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P R O S P E C T U S
DATED DECEMBER 1, 1997
GRANUM VALUE FUND
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126 East 56th Street
Twenty-Fifth Floor
New York, New York 10022
Granum Value Fund (the "Fund") is a non-diversified series of Granum Series
Trust (the "Trust"), an open-end management investment company (commonly known
as a mutual fund). The investment objective of the Fund is to seek capital
appreciation. The Fund pursues this objective by investing its assets
principally in equity securities, including common and preferred stocks, and
other securities, such as warrants and stock options, having equity
characteristics. In managing the Fund's portfolio, the investment adviser of the
Fund attempts to identify securities that are undervalued relative to their
potential for growth. The Fund may also pursue its objective by investing in
fixed income securities when such securities, in the judgment of the investment
adviser, provide attractive opportunities for capital appreciation. See
"INVESTMENT OBJECTIVE AND POLICIES." As part of its investment program, the Fund
may use certain derivative investments which involve certain risks. See
"DERIVATIVE INVESTMENTS." The Fund's investment policies and practices involve
certain risks and there can be no assurance that the Fund will achieve its
investment objective. See "RISK CONSIDERATIONS."
Granum Capital Management, L.L.C. serves as the Fund's investment adviser (the
"Investment Adviser"). Firstar Trust Company (the "Administrator") provides
administrative services to the Fund.
Shares of the Fund are distributed on a continuous basis at their current net
asset value per share, without imposition of any front-end or contingent
deferred sales charge, by Mercer Allied Company and Granum Securities, L.L.C.
(the "Distributors") and by selected securities dealers. The minimum initial
investment in the Fund is $5,000. Subsequent investments may be made in any
amount of $1,000 or more. See "HOW TO BUY SHARES."
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This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing. It should be read carefully
and retained for future reference. Additional information about the Fund is
contained in a Statement of Additional Information, dated December 1, 1997,
which, as amended or supplemented from time to time, is incorporated into this
Prospectus by this reference. The Statement of Additional Information has been
filed with the Securities and Exchange Commission (the "SEC") and is available
without charge by writing to the Transfer Agent or by calling 1-888-5-GRANUM
(547-2686).
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 3
Summary of Expenses......................................... 6
Financial Highlights........................................ 7
Investment Objective and Policies........................... 8
Investment Instruments and Practices........................ 9
Derivative Investments...................................... 14
Risk Considerations......................................... 17
Comparative Performance Information......................... 17
Management of the Fund...................................... 19
Fund Expenses............................................... 22
Dividends Distributions and Taxes........................... 22
How to Buy Shares........................................... 24
How to Redeem Shares........................................ 25
Distribution Plan........................................... 27
Fund Performance Information................................ 27
General Information......................................... 28
</TABLE>
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NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS OR IN APPROVED SALES LITERATURE IN CONNECTION WITH THE OFFER
CONTAINED HEREIN, AND IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST
OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST OR
BY THE DISTRIBUTORS TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus.
THE FUND Granum Value Fund (the "Fund") is a non-diversified
series of Granum Series Trust (the "Trust"), an,
open-end management investment company (commonly
known as a mutual fund).
INVESTMENT OBJECTIVE AND
POLICIES The investment objective of the Fund is to seek
capital appreciation. The Fund pursues this
objective by investing its assets principally in
equity securities, including common and preferred
stocks, and other securities, such as warrants and
stock options, having equity characteristics. In
managing the Fund's portfolio, the investment
adviser of the Fund attempts to identify securities
that are undervalued relative to their potential for
growth. The Fund may also pursue its objective by
investing in fixed income securities when such
securities, in the judgment of the investment
adviser, provide attractive opportunities for
capital appreciation. See "INVESTMENT OBJECTIVE AND
POLICIES." As part of its investment program, the
Fund may use certain derivative investments which
involve certain risks. See "DERIVATIVE INVESTMENTS."
INVESTMENT ADVISER Subject to the overall supervision of the Board of
Trustees of the Trust, Granum Capital Management,
L.L.C. (the "Investment Adviser") is responsible for
managing the investment operations of the Fund in
accordance with the Fund's investment objective and
policies. The Investment Adviser formulates a
continuing investment strategy for the Fund and
makes all decisions regarding investments to be
purchased or sold for the Fund. In consideration of
the services provided by the Investment Adviser, the
Fund pays the Investment Adviser monthly
compensation computed daily at the annual rate of
1.25% of the Fund's net assets (the "Basic Fee"),
which rate is adjusted monthly, as described below
(the "Monthly Performance Adjustment"), depending on
the investment performance of the Fund relative to
the investment performance of the Standard & Poor's
Composite Index of 500 Stocks (the "S&P 500 Index").
The Monthly Performance Adjustment may increase or
decrease the total advisory fee payable to the
Investment Adviser (the "Total Advisory Fee") by up
to 0.75% annually of the value of the Fund's net
assets. See "MANAGEMENT OF THE FUND -- Investment
Adviser."
ADMINISTRATOR The Trust has retained Firstar Trust Company (the
"Administrator") to provide various administrative
and accounting services necessary for the operations
of the Trust and the Fund. The Fund pays the
Administrator
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monthly fees for these services and reimburses the
Administrator for certain out-of-pocket expenses.
See "MANAGEMENT OF THE FUND -- Administrator."
FUND EXPENSES In addition to the fees paid to the Investment
Adviser and the Administrator, the Fund pays all of
its expenses other than those expressly assumed by
the Investment Adviser or the Distributors. The Fund
also makes payments to the Distributors for
distribution and shareholder services provided by
the Distributors and selected securities dealers.
See "FUND EXPENSES."
DIVIDENDS, DISTRIBUTIONS AND
TAXES The Fund intends to pay dividends and to make
distributions of long-term capital gains at least
annually. Unless requested otherwise by a
shareholder, dividends and capital gains
distributions are automatically reinvested in
additional shares of the Fund.
The Fund intends to qualify each year as a
"regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986, as amended. If so
qualified, the Fund will not be subject to federal
income taxes to the extent that it distributes its
net income to shareholders.
Shareholders will have to pay any applicable federal
income taxes on the dividends and distributions they
receive from the Fund, whether paid in cash or
reinvested in additional shares of the Fund.
Dividends and distributions will also be subject to
applicable state and local taxes.
HOW TO BUY SHARES Shares of the Fund are distributed on a continuous
basis at their current net asset value per share,
without imposition of any front-end or contingent
deferred sales charge, by Mercer Allied Company and
Granum Securities, L.L.C. (the "Distributors") and
by selected securities dealers. The minimum initial
investment in the Fund is $5,000. Subsequent
investments may be made in any amount of $1,000 or
more. See "HOW TO BUY SHARES."
HOW TO REDEEM Shares of the Fund may be redeemed at any time at
their current net asset value per share next
computed after receipt of a redemption request in
proper form. No charges are imposed in connection
with redemptions of shares. The value of the shares
redeemed may be more or less than their original
cost, depending upon the Fund's then-current net
asset value. See "HOW TO REDEEM SHARES."
DISTRIBUTION PLAN Under a distribution plan and a related agreement
adopted and entered into by the Trust in accordance
with Rule 12b-1 under the Investment Company Act of
1940, as amended (the "Distribution Plan"), the Fund
makes payments to the Distributors in consideration
of the services they
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provide in connection with the sale of the Fund's shares to investors
("Distribution Services") and for the furnishing of account related services by
the Distributors and securities dealers to shareholders of the Fund
("Shareholder Services"). As compensation for Distribution Services, the Fund
makes monthly payments to the Distributors which are computed at the annual rate
of 0.50% of the Fund's average net assets. From such compensation, the
Distributors make payments to securities dealers that have sold shares of the
Fund to their customers. As compensation for Shareholder Services, the Fund
makes monthly payments to the Distributors which are computed at the annual rate
of 0.25% of the Fund's average net assets. All payments to securities dealers by
the Distributors are made in arrears on a quarterly basis. See "DISTRIBUTION
PLAN."
RISK CONSIDERATIONS The Fund's investment policies involve certain
risks, and there can be no assurance that the Fund's
investment objective will be achieved. See "RISK
CONSIDERATIONS." Changes in the value of the Fund's
investments will result in changes in the value of
the Fund's shares, and thus the Fund's total return
to shareholders. A significant portion of the Fund's
assets may, from time to time, be invested in the
securities of companies having smaller market
capitalization, which involve greater investment
risks than securities of larger, well established
companies. The Fund's use of derivative investments
and limited diversification may be considered
speculative practices and may also result in losses
to the Fund. Investments in illiquid securities by
the Fund will also involve certain risks.
Investments in foreign securities are affected by
risk factors generally not thought to be present in
the U.S., including, among other things, increased
political, regulatory, contractual and economic risk
and exposure to currency fluctuations. Certain other
types of securities, such as derivatives, also are
affected by particular risks as described herein.
See "INVESTMENT INSTRUMENTS AND PRACTICES -- Foreign
Securities" and "DERIVATIVE INVESTMENTS." The
compensation that may be payable by the Fund to the
Investment Adviser is higher than the compensation
paid by most other mutual funds with investment
objectives similar to the investment objective of
the Fund. See "MANAGEMENT OF THE FUND -- Investment
Adviser."
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SUMMARY OF EXPENSES
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SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load Imposed on
Purchases (as a percentage
of offering price)......... NONE
Maximum Sales Load Imposed on
Reinvestment of Dividends.. NONE
Maximum Deferred Sales Load.. NONE
Redemption Fees.............. NONE
ANNUAL FUND OPERATING EXPENSES: (as a
percentage of average net assets)
Management Fee............... 1.25%*
Rule 12b-1 Expenses**
Distribution Fee........... 0.50%
Shareholder Services Fee... 0.25%
0.75%
Estimated Other Expenses..... 0.50%
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Estimated Total Fund
Operating Expenses......... 2.50%
</TABLE>
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* The fee paid by the Fund to the Investment Adviser is computed at the annual
rate of 1.25% of the average net assets of the Fund and is subject to increase
or decrease by as much as 0.75% based upon the investment performance of the
Fund in relation to the percentage change in the Standard & Poor's Composite
Index of 500 Stocks. See "MANAGEMENT OF THE FUND -- Investment Adviser."
** As a result of fees paid by the Fund pursuant to its distribution plan,
long-term shareholders may pay more than the economic equivalent of the maximum
front-end sales charge permitted by the National Association of Securities
Dealers, Inc. See "DISTRIBUTION PLAN."
The purpose of the foregoing table is to assist investors in understanding
the various costs and expenses that they will bear directly or indirectly as
shareholders of the Fund. The amounts set forth under "Estimated Other
Expenses," as well as the amounts in the Example below, are based upon estimates
of expenses for the current fiscal year.
EXAMPLE:
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1 Year 3 Years
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You would pay the following
expenses on a $1,000
investment, assuming (1)
a 5% annual return and
(2) redemption at the end
of each time period: $25 $78
</TABLE>
The above Example is based upon estimated Total Operating Expenses as set
forth in the Table above. The Example also assumes that the Fund's hypothetical
investment performance of 5% annually for the relevant periods was the same as
the percentage changes in the Standard & Poor's Composite Index of 500 Stocks
(the "S&P 500 Index") throughout such periods. If the percentage change in the
S&P 500 Index was a 2.5% annual return for those periods as compared to 5% for
the Fund, the expenses on a $1,000 investment for the one and three year periods
would be $29 and $89, respectively. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR
LESS THAN THOSE SHOWN. ANNUAL RETURN MAY BE GREATER OR LESS THAN THE ANNUAL
RETURN ASSUMED IN THE EXAMPLE.
For a more complete description of fees and expenses, see "DISTRIBUTION
PLAN," "FUND EXPENSES" and "MANAGEMENT OF THE FUND -- Investment Adviser."
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FINANCIAL HIGHLIGHTS
The condensed financial information set forth in the table that follows has
been audited by Coopers & Lybrand L.L.P., the Fund's independent public
accountants. The table reflects the result of the Fund's operations for a share
outstanding throughout the period May 1, 1997 (commencement of operations)
through October 31, 1997. The table should be read in conjunction with the
Fund's financial statements and notes thereto, which are incorporated by
reference into (and are legally a part of) the Fund's Statement of Additional
Information. The financial statements and the Statement of Additional
Information are available without charge by writing the Transfer Agent or by
calling 1-888-5-GRANUM (547-2686).
GRANUM VALUE FUND
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FINANCIAL HIGHLIGHTS
May 1, 1997(1) through October 31, 1997
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Selected Per share data:(4)
Net asset value, beginning of period........................ $ 20.00
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Income from Investment Operations:
Net investment loss......................................... (0.03)
Net realized and unrealized gain on investments............. 3.42
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Total from investment operations............................ 3.39
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Net asset value, end of period.............................. $ 23.39
=======
Total return(2)............................................. 16.95%
Supplemental data and ratios:
Net assets, end of period (000's)........................... $76,263
Ratio of net expenses to average net assets:(3)
Before expense reimbursement.............................. 3.03%
After expense reimbursement............................... 2.77%
Ratio of net investment income to average net assets:(2)
Before expense reimbursement.............................. (0.78)%
After expense reimbursement............................... (0.52)%
Portfolio turnover rate..................................... 3.12%
Average commission rate paid................................ 0.0583
</TABLE>
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(1) Commencement of Operations.
(2) Not annualized.
(3) Annualized.
(4) Information presented relates to a Share of Capital Stock of the Fund
outstanding for the entire period.
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INVESTMENT OBJECTIVE
AND POLICIES
The investment objective of the Fund is to seek capital appreciation. The
Fund pursues this objective by investing its assets principally in equity
securities, including common and preferred stocks, and other securities, such as
warrants and stock options, having equity characteristics. In managing the
Fund's portfolio, the Investment Adviser attempts to identify securities that
are undervalued relative to their potential for growth. The Fund may also pursue
its objective by investing in fixed income securities, when such securities, in
the judgment of the Investment Adviser, provide attractive opportunities for
capital appreciation. As part of its investment program, the Fund may use
certain derivative instruments which involve certain risks. See "DERIVATIVE
INVESTMENTS."
The Investment Adviser emphasizes the use of fundamental research,
particularly balance sheet and return-on-equity analysis, in identifying
companies that it believes to be undervalued, and focuses on those companies
that have, or have the potential to develop, above-average earnings, sales or
asset growth. In evaluating investments, the Investment Adviser also seeks to
identify companies that may be involved in special corporate situations, the
occurrence of which would favorably affect the values of the companies' equity
securities. Such situations could include, among other developments, the
following: a change in management or management policies; the acquisition of a
significant equity position in the company by an investor or investor group; a
merger, reorganization or the sale of a division; the spin-off of a subsidiary,
division, or other substantial assets; or a third-party or issuer tender offer.
The Investment Adviser believes that these situations can serve as catalysts for
capital appreciation in the equity securities of undervalued companies. The
Fund's investments are made without regard to market capitalization. Thus, a
significant portion of the Fund's assets may, from time to time, be invested in
the securities of companies having smaller market capitalizations. See
"INVESTMENT INSTRUMENTS AND PRACTICES - Smaller Companies." Current income is
not a primary factor in the consideration of equity investments for the Fund.
An essential element of the Investment Adviser's investment philosophy is
the pursuit of superior returns in rising markets and of preservation of capital
in declining markets. In implementing this philosophy, the Fund may use certain
derivative investments (including options and warrants) to pursue profit
opportunities or to hedge a portion of its portfolio against certain risks. See
"DERIVATIVE INVESTMENTS." There is no requirement, however, that the Fund hedge
its investment positions.
Although the Fund invests principally in equity securities of U.S.
companies, the Fund may also invest in the equity securities of foreign issuers
and in U.S. and foreign fixed income securities. The Fund may invest up to 20%
of the value of its total assets in the securities of foreign issuers. See
"TYPES OF INVESTMENTS AND RELATED RISK FACTORS -- Fixed Income Securities" and
"-- Foreign Securities." Under normal market conditions, the Fund will invest at
least 65% of its assets in equity securities, including for this purpose common
stocks, preferred stocks and securities with equity characteristics such as
convertible securities, warrants and options on stocks and stock indices. The
Fund will normally invest a portion of its assets in money market instruments
and similar investments for liquidity purposes. However, when the Investment
Adviser believes that a defensive investment posture is warranted, the Fund may
temporarily invest all or a substantial portion of its assets in high quality
fixed income securities,
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money market instruments and money market mutual funds, or may hold cash. See
"TYPES OF INVESTMENTS AND RELATED RISK FACTORS -- Temporary Investments."
Because the Fund is a "non-diversified" investment company, with respect to
50% of the value of its total assets, there are no percentage limitations on the
portion of the Fund's assets that may be invested in the securities of any one
issuer. However, as a matter of policy, the Fund does not invest more than 10%
of the value of its total assets in the securities of any one issuer. If this
percentage limitation is adhered to at the time of investment, the Fund will not
be required to reduce a position if, as a result of a change in percentage
resulting from a change in the values of the securities or in the total assets
of the Fund, the position exceeds this percentage limitation. Under these
policies, the Fund's portfolio may be subject to greater risk and volatility
than the portfolio of a "diversified" investment company. See "TYPES OF
INVESTMENTS AND RELATED RISK FACTORS -- Limited Diversification."
THE FUND'S INVESTMENT POLICIES INVOLVE CERTAIN RISKS, AND THERE CAN BE NO
ASSURANCE THAT THE FUND'S INVESTMENT OBJECTIVE WILL BE ACHIEVED. IN PARTICULAR,
THE FUND'S USE OF DERIVATIVE INVESTMENTS AND LIMITED DIVERSIFICATION MAY BE
CONSIDERED SPECULATIVE PRACTICES AND MAY RESULT IN LOSSES TO THE FUND.
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INVESTMENT INSTRUMENTS
AND PRACTICES
The Fund may utilize a variety of investment instruments and practices in
pursuing its investment program. Descriptions of these instruments and
practices, and the risks associated with them, are set forth below.
Investors should consider the Fund as a supplement to an overall investment
program and should invest only if they are willing to undertake the risks
involved. Changes in the value of the Fund's investments will result in changes
in the value of the Fund's shares, and thus the Fund's total return to
shareholders. The Fund's use of derivative investments should also be
considered. See "DERIVATIVE INVESTMENTS."
EQUITY SECURITIES
The Fund's investments in equity securities may include investments in
common stocks, preferred stocks and convertible securities of U.S. and foreign
issuers. The value of equity securities varies in response to many factors,
including, but not limited to, the activities and financial condition of
individual companies, the business market in which individual companies compete
and general market and economic conditions. Equity securities fluctuate in
value, often based on factors unrelated to the value of the issuer of the
securities, and such fluctuations can be significant.
SMALLER COMPANIES
The Fund may invest in the securities of issuers having smaller market
capitalizations than the issuers in which many other investment companies
invest. The investment risks associated with securities of smaller companies are
generally greater than those associated with the securities of larger,
well-established companies. Smaller companies often are of more recent formation
than other companies and may have limited product lines, distribution channels
and financial and managerial resources. Further, there is often less publicly
available information concerning smaller companies than there is for larger,
more established issuers. The equity securities of smaller companies are often
traded over-the-counter or on regional exchanges and those
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securities may not be traded in the volume typical for securities that are
traded on a national securities exchange. Consequently, the Fund may be required
to dispose of such securities over a longer period of time (and potentially at
less favorable prices) than would be the case for securities of larger
companies. In addition, the prices of the securities of smaller companies may be
more volatile than those of larger companies.
FIXED INCOME SECURITIES
To a limited extent, the Fund may invest in bonds and other types of debt
obligations of U.S. and foreign issuers. The Fund may invest in these fixed
income securities to pursue the Fund's investment objective when they offer, in
the judgment of the Investment Adviser, greater potential for capital
appreciation on a risk adjusted basis than alternative equity investments. The
Fund may also invest in these securities for temporary defensive purposes. See
"INVESTMENT INSTRUMENTS AND PRACTICES AND RELATED RISK FACTORS -- Temporary
Investments." Fixed income securities purchased by the Fund may include, among
others: bonds, notes and debentures issued by corporations; debt securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities ("U.S. Government Securities"); municipal securities;
mortgage-backed and asset-backed securities; and debt securities issued or
guaranteed by foreign governments, their agencies, instrumentalities or
political subdivisions, or by government owned, controlled or sponsored
entities, including central banks. These securities may pay fixed, variable or
floating rates of interest, and may include zero coupon obligations. Fixed
income securities are subject to the risk of the issuer's inability to meet
principal and interest payments on its obligations (i.e., credit risk) and are
subject to price volatility due to such factors as interest rate sensitivity,
market perception of the creditworthiness of the issuer and general market
liquidity (i.e., market risk). There are no restrictions as to the maximum
maturities of the fixed income securities in which the Fund may invest.
Securities having longer maturities involve greater risk of fluctuations in
value resulting from changes in interest rates.
The Fund may invest in both investment grade and non-investment grade debt
securities. Investment grade debt securities are those securities that have
received a rating from Standard & Poor's Ratings Group, a division of the
McGraw-Hill Companies, Inc. ("S&P") or Moody's Investors Service, Inc.
("Moody's") in one of the four highest rating categories or, if not rated, have
been determined by the Investment Adviser to be of comparable quality. Non-
investment grade debt securities (typically called "junk bonds") are securities
that have received a rating from S&P or Moody's of below investment grade or
that have been given no rating and have been determined by the Investment
Adviser to be of comparable quality to such lower rated securities. These lower
grade securities are considered to be predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal. Non-investment grade
debt securities in the lowest rating categories may involve a substantial risk
of default or may be in default. Changes in economic conditions or developments
regarding the individual issuer are more likely to cause price volatility and
weaken the capacity of the issuers of non-investment grade debt securities to
make principal and interest payments than is the case for higher grade debt
securities. An economic downturn affecting an issuer of non-investment grade
debt securities may result in an increased incidence of default. In addition,
the market for lower grade debt securities may be thinner and less active than
for higher grade debt securities. For these reasons, the Fund will not invest
more than 20% of the value of its total assets in non-convertible fixed income
securities which are not of investment grade.
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The Fund will not purchase any debt security rated below CCC by S&P or Caa
by Moody's (or any unrated debt security determined to be of comparable quality
by the Investment Adviser). If the rating of any debt security held by the Fund
is downgraded below such minimum ratings (or if the Investment Adviser
determines that a comparable unrated debt security has similarly declined in
quality), there is no requirement that the Fund sell such security. The
determination of whether to sell any such security will be made by the
Investment Adviser, consistent with its best investment judgment.
FOREIGN SECURITIES
Although the Fund invests principally in equity securities of U.S.
companies, the Fund is permitted to invest up to 20% of the value of its total
assets in equity and fixed income securities of foreign issuers, including
depository receipts (such as American Depository Receipts) that represent an
indirect interest in securities of foreign issuers. Investments in foreign
securities are affected by risk factors generally not thought to be present in
the U.S. With respect to such securities, there may be more limited information
publicly available concerning the issuer than would be the case with respect to
domestic securities, different accounting standards may be used by foreign
issuers and foreign trading markets may not be as liquid as U.S. markets.
Foreign securities also involve such risks as currency risks, possible
imposition of withholding or confiscatory taxes, possible currency transfer
restrictions, expropriation or other adverse political or economic developments
and the difficulty of enforcing obligations in other countries. These risks may
be greater in emerging markets and in less developed countries.
The purchase of securities denominated in foreign currencies will subject
the value of the Fund's investments in those securities to fluctuations due to
changes in foreign exchange rates. To hedge against the effects of changes in
foreign exchange rates, the Fund may enter into forward foreign currency
exchange contracts ("forward contracts"). These contracts represent agreements
to exchange an amount of currency at an agreed upon future date and rate. The
Fund will generally use forward contracts only to "lock in" the price in U.S.
dollars of a foreign security that the Fund plans to purchase or to sell, but in
certain limited cases may use such contracts to hedge against an anticipated
substantial decline in the price of a foreign currency against the U.S. dollar
that would adversely affect the U.S. dollar value of foreign securities held by
the Fund. Forward contracts will not be used in all cases and, in any event,
cannot completely protect the Fund against all changes in the values of foreign
securities resulting from fluctuations in foreign exchange rates. The Fund will
not enter into a forward contract if, as a result, forward contracts would
represent more than 20% of the Fund's total assets. For hedging purposes, the
Fund may also use options on foreign currencies, which expose the Fund to
certain risks. See "DERIVATIVE INVESTMENTS -- Options on Foreign Currency."
TEMPORARY INVESTMENTS
For defensive purposes, the Fund may temporarily invest all or a
substantial portion of its assets in high quality fixed income securities and
money market instruments, or may temporarily hold cash in such amounts as the
Investment Adviser deems appropriate. Fixed income securities will be deemed to
be of high quality if they are rated "A" or better by S&P or Moody's or, if
unrated, are determined to be of comparable quality by the Investment Adviser.
Money market instruments are high quality, short-term fixed income obligations
(which generally have remaining maturities of one year or less), and may
include: U.S. Government Securities; commercial paper; certificates of deposit
and banker's
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acceptances issued by domestic branches of United States banks that are members
of the Federal Deposit Insurance Corporation; and repurchase agreements for U.S.
Government Securities. In lieu of purchasing money market instruments, the Fund
may purchase shares of money market mutual funds that invest primarily in U.S.
Government Securities and repurchase agreements involving those securities,
subject to certain limitations imposed by the Investment Company Act of 1940
(the "1940 Act"). The Fund, as an investor in a money market fund, will
indirectly bear the fees and expenses of that fund, which will be in addition to
the fees and expenses of the Fund.
Repurchase agreements are agreements under which the Fund purchases
securities from a bank or a securities dealer that agrees to repurchase the
securities from the Fund at a higher price on a designated future date. If the
seller under a repurchase agreement becomes insolvent, the Fund's right to
dispose of the securities may be restricted, or the value of the securities may
decline before the Fund is able to dispose of them. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the securities before the repurchase of the securities under a repurchase
agreement is accomplished, the Fund may encounter delay and incur costs,
including a decline in the value of the securities, before being able to sell
the securities. If the seller defaults, the value of such securities may decline
before the Fund is able to dispose of them. If the Fund enters into a repurchase
agreement that is subject to foreign law and the other party defaults, the Fund
may not enjoy protections comparable to those provided to certain repurchase
agreements under U.S. bankruptcy law, and may suffer delays and losses in
disposing of the collateral as a result. The Fund has adopted procedures
designed to minimize certain of the risks of loss from repurchase agreement
transactions.
LIMITED DIVERSIFICATION
As a "non-diversified" investment company, the Fund is not subject to the
provisions of the 1940 Act that otherwise would limit the percentage of its
assets that may be invested in the securities of a single issuer. However, the
Fund will not invest more than 10% of the value of its total assets in the
securities of any one issuer. If this percentage limitation is adhered to at the
time of investment, the Fund will not be required to reduce a position if, as a
result of a change in percentage resulting from a change in the values of the
securities or in the total assets of the Fund, the position exceeds this
percentage limitation.
In addition, the Fund intends to comply with the diversification
requirements imposed by the Internal Revenue Code of 1986, as amended (the
"Code"). Under these requirements, at the end of each quarter of the Fund's
taxable year, at least 50% of the market value of the Fund's total assets must
be invested in cash, U.S. Government Securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited (for purposes of this calculation) to an amount not
greater than 5% of the value of the Fund's total assets and not greater than 10%
of the outstanding voting securities of such issuer.
Under the Fund's policies, a relatively high percentage of the Fund's
assets may be invested in the securities of a limited number of issuers, some of
which may be within the same industry or economic sector. The Fund's portfolio
may therefore be more susceptible to any single economic, political or
regulatory occurrence and may be more volatile than the portfolio securities of
a "diversified" investment company. Therefore, an investment in the Fund
involves greater risks than an investment in a "diversified" investment company.
- --------------------------------------------------------------------------------
12
<PAGE> 13
PORTFOLIO TURNOVER
Although many of the Fund's investments may be held for the purpose of
seeking capital appreciation over the long term, the Fund may also engage in
short-term trading in seeking capital appreciation. Moreover, securities may be
sold without regard to the time they have been held when investment
considerations warrant such action. It is expected that these policies will
cause the Fund's portfolio turnover rate to be higher than certain other
investment companies, although the portfolio turnover rate is not anticipated to
exceed 100%. A high portfolio turnover rate will result in higher brokerage
costs to the Fund and may also result in the realization of greater capital
gains which will be subject to tax, including short-term gains which will be
taxable to shareholders at ordinary income tax rates. See "DIVIDENDS,
DISTRIBUTIONS AND TAXES."
SHORT SALES
Although the Fund may not generally sell securities short, it may effect
short sales "against-the-box." In these transactions, the Fund sells short
securities it owns or has the right to obtain without payment of additional
consideration. The Fund may make a short sale against-the-box in order to hedge
against market risks when it believes that the price of a security may decline,
causing a decline in the value of a security owned by the Fund, or when the Fund
does not want to sell the security it owns. If the Fund makes a short sale
against-the-box, it will be required to set aside securities equivalent in kind
and amount to the securities sold short (or securities convertible or
exchangeable into such securities) and will hold such securities while the short
sale is outstanding. The Fund will incur transaction costs, including interest
expense, in connection with opening, maintaining and closing short sales
against-the-box.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase or sell securities on a when-issued or delayed
delivery basis. In these transactions, securities are purchased or sold by the
Fund with payment and delivery taking place as much as a month or more in the
future. The Fund engages in these transactions to secure an advantageous price
or yield at the time of entering into the transactions. However, the value of
securities purchased on a when-issued or delayed delivery basis is subject to
market fluctuation and no dividends or interest accrues to the purchaser during
the period before the settlement date. The Fund will not enter into a
when-issued and delayed delivery transaction, if as a result, when-issued and
delayed delivery positions which are not "covered" would exceed one-third of the
value of the Fund's total assets. For this purpose, a position will be "covered"
if the Fund's custodian maintains, in a segregated account for the Fund, cash
and other liquid securities held by the Fund and having a value (determined
daily) equal to or greater than the position.
ILLIQUID SECURITIES
The Fund may invest up to 15% of the value of its net assets in illiquid
securities. Illiquid securities are those securities which the Fund cannot sell
or dispose of in the ordinary course of business within seven days at
approximately the value at which the Fund carries the securities. These
securities include restricted securities and repurchase agreements maturing in
more than seven days. Restricted securities are securities that may not be sold
to the public without an effective registration statement under the Securities
Act of 1933, as amended (the "1933 Act"), and thus, may be sold only in
privately negotiated transactions or pursuant to an exemption from registration.
Subject to the adoption of guidelines by the Board of Trustees of the Trust,
certain restricted securities that may be sold to institutional investors
pursuant to Rule 144A
- --------------------------------------------------------------------------------
13
<PAGE> 14
under the 1933 Act and non-exempt commercial paper may be determined to be
liquid by the Investment Adviser. Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Investment
Adviser or at prices approximating the value at which the Fund is carrying the
securities.
LENDING PORTFOLIO SECURITIES
The Fund may lend its portfolio securities to brokers, dealers and
financial institutions in an amount not exceeding 33 1/3% of the value of the
Fund's total assets. These loans will be secured by collateral (consisting of
cash, U.S. Government Securities or irrevocable letters of credit) maintained in
an amount equal to at least 100% of the market value, determined daily, of the
loaned securities. The Fund may, subject to certain notice requirements, at any
time call the loan and obtain the return of the securities loaned. The Fund will
be entitled to payments equal to the interest and dividends on the loaned
securities and may receive a premium for lending the securities. By lending
portfolio securities, the Fund will seek to earn a return on the investment of
collateral. However, there may be delays in the recovery of the loaned
securities or a loss of rights in the collateral supplied should the borrower
fail financially. In addition, securities lending involves a form of leverage,
and the Fund may incur a loss if securities purchased with the collateral from
securities loans decline in value or if the income earned does not cover the
Fund's transaction costs.
INVESTMENT RESTRICTIONS
The Fund has adopted various restrictions on its investment practices.
Except as may otherwise be noted, these restrictions may be changed by the Board
of Trustees of the Trust. However, the Fund's investment objective and certain
of its investment restrictions are deemed fundamental policies and cannot be
changed without the approval of the holders of a majority (as defined in the
1940 Act) of the Fund's outstanding voting securities. Certain of the Fund's
investment restrictions are set forth in this Prospectus. Additional investment
restrictions are described in the Statement of Additional Information under
"INVESTMENT RESTRICTIONS." Under one such restriction, the Fund may borrow money
from banks for temporary extraordinary or emergency purposes (but not for
investment) in an amount up to 10% of the value of the Fund's total assets.
- ------------------------------------------------------
DERIVATIVE INVESTMENTS
The Fund may use certain derivative instruments in connection with its
investment activities. These include options on individual securities, options
on securities indices, options on foreign currency and warrants (collectively,
"Derivatives"). These instruments derive their performance, at least in part,
from the performance of an underlying asset or index. While Derivatives will be
used to pursue profit opportunities, and also for hedging purposes, the use of
Derivatives can increase the volatility of the Fund's net asset value, can
decrease the liquidity of the Fund's portfolio and make more difficult the
pricing of the Fund's portfolio. Derivatives may entail investment exposures
that are greater than their costs would suggest, meaning that a small investment
in Derivatives could have a large potential positive or negative impact on the
Fund's performance. If the Fund invests in Derivatives at inappropriate times or
judges market conditions incorrectly, such investments may lower the Fund's
return or result in losses. Changes in the liquidity of the secondary markets on
which the Fund's Derivatives may trade could result in significant, rapid and
unpredictable changes in the prices of such Derivatives, which could also cause
losses to the Fund.
- --------------------------------------------------------------------------------
14
<PAGE> 15
OPTIONS ON SECURITIES
The Fund may purchase call and put options on securities to seek capital
appreciation or for hedging purposes. The Fund may also write and sell covered
call and put options for hedging purposes. A put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
security at a stated exercise price at any time prior to the expiration of the
option. Similarly, a call option gives the purchaser of the option the right to
buy, and obligates the writer to sell, the underlying security at a stated
exercise price at any time prior to the expiration of the option.
A call option written by the Fund is "covered" if the Fund owns the
underlying security or holds related securities (i.e., securities whose price
movements correlate to the price movements of the securities underlying the
option) during the term of the option. By writing a covered call option, the
Fund foregoes the opportunity to realize any appreciation in the market price of
the underlying security above the exercise price and incurs the risk of having
to continue to hold a security that it might otherwise have subsequently
determined to sell based on investment considerations. A put option written by
the Fund is "covered" if the Fund maintains at all times cash, U.S. Government
Securities or other liquid securities having a value equal to the option
exercise price in a segregated account with the Fund's custodian, or if the Fund
has bought and holds a put on the same security (and on the same amount of
securities) where the exercise price of the put held by the Fund is equal to or
greater than the exercise price of the put written by the Fund. By writing a put
option, the Fund is exposed to the risk, during the term of the option, of a
decline in the price of the underlying security which the Fund would be required
to purchase at a higher price.
After the Fund has written an option, it may close out its position by
purchasing an option on the same security with the same exercise price and
expiration date as the option that it has previously written on the security.
The Fund will realize a profit or loss if the amount paid to purchase an option
is less or more, as the case may be, than the amount received from the sale
thereof. To close out a position as a purchaser of an option, the Fund would
ordinarily make a similar "closing sale transaction," which involves liquidating
the Fund's position by selling the option previously purchased, although the
Fund would be entitled to exercise the option should it deem it advantageous to
do so.
The Fund may also invest in so-called "synthetic" options or other
derivative instruments written by broker-dealers, including options on baskets
of specified securities. Synthetic options transactions involve the use of two
financial instruments that, together, have the economic effect of an options
transaction. The risks of synthetic options are generally similar to the risks
of actual options, with the addition of increased market risk, liquidity risk,
counterparty credit risk, legal risk and operations risk. Other derivative
instruments written by broker-dealers which may be utilized by the Fund include
derivative instruments which are both consistent with the Fund's investment
objective and legally permissible for the Fund. The risks of such derivative
instruments include market risk, liquidity risk, counterparty credit risk, legal
risk and operations risk. Synthetic options transactions and transactions
involving other derivative instruments as described above are deemed to be
subject to the Fund's limitation on the purchase of illiquid securities.
Options transactions may be effected on securities exchanges or in the
over-the-counter market. The Fund's over-the-counter options positions may be of
the American or the European variety. An American style option may be exercised
by the holder at any time after it is purchased until it expires. A European
style option
- --------------------------------------------------------------------------------
15
<PAGE> 16
may be exercised only on its expiration date. When options are purchased
over-the-counter, the Fund bears the risk that the counterparty that wrote the
option will be unable or unwilling to perform its obligations under the option
contract. In addition, the Fund may have difficulty closing out its positions in
over-the-counter options, which could result in losses to the Fund. Options
transactions that are effected in the over-the-counter market are subject to the
Fund's limitation on the purchase of illiquid securities.
OPTIONS ON SECURITIES INDICES
The Fund may purchase and may write and sell call and put options on stock
indices (such as the S&P 500 Index) listed on national securities exchanges or
traded in the over-the-counter market for hedging purposes. A stock index
fluctuates with changes in the market values of the stocks included in the
index. The effectiveness of purchasing or writing stock index options to hedge
the Fund's investment positions will depend upon the extent to which price
movements of securities held by the Fund correlate with price movements of the
stock index selected. Because the value of an index option depends upon
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss from the purchase or writing of
options on an index depends upon movements in the level of stock prices in the
stock market generally or, in the case of certain indexes, 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 stock indexes will be
subject to the Investment Adviser's ability to predict correctly movements in
the direction of the stock market generally or of a particular industry or
market segment. This requires different skills and techniques than predicting
changes in the price of individual stocks.
A put option on an index may be purchased to hedge against a general
decline in the stock market or in a particular market segment or industry. A
call option on an index may be purchased in an attempt to reduce the risk of
missing a general market advance or an increase in the prices of securities
within a particular market segment or industry.
Put and call options of stock indices written by the Fund must be
"covered." A call option on an index written by the Fund will be covered if the
Fund segregates in a separate account with its custodian cash, U.S. Government
Securities or other liquid securities with a value equal to its obligations
under the option. A put option written on an index will be "covered" if the Fund
maintains cash, U.S. Government Securities or other liquid securities with a
value equal to the exercise price of the option in a segregated account with its
custodian or if the Fund has bought and holds a put on the same index (and in
the same amount) where the exercise price of the put held is equal to or greater
than the exercise price of the put written.
OPTIONS ON FOREIGN CURRENCIES
The Fund may write and purchase covered put and call options on foreign
currencies, in amounts not exceeding 5% of the value of its total assets. The
Fund may engage in these transactions for the purpose of protecting against
declines in the U.S. dollar value of portfolio securities or in the U.S. dollar
of dividends or interest expected to be received on those securities. These
transactions may also be used to protect against increases in the U.S. dollar
cost of securities to be acquired by the Fund. As with other types of options,
however, writing an option on foreign currency constitutes only a partial hedge,
up to the amount of the premium received, and the Fund could be required to
purchase or sell foreign currencies at disadvantageous exchange rates, thereby
incurring losses. Certain options on foreign currencies are
- --------------------------------------------------------------------------------
16
<PAGE> 17
traded on the over-the-counter market and involve
liquidity and credit risks that may not be present in the case of exchange
traded currency options.
WARRANTS AND RIGHTS
The Fund may purchase warrants and rights to purchase securities. Warrants
are derivative instruments that permit, but do not obligate, the holder to
subscribe for other securities. Rights are similar to warrants, but normally
have a short duration and are distributed directly by the issuer to its
shareholders. Warrants and rights do not carry with them the right to dividends
or voting rights with respect to the securities that they entitle the holder to
purchase, and they do not represent any rights in the assets of the issuer. As a
result, warrants and rights may be considered more speculative than certain
other types of investments. In addition, the value of warrants and rights do not
necessarily change with the value of the underlying securities and such
securities cease to have value if they are not exercised prior to their
expiration dates.
- ------------------------------------------------------
RISK CONSIDERATIONS
The Fund's total return and net asset value will fluctuate, and such
fluctuations could be substantial. The Fund is subject to the risk that the
Investment Adviser's investment selections will cause the Fund to fail to
achieve its investment objective or to underperform the stock market as a whole.
The Fund is also subject to objective risk, which is the possibility that
returns from the value stocks in which the Fund invests will trail returns from
the overall stock market. As a group, value stocks tend to go through cycles of
relative under-performance and out-performance in comparison to common stocks in
general. These periods have, in the past, lasted for as long as several years.
Because the Fund may invest a significant portion of its assets in the
securities of companies having smaller market capitalization, the Fund's
portfolio may experience more volatility and be exposed to greater risk than the
portfolios of many other mutual funds. In addition, the Fund's use of derivative
investments and limited diversification may be considered speculative practices
and may result in losses to the Fund. Investments in non-investment grade debt
securities, foreign securities and illiquid securities by the Fund will also
involve certain risks as described above.
The Fund and the Investment Adviser are newly formed entities and have no
operating histories upon which investors can evaluate the performance of the
Fund. The principal members of the Investment Adviser, however, together have
substantial experience in managing private investment partnerships that have
investment objectives that are similar to the Fund's investment objective. See
"MANAGEMENT" and "COMPARATIVE PERFORMANCE INFORMATION."
The compensation that may be payable by the Fund to the Investment Adviser
is higher than the compensation paid by most other mutual funds with investment
objectives similar to the investment objective of the Fund. See "MANAGEMENT OF
THE FUND -- Investment Adviser."
- --------------------------------------------------------------------------------
17
<PAGE> 18
- ------------------------------------------------------
COMPARATIVE PERFORMANCE INFORMATION
The personnel of the Investment Adviser who are responsible for managing
the Fund's investments are the same individuals who, acting directly or through
an affiliate of the Investment Adviser, are solely responsible for providing
investment advice to two investment funds that are not registered under the 1940
Act (the "Other Funds"). See "MANAGEMENT OF THE FUND -- Investment Adviser." The
investment objectives, policies and strategies of the Other Funds are
substantially similar to those of the Fund. However, unlike the Other Funds, the
Fund does not borrow money from banks or brokers to purchase investments and
does not effect short sales of securities (other than short sales "against-
the-box"). The Investment Adviser will use investments and transactions in
options and other investment techniques to achieve investment exposures for the
Fund that are substantially similar to those that could be obtained through the
use of borrowings and short sales when, in the judgment of the Investment
Adviser, such action is warranted by prevailing investment conditions and
consistent with the investment objective of the Fund.
The composite investment performance of the Other Funds (which does not
represent the investment performance of the Fund) is set forth below. This
information is provided solely to illustrate the historical performance achieved
by the personnel of the Investment Adviser in managing investment funds having
the same investment objective as the Fund as compared to investment return of a
broad based market index. It is important to recognize that the fees and
expenses of the Other Funds and those of the Fund differ. The investment
performance of the Fund will therefore differ from the performance of the Other
Funds. In addition, the past performance of the Other Funds should not be viewed
as indicative of the Fund's future investment performance. Unlike the Fund, the
Other Funds are not subject to certain investment limitations, diversification
requirements and other restrictions imposed by the 1940 Act and the Code, which,
if applicable, might have adversely affected the past performance of the Other
Funds.
- --------------------------------------------------------------------------------
18
<PAGE> 19
The following data should be read in conjunction with the accompanying notes.
PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
<TABLE>
<CAPTION>
COMPOSITE OF OTHER COMPOSITE OF OTHER
FUNDS BASED ON FUNDS BASED ON S&P 500 AGGREGATE
YEAR ACTUAL FEES(1) THE FUND'S FEES(2) INDEX(3) NET ASSETS(4)
---- ------------------ ------------------ -------- -------------
<C> <C> <C> <C> <C>
1990(5) 2.4% 2.1% 2.5% 26
1991 49.4% 60.0% 30.4% 47
1992 16.6% 19.1% 7.6% 82
1993 8.5% 9.7% 10.1% 146
1994 -15.1% -15.4% 0.7% 128
1995 49.7% 56.0% 37.6% 215
1996 36.8% 43.9% 23.0% 340
1997(6) 29.0% 34.5% 29.6% 515
Cumulative Return(7) 1990 -1997 334% 444% 250%
</TABLE>
- ------------------------
NOTES
(1) The above returns of the Other Funds are net of all fees (including a 1%
management fee) and expenses and 20% incentive allocations to the advisers
of the Other Funds. The composite is a weighted average of the monthly total
returns of the Other Funds for the periods indicated. The returns are based
upon the results an investor would have achieved on an investment made at
the commencement of each of the Other Fund's operations. This information is
based upon audited financial statements for each period. The Other Funds
commenced operations on March 5, 1990 and August 16, 1993, respectively.
(2) The rates of return of the Other Funds have been modified to reflect the
investment performance of the Other Funds assuming the fees and estimated
expenses of the Fund. The composite is a weighted average of the monthly
total returns of the Other Funds for the periods indicated. The returns are
based upon the results an investor would have achieved on an investment made
at the commencement of each of the Other Fund's operations. This
presentation of the modified rates of return of the Other Funds should not
be viewed as indicative of the Fund's future investment performance.
(3) The S&P 500 Index is the Standard & Poor's Composite Index of 500 Stocks and
is provided for comparison purposes. The S&P 500 figures assume reinvestment
of all dividends paid by stocks included in the index. They do not, however,
include any allowance for the brokerage commissions or other fees required
to invest in those stocks. The Other Funds do not restrict their investments
solely to securities included in the S&P 500 Index.
(4) As of the end of the period, in millions.
(5) Returns for 1990 are for the period March 5, 1990 (date of inception)
through December 31, 1990.
(6) Returns for 1997 are for the period January 1, 1997 through September 30,
1997.
(7) Cumulative return is calculated by using a compounded, time-weighted return
and is the return that would have been earned on an investment in the Other
Funds on their inception through September 30, 1997.
- ------------------------------------------------------
MANAGEMENT
OF THE FUND
The Board of Trustees of the Trust is responsible for supervising the
operations and affairs of the Fund. The Trust's officers, who are all members,
partners, officers or employees of the Investment Adviser, the Administrator or
their affiliates, are responsible for the daily management and administration of
the Fund's operations.
INVESTMENT ADVISER
The Investment Adviser, Granum Capital Management, L.L.C., 126 East 56th
Street, 25th Floor, New York, New York 10022, an investment adviser registered
under the
- --------------------------------------------------------------------------------
19
<PAGE> 20
Investment Advisers Act of 1940, is controlled by Lewis M. Eisenberg and
Walter F. Harrison, III, who serve as its managing members. Subject to the
overall supervision of the Board of Trustees, the Investment Adviser is
responsible for managing the investment operations of the Fund in accordance
with the Fund's investment objective and policies. The Investment Adviser
formulates a continuing investment strategy for the Fund and makes all
decisions regarding investments to be purchased or sold for the Fund. An
investment committee (the "Investment Committee") comprised of Messrs.
Eisenberg and Harrison and Paul Matten is primarily responsible for managing
the investment operations of the Fund in accordance with the Fund's investment
objective and policies.
LEWIS M. EISENBERG graduated from Dartmouth College in 1964 and received an
M.B.A. from Cornell University in 1966. He has served as a founding partner and
portfolio manager of the investment adviser of one of the Other Funds since it
commenced operations in 1990, and has provided investment advice to the Other
Funds since their inception. From 1966 to 1989, Mr. Eisenberg was associated
with Goldman, Sachs & Co. ("Goldman, Sachs"). While at Goldman Sachs, Mr.
Eisenberg became a general partner of the firm, was co-head of the Equities
Division and served on the Sales, Trading and Research Policy Committee, the
Budget Committee and the International Equity Policy Committee, among others.
WALTER F. HARRISON, III graduated from Dartmouth College in 1966 and
received an M.B.A. in 1969 from the Amos Tuck School of Business Administration.
He has served as a founding partner and portfolio manager of the investment
adviser of one of the Other Funds since it commenced operations in 1990, and has
provided investment advice to the Other Funds since their inception. From 1971
to 1980, Mr. Harrison was associated with A.W. Jones & Associates and A.W. Jones
Co., two investment limited partnerships (collectively, "A.W. Jones"). During
his tenure with A.W. Jones, Mr. Harrison became a managing general partner and
was a member of the Policy Committee, set guidelines for equity exposure, and
performed extensive work on equities valuation techniques. From 1980 to 1983,
Mr. Harrison was senior vice president and a principal of Brokaw Capital
Management Co., Inc., and from 1983 to 1989, Mr. Harrison was associated with
Siebel Capital Management.
PAUL MATTEN graduated from Princeton University in 1984 and received an
M.B.A. and a J.D. in 1991 and an M.A. in 1995 from Harvard University. He has
served as a Vice President of the investment adviser of one of the Other Funds
since January 2, 1996. He served as a financial analyst with that investment
adviser from 1992 until 1995, when he took a leave of absence to complete his
studies at Harvard University. From 1984 to 1987, Mr. Matten was associated with
Merrill Lynch Capital Markets, an investment banking firm, as an analyst. From
1987 to 1991, Mr. Matten earned two graduate-level degrees at Harvard
University.
Although the Investment Adviser is a newly formed company which has not
previously served as the investment adviser of a registered investment company,
the advisory personnel of the investment adviser are all persons who are limited
partners or employees of the investment adviser to one of the Other Funds, which
commenced operations in 1990 and is under common control with the Investment
Adviser. In their capacities with such adviser or as general partners, these
persons have provided investment advisory services to clients, including the
Other Funds, and as of the date of this Prospectus currently manage investment
portfolios with assets in excess of $600 million.
The Fund pays the Investment Adviser monthly compensation computed daily at
the annual rate of 1.25% of the Fund's net assets (the
- --------------------------------------------------------------------------------
20
<PAGE> 21
"Basic Fee"), which rate is increased or decreased monthly (the "Monthly
Performance Adjustment") depending on the investment performance of the Fund
(including dividends and other distributions) relative to the investment
performance of the S&P 500 Index (including dividends and any cash distributions
paid by companies included in the index). The Monthly Performance Adjustment
will be 15% of the difference between the percentage investment performance of
the Fund and the percentage investment performance of the S&P 500 Index, each
measured over the preceding 12 calendar months (or since commencement of
operations if the Fund has not completed 12 full calendar months of operations),
but may not be more than +0.75% or -0.75%. This adjustment will result in
monthly compensation computed at annual rates ranging from 0.50% to 2.00% of the
Fund's net assets. For example, if the investment performance of the Fund is 12%
and the investment performance of the index is 10% for the measurement period,
the Basic Fee will be adjusted upward by 0.30% to 1.55%. Conversely, if the
performance of the Fund is 10% and the performance of the index is 12% for the
measurement period, the Basic Fee will be adjusted downward by 0.30% to 0.95%.
Prior to the completion of 12 full calendar months of operations, the short-term
investment performance of the Fund relative to the performance of the index will
have a greater impact on the total monthly advisory compensation than would be
the case if a measurement period of 12 full calendar months were used to compute
the Monthly Performance Adjustment.
The following table further illustrates how the advisory fee would vary
under the arrangement described above:
<TABLE>
<CAPTION>
PERCENTAGE POINT DIFFERENCE BETWEEN FUND MONTHLY TOTAL
PERFORMANCE (NET OF ADVISORY FEES) AND BASIC PERFORMANCE ADVISORY
PERCENTAGE CHANGE IN S&P 500 INDEX FEE (%) ADJUSTMENT (%) FEE (%)
---------------------------------------- ------- -------------- --------
<S> <C> <C> <C> <C>
+5 1.25 +0.75 2.00
+4 1.25 +0.60 1.85
+3 1.25 +0.45 1.70
+2 1.25 +0.30 1.55
+1 1.25 +0.15 1.40
0 1.25 0.0 1.25
-1 1.25 -0.15 1.10
-2 1.25 -0.30 0.95
-3 1.25 -0.45 0.80
-4 1.25 -0.60 0.65
-5 1.25 -0.75 0.50
</TABLE>
The table assumes that the differences between the Fund's performance and
the percentage change in the S&P 500 Index are exactly the percentages set forth
in the first column above. However, as previously discussed above, the Monthly
Performance Adjustment is computed as a specified percentage (15%) of the
percentage point difference between the Fund's performance and that of the S&P
500 Index. Thus, for example, if the percentage point difference in performance
was +1.3, the Monthly Performance Adjustment would be +0.19% and the total
advisory fee would be 1.44%.
The investment advisory fees payable by the Fund may be higher than the
fees paid by most
- --------------------------------------------------------------------------------
21
<PAGE> 22
other mutual funds with investment objectives similar in the investment
objective of the Fund.
ADMINISTRATOR
The Trust has retained Firstar Trust Company (the "Administrator"), 615
East Michigan Street, 3rd Floor, Milwaukee, WI 53202, to provide various
administrative and accounting services necessary for the operations of the Trust
and the Fund. Services provided by the Administrator include: facilitating
general Fund management; monitoring Fund compliance with federal and state
regulations; supervising the maintenance of the Fund's general ledger, the
preparation of the Fund's financial statements, the determination of the net
asset value of the Fund's assets and the declaration and payment of dividends
and other distributions to shareholders; and preparing specified financial, tax
and other reports. See "MANAGEMENT OF THE FUND -- Administrator." The Fund pays
the Administrator a monthly fee for administrative services which is calculated
as follows: a minimum annual fee of $30,000 on the first $40 million of the
Fund's average net assets plus 0.06% annually on the next $200 million of
average net assets; 0.05% annually on the next $300 million of average net
assets; and 0.03% annually on any remaining additional average net assets. The
Trust reimburses the Administrator for certain out-of-pocket expenses. In
addition, the Fund pays Firstar Trust Company an annual fee for accounting
services of $22,000 on the first $40 million of the assets, and 0.01% annually
on the next $200 million of such assets; and 0.005% of any remaining assets,
determined as of the end of the month; plus certain expenses.
- ------------------------------------------------------
FUND EXPENSES
The Fund pays all of its expenses other than those expressly assumed by the
Investment Adviser or the Distributors. Expenses of the Fund are deducted from
the Fund's total income before dividends are paid. The Fund's expenses include,
but are not limited to, the following: fees paid to the Investment Adviser and
the Administrator; payments pursuant to the Fund's distribution plan (see
"DISTRIBUTION PLAN"); fees of the Fund's independent accountants, custodian and
transfer agent and certain related expenses; taxes; organization costs;
brokerage fees and commissions; interest; costs incident to meetings of the
Board of Trustees of the Trust and meetings of the Fund's shareholders; costs of
printing and mailing prospectuses and reports to shareholders and the filing of
reports with regulatory bodies; legal fees and disbursements; fees payable to
federal and state regulatory authorities; fees and expenses of Trustees who are
not affiliated with the Investment Adviser, the Distributors or the
Administrator; and any extraordinary expenses.
The Investment Adviser has borne certain organizational costs which have
been reimbursed by the Fund. These expenses have been deferred by the Fund and
will be amortized over a period of sixty months.
- ------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS
The Fund intends to pay dividends at least annually consisting of
substantially all of its net investment income (i.e., the income it earns from
dividends and interest on its investments, and any short-term capital gains, net
of Fund expenses). Unless requested otherwise by a shareholder, dividends are
automatically reinvested in additional shares of the Fund at the net asset value
per share of the Fund in effect on the day after the dividend payment record
date.
- --------------------------------------------------------------------------------
22
<PAGE> 23
CAPITAL GAINS DISTRIBUTIONS
The Fund will realize capital gains or losses when it sells investments at
prices that are higher or lower than the prices paid by the Fund to purchase the
investments. Long-term capital gains, if any, will be distributed to
shareholders at least once annually. An additional distribution will be paid if
required for the Fund to avoid imposition of a federal income or excise tax on
undistributed capital gains. Capital gains distributions are automatically
reinvested in additional shares of the Fund at the net asset value per share in
effect on the day after the record date, unless otherwise requested by the
shareholder.
TAXES
The Fund intends to qualify each year as a "regulated investment company"
under Subchapter M of the Code. If so qualified, the Fund will not be subject to
federal income taxes to the extent that it distributes its net income to
shareholders as required by the Code. Certain federal income and excise taxes
would be imposed on the Fund if it fails to make certain required distributions
of its income to shareholders. The Fund intends, however, to make distributions
in a manner which will avoid the imposition of any such taxes. If, however, for
any taxable year the Fund fails to qualify as a "regulated investment company,"
it would be subject to federal corporate income tax on its taxable income.
Shareholders that are subject to federal income taxation will have to pay
any applicable federal income taxes on the dividends and distributions they
receive from the Fund, whether paid in cash or reinvested in additional shares
of the Fund. Dividends and distributions will also be subject to applicable
state and local taxes. Dividends derived from net investment income or net
realized short-term capital gains and all or a portion of any gains realized
from the sale or other disposition of certain market discount bonds will be
taxable to shareholders as ordinary income for federal income tax purposes.
Distributions from net realized long-term capital gains will be taxable to
shareholders as either mid-term or long-term capital gains (as appropriate) for
federal income tax purposes, regardless of how long shareholders have held their
shares of the Fund. The Code provides that the net capital gain of an individual
generally will not be subject to federal income tax at a rate in excess of 28%.
Each year, shareholders of the Fund will be sent full information on dividends
and capital gains distributions for tax purposes, including information as to
the portion taxable as ordinary income, the portion taxable as mid-term and
long-term capital gains and the amount of dividends eligible for the dividends
received deduction available for corporations.
Redemptions of shares of the Fund will result in the recognition of any
gain or loss for federal income tax purposes.
Dividends received from net investment income, together with distributions
from net realized short-term gain and all or a portion of any gains realized
from the sale or other disposition of certain market discount bonds, paid by the
Fund to a foreign investor generally are subject to U.S. nonresident withholding
tax at the rate of 30%, unless the foreign investor claims the benefit of a
lower rate specified in a treaty. Distributions from net realized long-term
gains paid by the Fund to a foreign investor as well as proceeds of any
redemption from a foreign investor's account may be subject to backup
withholding, as described below, unless the foreign investor certifies his
non-U.S. residency status.
Federal regulations generally require the Fund to withhold ("backup
withholding") and remit to the U.S. Treasury 31% of dividends, distributions
from net realized long-term gains and the proceeds of any redemption paid to a
shareholder if such shareholder fails to certify either that the Taxpayer
Identification Number ("TIN") furnished to the Fund is correct or that such
- --------------------------------------------------------------------------------
23
<PAGE> 24
shareholder has not received notice from the Internal Revenue Service (the
"IRS") of being subject to backup withholding. Furthermore the IRS may notify
the Fund to institute backup withholding if the IRS determines a shareholder's
TIN is incorrect or if a shareholder has failed to properly report taxable
dividends or interest on a federal tax return.
A TIN is either the Social Security number or employer identification
number of the record owner of the account. Any tax withheld as a result of
backup withholding does not constitute an additional tax imposed on the record
owner of the account, and may be claimed as a credit on the record owner's
federal income tax return.
The foregoing discussion regarding Federal taxation is for general
information only. It is based on tax laws and regulations as in effect on the
date of this Prospectus, and is subject to change by legislative or
administrative action. Prospective shareholders should consult their own tax
advisers concerning the federal, state, local and foreign tax consequences of
such an investment.
- ------------------------------------------------------
HOW TO BUY SHARES
Shares of the Fund are available for purchase by investors directly from
the Fund through each Distributor and from selected securities dealers which
have entered into dealer agreements with the Distributor. All purchases of
shares are effected at the net asset value per share of the Fund next computed
after the receipt of a purchase order and payment for the shares being
purchased. See "Share Price," below. No sales charge is imposed in connection
with the purchase of shares. However, the Distributors and securities dealers
that sell shares of the Fund receive compensation for their services which is
paid by the Fund. See "DISTRIBUTION PLAN." Stock certificates will not be
issued. Instead, the Transfer Agent maintains an account for each shareholder
reflecting full and fraction shares of the Fund owned, and sends shareholders
confirmations of each transaction and quarterly statements showing account
balances. The Fund reserves the right to reject any order to purchase shares.
The minimum initial investment in the Fund by an investor is $5,000. If an
investor has invested at least $5,000 in the Fund directly or indirectly through
another account (including, among other things, a 401(k) retirement account),
there is no minimum initial investment if such investor desires to invest
through additional accounts, and there is no minimum investment with respect to
any Fund account opened by the spouse of such investor. Subsequent investments
may be made in any amount of $1,000 or more. The Fund may waive these minimum
investment requirements in special circumstances and may modify these
requirements at any time.
Shares of the Fund may be purchased by check or federal funds wire using
the procedures described below.
PURCHASE BY MAIL
Checks to purchase shares of the Fund must be drawn on a U.S. bank and made
payable to "Granum Value Fund." Checks should be sent, together with a completed
Account Application in the case of an initial investment, to Granum Value Fund,
c/o Firstar Trust Company, 615 East Michigan Street, 3rd Floor, Milwaukee, WI
53202. Subsequent investments should be accompanied with an investment slip
(which will be enclosed with confirmations and statements sent to investors and
which will also be available upon request from the Distributors or the
Administrator), and your Fund account number should be written on the check.
Third party checks will not be accepted.
All checks are accepted subject to collection. In the event that an
investor's check does not
- --------------------------------------------------------------------------------
24
<PAGE> 25
clear, the Fund will hold the investor liable for the
full amount of any decrease in the value of the shares that have been issued and
for any collection costs incurred by the Fund. Payments for redemptions of
shares recently purchased by check (but not the date as of which the redemption
price is determined) may be delayed to assure that the purchase check clears,
which may take up to 15 days from the Transfer Agent's receipt of the check.
This delay can be avoided if shares are purchased by wire and will also not
apply if there are sufficient other shares in the account from which to satisfy
the requested redemption. In addition, Firstar Trust Company will charge a $20
fee for any returned check.
PURCHASE BY WIRE
Shares can be purchased by federal funds wire by existing investors and
prospective investors whose applications have been accepted by the Fund. To send
a wire payment, you should have your bank transmit federal funds to: Firstar
Bank Milwaukee, N.A., 777 East Wisconsin Avenue, Milwaukee, WI 53202, ABA #
075000022, Credit: Firstar Trust Company, Acct# 112952137, Attn.: Granum Value
Fund, Account Name (Name of Investor). In the case of an initial investment, you
should obtain an account number by calling 1-888-5-GRANUM (547-2686) before
wiring funds. A completed Account Application, including your account number,
should be submitted promptly after wiring federal funds for an initial
investment.
For further information regarding the procedures to be used in purchasing
shares, you may contact either Distributor or your securities dealer, or call
1-888-5-GRANUM (547-2686).
PLEASE BE SURE TO SUBMIT A COMPLETED ACCOUNT APPLICATION WITH ALL INITIAL
PURCHASES. AN ACCOUNT APPLICATION MUST BE ON FILE WITH THE TRANSFER AGENT IN
ORDER TO REDEEM SHARES.
SHARE PRICE
The Fund's net asset value per share is determined once daily as of the
close of trading on the floor of the New York Stock Exchange (currently 4:00
p.m., New York time), on each day the New York Stock Exchange is open for
business. Net asset value per share is computed by dividing the value of the
Fund's net assets (i.e., the value of its assets less its liabilities) by the
total number of Fund shares outstanding. The Fund's investments are valued at
their market value or, if market quotations are not readily available, at their
fair value as determined by the Investment Adviser in accordance with procedures
adopted by the Fund's Board of Trustees. The time at which transactions and
shares are priced and the time until which orders are accepted may be changed in
case of an emergency or if the NYSE closes at a time other than 4:00 p.m.,
Eastern time.
- ------------------------------------------------------
HOW TO REDEEM SHARES
Shares of the Fund may be redeemed at any time at their current net asset
value per share next computed after receipt of a redemption request in proper
form. See "HOW TO BUY SHARES -- Share Price." No charges are imposed in
connection with redemptions of shares. The value of the shares redeemed may be
more or less than their original cost, depending upon the Fund's then-current
net asset value.
The Fund ordinarily will make payment for all shares redeemed within seven
days after receipt by the Transfer Agent of a redemption request in proper form,
but may be delayed for more than seven days as provided by SEC rules. However,
if you purchase shares by check and submit shortly thereafter a redemption
request, the redemption proceeds will not be transmitted to you until your
purchase check has cleared, which may take up to 15 days. Prior to the time any
redemption is
- --------------------------------------------------------------------------------
25
<PAGE> 26
effective, dividends on such shares will accrue and
be payable, and you will be entitled to exercise all other rights of beneficial
ownership. Shares may not be redeemed unless you have submitted a completed
Account Application which is on file with the Transfer Agent.
The Fund reserves the right to redeem at its option, upon not less than 45
days' written notice, the account of any shareholder that, as a result of a
redemption of shares, has a value of less than $5,000 as the result of one or
more redemptions if the shareholder does not purchase additional shares to
increase the account value to at least $5,000 during the notice period.
Shares of the Fund may be redeemed by using one of the procedures described
below. For further information regarding redemption procedures, you may contact
either Distributor or your securities dealer, or call 1-888-5-GRANUM (547-2686).
WRITTEN REDEMPTION REQUESTS
You may redeem shares by written request mailed to: Granum Value Fund, c/o
Firstar Trust Company, 615 East Michigan Street, 3rd Floor, Milwaukee, WI 53202.
A written request must be signed by each shareholder, including each owner of a
joint account, and each signature must be guaranteed for redemptions over
$50,000. The Transfer Agent has adopted standards and procedures pursuant to
which signature guarantees in proper form generally will be accepted from
domestic banks, brokers, dealers, credit unions, national securities exchanges,
registered securities associations, clearing agencies and savings associations,
as well as from participants in the New York Stock Exchange Medallion Signature
Program, the Securities Transfer Agents Medallion Program ("STAMP") and the
Stock Exchanges Medallion Program. If you have any questions with respect to
signature-guarantees, please call 1-888-5-GRANUM (547-2686).
The proceeds of the redemption of shares redeemed by written request will
normally be paid by check made payable to the shareholders of record. However,
you may request that redemption proceeds of $1,000 or more be wired to any
member bank of the Federal Reserve System if you have previously on your Account
Application, or on a Shareholder Services Form filed with the Transfer Agent,
designated an account at such bank to which redemption proceeds may be wired.
TELEPHONE REDEMPTION REQUESTS
You may redeem shares by telephone request if you have checked the
appropriate box on the Account Application or have filed a Shareholder Services
Form with the Transfer Agent. If you have selected this option, you may place a
redemption request by calling 1-888-5-GRANUM (547-2686). The proceeds of
telephone redemptions in the amount of $1,000 or more will be wired to your
account at any member bank of the Federal Reserve System if you have previously
designated an account at such a bank to which redemption proceeds may be wired.
Otherwise redemption proceeds will be paid by check made payable to the
shareholders of record.
During times of extreme economic or market conditions, you may experience
difficulty in contacting the Transfer Agent by telephone to request a redemption
of Fund shares. In such cases, you should consider using a written redemption
request sent by overnight service to: Granum Value Fund, c/o Firstar Trust
Company, 615 East Michigan Street, 3rd Floor, Milwaukee, WI 53202. Using this
procedure may result in your redemption request being processed at a later time
that it would have been if the telephone redemption procedure had been used.
During the delay, the Fund's net asset value may fluctuate.
By selecting the telephone redemption option, you authorize the Transfer
Agent to act on telephone instructions reasonably believed by the
- --------------------------------------------------------------------------------
26
<PAGE> 27
Transfer Agent to be genuine. The Transfer Agent employs reasonable procedures,
such as requiring a form of personal identification, to confirm that telephone
redemption instructions are genuine, and neither the Fund nor the Transfer Agent
will be liable for any losses due to unauthorized or fraudulent instructions if
such procedures are followed. The Fund reserves the right to refuse any request
made by telephone, including requests made shortly after a change of address,
and may limit the number of such requests within a specified period.
- ------------------------------------------------------
DISTRIBUTION PLAN
Under a distribution plan adopted by the Trust in accordance with Rule
12b-1 under the 1940 Act (the "Distribution Plan"), the Fund makes payments to
the Distributors in consideration of the services they provide in connection
with the sale of the Fund's shares to investors ("Distribution Services") and
for the furnishing of account related services by the Distributors and
securities dealers to shareholders of the Fund ("Shareholder Services").
Shareholder Services provided by the Distributors and securities dealers include
responding to shareholder inquiries regarding the Fund and their accounts with
the Fund, and providing shareholders with reports, information and services
related to their Fund accounts.
In consideration of the services provided by the Distributors, the Trust
has agreed on behalf of the Fund to pay a monthly fee to each Distributor for
Distribution Services and a monthly fee to each Distributor for Shareholder
Services, which fees are computed at the annual rates of 0.50% of the average
net assets of the Fund and 0.25% of the average net assets of the Fund,
respectively, attributable to shares held by persons who have purchased shares
through such Distributor or through broker-dealers that have entered into
selling agreements with such Distributor. From such compensation, the
Distributors make payments to securities dealers whose customers have purchased
shares of the Fund. Payments to securities dealers are made in arrears on a
quarterly basis.
- ------------------------------------------------------
FUND PERFORMANCE INFORMATION
Advertisements and sales literature relating to the Fund and reports to
shareholders may include quotations of the Fund's investment performance. In
such materials, the Fund's performance may be calculated on the basis of average
annual total return or total return.
Average annual total return is calculated pursuant to a standardized
formula which assumes that an investment was purchased with an initial payment
of $1,000 and that the investment was redeemed at the end of a stated period of
time, after giving effect to the reinvestment of dividends and distributions
during the period. The return is expressed as a percentage rate which, if
applied on a compounded annual basis, would result in the redeemable value of
the investment at the end of the period. Advertisements of the Fund's
performance will include the Fund's average annual total return for one, five
and ten year periods, depending upon the length of time during which the Fund
has operated.
Total return is computed on a per share basis and assumes the reinvestment
of dividends and distributions. Total return generally is expressed as a
percentage rate which is calculated by combining the income and principal
changes for a specified period and dividing by the net asset value per share at
the beginning of the period. Advertisements may include the percentage rate of
total return or may include the value of a
- --------------------------------------------------------------------------------
27
<PAGE> 28
hypothetical investment at the end of the period
which assumes the application of the percentage rate of total return.
Performance will vary from time to time, and past results are not
necessarily representative of future results.
Comparative performance information may be used from time to time in
advertising or marketing the Fund's shares, including data from Lipper
Analytical Services, Inc., the S&P 500 Index, the Wilshire 5000 Index, the Dow
Jones Industrial Average, Money Magazine, Morningstar, Inc. and other industry
publications.
- ------------------------------------------------------
GENERAL INFORMATION
DESCRIPTION OF SHARES
The Trust is a Delaware business trust, organized pursuant to a Certificate
of Trust dated December 19, 1996, and is authorized to issue an unlimited number
of shares of beneficial interest, $0.001 par value. As of the date of this
Prospectus, the Trust has established one series of its shares, representing
interests in the Fund. The Board of Trustees has the power to establish
additional series of shares representing interests in separate investment
portfolios and, subject to applicable laws and regulations, to issue two or more
classes of shares of each series. Shares are fully paid and non-assessable, and
have no preemptive or conversion rights.
Shareholders of the Fund are entitled to vote on the election of Trustees
and the ratification of the Trust's independent accountants when those matters
are voted upon at a meeting of shareholders and on certain other matters. Each
share (and fractional share) is entitled to that number of votes which equals
the net asset value of such share (or fraction thereof). Shares of the Fund have
non-cumulative voting rights, which means that shareholders entitled to cast
more than 50% of the votes for the election of Trustees can elect all of the
Trustees standing for election if they choose to do so.
Under Delaware law, a shareholder of the Fund could, under certain
circumstances, be held personally liable for the obligations of the Trust and
the Fund, but only to the extent of the shareholder's investment. The
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust or the Fund, which
are binding only on the assets and property of the Fund. The Declaration of
Trust requires that notice of this disclaimer be given in each contract or
obligation entered into or executed by the Trust or the Trustees. In view of the
foregoing, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Fund itself would
be unable to meet its obligations and should therefore be considered remote.
Annual meetings of shareholders will not be held except as required by the
1940 Act or other applicable law. A meeting will be held on the removal of a
trustee or trustees of the Fund if requested in writing by holders of not less
than 10% of the outstanding shares of the Fund. The Fund will assist in
communications among shareholders as required by Section 16(c) of the 1940 Act.
DISTRIBUTORS
Mercer Allied Company ("Mercer Allied") and Granum Securities, L.L.C.
("Granum Securities") serve as co-distributors of shares of the Fund. The
principal business address of Mercer Allied is One Wall Street, Albany, New York
12205. The principal business address of Granum Securities is 126 East 56th
Street, Twenty-fifth Floor, New York, New York 10022. Granum Securities is an
affiliate of, and is under common control with, the Investment Adviser.
- --------------------------------------------------------------------------------
28
<PAGE> 29
TRANSFER AGENT
Firstar Trust Company, 615 East Michigan Street, 3rd Floor, Milwaukee, WI
53202, serves as the Fund's transfer agent and dividend disbursing agent.
Shareholders of the Fund may contact the Transfer Agent with their questions
regarding transactions in shares of the Fund and their account balances.
CUSTODIAN
Firstar Trust Company also serves as custodian for the Fund, and in that
capacity maintains custody of all securities and cash assets of the Fund. The
custodian is authorized to hold the Fund's investments in securities
depositories and with subcustodians approved by the Fund.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933, as amended and the 1940 Act. Copies of the Registration
Statement may be obtained at a reasonable charge from the SEC or may be
examined, without charge, at the office of the SEC in Washington, D.C.
SHAREHOLDER REPORTS
The Fund sends shareholders annual and semi-annual reports without charge.
These reports include further information regarding the Fund's investment
performance. The financial statements of the Fund appearing in the Fund's annual
reports will be audited by Coopers & Lybrand L.L.P., the Fund's independent
public accountants.
SHAREHOLDER INQUIRIES
For questions concerning shareholder accounts, dividends and share purchase
and redemption procedures, a shareholder may contact their securities dealer or
may call the Transfer Agent toll free at 1-888-5-GRANUM (547-2686).
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29
<PAGE> 30
- ------------------------------------------------------
INVESTMENT ADVISER
GRANUM CAPITAL MANAGEMENT, L.L.C.
126 East 56th Street
Twenty-fifth Floor
New York, New York 10022
- ------------------------------------------------------
DISTRIBUTORS
MERCER ALLIED COMPANY
One Wall Street
Albany, New York 12205
GRANUM SECURITIES, L.L.C.
126 East 56th Street
Twenty-fifth Floor
New York, New York 10022
- ------------------------------------------------------
ADMINISTRATOR, TRANSFER AGENT AND CUSTODIAN
FIRSTAR TRUST COMPANY
615 East Michigan Street
3rd Floor
Milwaukee, Wisconsin 53202
- ------------------------------------------------------
INDEPENDENT PUBLIC ACCOUNTANTS
COOPERS & LYBRAND L.L.P
The 411 East Wisconsin Building
Milwaukee, Wisconsin 53202
- ------------------------------------------------------
LEGAL COUNSEL
SCHULTE ROTH & ZABEL LLP
900 Third Avenue
New York, New York 10022
PROSPECTUS
GRANUM
VALUE
FUND
December 1, 1997
- --------------------------------------------------------------------------------
<PAGE> 31
GRANUM VALUE FUND
126 EAST 56TH STREET
TWENTY-FIFTH FLOOR
NEW YORK, NEW YORK 10022
STATEMENT OF
ADDITIONAL INFORMATION
DATED DECEMBER 1, 1997
Granum Value Fund (the "Fund") is a non-diversified series of Granum Series
Trust (the "Trust"), an open-end management investment company (or mutual fund).
The investment objective of the Fund is to seek capital appreciation. The Fund
pursues this objective by investing its assets principally in equity securities,
including common and preferred stocks and other securities, such as warrants and
stock options, having equity characteristics. In managing the Fund's portfolio,
the investment adviser of the Fund attempts to identify securities that are
undervalued relative to their potential for growth. The Fund may also pursue its
objective by investing in fixed income securities when such securities, in the
judgment of the investment adviser, provide attractive opportunities for capital
appreciation. As part of its investment program, the Fund may use certain
derivative investments which involve certain risks. The Fund's investment
policies and practices involve certain risks and there can be no assurance that
the Fund will achieve its investment objective.
Granum Capital Management, L.L.C. serves as the Fund's investment adviser
(the "Investment Adviser"). Firstar Trust Company (the "Administrator") provides
administrative services to the Fund.
Shares of the Fund are distributed on a continuous basis at their current
net asset value per share, without imposition of any front-end or contingent
deferred sales charge, by Mercer Allied Company and Granum Securities, L.L.C.
(the "Distributors") and by selected securities dealers. The minimum initial
investment in the Fund is $5,000. Subsequent investments may be made in any
amount of $1,000 or more.
------------------------
Information about the Fund is set forth in a separate Prospectus for the
Fund, dated December 1, 1997, which provides the basic information you should
know before investing. To obtain a copy of the Fund's Prospectus, please write
to Granum Value Fund, c/o Firstar Trust Company, 615 East Michigan Street, 3rd
Floor, Milwaukee, WI 53202, or call 1-888-5-GRANUM (547-2686). This Statement of
Additional Information is not a prospectus, but contains information in addition
to and more detailed than that set forth in the Prospectus. It is intended to
provide you with additional information regarding the activities and operations
of the Fund and the Trust, and should be read in conjunction with the Fund's
Prospectus.
<PAGE> 32
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT POLICIES AND PRACTICES........................... B-3
DERIVATIVE INVESTMENTS...................................... B-7
INVESTMENT RESTRICTIONS..................................... B-8
TRUSTEES AND OFFICERS....................................... B-9
INVESTMENT ADVISORY AGREEMENT............................... B-11
DISTRIBUTORS................................................ B-13
DISTRIBUTION PLAN........................................... B-13
HOW TO REDEEM SHARES........................................ B-15
DETERMINATION OF NET ASSET VALUE............................ B-15
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................... B-16
PORTFOLIO TRANSACTIONS AND BROKERAGE........................ B-18
PERFORMANCE INFORMATION..................................... B-19
GENERAL INFORMATION......................................... B-20
APPENDIX A.................................................. B-23
</TABLE>
<PAGE> 33
INVESTMENT POLICIES AND PRACTICES
The sections below describe, in greater detail than in the Fund's
Prospectus, some of the different types of investments which may be made by the
Fund and the different investment practices in which the Fund may engage. The
use of options by the Fund is discussed under "DERIVATIVE INVESTMENTS." The
general investment policies of the Fund are described in the Prospectus.
TYPES OF EQUITY SECURITIES
The equity securities which may be purchased by the Fund include common,
preferred and convertible preferred stocks, and securities having equity
characteristics such as rights, warrants and convertible debt securities. See
"-- Convertible Securities." Common stocks and preferred stocks represent equity
ownership interests in a corporation and participate in the corporation's
earnings through dividends which may be declared by the corporation. Unlike
common stocks, preferred stocks are entitled to stated dividends payable from
the corporation's earnings, which in some cases may be "cumulative" if prior
stated dividends have not been paid. Dividends payable on preferred stock have
priority over distributions to holders of common stock, and preferred stocks
generally have preferences on the distribution of assets in the event of the
corporation's liquidation. Preferred stocks may be "participating," which means
that they may be entitled to dividends in excess of the stated dividend in
certain cases. The rights of common and preferred stocks are generally
subordinate to rights associated with a corporation's debt securities.
CONVERTIBLE SECURITIES
Convertible securities may be purchased by the Fund. These securities
include convertible debt obligations and convertible preferred stock. A
convertible security entitles the holder to exchange it for a fixed number of
shares of common stock (or other equity security), usually at a fixed price
within a specified period of time. Until conversion, the holder receives the
interest paid on a convertible bond or the dividend preference of a preferred
stock.
Convertible securities have an "investment value" which is the theoretical
value determined by the yield it provides in comparison with similar securities
without the conversion feature. The investment value changes based upon
prevailing interest rates and other factors. They also have a "conversion value"
which is the worth in market value if the security were exchanged for the
underlying equity security. Conversion value fluctuates directly with the price
of the underlying security. If conversion value is substantially below
investment value, the price of the convertible security is governed principally
by its investment value. If the conversion value is near or above investment
value, the price of the convertible security generally will rise above
investment value and may represent a premium over conversion value due to the
combination of the convertible security's right to interest (or dividend
preference) and the possibility of capital appreciation from the conversion
feature. A convertible security's price, when price is influenced primarily by
its conversion value, will generally yield less than a senior non-convertible
security of comparable investment value. Convertible securities may be purchased
at varying price levels above their investment values or conversion values.
However, there is no assurance that any premium above investment value or
conversion value will be recovered because prices change and, as a result, the
ability to achieve capital appreciation through conversion may never be
realized.
SPECIAL CORPORATE SITUATION INVESTMENTS
The Fund may invest a significant portion of its total assets in securities
of companies that may be involved in special corporate situations, the
occurrence of which would favorably affect the values of the companies' equity
securities. Such situations could include, among other developments, the
following: a change in management or management policies; the acquisition of a
significant equity position in the company by an investor or investor group; a
merger, reorganization or the sale of a division; the spin-off of a subsidiary,
division, or other substantial assets; or a third-party or issuer tender offer.
The primary risk of this type of investing is that if the contemplated
transaction is abandoned, revised, delayed or becomes subject to
B-3
<PAGE> 34
unanticipated uncertainties, the market price of the securities may decline
below the purchase price paid by the Fund.
In general, securities that are the subject of a special corporate
situation sell at a premium to their market prices immediately prior to the
announcement of the situation. However, the increased market price of these
securities sometimes reflect a discount from what the stated or appraised value
of the security would be if the contemplated transaction were approved or
consummated. These investments may be advantageous when the following occur: (1)
the discount significantly overstates the risk of the contingencies involved;
(2) the discount significantly undervalues the securities, assets or cash to be
received by shareholders of the prospective portfolio company as a result of the
contemplated transactions; or (3) the discount fails adequately to recognize the
possibility that the offer or proposal may be replaced or superseded by an offer
or proposal of greater value. The evaluation of these contingencies requires
unusually broad knowledge and experience on the part of the Investment Adviser,
which must appraise not only the value of the issuer and its component
businesses as well as the assets or securities to be received as a result of the
contemplated transaction, but also the financial resources and business
motivation of the offeror as well as the dynamics of the business climate when
the offer or proposal is in progress.
The Fund's special corporate situation investments may tend to increase its
turnover ratio, thereby increasing its brokerage and other transaction expenses
as well as making it more difficult for the Fund to meet the tests for favorable
tax treatment as a "regulated investment company" specified by the Internal
Revenue Code of 1986, as amended (the "Code"). See "DIVIDENDS, DISTRIBUTIONS AND
TAXES." The Investment Adviser attempts to select investments of the type
described that, in its view, have a reasonable prospect of capital appreciation
that is significant in relation to both the risk involved and the potential of
available alternate investments. The Investment Adviser will closely monitor the
effect of such investments on the tax qualification tests of the Code.
TYPES OF FIXED INCOME SECURITIES
Generally. The types of fixed income securities in which the Fund may
invest, and certain of their attendant risks, are described in the Prospectus.
Under certain circumstances, these investments are subject to certain quality
limitations and other restrictions and include money market instruments and
other types of obligations. Investors should recognize that, although securities
ratings issued by Standard & Poor's Ratings Group, a division of The McGraw-Hill
Companies, Inc. ("S&P") and Moody's Investors Service, Inc. ("Moody's") provide
a generally useful guide as to credit risks, they do not offer any criteria to
evaluate interest rate risk. A description of the ratings used by S&P and
Moody's is set forth in Appendix A to this Statement of Additional Information.
Changes in interest rate levels generally cause fluctuations in the prices of
fixed income securities and will, therefore, cause fluctuations in the net asset
value per share of the Fund. Subsequent to the purchase of a fixed income
security by the Fund, the ratings or credit quality of such security may
deteriorate. Any such subsequent adverse changes in the rating or quality of a
security held by the Fund would not require the Fund to sell the security.
Zero Coupon Securities. Fixed income securities purchased by the Fund may
include zero coupon securities. These securities do not pay any interest until
maturity and, for this reason, zero coupon securities of longer maturities may
trade at a deep discount from their face or par values and may be subject to
greater fluctuations in market value than ordinary debt obligations of
comparable maturity. Current federal tax law requires the holder of a zero
coupon security to accrue a portion of the discount at which the security was
purchased as income each year even though the holder receives no interest
payment that year.
Variable and Floating Rate Securities. Fixed income securities purchased by
the Fund may also include variable and floating rate securities. The interest
rates payable on these securities are adjusted either at pre-designated periodic
intervals or whenever there is a change in an established market rate of
interest. Other features may include a right whereby the Fund may demand
prepayment of the principal amount prior to the stated maturity (a "demand
feature") and the right of an issuer to prepay the principal amount prior to
maturity. One benefit of variable and floating rate securities is that, because
of interest rate adjustments on the
B-4
<PAGE> 35
obligation, changes in market value that would normally result from fluctuations
in prevailing interest rates are reduced. One benefit of a demand feature is
enhanced liquidity.
Non-Investment Grade Debt Securities. As discussed in the Prospectus, the
Fund may invest in both investment grade and non-investment grade debt
securities. Non-investment grade debt securities (typically called "junk bonds")
are securities that are considered to be predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal.
Companies that issue certain of these securities often are highly leveraged
and may not have available to them more traditional methods of financing.
Therefore, the risk associated with acquiring the securities of such issuers
generally is greater than is the case with higher grade securities. For example,
during an economic downturn or a sustained period of rising interest rates,
highly leveraged issuers of these securities may not have sufficient revenues to
meet their interest payment obligations. The issuer's ability to service its
debt obligations also may be affected adversely by specific corporate
developments, forecasts, or the unavailability of additional financing. The risk
of loss because of default by the issuer is significantly greater for the
holders of these securities because such securities generally are unsecured and
often are subordinated to other creditors of the issuer.
Because there is no established retail secondary market for many of these
securities, the Fund anticipates that such securities could be sold only to a
limited number of dealers or institutional investors. To the extent a secondary
trading market for these securities does exist, it generally is not as liquid as
the secondary market for higher grade securities. The lack of a liquid secondary
market may have an adverse impact on market price and yield and the Fund's
ability to dispose of particular issues when necessary to meet the Fund's
liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it more difficult for the
Fund to obtain accurate market quotations for purposes of valuing the Fund's
portfolio and calculating its net asset value. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of these securities. In such cases, judgment may play a
greater role in valuation because less reliable, objective data may be
available.
These securities may be particularly susceptible to economic downturns. It
is likely that an economic recession could disrupt severely the market for such
securities and may have an adverse impact on the value of such securities. In
addition, it is likely that any such economic downturn could adversely affect
the ability of the issuers of such securities to repay principal and pay
interest thereon and increase the incidence of default for such securities.
The Fund may acquire these securities during an initial offering. Such
securities may involve special risks because they are new issues. The Fund has
no arrangement with any person concerning the acquisition of such securities,
and the Investment Adviser will review the credit and other characteristics
pertinent to such new issues.
FORWARD CONTRACTS
As discussed in the Prospectus, the Fund is authorized to enter into
forward foreign currency exchange contracts ("forward contracts"). These
contracts represent agreements to exchange an amount of currency at an agreed
upon future date and rate. The rate can be higher or lower than the spot rate
between the currencies that are the subject of the contract. A forward contract
generally has no deposit requirement, and such transactions do not involve
commissions. By entering into a forward contract for the purchase or sale of the
amount of foreign currency invested in an equity or fixed income security of a
foreign issuer (a "foreign security"), the Fund can hedge against possible
variations in the value of the dollar versus the subject currency either between
the date the foreign security is purchased or sold and the date on which payment
is made or received ("transaction hedging"), or during the time the Fund holds
the foreign security ("position hedging"). Hedging against a decline in the
value of a currency through the use of forward contracts does not eliminate
fluctuations in the prices of securities or prevent losses if the prices of
securities decline. Hedging transactions preclude the opportunity for gain if
the value of the hedged currency should rise. The Fund will not speculate in
forward currency contracts. If the Fund enters into a "position hedging
transaction," which is
B-5
<PAGE> 36
the sale of forward non-U.S. currency with respect to a security held by it and
denominated in such foreign currency, the Trust's custodian will place cash or
liquid securities in a separate account in an amount equal to the value of the
Fund's total assets committed to the consummation of such forward contract. If
the value of the securities placed in the account declines, additional cash or
securities will be placed in the account so that the value of cash or securities
in the account will equal the amount of the Fund's commitments with respect to
such contracts. Forward contracts will not be used in all cases and, in any
event, cannot completely protect the Fund against all changes in the values of
foreign securities resulting from fluctuations in foreign exchange rates.
REPURCHASE AGREEMENTS
As discussed in the Prospectus, the Fund may enter into repurchase
agreements involving the types of securities which are eligible for purchase by
the Fund. However, there is no limitation upon the maturity of the securities
underlying the repurchase agreements.
Repurchase agreements, which may be viewed as a type of secured lending by
the Fund, typically involve the acquisition by the Fund of debt securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities (collectively, "U.S. Government Securities") or other
securities from a selling financial institution such as a bank, savings and loan
association or broker-dealer. The agreement provides that the Fund will sell
back to the institution, and that the institution will repurchase, the
underlying security ("collateral") at a specified price and at a fixed time in
the future, usually not more than seven days from the date of purchase. The Fund
will receive interest from the institution until the time when the repurchase is
to occur. Although such date is deemed to be the maturity date of a repurchase
agreement, the maturities of securities subject to repurchase agreements are not
subject to any limits and may exceed one year.
While repurchase agreements involve certain risks not associated with
direct investments in debt securities, the Trust follows procedures designed to
minimize such risks. These procedures include a requirement that the Investment
Adviser effect repurchase transactions only with large, well capitalized United
States financial institutions approved by it as creditworthy based upon periodic
review under guidelines established and monitored by the Board of Trustees. In
addition, the value of the collateral underlying the repurchase agreement, which
will be held by the Trust's custodian on behalf of the Fund, will always be at
least equal to the repurchase price, including any accrued interest earned on
the repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, the Fund will seek to liquidate such collateral. However,
the exercise of the Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss.
LENDING PORTFOLIO SECURITIES
As discussed in the Prospectus, the Fund may lend its portfolio securities
to brokers, dealers and financial institutions. The advantage of such loans is
that the Fund continues to receive the income on the loaned securities while at
the same time earning interest on the cash amounts deposited as collateral,
which will be invested in short-term investments.
A loan may be terminated by the borrower on one business day's notice, or
by the Trust on four business days' notice. If the borrower fails to deliver the
loaned securities within four days after receipt of notice, the Trust could use
the collateral to replace the securities while holding the borrower liable for
any excess of replacement cost exceeding the collateral. As with any extensions
of credit, there are risks of delay in recovery and in some cases even loss of
rights in the collateral should the borrower of the securities fail financially.
However, loans of securities will only be made to firms deemed by the Board of
Trustees to be creditworthy (such creditworthiness will be monitored on an
ongoing basis) and when the income which can be earned from such loans justifies
the attendant risks. Upon termination of the loan, the borrower is required to
return the securities. Any gain or loss in the market price during the loan
period would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Trust will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the
B-6
<PAGE> 37
exercise of such rights if the matters involved would have a material effect on
the investment in such loaned securities. The Fund will pay reasonable finder's,
administrative and custodial fees in connection with loans of securities. The
Fund may lend foreign securities consistent with the foregoing requirements.
DERIVATIVE INVESTMENTS
As discussed in the Prospectus, the Fund may use certain derivative
instruments in connection with its investment activities. These include options
on individual securities, options on securities indices, options on foreign
currency and warrants (collectively, "Derivatives"). The specific Derivatives
transactions in which the Fund may engage are noted and described in the
Prospectus. The discussion below provides additional information regarding the
risk of Derivatives generally and use of options on securities indices.
DERIVATIVES -- GENERALLY
The Fund may invest in Derivatives for a variety of reasons, including to
hedge certain market risks, to provide a substitute for purchasing or selling
particular securities or to increase potential income gain. Derivatives may
provide a less costly, quicker or more specifically focused way for the Fund to
invest than "traditional" securities and currencies would.
Derivatives can be volatile and involve various types and degrees of risk,
depending upon the characteristics of the particular Derivative and the Fund's
portfolio as a whole. Derivatives permit the Fund to increase or decrease the
level of risk, or change the character of the risk, to which its portfolio is
exposed in much the same way as the Fund can increase or decrease the level of
risk, or change the character of the risk, of its portfolio by making
investments in specific securities or currencies.
Derivatives may entail investment exposures that are greater than their
cost would suggest, meaning that a small investment in Derivatives could have a
large potential impact on the Fund's performance.
Derivatives may be purchased on established exchanges or over-the-counter
through privately negotiated transactions. Exchange traded Derivatives generally
are guaranteed by the clearing agency which is the issuer or counterparty to
such Derivatives. This guarantee usually is supported by a daily payment system
(i.e., variation margin requirements) operated by the clearing agency in order
to reduce settlement risks. As a result, unless the clearing agency defaults,
there is relatively little counterparty credit risk associated with Derivatives
purchased on an exchange. By contrast, no clearing agency guarantees
over-the-counter Derivatives. Therefore, each party to an over-the-counter
Derivative bears the risk that the counterparty will default. Accordingly, the
Investment Adviser will consider the creditworthiness of counterparties to
over-the-counter Derivatives in the same manner as it would review the credit
quality of a security to be purchased by the Fund. Over-the-counter Derivatives
are less liquid than exchange-traded Derivatives since the other party to the
transaction may be the only investor with sufficient understanding of the
Derivative to be interested in bidding for it.
RISKS OF OPTIONS ON SECURITIES INDICES
As discussed in the Prospectus, the purchase and sale of options on
securities indices will be subject to risks applicable to options transactions
generally. In addition, the distinctive characteristics of options on indices
create certain risks that are not present with securities options. Index prices
may be distorted if trading of certain securities 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
securities included in the index or if dissemination of the current level of an
underlying index is interrupted. If this occurred, the Fund would not be able to
close out options which it had purchased and, if restrictions on exercise were
imposed, may be unable to exercise an option it holds, which could result in
losses if the underlying index moves adversely before trading resumes. However,
it is the Fund's policy to purchase options only on indices which include a
sufficient number of securities so that the likelihood of a trading halt in the
index is minimized.
The purchaser of an index option may also be subject to a timing risk. If
an option is exercised by the Fund before final determination of the closing
index value for that day, the risk exists that the level of the
B-7
<PAGE> 38
underlying index may subsequently change. If such a change caused the exercised
option to fall out-of-the-money (that is, the exercising of the option would
result in a loss, not a gain), the Fund would be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer. Although the Fund may be able to
minimize this risk by withholding exercise instructions until just before the
daily cutoff time, it may not be possible to eliminate this risk entirely
because the exercise cutoff times for index options may be earlier than those
fixed for other types of options and may occur before definitive closing index
values are announced. Alternatively, when the index level is close to the
exercise price, the Fund may sell rather than exercise the option. Although the
markets for certain index option contracts have developed rapidly, the markets
for other index options are not as liquid. The ability to establish and close
out positions on such options will be subject to the development and maintenance
of a liquid secondary market. It is not certain that this market will develop in
all index option contracts. The Fund will not purchase or sell any index option
contract unless and until in the opinion of the Investment Adviser the market
for such options has developed sufficiently that such risk in connection with
such transactions is no greater than such risk in connection with options on
securities.
LIMITATIONS ON OPTIONS ON SECURITIES AND SECURITIES INDICES
The Fund may invest up to 10% of its total assets, represented by the
premium paid, in the purchase of call and put options on securities and
securities indices. The Fund may write (i.e., sell) covered call and put options
on securities and securities indices to the extent of 10% of the value of its
total assets at the time such options are written.
INVESTMENT RESTRICTIONS
The Fund has adopted various investment restrictions on its investment
activities. Certain of these are fundamental policies which cannot be changed
without approval by the holders of a majority, as defined in the Investment
Company Act of 1940 (the "1940 Act"), of the Fund's outstanding voting shares.
For the Fund to alter a fundamental policy requires the affirmative vote of the
holders of (a) 67% or more of the shares of the Fund present at a meeting of
shareholders, if the holders of at least 50% of the outstanding shares of the
Fund are present or represented by proxy or (b) more than 50% of the outstanding
shares of the Fund, whichever is less.
Under its fundamental policies, the Fund may not:
1. Invest more than 25% of the value of its total assets in the
securities of issuers in any single industry, provided that there shall be
no limitation on the purchase of U.S. Government securities.
2. Purchase or sell commodities, except that the Fund may purchase and
sell foreign currency and options on foreign currency and may enter into
forward foreign currency exchange contracts in connection with its
investments in foreign securities.
3. Purchase or sell real estate or interests therein, or purchase oil,
gas or other mineral leases, rights or royalty contracts or development
programs, except that the Fund may invest in the securities of issuers
engaged in the foregoing activities and may invest in securities secured by
real estate or interests therein.
4. Issue senior securities as defined by the 1940 Act or borrow money,
except that the Fund may borrow from banks for temporary extraordinary or
emergency purposes (but not for investment) in an amount up to 10% of the
value of the Fund's total assets (calculated at the time of the borrowing).
The Fund may not make additional investments while it has any borrowings
outstanding. This restriction shall not be deemed to prohibit the Fund from
purchasing or selling securities on a when-issued or delayed-delivery
basis, or entering into repurchase agreements, lending portfolio
securities, selling securities short against-the-box, or writing covered
put and call options on securities, stock indices and foreign currencies,
in each case in accordance with such investment policies as may be adopted
by the Board of Trustees.
5. Underwrite the securities of other issuers, except to the extent
that the Fund may be deemed to be an underwriter in connection with the
disposition of portfolio securities.
B-8
<PAGE> 39
6. Make loans of money or securities, except that the Fund may lend
money through the purchase of permitted investments, including repurchase
agreements, and may lend its portfolio securities in an amount not
exceeding 33 1/3% of the value of the Fund's total assets.
The Fund has adopted the following additional investment restrictions which
are not fundamental and may be changed by the Board of Trustees. Under these
restrictions, the Fund may not:
1. Make short sales of securities (other than short sales
against-the-box) or purchase securities on margin, but the Fund may make
margin deposits in connection with its permitted investment activities.
2. Invest in the securities of a company for the purpose of exercising
management or control; however, this shall not be deemed to prohibit the
Fund from exercising voting rights with respect to its portfolio
securities.
3. Pledge, mortgage, hypothecate or otherwise encumber its assets,
except to secure permitted borrowings and to implement collateral and
similar arrangements incident to permitted investment practices.
4. Purchase securities which are illiquid, including repurchase
agreements maturing in more than seven days, if as a result more than 15%
of the value of the Fund's net assets would be so invested.
5. Purchase securities of other investment companies, except to the
extent permitted under the 1940 Act.
Except as otherwise may be stated, all percentage limitations on the Fund's
investment practices apply at the time of an investment or a transaction. A
later change in any percentage resulting from a change in value of the
investment or the total value of the Fund's assets will not constitute a
violation of such restriction.
TRUSTEES AND OFFICERS
The Board of Trustees of the Trust has the overall responsibility for
monitoring the operations of the Trust and the Fund and for supervising the
services provided by the Investment Adviser and other organizations. The
officers of the Trust are responsible for managing the day-to-day operations of
the Trust and the Fund.
Set forth below is information with respect to each of the Trustees and
officers of the Trust, including their principal occupations during the past
five years.
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS POSITION(S) HELD WITH TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
--------------------- --------------------------- -------------------------------------------
<S> <C> <C>
John Breyo (51)*..................... Trustee President of The Ayco Company, L.P.
One Wall Street (financial planner), December 1994 to
Albany, New York present; President of Breham, Inc., general
12205-3894 partner, Mercer Allied Company. L.P. (a
broker-dealer), October 1994 to present
(and, previously, was associated with its
predecessor); President of Ayco Corporation
(a registered investment advisor)
previously.
Lewis M. Eisenberg (55)*............. Co-Chairman of the Board of Co-Chairman of private investment adviser;
126 East 56th Street Trustees Managing Member of Granum Capital
25th Floor Management, L.L.C. since January 27, 1997
New York, New York 10022 and of Granum Securities, L.L.C. since
March 7, 1997.
</TABLE>
B-9
<PAGE> 40
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS POSITION(S) HELD WITH TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
--------------------- --------------------------- -------------------------------------------
<S> <C> <C>
Herbert W. McCord (55)............... Trustee President and Chief Executive Officer of
125 Half Mile Road Granum Communications Corporation, October
Suite 200 1996 until present; President and Chief
Red Bank, New Jersey Executive Officer of Granum Communications,
07701 Inc. and Granum Holdings, L.P., May 1990 to
June 1996.
Burnell R. Roberts (70).............. Trustee Chairman of Sweetheart Holding Inc. and
Kettering Tower Sweetheart Cup Company Inc., September 1993
Suite 2340 to present; Director of Mead Corporation,
Dayton, Ohio 45423 October 1981 to May 1993; Chairman of Board
of Directors and Chief Executive Officer of
Mead Corporation, April 1982 to May 1992.
Alan Sinai (58)...................... Trustee Chief Global Economist, President and Chief
260 Franklin Street Executive Officer of Primark Decision
15th Floor Economics, Inc.
Boston, Massachusetts
02110
Richard A. Zimmer (53)............... Trustee Of counsel with Dechert Price & Rhoads,
199 Nassau Street February 1997 until present; Member of
Princeton, New Jersey Congress, from the 12th District of New
08540 Jersey, 1991 to 1997.
Peter Heerwagen (52)................. Vice President Senior Vice President and Chief Investment
One Wall Street Officer of The Ayco Company, L.P.
Albany, New York (financial planner), December 1994 to
12205-3894 present; a registered representative of
Mercer Allied Company, L.P. (a broker-
dealer), October 1994 to present (and,
previously, was associated with its
predecessor). Senior Vice President and
Chief Investment Officer of Ayco
Corporation (a registered investment
adviser) previously.
Paul A. Matten (35).................. Vice President Vice President of private investment
126 East 56th Street adviser since January 1996; Vice President
25th Floor of Granum Capital Management, L.L.C. since
New York, New York 10022 January 27, 1996. Received M.A. from
Harvard University in 1995; Financial
analyst with private investment adviser
from 1992 to 1995; Received M.B.A. and J.D.
from Harvard University in 1991.
Jonas B. Siegel (54)................. Vice President, Treasurer Managing Director and Chief Administrative
126 East 56th Street and Chief Financial Officer of private investment adviser,
25th Floor Officer January 1994 to present; Managing Director
New York, New York 10022 of Granum Capital Management, L.L.C. since
January 27, 1996 and President of Granum
Securities, L.L.C. since March 7, 1997;
Vice President of Goldman, Sachs & Co. from
1982 to 1993.
</TABLE>
B-10
<PAGE> 41
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS POSITION(S) HELD WITH TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
--------------------- --------------------------- -------------------------------------------
<S> <C> <C>
Peter R. Martin (40)................. Vice President and General Counsel of The Ayco Company, L.P.
One Wall Street Secretary (financial planner), December 1994 to
Albany, New York 12205-3894 present; Vice President and Secretary of
Breham, Inc., the general partner of Mercer
Allied Company (a broker-dealer), October
1994 to present (and previously Vice-
President and Secretary of its
predecessor); General Counsel of Ayco
Corporation (a registered investment
adviser) previously.
</TABLE>
- -------------------------
* Messrs. Breyo, Eisenberg and Harrison are Trustees who are "interested
persons" (as defined by the 1940 Act) of the Trust by virtue of their
affiliations with the Investment Adviser or the Distributors.
Trustees who are not officers or employees of the Investment Adviser, a
Distributor or their affiliated companies, are each paid an annual retainer of
$6,000 and receive an attendance fee of $1,000 for each meeting of the Board of
Trustees they attend. Officers of the Trust, all of whom are members, officers
or employees of the Investment Adviser, a Distributor, the Administrator or
their affiliates, receive no compensation from the Trust.
Trustee compensation from the Trust for the current fiscal year is
estimated as follows:
COMPENSATION TABLE*
<TABLE>
<CAPTION>
PENSION OR
AGGREGATE RETIREMENT BENEFITS ESTIMATED TOTAL COMPENSATION
NAME OF PERSON, COMPENSATION ACCRUED AS PART OF BENEFITS UPON FROM TRUST PAID TO
POSITION FROM FUND FUND EXPENSES RETIREMENT TRUSTEES
--------------- ------------ ------------------- ------------- ------------------
<S> <C> <C> <C> <C>
John Breyo,........................ $ 0 $0 $0 $ 0
Trustee
Lewis M. Eisenberg,................ $ 0 $0 $0 $ 0
Co-Chairman of the Board of
Trustees
Walter Harrison,................... $ 0 $0 $0 $ 0
Co-Chairman of the Board of
Trustees
Herbert W. McCord,................. $10,000 $0 $0 $10,000
Trustee
Burnell R. Roberts,................ $10,000 $0 $0 $10,000
Trustee
Alan Sinai,........................ $10,000 $0 $0 $10,000
Trustee
Richard A. Zimmer,................. $10,000 $0 $0 $10,000
Trustee
</TABLE>
- -------------------------
* Estimated compensation for the fiscal year ending October 31, 1998.
INVESTMENT ADVISORY AGREEMENT
The following information supplements and should be read in conjunction
with the sections in the Fund's Prospectus entitled "MANAGEMENT OF THE FUND --
Investment Adviser."
The Investment Adviser is a Delaware limited liability company with offices
at 126 East 56th Street, Twenty-fifth floor, New York, New York 10022. It is
controlled by its managing members, Messrs. Eisenberg and Harrison.
B-11
<PAGE> 42
The Investment Adviser provides investment advisory services to the Fund
pursuant to an Investment Advisory Agreement (the "Advisory Agreement"), dated
March 13, 1997 with the Trust. The Advisory Agreement was approved by the
Trust's Board of Trustees, including a majority of the Trustees who are not
"interested persons" (as defined by the 1940 Act) of the Trust at a meeting held
on March 13, 1997, and was approved on March 13, 1997 by the vote of the sole
shareholder of the Trust on such date. The Advisory Agreement is terminable
without penalty, on 60 days' notice, by the Trust's Board or by vote of the
holders of a majority of the Fund's shares, or, on not less than 90 days'
notice, by the Investment Adviser. The Advisory Agreement has an initial term
expiring on February 28, 1999, and may be continued in effect from year to year
thereafter subject to the approval thereof by (i) the Trust's Board or (ii) vote
of a majority (as defined by the 1940 Act) of the outstanding voting securities
of the Fund, provided that in either event the continuance must also be approved
by a majority of the Trustees who are not "interested persons" (as defined by
the 1940 Act) of the Trust or the Investment Adviser, by vote cast in person at
a meeting called for the purpose of voting on such approval. The Advisory
Agreement provides that it will terminate automatically in the event of its
"assignment" (as defined by the 1940 Act and the rules thereunder).
The Investment Adviser manages the Fund's investments in accordance with
the stated policies of the Fund, subject to the supervision of the Trust's
Board. The Investment Adviser is responsible for all investment decisions for
the Fund and for placing orders for the purchase and sale of investments for the
Fund's portfolio. The Investment Adviser also provides such additional
administrative services as the Trust or the Fund may require beyond those
furnished by the Administrator and furnishes, at its own expense, such office
space, facilities, equipment, clerical help, and other personnel and services as
may reasonably be necessary in connection with the operations of the Trust and
the Fund. In addition, the Investment Adviser pays the salaries of officers of
the Trust and any fees and expenses of Trustees of the Trust who are also
officers, directors or employees of the Investment Adviser or who are officers
or employees of any company affiliated with the Investment Adviser and bears the
cost of telephone service, heat, light, power and other utilities associated
with the services it provides.
In consideration of the services provided by the Investment Adviser, the
Fund pays the Investment Adviser monthly compensation computed daily at the
annual rate of 1.25% of the Fund's net assets (the "Basic Fee"), which rate is
adjusted monthly, as described below (the "Monthly Performance Adjustment"),
depending on the investment performance of the Fund relative to the investment
performance of the Standard & Poor's Composite Index of 500 Stocks (the "S&P 500
Index"). The Basic Fee as so adjusted is the "Total Advisory Fee."
The Total Advisory Fee applicable each calendar month is determined by: (1)
adding (a) 1/12th of the Basic Fee plus (b) 1/12th of the Monthly Performance
Adjustment (as specified below); (2) multiplying the result thereof by the net
assets of the Fund; and (3) dividing the amount so determined by the number of
days in the month. The Monthly Performance Adjustment for each month is a
percentage rate determined by: (a) subtracting from the cumulative percentage
performance of the Fund (net of all expenses, including the fees payable
pursuant to this Agreement) over the 12 calendar months preceding, the
percentage change in the S&P 500 Index over the same period (including the value
of dividends paid during the measurement period on stocks included in the S&P
500 Index); and (b) multiplying the result by 0.15; provided, however, that the
maximum Monthly Performance Adjustment will not exceed +.75% or -.75%. Until
such time as the Fund has completed 12 full calendar months of operations, the
performance of the Fund and the S&P 500 Index will be measured from the date of
commencement of the Fund's operations. The Monthly Performance Adjustment will
become applicable only after the Fund has completed three full calendar months
of operations. During the period May 1, 1997 (commencement of operations) to
October 31, 1997, the Fund accrued fees of $268,528 payable to the Investment
Advisor pursuant to the Advisory Agreement. A table illustrating how the Total
Advisory Fee will vary depending upon the investment performance of the Fund
relative to the S&P 500 Index is contained in the Prospectus.
The Basic Fee, and the Total Advisory Fee that may be payable by the Fund
as a result of the Monthly Performance Adjustment, are each higher than the fees
paid by most other mutual funds with investment objectives similar to the
investment objective of the Fund.
B-12
<PAGE> 43
DISTRIBUTORS
Shares of the Fund are distributed on a continuous basis at their current
net asset value per share, without imposition of any front-end or contingent
deferred sales charge, by Mercer Allied Company ("Mercer Allied") and Granum
Securities, L.L.C. ("Granum Securities"), which serve as co-distributors, and by
selected securities dealers.
Mercer Allied and Granum Securities provide these services to the Fund
pursuant to Distribution Agreements dated as of March 13, 1997 and November 5,
1997, respectively, with the Trust (the "Distribution Agreements"). The
Distribution Agreements were approved by the Board of Trustees, including a
majority of the Trustees who are not parties to the Distribution Agreement or
"interested persons" (as defined by the 1940 Act) of the Investment Adviser or
the Distributors at a meeting held in person on March 13, 1997. The Distribution
Agreements are terminable without penalty, on 60 days' notice, by the Trust's
Board or by vote of the holders of a majority of the Fund's shares, or, on not
less than 90 days' notice, by the Distributors. The Distribution Agreement with
Mercer Allied has an initial term expiring on March 13, 1999. The Distribution
Agreement with Granum Securities has an initial term expiring on November 5,
1997. Each Distribution Agreement may be continued in effect from year-to-year
after its initial term, subject to the approval by (i) the Trust's Board or (ii)
vote of the holders of a majority of the Fund's outstanding shares, provided
that in either event the continuance must also be approved by a majority of the
Trustees who are not "interested persons" (as defined by the 1940 Act) of the
Investment Adviser or the Distributors, by vote cast in person at a meeting
called for the purpose of voting on such approval. The Distribution Agreements
each provide that it will terminate automatically in the event of its
"assignment" (as defined by the 1940 Act and the rules thereunder).
Under the terms of the Distribution Agreements, the Distributors bear all
of the costs associated with distribution of the shares of the Fund, including
the incremental cost of printing prospectuses, statements of additional
information, annual reports and other periodic reports for distribution to
prospective investors and the costs of preparing, distributing and publishing
sales literature and advertising materials. However, pursuant to a distribution
plan adopted by the Trust, the Fund makes certain payments to each Distributor
for services it provides. See "DISTRIBUTION PLAN." In each Distribution
Agreement, the Trust has agreed to indemnify the respective Distributor to the
extent permitted by applicable law against certain liabilities under the
Securities Act of 1933, as amended.
Mercer Allied is a Delaware limited partnership that is wholly owned by The
Ayco Company, L.P. and the principals of that firm. Mercer Allied's address is
One Wall Street, Albany, New York 12205. Granum Securities is an affiliate of,
and is under common control with, the Investment Adviser. Granum Securities is a
Delaware limited liability company with offices at 126 East 56th Street,
Twenty-fifth floor, New York, New York 10022.
Compensation paid to the Distributors during the period May 1, 1997
(commencement of operations) to October 31, 1997 is set forth below:
<TABLE>
<CAPTION>
NAME OF NET UNDERWRITING COMPENSATION ON
PRINCIPAL DISCOUNTS AND REDEMPTION AND BROKERAGE OTHER
UNDERWRITER(S) COMMISSIONS REPURCHASES COMMISSIONS COMPENSATION
-------------- ---------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Mercer Allied................... $0 $0 $0 $149,744*
Granum Securities............... $0 $0 $0 $ 2,534*
</TABLE>
- -------------------------
* Total distribution and shareholder servicing fees.
DISTRIBUTION PLAN
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "DISTRIBUTION PLAN."
B-13
<PAGE> 44
The Trust has adopted a plan of distribution on behalf of the Fund pursuant
to Rule 12b-1 under the 1940 Act (the "Distribution Plan"). The Distribution
Plan was approved by the Board of Trustees, including a majority of the Trustees
who are not "interested persons" (as defined by the 1940 Act) of the Trust and
who have no direct or indirect financial interest in the operation of the
Distribution Plan or in any agreement related to the Plan ("Qualified
Trustees"), at a meeting held in person on March 13, 1997. The Distribution Plan
provides that it will continue in effect for a period of one year from the date
of its execution, and may be continued in effect from year to year thereafter,
provided that each such continuance is approved annually by a vote of both a
majority of the Trustees and a majority of the Qualified Trustees. The
Distribution Plan requires that the Trust shall provide to the Board of
Trustees, and the Board of Trustees shall review, at least quarterly, a written
report of the amounts expended (and the purposes therefor) under the
Distribution Plan. The Distribution Plan further provides that the selection and
nomination of Qualified Trustees shall be committed to the discretion of those
Trustees, who are not "interested persons" (as defined by the 1940 Act) of the
Distributors, then in office. The Distribution Plan may be terminated at any
time by a vote of a majority of the Qualified Trustees or by vote of a majority
of the outstanding voting shares of the Fund (as defined by the 1940 Act). The
Distribution Plan may not be amended to increase materially the amount of
permitted expenses thereunder without the approval of shareholders and may not
be materially amended in any case without a vote of the majority of both the
Trustees and the Qualified Trustees. The Fund will preserve copies of any plan,
agreement or report made pursuant to the Distribution Plan for a period of not
less than six years from the date of the Distribution Plan, and for the first
two years such copies will be preserved in an easily accessible place.
Under the Distribution Plan, the Fund compensates each Distributor for the
services it provides in connection with the sale of the Fund's shares to
investors ("Distribution Services") and for furnishing or arranging for
securities dealers to provide account related services to shareholders
("Shareholder Services"). Shareholder Services provided by the Distributors and
securities dealers include responding to shareholder inquiries regarding the
Fund and their accounts with the Fund, and providing shareholders with reports,
information and services related to their Fund accounts.
In consideration of the services provided by the Distributors, the Trust
has agreed on behalf of the Fund to pay a monthly fee to each Distributor for
Distribution Services and a monthly fee to each Distributor for Shareholder
Services, which fees are computed at the annual rates of 0.50% of the average
net assets of the Fund and 0.25% of the average net assets of the Fund,
respectively, attributable to shares held by persons who have purchased shares
through such Distributor or through broker-dealers that have entered into
selling agreements with such Distributor.
Since payments made pursuant to the Distribution Plan are not directly tied
to actual expenses, the amount of payments by the Fund during any year may be
more or less than actual expenses incurred by each Distributor in providing
Distribution Services and Shareholder Services. For this reason, this type of
distribution fee arrangement is characterized by the staff of the Securities and
Exchange Commission as being of the "compensation variety" (in contrast to
"reimbursement" arrangements under which payments by a fund are made only to
reimburse specific expenses). However, the Fund is not liable for any
distribution related expenses incurred by a Distributor in excess of the amounts
paid pursuant the Distribution Plan.
During the period May 1, 1997 (commencement of operations) to October 31,
1997, the Fund accrued fees payable to the Distributors of $152,278 pursuant to
the Distribution Plan. Such amount was accrued as compensation for Distribution
Services and Shareholder Services. No payments pursuant to the Distribution Plan
were made by the Fund for advertising, printing or mailing prospectuses,
compensation to dealers or sales personnel, or interest or other carrying or
finance charges. Each of the Trustees and officers of the Trust who is an
officer of one of the Distributors, an owner of the securities of or other
interest in one of the Distributors or of a controlling person of one of the
Distributors, may be deemed to have a direct or indirect interest in the
operation of the Distribution Plan.
The Distribution Plan was adopted by the Board of Trustees to foster the
distribution of shares of the Fund. The Trustees believe that promoting the sale
of shares to investors will benefit the Fund and its shareholders by helping to
assure growth of the Fund's assets to a level which will enable realization of
certain
B-14
<PAGE> 45
operating economies and enhance the ability of the Investment Adviser to pursue
effectively the Fund's investment program.
HOW TO REDEEM SHARES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "HOW TO REDEEM SHARES."
WIRE REDEMPTION PRIVILEGE
By using this Privilege, the investor authorizes the Transfer Agent to act
on wire or telephone redemption instructions from any person representing
himself or herself to be the investor and reasonably believed by the Transfer
Agent to be genuine. Ordinarily, the Trust will initiate payment for shares
redeemed pursuant to this Privilege on the next business day after receipt by
the Transfer Agent of the redemption request in proper form. Redemption proceeds
($1,000 minimum) will be transferred by Federal Reserve wire only to the
commercial bank account specified by the investor on the Account Application or
Distribution Services Form, or to a correspondent bank if the investor's bank is
not a member of the Federal Reserve System. Fees ordinarily are imposed by such
bank and usually are borne by the investor. Immediate notification by the
correspondent bank to the investor's bank may be necessary to avoid a delay in
crediting the Fund to the investor's bank account.
To change the commercial bank, or account designated to receive redemption
proceeds, a written request must be sent to the Transfer Agent. This request
must be signed by each shareholder, with each signature guaranteed as described
in the Prospectus under "HOW TO REDEEM SHARES -- Written Redemption Requests."
SUSPENSION OF REDEMPTIONS
The right of redemption may be suspended or the date of payment postponed
(a) during any period when the New York Stock Exchange, Inc. (the "NYSE") is
closed (other than customary weekend and holiday closings), (b) when trading in
the markets the Fund ordinarily utilizes is restricted, or when an emergency
exists as determined by the Securities and Exchange Commission such that
disposal of the Fund's investments or determination of its net asset value is
not reasonably practicable, or (c) for such other periods as the Securities and
Exchange Commission by order may permit to protect the Fund's shareholders.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction
with the sections in the Fund's Prospectus entitled "HOW TO BUY SHARES" and "HOW
TO REDEEM SHARES."
Net asset value is determined as of the close of trading on the NYSE
(generally 4:00 p.m. Eastern time) each day the NYSE is open, except that no
computation need be made on a day on which no orders to purchase or redeem
shares have been received. The NYSE currently observes the following holidays:
New Year's Day; Martin Luther King, Jr. Day (third Monday in January);
Presidents' Day (third Monday in February); Good Friday (Friday before Easter);
Memorial Day (last Monday in May); Independence Day; Labor Day (first Monday in
September); Thanksgiving Day (last Thursday in November); and Christmas Day.
Net asset value per share is computed by dividing the value of the Fund's
net assets (i.e., the value of its assets less its liabilities) by the total
number of Fund shares outstanding. In computing net asset value, securities are
valued at market value as of the close of trading on each business day when the
NYSE is open. Securities, other than stock options, listed on the NYSE or other
exchanges are valued on the basis of the last reported sale price on the
exchange on which they are primarily traded. However, if the last sale price on
the NYSE is different than the last sale price on any other exchange, the NYSE
price will be used. If there are no sales on that day, then the securities are
valued at the bid price on the NYSE or other primary exchange for
B-15
<PAGE> 46
that day. Securities traded in the over-the-counter market are valued on the
basis of the last sales price as reported by NASDAQ. If there are no sales on
that day, then the securities are valued at the mean between the closing bid and
asked prices as reported by NASDAQ. Stock options traded on national securities
exchanges are valued at the last sales price or, if no sales are reported, at
the bid price as of the close of the exchange. Securities for which market
quotations are not readily available and other assets are valued at fair value
as determined pursuant to procedures adopted in good faith by the Board of
Trustees. Debt securities which mature in less than 60 days are valued at
amortized cost (unless the Board of Trustees determines that this method does
not represent fair value), if their original maturity was 60 days or less or by
amortizing the value as of the 61st day prior to maturity, if their original
term to maturity exceeded 60 days. A pricing service may be utilized to
determine the fair value of securities held by the Fund. Any such service might
value the investments based on methods which include consideration of: yields or
prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. The
service may also employ electronic data processing techniques, a matrix system
or both to determine valuation. The Board of Trustees will review and monitor
the methods used by such services to assure itself that securities are valued at
their fair values.
The values of securities held by the Fund and other assets used in
computing net asset value are determined as of the time trading in such
securities is completed each day, which, in the case of foreign securities,
generally occurs at various times prior to the close of the NYSE. Trading in
securities listed on foreign securities exchanges will be valued at the last
sale or, if no sales are reported, at the bid price as of the close of the
exchange. Foreign currency exchange rates are also generally determined prior to
the close of the NYSE. On occasion, the values of such securities and exchange
rates may be affected by events occurring between the time as of which
determinations of such values or exchange rates are made and the close of the
NYSE. When such events materially affect the value of securities held by the
Fund or their liabilities, such securities and liabilities will be valued at
fair value in accordance with procedures adopted in good faith by the Board of
Trustees. The values of any assets and liabilities initially expressed in
foreign currencies will be converted to U.S. dollars based on exchange rates
determined at the time of the close of the London Stock Exchange.
The following table shows the calculation of the net asset value per share
(offering price) of the Fund as of October 31, 1997:
<TABLE>
<CAPTION>
(A) (B) (C)
NET ASSETS SHARES OUTSTANDING OFFERING PRICE (A) / (B)
---------- ------------------ ------------------------
<S> <C> <C>
$76,262,599 3,260,570 $23.39
</TABLE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "DIVIDENDS, DISTRIBUTIONS AND
TAXES." In addition, the following is only a summary of certain additional tax
considerations that are not described in the Prospectus and generally affect the
Fund and its shareholders. No attempt is made to present a detailed explanation
of the tax treatment of the Fund or its shareholders, and the discussion here
and in the Prospectus are not intended as substitutes for careful tax planning.
It is the policy of the Trust each fiscal year to distribute substantially
all of the Fund's net investment income and net realized capital gains, if any,
to its shareholders. The Fund intends to qualify as a regulated investment
company under the provisions of the Code. If so qualified, the Fund will not be
subject to federal income tax on that part of its net investment income and net
realized capital gains which it distributed to its shareholders. To qualify for
such tax treatment, the Fund must generally, among other things, (a) derive at
least 90% of its gross income from dividends, interest (including payments
received with respect to loans of stock and securities) and gains from the sale
or other disposition of stock or securities and certain related income; and (b)
diversify its holdings so that at the end of each fiscal quarter (i) 50% of the
market value of the Fund's assets is represented by cash, U.S. Government
securities and other securities limited, in respect of
B-16
<PAGE> 47
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). These requirements may limit the ability of the Fund to
engage in certain transactions involving options.
Shareholders will be notified annually by the Fund as to the federal tax
status of dividends and distributions paid to or reinvested by the shareholder
for the preceding taxable year. In addition, dividend and long-term capital
gains distributions may also be subject to state and local taxes. Each
shareholder is advised to consult its own tax adviser concerning the tax effects
of share ownership.
Depending upon the composition of the Fund's income, the entire amount or a
portion of the dividends paid by the Fund from net investment income may qualify
for the dividends received deduction allowable to qualifying U.S. corporate
shareholders (the "dividends received deduction"). In general, dividend income
of the Fund distributed to qualifying corporate shareholders will be eligible
for the dividends received deduction only to the extent that the Fund's income
consists of dividends paid by U.S. corporations. However, Section 246(c) of the
Code provides that if a qualifying corporate shareholder has disposed of Fund
shares not held for 46 days or more and has received a dividend from net
investment income with respect to such shares, the portion designated by the
Fund as qualifying for the dividends received deduction will not be eligible for
such shareholder's dividends received deduction. In addition, the Code provides
other limitations with respect to the ability of a qualifying corporate
shareholder to claim the dividends received deduction in connection with holding
Fund shares.
It should be noted that both dividends and capital gains distributions
received by an investor have the effect of reducing the net asset value of the
shares by the exact amount of the dividend or capital gains distribution. If the
net asset value of the shares should be reduced below a shareholder's cost as a
result of the distribution of realized long-term capital gains, such
distribution would be at least a partial return of capital but nonetheless
taxable at capital gains rates. Therefore, an investor should consider the tax
consequences of purchasing shares immediately prior to a distribution record
date.
Dividends and interest received by the Fund on foreign investments may give
rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes.
Distributions by the Fund of net investment income and the excess of net
short-term capital gains over net mid-term and long-term capital loss are
taxable to shareholders of the Fund as ordinary income regardless of whether
such distributions are reinvested in additional shares or paid in cash.
Distributions of net long-term gains, if any, are taxable as either mid-term or
long-term capital gains (as appropriate) regardless of how long the investor has
held the shares and regardless of whether the distribution is received in
additional shares or in cash.
Ordinarily, gains and losses realized by the Fund from portfolio
transactions will be treated as capital gains and losses. However, a portion of
the gain or loss realized from the disposition of foreign currencies (including
foreign currency denominated bank deposits) and non-U.S. dollar denominated
securities (including debt instruments and certain forward contracts and
options) may be treated as ordinary income or loss under Section 988 of the
Code. In addition, all or a portion of any gains realized from the sale or other
disposition of certain market discount bonds will be treated as ordinary income
under Section 1276 of the Code. Finally, all or a portion of the gain realized
from engaging in "conversion transactions" may be treated as ordinary income
under Section 1258 of the Code. "Conversion transactions" are defined to include
certain forward, futures, option and straddle transactions, transactions
marketed or sold to produce capital gains, or transactions described in Treasury
regulations to be issued in the future.
Under Section 1256 of the Code, any gain or loss realized by the Fund from
certain forward contracts and options transactions will be treated as 60%
long-term capital gain or loss and 40% short-term capital gain or loss. Gain or
loss will arise upon exercise or lapse of such contracts and options as well as
from closing transactions. In addition, any such contracts or options remaining
unexercised at the end of the Fund's taxable
B-17
<PAGE> 48
year will be treated as sold for their then fair market value, resulting in
additional gain or loss to the Fund characterized in the manner described above.
Offsetting positions held by a Fund involving certain foreign currency
forward contracts or options may constitute "straddles." "Straddles" are defined
to include "offsetting positions" in actively traded personal property. The tax
treatment of "straddles" is governed by Sections 1092 of the Code, which, in
certain circumstances, overrides or modifies the provisions of Sections 1256 and
988 of the Code. As such, all or a portion of any short or long-term capital
gain from certain "straddle" transactions may be recharacterized as ordinary
income.
If the Fund were treated as entering into "straddles" by reason of its
engaging in certain forward contracts or options transactions, such "straddles"
would be characterized as "mixed straddles" if the forward contracts or options
transactions comprising a part of such "straddles" were governed by Section 1256
of the Code. The Fund may make one or more elections with respect to "mixed
straddles." Depending on which election is made, if any, the results to the Fund
may differ. If no election is made, to the extent the "straddle" and conversion
transaction rules apply to positions established by the Fund, losses realized by
the Fund will be deferred to the extent of unrealized gain in the offsetting
position. Moreover, as a result of the "Straddle" and conversion transaction
rules, short-term capital loss on "straddle" positions may be recharacterized as
long-term capital loss, long-term capital gains from such positions may be
treated as short-term capital gains, and any capital gains from such positions
may be treated as ordinary income.
In the event there are short sales of an appreciated financial position,
which constitute constructive sales under Section 308 of the Code, the Fund must
recognize gain as if the position were sold, assigned, or otherwise terminated
at its fair market value as of the date of the short sale and immediately
repurchased. Appropriate adjustments would be made in the amount of any gain or
loss subsequently realized on that position to reflect the gain recognized on
the short sale. The Fund's holding period in the position would begin as if the
Fund had first acquired the position on the date of the short sale.
Under present Delaware law, the Trust is not subject to any state income
taxation during any fiscal year in which the Fund qualifies as a regulated
investment company. However, the Trust might be subject to Delaware income taxes
for any taxable year in which the Fund did not so qualify. Further, the Trust
may be subject to tax in certain states where it does business. In those states
which have income tax laws, the tax treatment of the Trust and its shareholders
in respect to distributions may differ from federal tax treatment.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision of the Board of Trustees, the Investment
Adviser is responsible for decisions to buy and sell securities for the Fund,
the selection of brokers and dealers to effect the transactions, and the
negotiation of brokerage commissions, if any. Purchases and sales of securities
on a stock exchange are effected through brokers who charge a commission for
their services. In the over-the-counter market, securities are generally traded
on a "net" basis with dealers acting as principal for their own accounts without
a stated commission, although the price of the security usually includes a
profit to the dealer. In underwritten offerings, securities are purchased at a
fixed price which includes an amount of compensation to the underwriter,
generally referred to as the underwriter's concession or discount. Certain money
market instruments may be purchased directly from an issuer, in which case no
commission or discounts are paid. The Fund anticipates that its transactions
involving foreign securities will be effected primarily on principal stock
exchanges for such securities. Fixed commissions on such transactions are
generally higher than negotiated commissions on domestic transactions. There is
also generally less government supervision and regulation of foreign stock
exchanges and brokers than in the United States.
Affiliates of the Investment Adviser currently serve as investment adviser
to a number of clients, including private investment companies, and the
Investment Adviser may in the future act as investment adviser to other
registered investment companies. It is the practice of the Investment Adviser to
cause purchase and sale transactions to be allocated among the Fund and others
whose assets are managed by the Investment Adviser or its affiliates in such
manner as it deems equitable. In making such allocations, the main
B-18
<PAGE> 49
factors considered are the respective investment objectives, the relative size
of portfolio holdings of the same or comparable securities, the availability of
cash for investment, the size of investment commitments generally held and the
opinions of the persons responsible for managing the Fund and the other client
accounts. This procedure may, under certain circumstances, have an adverse
effect on the Fund.
The policy of the Trust regarding purchases and sales of securities for the
Fund is that primary consideration will be given to obtaining the most favorable
prices and efficient executions of transactions. Consistent with this policy,
when securities transactions are effected on a stock exchange, the Trust's
policy is to pay commissions which are considered fair and reasonable without
necessarily determining that the lowest possible commissions are paid in all
circumstances. The Board of Trustees believes that a requirement always to seek
the lowest commission cost could impede effective management and preclude the
Investment Adviser from obtaining high quality brokerage and research services.
In seeking to determine the reasonableness of brokerage commissions paid in any
transaction, the Investment Adviser relies on its experience and knowledge
regarding commissions generally charged by various brokers and on its judgment
in evaluating the brokerage and research services received from the broker
effecting the transaction. Such determinations are necessarily subjective and
imprecise, as in most cases an exact dollar value for those services is not
ascertainable.
In seeking to implement the Trust's policies, the Investment Adviser
effects transactions with those brokers and dealers who it believes provide the
most favorable prices and which are capable of providing efficient executions.
If the Investment Adviser believes such price and execution are obtainable from
more than one broker or dealer, it may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the Trust or the Investment Adviser. Such services may include, but
are not limited to, any one or more of the following: information as to the
availability of securities for purchase or sale; statistical or factual
information or opinions pertaining to investments; wire services; and appraisals
or evaluations of portfolio securities. The information and services received by
the Investment Adviser from brokers and dealers may be of benefit in the
management of accounts of other clients and may not in all cases benefit the
Trust directly. While such services are useful and important in supplementing
its own research and facilities, the Investment Adviser believes the value of
such services is not determinable and does not significantly reduce its
expenses.
Portfolio transactions may be effected through qualified broker-dealers who
recommend the Fund to their clients, or who act as agent in the purchase of the
Fund's shares for their clients. When a number of brokers and dealers can
provide comparable best price and execution on a particular transaction, the
Fund's adviser may consider the sale of Fund shares by a broker or dealer in
selecting among qualified broker-dealers.
During the period May 1, 1997 (commencement of operations) to October 31,
1997, the Fund paid aggregate brokerage commissions of $114,374.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "FUND PERFORMANCE
INFORMATION."
GENERALLY
As discussed in the Prospectus, from time to time the Trust may disseminate
quotations of total return and other performance related and comparative
information.
From time to time, the performance of the Fund or of individual accounts or
mutual funds managed by the Investment Adviser may be compared to the
performance of other mutual funds following similar objectives, to a database
including the performance of individually managed portfolios maintained by the
Investment Adviser or to recognized market indices. Comparative performance
information may be used from time to time in advertising or marketing the Fund's
shares, including data from Lipper Analytical Services, Inc., the S&P 500 Index,
the Wilshire 5000 Index, the Dow Jones Industrial Average, Money Magazine,
Morningstar, Inc. and other industry publications. The Fund's return may also be
compared to the cost of living (measured by the Consumer Price Index) or the
return of various categories of investments (as
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measured by Ibbotson Associates or others) over the same period. In addition to
performance rankings, the Fund may compare its total expense ratio to the
average total expense ratio of similar funds tracked by Lipper Analytical
Services, Inc.
In advertising materials, the Trust may quote or reprint financial or
business publications and periodicals, including model portfolios or
allocations, as they relate to current economic and political conditions, fund
management, portfolio composition, investment philosophy, investment techniques,
the desirability of owning a particular mutual fund, and the Investment
Adviser's services and products. The Investment Adviser may provide information
designed to clarify investment goals and explore various financial strategies.
Such information may include information about current economic, market, and
political conditions; materials that describe general principles of investing,
such as asset allocation, diversification, risk tolerance, and goal setting.
Materials may also include discussions of other products and services offered by
the Investment Adviser.
The Trust may quote various measures of the volatility and benchmark
correlation of the Fund in advertising. In addition, the Trust may compare these
measures to those of other funds. Measures of volatility seek to compare the
Fund's historical share price fluctuations or total returns to those of a
benchmark. Measures of benchmark correlation indicate how valid a comparative
benchmark may be. All measures of volatility and correlation are calculated
using averages of historical data.
TOTAL RETURN
The Fund's quotations of total return will reflect the average annual
compounded rate of return on an assumed investment of $1,000 that equates the
initial amount invested to the ending redeemable value according to the
following formula:
P (1 + T)(n) = ERV
"P" represents a hypothetical initial investment of $1,000; "T" represents
average annual total return; "n" represents the number of years; and "ERV"
represents the ending redeemable value of the initial investment. Dividends and
other distributions are assumed to be reinvested in shares at the prices in
effect on the reinvestment dates. ERV will be adjusted to reflect the effect of
any absorption of Fund expenses by the Investment Adviser. Quotations of total
return will be for a one year, five year and ten year periods ended on the date
of the most recent balance sheet included in the Trust's registration statement
at such times as the registration statement has been in effect for such periods.
Until such time as the registration has been effective for the one year, five
year and ten year periods, the Fund's quotations of total return will also
include a quotation of total return for the time period during which the
registration statement has been in effect or commencement of operations,
whichever is later. The Fund may also provide quotations of total return for
other periods and quotations of cumulative total returns, which reflect the
actual performance of the Fund over the entire period for which the quotation is
given.
The average annualized total return for the Fund for the period May 1, 1997
(commencement of operations) to October 31, 1997 was 36.66% (183 days in
period).
NET ASSET VALUE
Charts and graphs using the Fund's net asset values, adjusted net asset
values, and benchmark indices may be used to exhibit performance. An adjusted
net asset value includes any distributions paid by the Fund and reflects all
elements of its return.
GENERAL INFORMATION
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "GENERAL INFORMATION."
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DESCRIPTION OF SHARES
Interests in the Fund are represented by shares of beneficial interest,
$.001 par value. The Trust is authorized to issue an unlimited number of shares.
Each share of the Fund represents an equal proportionate interest in the
Fund with each other share of the Fund, without any priority or preference over
other shares. All consideration received for the sales of shares of the Fund,
all assets in which such consideration is invested, and all income, earnings and
profits derived therefrom are allocated to and belong to the Fund. As such, the
interest of shareholders in the Fund will be separate and distinct from the
interest of shareholders of any other series of the Trust that may be created in
the future, and shares of the Fund will be entitled to dividends and
distributions only out of the net income and gains, if any, of the Fund as
declared by the Board of Trustees. The assets of the Fund will be segregated on
the Trust's books from the assets of any other series and will be charged with
the expenses and liabilities of the Fund and with a share of the general
expenses and liabilities of the Trust not attributable to the Fund or any other
series. The Board of Trustees will determine those expenses and liabilities
deemed to be general, and these items would be allocated among the Fund and any
other series as deemed fair and equitable by the Board of Trustees in its sole
discretion.
W. Jean Olson, 325 Hartshorn Drive, Short Hills, New Jersey, 07078 owned
beneficially and of record 6.24% of the Fund's outstanding shares as of October
31, 1997. No other person owns or is known by the Fund to have owned
beneficially and/or of record 5% or more of any class of the Fund's outstanding
shares as of October 31, 1997. The trustees and officers of the Trust owned
2.38% of the outstanding shares of the Fund as of October 31, 1997.
TRUSTEE AND OFFICER LIABILITY
Under the Trust's Declaration of Trust and its By-Laws, and under Delaware
law, the Trustees, officers, employees and certain agents of the Trust are
entitled to indemnification under certain circumstances against liabilities,
claims and expenses arising from any threatened, pending or completed action,
suit or proceeding to which they are made parties by reason of the fact that
they are or were such Trustees, officers, employees or agents of the Trust,
subject to the limitations of the 1940 Act which prohibit indemnification which
would protect such persons against liabilities to the Trust or its shareholders
to which they would otherwise be subject by reason of their own bad faith,
willful misfeasance, gross negligence or reckless disregard of duties.
INDEPENDENT PUBLIC ACCOUNTANTS
Coopers & Lybrand L.L.P., The 411 East Wisconsin Building, Milwaukee,
Wisconsin 53202, are the independent public accountants of the Trust. The
independent public accountants are responsible for auditing the financial
statements of the Fund. The selection of the independent public accountants is
approved annually by the Board of Trustees.
CUSTODIAN
Firstar Trust Company, 615 East Michigan Street, 3rd Floor, Milwaukee, WI
53202, serves as custodian of the Trust's assets and maintains custody of the
Fund's cash and investments. Cash held by the custodian, which may at times be
substantial, is insured by the Federal Deposit Insurance Corporation up to the
amount of available insurance coverage limits (presently, $100,000).
ADMINISTRATOR
The Trust has retained Firstar Trust Company, 615 East Michigan Street, 3rd
Floor, Milwaukee, WI 53202, to provide various administrative and accounting
services necessary for the operations of the Trust and the Fund. Services
provided by the Administrator include: facilitating general Fund management;
monitoring Fund compliance with federal and state regulations; supervising the
maintenance of the Fund's general ledger, the preparation of the Fund's
financial statements, the determination of the net asset value of the Fund's
assets and the declaration and payment of dividends and other distributions to
shareholders; and
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<PAGE> 52
preparing specified financial, tax and other reports. The Fund pays the
Administrator a monthly fee for administrative services which is calculated at
the following annual rates: 0.06% of the first $240 million of the Fund's
average net assets (subject to a minimum annual fee of $30,000); 0.05% of the
next $300 million of the Fund's average net assets; and 0.03% of the remaining
value of the Fund's average net assets. The Trust reimburses the Administrator
for certain out-of-pocket expenses. In addition, the Fund pays Firstar Trust
Company a fee for accounting services of $22,000 on the first $40 million of
assets, and 0.01% annually on the next $200 million of such assets; and 0.005%
of any remaining assets, determined as of the end of the month; plus certain
expenses.
LEGAL COUNSEL
Schulte Roth & Zabel LLP, New York, New York, serves as counsel to the
Trust.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not contain
all of the information set forth in the Registration Statement the Trust has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by the rules and regulations of the Securities and
Exchange Commission.
FINANCIAL STATEMENTS
The following audited financial statements of the Fund and the notes
thereto and the report of Coopers & Lybrand L.L.P. with respect to such
financial statements, are incorporated herein by reference to the Fund's Annual
Report to shareholders for the period May 1, 1997 (commencement of operations)
through October 31, 1997:
Schedule of Investments as of October 31, 1997;
Statement of Assets and Liabilities as of October 31, 1997;
Statement of Operations for the period May 1, 1997 through October 31,
1997;
Statement of Changes in Net Assets for the period May 1, 1997 through
October 31, 1997; and
Financial Highlights for the period May 1, 1997 through October 31,
1997.
The financial statements of the Fund incorporated by reference in this
Statement of Additional Information have been audited by Coopers & Lybrand
L.L.P., independent public accountants, as indicated in their report with
respect thereto. The financial statements are incorporated by reference herein
in reliance upon the authority of said firm as experts in accounting and
auditing and giving said report.
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APPENDIX A
Description of ratings used by Standard & Poor's Ratings Group, a division
of The McGraw-Hill Companies, Inc. ("S&P"), and Moody's Investors Service, Inc.
("Moody's"):
S&P
LONG-TERM ISSUE CREDIT RATINGS
AAA
An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA
An obligation rated "AA" differs from the highest rated obligations only in
a small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A
An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB
An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor meet its financial commitment on the
obligation.
-------------------------
Obligations rated "BB," "B," "CCC," "CC," and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
-------------------------
BB
An obligation rated "BB" is less vulnerable to non-payment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B
An obligation rated "B" is more vulnerable to non-payment then obligations
rated "BB," but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial
commitment on the obligation.
CCC
An obligation rated "CCC" is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
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<PAGE> 54
MOODY'S
CORPORATE BOND RATINGS
AAA
Bonds which are rated as "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and generally are referred to as
"gilt edge." 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 generally are 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
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA
Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and, thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B
Bonds which are rated "B" generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA
Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
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.
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