prohibit the
Fund from engaging in options or futures transactions or short sales;
2. 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);
3. Make loans of money (except for purchases of debt securities consistent
with the investment policies of the Fund and except for repurchase agreements);
4. The Fund will invest no more than 20% of the value of its total assets
in securities issued by foreign companies.
5. Purchase or sell real estate or interests in real estate or real estate
limited partnerships (although the Fund may purchase and sell securities which
are secured by real estate and securities of companies which invest or deal in
real estate);
6. The Fund will not purchase or sell commodities or commodity contracts,
except futures contracts and related options and other similar contracts.
7. 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);
The Fund has adopted the following operating (i.e. non-fundamental)
investment policies and restrictions which may be changed by the Board of
Directors without shareholder approval:
1. The Fund will not 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. The Fund will not participate on a joint or joint-and-several basis in
any securities trading account.
3. The Fund will not invest in warrants if, as a result, the investments
(valued at the lower of cost or market) would exceed 5% of the value of the
Fund's total assets.
4. Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of transactions;
5. The Fund will not invest more than 15% of its net assets in securities
which are restricted as to disposition or otherwise are illiquid or have no
readily available market (except for securities which are determined by the
Board of Trustees to be liquid).
Except for the Fund's policies regarding borrowing and illiquid securities,
any investment restriction described in the prospectus and this SAI which
involves a maximum percentage of securities or assets shall not be considered to
be violated unless an excess over the applicable percentage occurs immediately
after an acquisition of securities or utilization of assets and such excess
results therefrom.
B-15
<PAGE>
MANAGEMENT
The overall management of the business and affairs of the Trust is vested
with its Board of Trustees. The Board approves all significant agreements
between the Trust and persons or companies furnishing services to it, including
the agreements with the Advisor, Administrator, Custodian and Transfer Agent.
The day to day operations of the Trust are delegated to its officers, subject to
the Fund's investment objectives and policies and to general supervision by the
Board of Trustees.
The Trustees and officers of the Trust, their 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, 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.
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.
THOMAS W. MARSCHEL (born 1970) Vice President
4455 E. Camelback Rd., Suite 261-E, Phoenix, AX 85018. Vice President,
Investment Company Administration, LLC; Assistant Vice President, Investment
Company Administration, LLC from October 1995 to January 2000; Fund Accounting
Supervise\or with SEI Fund Resources from January 1994 to October 1995.
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.
B-16
<PAGE>
NAME AND POSITION AGGREGATE COMPENSATION FROM THE TRUST
----------------- -------------------------------------
Walter E. Auch, Sr., Trustee $12,000
Donald E. O'Connor, Trustee $12,000
George T. Wofford III, Trustee $12,000
Compensation indicated is for the calendar-year ended December 31, 1999.
Currently, each Independent Trustee receives $12,000 per year in fees, plus
$1,500 for each meeting attended and is reimbursed for expenses. This amount is
allocated among the portfolios of the Trust. The Trust has no pension or
retirement plan. No other entity affiliated with the Trust pays any compensation
to the Trustees. .
THE ADVISOR
The Advisor is a Minnesota partnership which is 45% owned by an affiliated
company, Voyageur Advisory Services LLC ("Voyageur"), and 45% owned by SBGP
Holdings, Inc. ("Holdings"). Voyageur is owned by Dougherty Financial Group LLC.
Holdings is 50% owned by Ralph M. Segall and 50% by C. Alfred Bryant, Managing
Partners of Segall Bryant & Hamill. The remaining 10% of the Advisor is owned by
other employees of the firm.
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, SAI, and undertakings; and such other
limitations, policies and procedures as the Trustees of the Trust may impose
from time to time in writing to the Advisor. In providing such services, the
Advisor shall at all times adhere to the provisions and restrictions contained
in the federal securities laws, applicable state securities laws, the Code, and
other applicable law.
Without limiting the generality of the foregoing, the Advisor has agreed to
(i) furnish the Fund with advice and recommendations with respect to the
investment of the Fund's assets, (ii) effect the purchase and sale of portfolio
securities; (iii) manage and oversee the investments of the Fund, subject to the
ultimate supervision and direction of the Trust's Board of Trustees; (iv) vote
proxies and take other actions with respect to the Fund's securities; (v)
maintain the books and records required to be maintained with respect to the
securities in the Fund's portfolio; (vi) furnish reports, statements and other
data on securities, economic conditions and other matters related to the
investment of the Fund's assets which the Trustees or the officers of the Trust
may reasonably request; and (vii) render to the Trust's Board of Trustees such
periodic and special reports as the Board may reasonably request. The Advisor
has also agreed, at its own expense, to maintain such staff and employ or retain
such personnel and consult with such other persons as it shall from time to time
determine to be necessary to the performance of its obligations under the
Advisory Agreement. Personnel of the Advisor may serve as officers of the Trust
provided they do so without compensation from the Trust. Without limiting the
generality of the foregoing, the staff and personnel of the Advisor shall be
deemed to include persons employed or retained by the Advisor to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Advisor or the Trust's Board of Trustees may desire and reasonably request.
With respect to the operation of the Fund, the Advisor has agreed to be
responsible for the expenses of printing and distributing extra copies of the
Fund's prospectus, SAI, 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.
B-17
<PAGE>
In addition to the fees payable to the Advisor and the Administrator, the
Fund is responsible for its operating expenses, including: fees and expenses
incurred in connection with the issuance, registration and transfer of its
shares; brokerage and commission expenses; all expenses of transfer, receipt,
safekeeping, servicing and accounting for the cash, securities and other
property of the Trust for the benefit of the Fund including all fees and
expenses of its custodian, shareholder services agent and accounting services
agent; interest charges on any borrowings; costs and expenses of pricing and
calculating its daily net asset value and of maintaining its books of account
required under the 1940 Act; taxes, if any; a pro rata portion of expenditures
in connection with meetings of the Fund's shareholders and the Trust's Board of
Trustees that are properly payable by the Fund; salaries and expenses of
officers and fees and expenses of members of the Trust's Board of Trustees or
members of any advisory board or committee who are not members of, affiliated
with or interested persons of the Advisor or Administrator; insurance premiums
on property or personnel of the Fund which inure to its benefit, including
liability and fidelity bond insurance; the cost of preparing and printing
reports, proxy statements, prospectuses and SAIs 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, however, 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.
For the fiscal year ended April 30, 2000, the Fund incurred $72,047 in
advisory fees, all of which were waived by the Advisor. During the same period
the Advisor reimbursed the Fund an additional $34,032 in e For the period April
1, 1999 (commencement of operations) through April 30, 1999, the Fund incurred
$4,765 in advisory fees, all of which were waived by the Advisor. During the
same period, the Advisor reimbursed the Fund an additional $33,617 in expenses.
Under the Advisory Agreement, the Advisor will not be liable to the Trust
or the Fund or any shareholder for any act or omission in the course of, or
connected with, rendering services or for any loss sustained by the Trust except
in the case of a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages will be limited as
provided in the 1940 Act) or of willful misfeasance, bad faith or gross
negligence, or reckless disregard of its obligations and duties under the
Advisory 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.
B-18
<PAGE>
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 SEC and any other governmental agency (the Trust agreeing to
supply or cause to be supplied to the Administrator all necessary financial and
other information in connection with the foregoing); (iv) preparing such
applications and reports as may be necessary to permit the offer and sale of the
shares of the Trust under the securities or "blue sky" laws of the various
states selected by the Trust (the Trust agreeing to pay all filing fees or other
similar fees in connection therewith); (v) responding to all inquiries or other
communications of shareholders, if any, which are directed to the Administrator,
or if any such inquiry or communication is more properly to be responded to by
the Trust's custodian, transfer agent or accounting services agent, overseeing
their response thereto; (vi) overseeing all relationships between the Trust and
any custodian(s), transfer agent(s) and accounting services agent(s), including
the negotiation of agreements and the supervision of the performance of such
agreements; and (vii) authorizing and directing any 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 April 30, 2000, the Fund paid the Administrator
$30,082 in fees.
DISTRIBUTION PLAN
Pursuant to a plan of distribution adopted by the Trust, on behalf of the
Fund, pursuant to Rule 12b-1 under the 1940 Act (the "Plan"), the Fund may pay
distribution and related expenses up to 0.25% of its average net assets to the
Advisor as distribution coordinator. Expenses permitted to be paid include
preparation, printing and mailing of prospectuses, shareholder reports such as
semi-annual and annual reports, performance reports and newsletters, sales
literature and other promotional material to prospective investors, direct mail
solicitations, advertising, public relations, compensation of sales personnel,
advisors or other third parties for their assistance with respect to the
distribution of the Fund's shares, payments to financial intermediaries for
shareholder support, administrative and accounting services with respect to
shareholders of the Fund and such other expenses as may be approved from time to
time by the Board of Trustees of the Trust.
The Plan allows excess distribution expenses to be carried forward by the
Advisor, as distribution coordinator, and resubmitted in a subsequent fiscal
year, provided that (i) distribution expenses cannot be carried forward for more
than three years following initial submission; (ii) the Trustees have made a
B-19
<PAGE>
determination at the time of initial submission that the distribution expenses
are appropriate to be carried forward and (iii) the Trustees make a further
determination, at the time any distribution expenses which have been carried
forward are submitted for payment, that payment at the time is appropriate,
consistent with the objectives of the Plan and in the current best interests of
shareholders.
Under the Plan, the Trustees will be furnished quarterly with information
detailing the amount of expenses paid under the Plan and the purposes for which
payments were made. The Plan may be terminated at any time by vote of a majority
of the Trustees of the Trust who are not interested persons. Continuation of the
Plan is considered by such Trustees no less frequently than annually.
During the fiscal year ended April 30, 2000, the Fund paid $24,016 in
distribution fees, of which $21,829 was paid out as compensation to dealers,
$531 was for reimbursement of printing expenses and $1,656 was for reimbursement
of advertising expenses.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisory Agreement states that the Advisor shall be responsible for
broker-dealer selection and for negotiation of brokerage commission rates,
provided that the Advisor shall not direct orders to an affiliated person of the
Advisor without general prior authorization to use such affiliated broker or
dealer by the Trust's Board of Trustees. The Advisor's primary consideration in
effecting a securities transaction will be execution at the most favorable
price. In selecting a broker-dealer to execute each particular transaction, the
Advisor may take the following into consideration: the best net price available;
the reliability, integrity and financial condition of the broker-dealer; the
size of and difficulty in executing the order; and the value of the expected
contribution of the broker-dealer to the investment performance of the Fund on a
continuing basis. The price to the Fund in any transaction may be less favorable
than that available from another broker-dealer if the difference is reasonably
justified by other aspects of the portfolio execution services offered.
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.
B-20
<PAGE>
For the fiscal year ended April 30, 2000 and the period April 1 through
April 30, 1999, the Fund paid $113,700 and $3,951, respectively, in brokerage
commission..
PORTFOLIO TURNOVER
Although the Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Advisor, investing
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% portfolio turnover rate would occur if all
the securities in the Fund's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to transaction costs and may result in a
greater number of taxable transactions. See "Portfolio Transactions and
Brokerage." For the fiscal period April 1, 1999 through April 30, 1999 and for
the fiscal year ended April 30, 2000, the Fund had a portfolio turnover rate of
114.39% and 18.02%, respectively.
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 certificates for
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.
B-21
<PAGE>
HOW TO SELL SHARES
You can sell your Fund shares any day the NYSE is open for regular trading,
either directly to the Fund or through your investment representative. The Fund
will forward redemption proceeds or redeem shares for which it has collected
payment of the purchase price.
Payments to shareholders for shares of the Fund redeemed directly from the
Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the NYSE is restricted as determined by the SEC or
the NYSE is closed for other than weekends and holidays; (b) an emergency exists
as determined by the SEC making disposal of portfolio securities or valuation of
net assets of the Fund not reasonably practicable; or (c) for such other period
as the SEC may permit for the protection of the Fund's shareholders. At various
times, the Fund may be requested to redeem shares for which it has not yet
received confirmation of good payment; in this circumstance, the Fund may delay
the redemption until payment for the purchase of such shares has been collected
and confirmed to the Fund.
Send a signed letter of instruction to the Transfer Agent, along with any
certificates that represent shares you want to sell. The price you will receive
is the next net asset value calculated after the Fund receives your request in
proper form. In order to receive that day's net asset value, the Transfer Agent
must receive your request before the close of regular trading on the NYSE.
Your investment representative must receive your request before the close
of regular trading on the NYSE to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge you for its services. If you
sell shares having a net asset value of $100,000 a signature guarantee is
required.
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
B-22
<PAGE>
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (approximately $250,000).
NET ASSET VALUE
The net asset value of the Fund's shares will fluctuate and is determined
as of the close of trading on the New York Stock Exchange (the "NYSE")
(generally 4:00 p.m. Eastern time) each business day. The NYSE annually
announces the days on which it will not be open for trading. The most recent
announcement indicates that it will not be open for the following holidays: New
Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. However,
the NYSE may close on days not included in that announcement.
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the NYSE. In addition,
trading in and valuation of foreign securities may not take place on every day
in which the NYSE is open for trading. In that case, the price used to determine
the Fund's net asset value on the last day on which such exchange was open will
be used, unless the Trust's Board of Trustees determines that a different price
should be used. Furthermore, trading takes place in various foreign markets on
days in which the NYSE is not open for trading and on which the Fund's net asset
value is not calculated. Occasionally, events affecting the values of such
securities in U.S. dollars on a day on which the Fund calculates its net asset
value may occur between the times when such securities are valued and the close
of the NYSE that will not be reflected in the computation of the Fund's net
asset value unless the Board or its delegates deem that such events would
materially affect the net asset value, in which case an adjustment would be
made.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor 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.
Corporate debt securities are valued on the basis of valuations provided by
dealers in those instruments, by an independent pricing service, approved by the
Board, or at fair value as determined in good faith by procedures approved by
the Board. Any such pricing service, in determining value, will use information
B-23
<PAGE>
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities and yield to maturity information.
An option that is written by the Fund is generally valued at the last sale
price or, in the absence of the last sale price, the last offer price. An option
that is purchased by the Fund is generally valued at the last sale price or, in
the absence of the last sale price, the last bid price. If an options exchange
closes after the time at which the Fund's net asset value is calculated, the
last sale or last bid and asked prices as of that time will be used to calculate
the net asset value.
Any assets or liabilities initially expressed in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board in good faith will establish a conversion rate for such currency.
All other assets of the Fund are valued in such manner as the Board in good
faith deems appropriate to reflect their fair value.
TAXATION
The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, (the "Code"), for each taxable year by complying with all applicable
requirements regarding the source of its income, the diversification of its
assets, and the timing of its distributions. The Fund's policy is to distribute
to its shareholders all of its investment company taxable income and any net
realized capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes based on net income. However, the Board may
elect to pay such excise taxes if it determines that payment is, under the
circumstances, in the best interests of the Fund.
In order to qualify as a regulated investment company, the Fund must, among
other things, (a) derive at least 90% of its gross income each year from
dividends, interest, payments with respect to loans of stock and securities,
gains from the sale or other disposition of stock or securities or foreign
currency gains related to investments in stock or securities, or other income
(generally including gains from options, futures or forward contracts) derived
with respect to the business of investing in stock, securities or currency, and
(b) diversify its holdings so that, at the end of each fiscal quarter, (i) at
least 50% of the market value of its assets is represented by cash, cash items,
U.S. Government securities, securities of other regulated investment companies
and other securities limited, for purposes of this calculation, in the case of
other securities of any one issuer to an amount not greater than 5% of the
Fund's assets or 10% of the voting securities of the issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. Government securities or securities of other regulated
investment companies). As such, and by complying with the applicable provisions
of the Code, the Fund will not be subject to federal income tax on taxable
income (including realized capital gains) that is distributed to shareholders in
accordance with the timing requirements of the Code. If the Fund is unable to
meet certain requirements of the Code, it may be subject to taxation as a
corporation.
Distributions of net investment income and net realized capital gains by
the Fund will be taxable to shareholders whether made in cash or reinvested by
the Fund in shares. In determining amounts of net realized capital gains to be
distributed, any capital loss carry-overs from the eight prior taxable years
will be applied against capital gains. Shareholders receiving a distribution
from the Fund in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
B-24
<PAGE>
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.
If more than 50% in value of the total assets of the Fund at the end of its
fiscal year is invested in stock or securities of foreign corporations, the Fund
may elect to pass through to its shareholders the pro rata share of all foreign
income taxes paid by the Fund. If this election is made, shareholders will be
(i) required to include in their gross income their pro rata share of the Fund's
foreign source income (including any foreign income taxes paid by the Fund), and
(ii) entitled either to deduct their share of such foreign taxes in computing
their taxable income or to claim a credit for such taxes against their U.S.
income tax, subject to certain limitations under the Code, including certain
holding period requirements. In this case, shareholders will be informed in
writing by the Fund at the end of each calendar year regarding the availability
of any credits on and the amount of foreign source income (including or
excluding foreign income taxes paid by the Fund) to be included in their income
tax returns. If not more than 50% in value of the Fund's total assets at the end
of its fiscal year is invested in stock or securities of foreign corporations,
the Fund will not be entitled under the Code to pass through to its shareholders
their pro rata share of the foreign taxes paid by the Fund. In this case, these
taxes will be taken as a deduction by the Fund.
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.
B-25
<PAGE>
Any security, option, or other position entered into or held by the Fund
that substantially diminishes the Fund's risk of loss from any other position
held by the Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of the Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that are subject
to Section 1256 of the Code ("Section 1256 Contracts") and that are held by the
Fund at the end of its taxable year generally will be required to be "marked to
market" for federal income tax purposes, that is, deemed to have been sold at
market value. Sixty percent of any net gain or loss recognized on these deemed
sales and 60% of any net gain or loss realized from any actual sales of Section
1256 Contracts will be treated as long-term capital gain or loss, and the
balance will be treated as short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by the Fund. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency denominated
payables and receivables and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60/40 rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of the Fund's
gain or loss on the sale or other disposition of shares of a foreign corporation
may, because of changes in foreign currency exchange rates, be treated as
ordinary income or loss under Section 988 of the Code rather than as capital
gain or loss.
A shareholder who purchases shares of the Fund by tendering payment for the
shares in the form of other securities may be required to recognize gain or loss
for income tax purposes on the difference, if any, between the adjusted basis of
the securities tendered to the fund and the purchase price of the Fund's shares
acquired by the shareholder.
Section 475 of the Code requires that a "dealer" in securities must
generally "mark to market" at the end of its taxable year all securities which
it owns. The resulting gain or loss is treated as ordinary (and not capital)
gain or loss, except to the extent allocable to periods during which the dealer
held the security for investment. The "mark to market" rules do not apply,
however, to a security held for investment which is clearly identified in the
dealer's records as being held for investment before the end of the day in which
the security was acquired. The IRS has issued guidance under Section 475 that
provides that, for example, a bank that regularly originates and sells loans is
a dealer in securities, and subject to the "mark to market" rules. Shares of the
Fund held by a dealer in securities will be subject to the "mark to market"
rules unless they are held by the dealer for investment and the dealer property
identifies the shares as held for investment.
Redemptions and exchanges of shares of the Fund will result in gains or
losses for tax purposes to the extent of the difference between the proceeds and
the shareholder's adjusted tax basis for the shares. Any loss realized upon the
redemption or exchange of shares within six months from their date of purchase
will be treated as a long-term capital loss to the extent of distributions of
long-term capital gain dividends during such six-month period. All or a portion
of a loss realized upon the redemption of shares may be disallowed to the extent
shares are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
B-26
<PAGE>
Distributions and redemptions may be subject to state and local income
taxes, and the treatment thereof may differ from the federal income tax
treatment. Foreign taxes may apply to non-U.S. investors.
The above discussion and the related discussion in the prospectuses are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Fund. The law firm of Paul, Hastings, Janofsky & Walker
LLP has expressed no opinion in respect thereof. Nonresident aliens and foreign
persons are subject to different tax rules, and may be subject to withholding of
up to 30% on certain payments received from the Fund. Shareholders are advised
to consult with their own tax advisers concerning the application of foreign,
federal, state and local taxes to an investment in the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund will receive income in the form of dividends and interest earned
on its investments in securities. This income, less the expenses incurred in its
operations, is the Fund's net investment income, substantially all of which will
be declared as dividends to the Fund's shareholders.
The amount of income dividend payments by the Fund is dependent upon the
amount of net investment income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. The
Fund does not pay "interest" or guarantee any fixed rate of return on an
investment in its shares.
The Fund also may derive capital gains or losses in connection with sales
or other dispositions of its portfolio securities. Any net gain the Fund may
realize from transactions involving investments held less than the period
required for long-term capital gain or loss recognition or otherwise producing
short-term capital gains and losses (taking into account any carryover of
capital losses from the eight previous taxable years), although a distribution
from capital gains, will be distributed to shareholders with and as a part of
dividends giving rise to ordinary income. If during any year the Fund realizes a
net gain on transactions involving investments held more than the period
required for long-term capital gain or loss recognition or otherwise producing
long-term capital gains and losses, the Fund will have a net long-term capital
gain. After deduction of the amount of any net short-term capital loss, the
balance (to the extent not offset by any capital losses carried over from the
eight previous taxable years) will be distributed and treated as long-term
capital gains in the hands of the shareholders regardless of the length of time
the Fund's shares may have been held by the shareholders. For more information
concerning applicable capital gains tax rates, see your tax advisor.
Any dividend or distribution paid by the Fund reduces the Fund's net asset
value per share on the date paid by the amount of the dividend or distribution
per share. Accordingly, a dividend or distribution paid shortly after a purchase
of shares by a shareholder would represent, in substance, a partial return of
capital (to the extent it is paid on the shares so purchased), even though it
would be subject to income taxes.
Dividends and other distributions will be made in the form of additional
shares of the Fund unless the shareholder has otherwise indicated. Investors
have the right to change their elections with respect to the reinvestment of
dividends and distributions by notifying the Transfer Agent in writing, but any
such change will be effective only as to dividends and other distributions for
which the record date is seven or more business days after the Transfer Agent
has received the written request.
B-27
<PAGE>
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 $1,000 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.
For the period April 1, 1999 through April 30, 2000 and the fiscal year
ended April 30, 2000, the Fund's average annual total return was 19.18% and
14.93%, respectively. Certain fees and expenses of the Fund have been waived or
reimbursed during this period. Accordingly, return figures are higher than they
would have been had such fees and expenses not been waived or reimbursed
YIELD
Annualized yield quotations used in the Fund's advertising and promotional
materials are calculated by dividing the Fund's investment income for a
specified thirty-day period, net of expenses, by the average number of shares
outstanding during the period, and expressing the result as an annualized
percentage (assuming semi-annual compounding) of the net asset value per share
at the end of the period. Yield quotations are calculated according to the
following formula:
YIELD = 2 [(a-b + 1)6 - 1]
---
cd
where "a" equals dividends and interest earned during the period; "b" equals
expenses accrued for the period, net of reimbursements; "c" equals the average
daily number of shares outstanding during the period that are entitled to
receive dividends, and "d" equals the maximum offering price per share on the
last day of the period.
Except as noted below, in determining net investment income earned during
the period ("a" in the above formula), the Fund calculates interest earned on
each debt obligation held by it during the period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last business day of the period or,
if the obligation was purchased during the period, the purchase price plus
accrued interest; (2) dividing the yield to maturity by 360 and multiplying the
resulting quotient by the market value of the obligation (including actual
accrued interest). Once interest earned is calculated in this fashion for each
debt obligation held by the Fund, net investment income is then determined by
totaling all such interest earned.
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.
B-28
<PAGE>
OTHER INFORMATION
Performance data of the Fund quoted in advertising and other promotional
materials represents past performance and is not intended to predict or
guarantee future results. The return and principal value of an investment in the
Fund will fluctuate, and an investor's redemption proceeds may be more or less
than the original investment amount. In advertising and promotional materials
the Fund may compare its performance with data published by Lipper Analytical
Services, Inc. ("Lipper") or CDA Investment Technologies, Inc. ("CDA"). The Fund
also may refer in such materials to mutual fund performance rankings and other
data, such as comparative asset, expense and fee levels, published by Lipper or
CDA. Advertising and promotional materials also may refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals including, but not limited to, THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD and B
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 series of shares of
beneficial interest, par value $0.01 per share. The Declaration of Trust permits
the Trustees to issue an unlimited number of full and fractional shares of
beneficial interest and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interest
in the Fund. Each share represents an interest in the Fund proportionately equal
to the interest of each other share. Upon the Fund's liquidation, all
shareholders would share pro rata in the net assets of the Fund available for
distribution to shareholders. Income and operating expenses not specifically
attributable to a particular Fund are allocated fairly among the Funds by the
Trustees, generally on the basis of the relative net assets of each Fund in the
Trust.
The Declaration of Trust does not require the issuance of stock
certificates. If stock certificates are issued, they must be returned by the
registered owners prior to the transfer or redemption of shares represented by
such certificates.
If the Board of Trustees should determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay redemption proceeds in whole or in
part by a distribution in kind of securities from the portfolio of the Fund, in
compliance with the Trust's election to be governed by Rule 18f-1 under the 1940
Act. Pursuant to Rule 18f-1, the Fund is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90-day period for any one shareholder. If shares are redeemed in
kind, the redeeming shareholder will likely incur brokerage costs in converting
the assets into cash.
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 261E, 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, Hauppage, NY 11787 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.
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The validity of the Fund's shares has been passed on by Paul, Hastings,
Janofsky & Walker LLP, 345 California Street, San Francisco, CA 94104.
Shares of the Fund owned by the Trustees and officers as a group were less
than 1% at August 1,2000.
On July 31, 2000, the following persons owned of record and/or beneficially
more than 5% of the Fund's outstanding voting securities:
Charles Schwab & Co. Inc., Special Custody Account for the Exclusive
Benefit of Customers, ATTN Mutual Funds, 101 Montgomery Street, San Francisco,
CA 94104; 60.67% record.
National Financial Services Corp. for Exclusive Benefit of Customers, 200
Liberty Street, 5th FL, New York, NY 10281; 14.75% record.
LaSalle Bank Cust, FBO Segall Bryant Omnibus, C-8159Q103, PO Box 1443,
Chicago, IL 60690-1443; 7.76% record.
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.
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APPENDIX
DESCRIPTION OF RATINGS
MOODY'S INVESTORS SERVICE, INC.: CORPORATE BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and
carry the smallest degree of investment risk. Interest payments are protected by
a large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa-Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
A-Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
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.
Moody's applies numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier "1" indicates that the security ranks in the higher end of its generic
rating category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.
STANDARD & POOR'S RATINGS GROUP: CORPORATE BOND RATINGS
AAA-This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to pay principal and
interest.
AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
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.
Plus (+) or Minus (-)--The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
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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.
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