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P R O S P E C T U S
DATED MARCH 1, 1999
GRANUM VALUE FUND
A SERIES OF GRANUM SERIES TRUST
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126 East 56th Street
Twenty-Fifth Floor
New York, New York 10022
This Prospectus sets forth concisely the information about the Fund that you
should know before investing. It should be read carefully and retained for
future reference.
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved of these securities and has not passed on the adequacy
or accuracy of the information in this Prospectus. It is a criminal offense to
state otherwise.
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TABLE OF CONTENTS
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PAGE
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Goal and Strategy........................................... 3
Main Risks.................................................. 3
Past Performance............................................ 5
Fees and Expenses........................................... 6
Financial Highlights........................................ 7
Comparative Performance Information......................... 8
More About The Fund's Investment and Related Risks.......... 10
Management of the Fund...................................... 12
Fund Expenses............................................... 15
Dividends, Distributions and Taxes.......................... 15
How to Buy Shares........................................... 15
How to Redeem Shares........................................ 17
Distribution Plan........................................... 18
Fund Performance Information................................ 19
General Information......................................... 19
</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 DISTRIBUTORS. 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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GOAL AND STRATEGY
GOAL AND TYPES OF INVESTMENTS
The investment objective of the Fund is capital appreciation. In pursuing
this objective, the Fund normally invests at least 65% of its assets in equity
securities. These securities include common and preferred stocks, and other
securities, such as convertible securities, warrants and stock options, having
equity characteristics. A portion of the Fund's assets may be invested in bonds
and other types of debt obligations. In managing the Fund's portfolio, the
investment adviser attempts to achieve superior returns in rising markets and to
preserve capital in declining markets.
HOW THE INVESTMENT ADVISER SELECTS INVESTMENTS
The Fund follows a value investment strategy. This means that the
investment adviser uses fundamental research such as balance sheet and
return-on-equity analysis, and looks for securities that are undervalued
relative to their potential for growth. The investment adviser focuses on
companies it believes have the potential to produce above-average returns, sales
and asset growth. It also seeks to identify companies that may be involved in
"special situations" which may increase the value of the company's stock.
Special situations include a change in management or management policies, the
acquisition of a significant equity position in the company by others, 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.
INVESTMENTS IN SMALLER COMPANIES
The Fund's investments are made without regard to the size of issuers. As a
result, a significant portion of the Fund's assets may be invested in companies
with smaller market capitalizations.
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MAIN RISKS
An investment in the Fund is subject to certain risks. The value of the
Funds' investments increase or decrease. This will cause the value of the Fund's
shares to increase or decrease. You may lose money on your investment in the
Fund.
INVESTMENTS IN EQUITY SECURITIES
Although investments in equity securities, such as stocks, historically
have been a leading choice for long-term investors, the values of stocks rise
and fall depending on many factors. The stock or other security of a company may
not perform as well as expected, and may decrease in value, because of factors
related to the company (such as poorer than expected earnings or certain
management decisions) or to the industry in which the company is engaged (such
as a reduction in the demand for products or services in a particular industry).
General market and economic factors may adversely affect securities markets
generally, which could in turn adversely affect the value of the Fund's
investments, regardless of the performance or expected performance of companies
in which the Fund invests. There is also a risk that the investment adviser's
judgment about the attractiveness, value and potential appreciation of
particular securities will be incorrect. Special situations involve risks that
the contemplated transactions will be abandoned, revised, delayed or that an
anticipated event will not occur. This can result in the market price of
securities declining.
INVESTMENTS IN SMALLER COMPANIES
Investments in smaller capitalization companies involve additional risks.
The value of securities issued by small and medium capitalization companies
tends to be more vulnerable to adverse developments specific to the company or
the industry, or the securities markets generally, than the securities of larger
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capitalization companies. Returns on these investments may vary substantially
from the performance of the overall equity markets.
INVESTMENTS IN BONDS AND SIMILAR SECURITIES
Investments in bonds and other debt obligations pose different risks. The
value of fixed income securities generally will fall if interest rates rise. The
value of these securities may also fall as a result of other factors such as the
performance of the issuer, the market perception of the issuer or general
economic conditions. These investments also involve a risk that the issuer may
not be able to meet its principal and interest payment obligations. The Fund is
not restricted as to the maximum maturities of fixed income securities in which
it may invest. Fixed income securities having longer maturities involve greater
risk of fluctuations in value.
OPTIONS AND WARRANTS
Investments in options and warrants are speculative and involve substantial
risk, including the risk of a complete loss of the value of the investment.
NON-DIVERSIFICATION
The Fund is "non-diversified." This means that, as compared to mutual funds
which are diversified, the Fund may invest a greater percentage of its total
assets in the securities of a single issuer. As a result, the Fund may hold
larger positions in a relatively small number of stocks as compared to many
other mutual funds. This may make the Fund's performance more volatile than
would be the case if it had a more diversified investment portfolio.
OTHER RISKS ASSOCIATED WITH YOUR INVESTMENT
The Fund may invest in various derivative instruments, both to hedge its
portfolio and to increase returns, when the investment adviser determines,
consistent with the Fund's investment objective, that use of these instruments
is appropriate. These investments may be considered speculative. There is the
risk that they may significantly reduce returns or increase the volatility of
the Fund.
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PAST PERFORMANCE
The two tables below show information about the Fund's annual return. The
first table shows how the Fund's performance has varied in the first two years
of its operation. The second table shows how the Fund's performance during the
last year compares to that of the S&P 500 Index(TM), a widely recognized,
unmanaged index of stocks frequently used as a general measure of U.S. stock
market performance. These tables allow you to compare the Fund's performance to
the performance of other mutual funds or with the performance of the U.S.
securities markets generally. The information shown assumes reinvestment of
dividends and distributions. As with all mutual funds, past performance is not a
prediction of future results.
YEAR-TO-YEAR TOTAL RETURN
AS OF 12/31 EACH YEAR
GRAPH
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TOTAL RETURN FROM NOVEMBER 1, 1998
(BEGINNING OF FISCAL YEAR)
THROUGH DECEMBER 31, 1998: 11.98%
BEST QUARTER: 16.72%
(QUARTER ENDING 12/31/98)
WORST QUARTER: (17.33%)
(QUARTER ENDING 9/30/98)
</TABLE>
AVERAGE ANNUAL RETURN
AS OF 12/31 EACH YEAR
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Since
1 Year Inception**
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Fund..................... 1.40% 13.07%
S&P 500 Index............ 28.58% 31.28%
</TABLE>
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* From commencement of operations on 5/1/97 through 12/31/97.
** From commencement of operations on 5/1/97 through 12/31/98.
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FEES AND EXPENSES
This table describes the fees and expenses that you pay if you buy and hold
shares of the Fund.
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SHAREHOLDER FEES (FEES PAID DIRECTLY FROM
YOUR INVESTMENT):
Maximum Sales Charge (Load)
Imposed on Purchases (as a
percentage of offering
price)..................... NONE
Maximum Deferred Sales Charge
(Load)..................... NONE
Maximum Sales Charge (Load)
Imposed on Reinvestment of
Dividends.................. NONE
Redemption Fees.............. NONE
Exchange Fees................ NONE
ANNUAL FUND OPERATING EXPENSES (EXPENSES
THAT ARE DEDUCTED FROM FUND ASSETS)
(as a percentage of average net assets)
Management Fee............... 0.72%*
Distribution and Service
(12b-1) Fees**............. 0.75%
Other Expenses............... 0.41%
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Total Annual Fund Operating
Expenses................... 1.88%***
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* The basic 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 S&P 500 Index. As a
result, the maximum management fee that the Fund could pay to the investment
adviser is 2.00% of average net assets and the minimum is 0.50%. 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."
*** Depending on the performance of the Fund relative to the S&P 500 Index,
total Fund operating expenses could range from 1.66% to 3.16% of average net
assets.
EXAMPLE:
This Example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example is based upon Total Fund Operating Expenses as set forth in the
table above. It assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. This
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
S&P 500 Index during those periods, and also assumes no change in Fund expenses.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
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1 Year 3 Years 5 Years 10 Years
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$191 $591 $1,016 $2,201
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FINANCIAL HIGHLIGHTS
This table describes the Fund's performance for the fiscal years indicated.
It is intended to help you understand the Fund's financial results for a single
Fund share. The total returns in the table represent the rate that an investor
would have earned on an investment in the Fund (assuming reinvestment of all
dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, the Fund's independent accountants. Their report,
along with the Fund's financial statements, are available without charge upon
request.
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MAY 1, 1997(1)
YEAR ENDED THROUGH
OCTOBER 31, 1998 OCTOBER 31, 1997
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Per share data:(4)
Net asset value, beginning of period........................ $ 23.39 $ 20.00
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Income (loss) from Investment Operations:
Net investment income (loss)................................ 0.03 (0.03)
Net realized and unrealized gain (loss) on investments...... (1.49) 3.42
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Total from investment operations............................ (1.46) 3.39
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Net asset value, end of period.............................. $ 21.93 $ 23.39
======== =======
Total return................................................ (6.24)% 16.95%(2)
Supplemental data and ratios:
Net assets, end of period (000's)........................... $118,656 $76,263
Ratio of net expenses to average net assets:
Before expense reimbursement.............................. 1.88% 3.03%(3)
After expense reimbursement............................... 1.88% 2.77%(3)
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement.............................. 0.17% (0.78)%(3)
After expense reimbursement............................... 0.17% (0.52)%(3)
Portfolio turnover rate..................................... 3.45% 3.12%
</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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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
affiliates of the investment adviser (the "Granum Advisers"), are solely
responsible for providing investment advice to other investment funds, including
other investment funds that are not registered under the Investment Company Act
of 1940 (collectively, 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 is set forth below.
This composite performance information does not represent the performance of the
Fund, which is also set forth below. The information for the Other Funds 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 the 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 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, certain of the Other Funds are
not subject to certain investment limitations, diversification requirements and
other restrictions imposed by the Investment Company Act and the Internal
Revenue Code, which, if applicable, might have adversely affected the past
performance of the Other Funds. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE
RESULTS.
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The following data should be read in conjunction with the accompanying
notes.
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COMPOSITE OF OTHER COMPOSITE OF OTHER AGGREGATE NET
PERFORMANCE FUNDS BASED ON FUNDS BASED ON S&P 500 ASSETS OF OTHER
YEAR OF THE FUND ACTUAL FEES(1) THE FUND'S FEES(2) INDEX(3) FUNDS(4)
---- ----------- ------------------ ------------------ -------- ----------------
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1990(5) -- 2.4% 1.9% 1.4% 26
1991 -- 49.4% 60.0% 30.4% 47
1992 -- 16.6% 19.1% 7.6% 82
1993 -- 8.3% 9.4% 10.1% 162
1994 -- -15.1% -15.4% 1.3% 153
1995 -- 47.5% 53.1% 37.6% 215
1996 -- 36.8% 44.2% 23.0% 340
1997(6) 21.1% 31.7% 37.9% 33.4% 552
1998 1.1% -1.4% -1.6% 28.6% 568
Cumulative Return(7) 1990-1998 330.0% 438.0% 361.0%
</TABLE>
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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 or fees 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.
Except for the performance information of one account the affect of which on
the composite returns shown is immaterial, this information is based upon
audited financial statements for each period.
(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 on 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 considered to be generally representative of the U.S. large cap stock
market on a whole. The performance data for the S&P 500 Index 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 Fund and the Other Funds do not restrict
their investments 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) of the
Granum Advisers' first investment vehicle, Granite Capital, L.P., through
December 31, 1990.
(6) Returns for 1997 for the Fund are for the period May 1, 1997 (commencement
of operations) through December 31, 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 date through December 31, 1998.
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MORE ABOUT THE FUND'S INVESTMENT AND RELATED RISKS
The Fund may use various 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.
You should consider the Fund as a supplement to an overall investment
program and should invest only if you 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.
EQUITY SECURITIES
The Fund's investments in equity securities may include investments in
common stocks and preferred stocks of U.S. and foreign issuers. The Fund may
also purchase securities that have equity characteristics, such as convertible
securities, warrants and stock options. The value of equity securities varies in
response to many factors. Factors specific to a company, such as certain
decisions by management, lower demand for its products or services, or even loss
of a key executive, could result in a decrease in the value of the company's
securities. Factors specific to the industry in which a company participates,
such as increased competition or costs of production or consumer or investor
perception, can have a similar effect. The value of a company's stock can also
be adversely effected by changes in financial markets generally, such as an
increase in interest rates or consumer confidence, that are unrelated to the
company itself or its industry. The Fund's focus on value stocks carries
additional risks. As a group, value stocks tend to go through cycles of relative
underperformance and out-performance in comparison to common stocks generally.
These cycles have in the past lasted for periods of several years. These factors
and others can cause significant fluctuations in the prices of securities in
which the Fund invests and can result in significant losses.
SMALLER COMPANIES
The Fund may invest in the securities of issuers having smaller market
capitalizations than the issuers in which many other mutual funds invest.
Investments in smaller companies are generally riskier than investments in
larger, well-established companies. Smaller companies often are more recently
formed than larger companies and may have limited product lines, distribution
channels and financial and managerial resources. There is often less publicly
available information about smaller companies than there is for larger, more
established issuers, making it more difficult for the investment adviser to
analyze the value of the company in relation to its potential for growth. The
equity securities of smaller companies are often traded over-the-counter or on
regional exchanges and those 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 sell these 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
The Fund may invest a portion of its assets in bonds and other debt
obligations, including such securities issued by U.S. and foreign corporations,
the U.S. government or foreign governments or their agencies, and municipal
governments. These securities may pay fixed, variable or floating rates of
interest, and may include zero coupon
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obligations. The Fund may invest in both investment grade debt securities and
non-investment grade debt securities (including junk bonds).
All debt securities are subject to certain risks. One risk is whether the
issuer will be able to meet principal or interest payments. Another risk is that
the prices of debt securities will generally decline as interest rates rise. The
prices of debt securities may also decline as a result of market perception of
the creditworthiness of the issuer and general market liquidity.
Non-investment grade securities, especially junk bonds, which are highly
speculative investments, are also more sensitive to these risks, particularly
credit risk. Also, the markets for non-investment grade securities may be
thinner and less active than for investment grade 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 that are not investment grade.
FOREIGN SECURITIES
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. These investments
involve risks not associated with investments in the U.S., including the risk of
fluctuations in foreign currency exchange rates, unreliable and untimely
information about the issuers and political and economic instability. These
risks are more severe in emerging markets and could result in the investment
adviser misjudging the value of certain securities or in a significant loss in
the value of those securities.
ILLIQUID SECURITIES
The Fund may invest up to 15% of the value of its net assets in illiquid
securities. These securities lack a ready market in which they can be sold. For
this reason, illiquid securities involve the risk that the Fund will not be able
to sell them when desired or at a favorable price.
OPTIONS AND WARRANTS
Options and warrants are forms of derivative instruments. They can have
equity-like characteristics and typically derive their value, at least in part,
from the value of an underlying asset or index. The Fund may, but is not
obligated to, engage in options transactions. It may invest in warrants and
options for profit opportunities. It may also use options to hedge the
portfolio. The Fund will write only covered call or covered put options. The
Fund may trade in options on securities, options on securities indices and
foreign currency options. It may also invest in warrants and rights.
A put option gives the purchaser of the option the right to sell, and
obligates the writer to buy, an underlying asset or index at a stated exercise
price at any time prior to the expiration of the option. A call option gives the
purchaser of the option the right to buy, and obligates the writer to sell, an
underlying asset or index at a stated exercise price at any time prior to the
expiration of the option.
Warrants are 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 are not dividend-paying investments and do not
have voting rights like common stock. They also do not represent any rights in
the assets of the issuer. As a result, warrants and rights may be considered
more speculative than direct equity investments. In addition, the value of
warrants and rights do not necessarily change with the value of the underlying
securities and may cease to have value if they are not exercised prior to their
expiration dates.
The use of derivative instruments like options, rights and warrants can
increase the volatility of
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the Fund's portfolio. They may entail investment exposures that are greater than
their costs would suggest. This means that a small investment in these
instruments could have a large potential positive or negative impact on the
Fund's performance. If the Fund invests in these instruments at inappropriate
times or judges market conditions incorrectly, they may lower the Fund's return
or result in substantial losses. Changes in the liquidity of the secondary
markets in which these instruments trade can result in significant, rapid and
unpredictable changes in their prices, which could also cause losses to the
Fund.
TEMPORARY DEFENSIVE INVESTMENTS
During periods of adverse market or economic conditions, the Fund may
temporarily invest all or a substantial portion of is assets in high quality,
fixed income securities, money market instruments and money market mutual funds,
or it may hold cash. The Fund will not be pursuing its goal of capital
appreciation in these circumstances. The Fund may also hold these investments
for liquidity purposes.
OTHER INVESTMENTS
The Fund may make other types of investments, including investments in
other derivative instruments, and may engage in various investment practices,
including securities lending and the purchase of securities on a when-issued
basis. These investments and practices, and their risks, are described in the
Statement of Additional Information.
COMPENSATION TO INVESTMENT ADVISER
The compensation that may be payable by the Fund to the investment adviser
may under certain circumstances be higher than the compensation paid by most
other mutual funds with similar investment objectives. The compensation actually
paid to the investment adviser will increase or decrease depending on the Fund's
performance versus the S&P 500 Index. This may create an incentive for the
investment adviser to make riskier investments than it might make absent this
compensation arrangement.
YEAR 2000 ISSUES
Many computer software systems in use today recognize dates using a two
digit year code. These systems cannot distinguish between the years preceding
the year 2000 and years beginning after 1999. This is known as the "Year 2000"
problem. Most of the services provided to the Fund depend on the smooth
functioning of computer systems. Any failure to adapt these systems prior to the
year 2000 could interfere with the proper operations of the Fund. In addition,
because the Year 2000 problem affects virtually all organizations, companies in
which the Fund invests could be adversely impacted by this issue. Although this
Year 2000 problem could have a negative impact on the Fund and its operations,
the Fund is working to avoid the problem and to obtain assurances from its
service providers that they are taking similar steps.
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MANAGEMENT OF THE FUND
The Board of Trustees of Granum Series Trust (of which the Fund is a
series) (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 Fund's distributor or their affiliates,
are responsible for the daily management and administration of the Fund's
operations.
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INVESTMENT ADVISER
The investment adviser of the Fund is Granum Capital Management, L.L.C.,
126 East 56th Street, 25th Floor, New York, New York 10022. Lewis M. Eisenberg
and Walter F. Harrison, III control the investment adviser and serve as its
managing members. Subject to the overall supervision of the Board of Trustees,
the investment adviser manages the investment operations of the Fund in
accordance with the Fund's investment objective and policies and formulates a
continuing investment strategy for the Fund. The investment adviser has
established an investment committee (the "Investment Committee"), comprised of
Messrs. Eisenberg and Harrison and Mr. Paul Matten, to perform these functions.
The Investment Committee makes all decisions regarding investments to be
purchased or sold.
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.
The advisory personnel of the investment adviser are all persons who are
members or employees of the investment advisers to the Other Funds, which are
under common control with the investment adviser to the Fund. In their
capacities with such advisers or as general partners, these persons have
provided investment advisory services to clients, including the Other Funds, and
as of October 31, 1998 manage investment portfolios with assets in excess of
$636 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 "Basic Fee"). This Basic
Fee is increased or decreased monthly (the "Monthly Performance Adjustment")
depending on the investment
- --------------------------------------------------------------------------------
13
<PAGE> 14
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 (the
"Measurement Period"), 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%.
The following table further illustrates how the advisory fee would vary
under this arrangement:
<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 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. 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 other mutual funds with similar investment objectives.
- --------------------------------------------------------------------------------
14
<PAGE> 15
- --------------------------------------------------------------------------------
FUND EXPENSES
The Fund pays all of its expenses other than those expressly assumed by the
investment adviser or by the distributors of the Fund's shares. 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 Fund's 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.
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund pays dividends from its net investment income and distributes any
net capital gains that it realizes. Dividends and distributions will generally
be paid once a year. They will be reinvested in the Fund unless you instruct the
Fund otherwise.
TAXES
Fund dividends and distributions are taxable to most investors (unless your
investment is in an IRA or other tax-advantaged account). The tax status of any
dividend or distribution is the same regardless of how long you have been an
investor in the Fund and whether or not you reinvest your dividends and
distributions or take them as cash. In general, dividends paid from the Fund's
net investment income (which would include short-term capital gains) are taxable
as ordinary income. Distributions of long-term capital gains generally are
taxable at the rate of 10% (if you are in the 15% tax bracket) or 20% (if you
are in the 28% tax bracket or above). In addition, any sale of Fund shares will
generate a tax liability if you realize a gain on the sale.
The tax status of the dividends and distributions for each calendar year
will be detailed in your annual tax statement from the Fund.
The above discussion provides very general information only. You should
always consult your tax professional about federal, state and local tax
consequences associated with your investment in the Fund.
- --------------------------------------------------------------------------------
HOW TO BUY SHARES
You may purchase Fund shares at the net asset value per share next computed
after receipt of your purchase order and payment. See "Share Price," below. You
pay no sales charge when you purchase or redeem shares. However, the Fund's
distributors and securities dealers that sell shares of the Fund receive
compensation from the Fund for their services. See "DISTRIBUTION PLAN." You will
not receive any stock certificate evidencing your purchase of Fund shares, but
will instead receive written confirmation of each transaction and quarterly
statements showing account balances.
The minimum initial investment in the Fund is $5,000. If you invest at
least $5,000 in the Fund for a single account (including, among others, a
- --------------------------------------------------------------------------------
15
<PAGE> 16
401(k) retirement account), the minimum initial investment requirement will not
apply to additional accounts that are opened by you or your spouse. Subsequent
investments in an account 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.
PURCHASE BY MAIL
You may purchase shares by sending a check, together with a completed
Account Application in the case of an initial investment, to Granum Value Fund,
c/o Firstar Mutual Fund Services, LLC, 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 and
which will also be available upon request from the Fund's distributors or the
Fund's transfer agent). Always write your Fund account number on the check. All
checks to purchase shares must be drawn on a U.S. bank and made payable to
"Granum Value Fund." Third party checks will not be accepted.
All checks are accepted subject to collection. In the event your check does
not clear, the Fund will hold you 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 your check. This delay can be avoided if
shares are purchased by wire and will also not apply if there are sufficient
other shares in your account from which to satisfy the requested redemption.
Firstar Mutual Fund Services, LLC will charge a $25 fee for any returned check.
PURCHASE BY WIRE
You may purchase shares by wiring federal funds. 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 Mutual Fund Services, LLC, Acct # 112952137, Attn.: Granum Value Fund,
Account Number, 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. Your bank may charge a fee to wire funds.
PURCHASE BY TELEPHONE
By using the Fund's telephone purchase option you may move money from your
bank account to your Fund account at your request by calling 1-888-5-GRANUM.
Only bank accounts held at domestic financial institutions that are Automated
Clearing House (ACH) members may be used for telephone transactions. To have
your shares purchased at the net asset value determined as of the close of
regular trading on a given date, the Fund's transfer agent must receive both
your purchase order and payment by Electronic Funds Transfer through the ACH
system before the close of regular trading on such date. Most transfers are
completed within three business days. You may not use telephone transactions for
initial purchases of Fund shares. The minimum amount that can be transferred by
telephone is $100.
PURCHASE BY AUTOMATIC INVESTMENT
If you choose the Automatic Investment option, you may move money from your
bank account to your Fund account on the schedule you select (e.g. monthly,
bimonthly or quarterly) in any amount subject to a $100 minimum. You
- --------------------------------------------------------------------------------
16
<PAGE> 17
Fund account must be established at the minimum initial investment level before
the Automatic Investment Plan goes into effect.
For further information regarding the procedures to be used in purchasing
shares, you may contact either of the Fund's distributors 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
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. The
Fund calculates net asset value per share by dividing the value of its net
assets (i.e., the value of its assets less its liabilities) by the total number
of 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 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
You may redeem shares of the Fund at any time. Your shares will be redeemed
at their current net asset value per share next computed after receipt of your
redemption request in proper form. See "HOW TO BUY SHARES -- Share Price." No
charges are imposed in connection with redemptions. The value of the shares
redeemed may be more or less than their original cost, depending upon changes in
the Fund's net asset value per share.
The Fund normally makes payment for all shares redeemed within seven days
after receipt by the transfer agent of a redemption request in proper form. 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. 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 a 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 of the Fund's distributors or your securities dealer, or call 1-888-
5-GRANUM (547-2686).
WRITTEN REDEMPTION REQUESTS
You may redeem shares by mailing a written request to: Granum Value Fund,
c/o Firstar Mutual Fund Services, LLC, 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. Each signature must be guaranteed for
redemptions exceeding $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,
- --------------------------------------------------------------------------------
17
<PAGE> 18
clearing agencies and savings associations, as well as from participants in the
New York Stock Exchange Medallion Signature Program and the Securities Transfer
Agents Medallion Program ("STAMP"). If you have any questions with respect to
signature guarantees, please call 1-888-5-GRANUM (547-2686).
The proceeds of a written redemption request will normally be paid by check
made payable to the shareholders of record. You may request that redemption
proceeds of $1,000 or more be wired to your account at any member bank of the
Federal Reserve System if you have previously designated that account as one to
which redemption proceeds may be wired. A $12 wire fee will be deducted from
your account.
TELEPHONE REDEMPTION REQUESTS
You may redeem shares by telephone request if you have elected to have this
option. You may place a telephone 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 which you have previously designated. Otherwise redemption proceeds will
be paid by check.
During times of extreme economic or market conditions, you may experience
difficulty in contacting the transfer agent by telephone to request a
redemption. In such cases, you should consider using a written redemption
request sent by overnight service to: Granum Value Fund, c/o Firstar Mutual Fund
Services, LLC, 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 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. Neither the Fund nor the transfer agent will be liable for any losses
due to unauthorized or fraudulent instructions if these 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
requests within a specified period.
- --------------------------------------------------------------------------------
DISTRIBUTION PLAN
The Trust has adopted a distribution plan in accordance with Rule 12b-1
under the Investment Company Act of 1940. Under the distribution plan, the Fund
makes payments to Mercer Allied Company and Granum Securities, L.L.C., the
distributors of the Fund's shares, for services they provide in connection with
the sale of shares to investors ("Distribution Services") and for the furnishing
of account related services by the distributors and securities dealers 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.
The Fund pays monthly fees to each distributor for Distribution Services
and Shareholder Services. The fee for Distribution Services is computed at the
annual rate of 0.50% of the average net assets of the Fund. The fee for
Shareholder Services is computed at the annual rate of 0.25% of the average net
assets of the Fund. The fees to each distributor are based on the value of
shares held by persons who have purchased shares through that distributor or
through broker-dealers that have entered into
- --------------------------------------------------------------------------------
18
<PAGE> 19
selling agreements with that distributor. From this compensation, the
distributors make payments to securities dealers whose customers have purchased
shares of the Fund.
Because these fees are paid out of the Fund's assets on an on-going basis,
over time these fees will increase the cost of your investment and may cost you
more that other types of sales charges.
- --------------------------------------------------------------------------------
FUND PERFORMANCE INFORMATION
Advertisements and sales literature relating to the Fund and reports to
shareholders may include quotations of investment performance. In these
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 using 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
quotations of 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 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, as well as published ratings and
rankings, 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
ADMINISTRATOR
Firstar Mutual Fund Services, LLC ("Firstar"), 615 East Michigan Street,
3rd Floor, Milwaukee, WI 53202, provides various administrative and accounting
services to the Fund. Administrative services provided by Firstar 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. The Fund pays Firstar 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 Fund reimburses Firstar for certain out-of-pocket
- --------------------------------------------------------------------------------
19
<PAGE> 20
expenses. In addition, the Fund pays Firstar 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.
DISTRIBUTORS
Mercer Allied Company and Granum Securities, L.L.C. 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 Fund's investment adviser.
TRANSFER AGENT
Firstar Mutual Fund Services, LLC, 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 any
questions regarding their transactions in shares of the Fund and account
balances.
CUSTODIAN
Firstar Bank Milwaukee, N.A. serves as custodian for the Fund. In that
capacity, it 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.
- --------------------------------------------------------------------------------
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 AND TRANSFER AGENT
FIRSTAR MUTUAL FUND SERVICES, LLC
615 East Michigan Street
3rd Floor
Milwaukee, Wisconsin 53202
- --------------------------------------------------------------------------------
CUSTODIAN
FIRSTAR BANK MILWAUKEE, N.A.
615 East Michigan Street
3rd Floor
Milwaukee, Wisconsin 53202
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
- --------------------------------------------------------------------------------
LEGAL COUNSEL
SCHULTE ROTH & ZABEL LLP
900 Third Avenue
New York, New York 10022
- --------------------------------------------------------------------------------
20
<PAGE> 21
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
For more information about the Fund, the following documents are available
free upon request:
ANNUAL/SEMI-ANNUAL REPORTS
Additional information is available in the Fund's annual and semi-annual
reports to shareholders. The annual report contains a discussion of the market
conditions and investment strategies that significantly affected the Fund's
performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more details about the Fund and its policies. A current SAI
is on file with the SEC and is incorporated by reference into (and is legally a
part of) this Prospectus.
- --------------------------------------------------------------------------------
TO OBTAIN INFORMATION
To obtain free copies of the annual or semi-annual report or the SAI or
discuss questions about the Fund:
BY TELEPHONE
Call your securities dealer or call 1-888-5-GRANUM (547-2686)
BY MAIL
Write to: Granum Value Fund, c/o Firstar Mutual Fund Services, LLC, 615 East
Michigan Street, 3rd Floor, Milwaukee, Wisconsin 53202
Free text only versions of the annual report, semi-annual report and the SAI
are available on the SEC's Internet website, http://www.sec.gov. You can also
obtain copies by visiting the SEC's Public Reference Room in Washington, D.C. or
by sending your request and a duplicating fee to the SEC's Public Reference
Section, Washington, D.C. 20549-6009.
Investment Company Act File Number 811-08029
PROSPECTUS
GRANUM
VALUE
FUND
March 1, 1999
- --------------------------------------------------------------------------------
<PAGE> 22
GRANUM VALUE FUND
126 EAST 56TH STREET
TWENTY-FIFTH FLOOR
NEW YORK, NEW YORK 10022
STATEMENT OF
ADDITIONAL INFORMATION
DATED MARCH 1, 1999
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)
organized as a business trust under the laws of the State of Delaware. 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 Mutual Fund Services, LLC (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 March 1, 1999, 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 Mutual Fund Services, LLC, 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.
B-1
<PAGE> 23
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INVESTMENT POLICIES AND PRACTICES........................... B-3
DERIVATIVE INVESTMENTS...................................... B-11
INVESTMENT RESTRICTIONS..................................... B-14
TRUSTEES AND OFFICERS....................................... B-16
INVESTMENT ADVISORY AGREEMENT............................... B-19
DISTRIBUTORS................................................ B-21
DISTRIBUTION PLAN........................................... B-22
HOW TO REDEEM SHARES........................................ B-23
DETERMINATION OF NEW ASSET VALUE............................ B-24
DIVIDENDS, DISTRIBUTIONS AND TAXES.......................... B-25
PORTFOLIO TRANSACTIONS AND BROKERAGE........................ B-28
PERFORMANCE INFORMATION..................................... B-29
GENERAL INFORMATION......................................... B-31
</TABLE>
B-2
<PAGE> 24
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
principal investment strategies and associated risks 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.
B-3
<PAGE> 25
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 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. As described in the Fund's Prospectus, the Fund may invest in
bonds and other types of debt obligations of U.S. and foreign issuers. 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 issue or guaranteed by foreign governments,
their agencies, instrumentalities or political subdivisions, or by government
owned, controlled or sponsored entities, including central banks. 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")
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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 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. The Fund will not
invest more than 20% of the value of its total assets in non-convertible
securities which are not investment grade.
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
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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.
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, it may 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
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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 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 involve certain risks not associated with direct investments in debt
securities. See "INVESTMENT POLICIES AND PRACTICES -- Repurchase Agreements."
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 its 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.
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<PAGE> 29
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 owned by the
Fund may decline or when the Fund does not want to sell the security it owns. If
the Fund effects 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 under the 1933 Act and non-exempt commercial paper may be
determined to be liquid by the Investment Adviser. Illiquid securities involve
the risk
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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.
FORWARD CONTRACTS
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
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
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 may be utilized by the Fund in lieu of
purchasing money market instruments.
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.
Repurchase agreements involve certain risks not associated with direct
investments in debt securities. 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
B-9
<PAGE> 31
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 the risks of loss from
repurchase agreement transactions. 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
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. 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.
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 Funds transactions
costs. 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.
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<PAGE> 32
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 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 principal Derivatives
transactions in which the Fund may engage are noted and described in the
Prospectus. The discussion below provides additional information regarding the
risks associated with those transactions and other transactions in Derivatives
in which the Fund may engage, as well as the risk of Derivatives generally and
use of options on securities indices.
DERIVATIVES -- GENERALLY
The Fund may, but is not obligated to, invest in Derivatives. It may do so
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.
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<PAGE> 33
OPTIONS ON SECURITIES
As discussed in the Prospectus, 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 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 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
B-12
<PAGE> 34
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 on 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.
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 underlying
B-13
<PAGE> 35
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.
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 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.
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.
B-14
<PAGE> 36
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.
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.
B-15
<PAGE> 37
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 (52)*..................... Trustee President, CEO and Chairman of The Ayco
One Wall Street Company, L.P. (financial planner), December
Albany, New York 1994 to present; President of Breham, Inc.,
12205-3894 general 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.
Edwin M. Cooperman (55).............. Trustee Chairman of Tutortime Inc., 1997 to
70 Falmouth Street present; Consultant, Edmarc Investments,
Short Hills, New Jersey 07078 May 1996 to present; Chairman and Chief
Executive Officer, Travelers Bank Group of
Travelers Group (formerly Primerica
Corporation), 1994 to April 1996; Executive
Vice President, Travelers Group, 1991 to
April 1996; Chairman and Chief Executive
Officer, Primerica Financial Services
Group, 1991 to 1994.
Lewis M. Eisenberg (56)*............. 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.
Walter F. Harrison, III (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-16
<PAGE> 38
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS POSITION(S) HELD WITH TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
--------------------- --------------------------- -------------------------------------------
<S> <C> <C>
Burnell R. Roberts (71).............. Trustee Partner, American Industrial Partners, 1993
Kettering Tower to present; Chairman of Sweetheart Holding
Suite 2340 Inc. and Sweetheart Cup Company Inc.,
Dayton, Ohio 45423 September 1993 to present; Director of Mead
Corporation, October 1981 to May 1993;
Chairman of the Board of Directors and
Chief Executive Officer of Mead
Corporation, April 1982 to May 1992.
Thaddeus Seymour (70)................ Trustee Professor of English, Rollins College,
Rollins College Winter Park, Florida, 1991 to present;
Winter Park, Florida 32789 President of Rollins College, 1978 to 1991.
Richard A. Zimmer (54)............... Trustee Of counsel with Dechert Price & Rhoads,
199 Nassau Street February 1997 until present; Member of
Princeton, New Jersey 08540 Congress, from the 12th District of New
Jersey, 1991 to 1997.
Peter Heerwagen (53)................. Vice President Senior Vice President and Chief Investment
One Wall Street Officer of The Ayco Company, L.P.
Albany, New York 12205-3894 (financial planner), December 1994 to
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 (36).................. 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 (55)................. Vice President, Treasurer Managing Director and Chief Administrative
126 East 56th Street and Chief Financial Officer Officer of private investment adviser,
25th Floor 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-17
<PAGE> 39
<TABLE>
<CAPTION>
NAME, AGE AND ADDRESS POSITION(S) HELD WITH TRUST PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
--------------------- --------------------------- -------------------------------------------
<S> <C> <C>
Peter R. Martin (41)................. Vice President and Senior Vice President and General Counsel
One Wall Street Secretary of The Ayco Company, L.P. (financial
Albany, New York 12205-3894 planner), December 1994 to 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.
Dana Armour (30)..................... Assistant Secretary Trust Officer, Mutual Fund Services, LLC,
615 E. Michigan Street June 1992 to present.
Milwaukee, Wisconsin 53202
</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 1998 fiscal year is set forth
below. (Messrs. McCord and Sinai resigned as Trustees during the 1998 fiscal
year and no longer serve as Trustees.)
B-18
<PAGE> 40
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,...........................
Trustee $ 0 $0 $0 $ 0
Edwin M. Cooperman,...................
Trustee $ 7,500 $0 $0 $ 7,500
Lewis M. Eisenberg,...................
Co-Chairman of the Board of Trustees $ 0 $0 $0 $ 0
Walter Harrison,......................
Co-Chairman of the Board of Trustees $ 0 $0 $0 $ 0
Herbert W. McCord,....................
Trustee $ 2,500 $ 2,500
Burnell R. Roberts,...................
Trustee $ 9,000 $0 $0 $ 9,000
Thaddeus Seymour,.....................
Trustee $ 7,500 $0 $0 $ 7,500
Alan Sinai,...........................
Trustee $ 2,500 $ 2,500
Richard A. Zimmer,....................
Trustee $10,000 $0 $0 $10,000
</TABLE>
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.
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
B-19
<PAGE> 41
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 continuance of the Advisory Agreement
for an additional term expiring February 28, 2000 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 or the Investment Adviser at
a meeting held in person on December 7, 1998. 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%. 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. During the fiscal year ended October 31, 1998, the Fund
accrued fees of $812,828 payable to the Investment Adviser 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-20
<PAGE> 42
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,
1999. 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 continuance of the
Distribution Agreements for terms expiring March 13, 2000 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 Investment Adviser or
the Distributors, at a meeting held in person on December 7, 1998. Each
Distribution Agreement provides 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.
B-21
<PAGE> 43
Compensation paid to the Distributors during the fiscal year ended October
31, 1998 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 $795,375
Granum Securities................. $0 $0 $0 $ 45,457
</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."
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
continuance of the Distribution Plan was approved by the Trust's Board of
Trustees, including a majority of the Qualified Trustees, at a meeting held in
person on December 7, 1998. 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.
B-22
<PAGE> 44
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 and during
the fiscal year ended October 31, 1998, the Fund accrued fees payable to the
Distributors of $840,832 pursuant to the Distribution Plan. Such amounts were
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 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
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<PAGE> 45
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 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
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<PAGE> 46
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, 1998:
<TABLE>
<CAPTION>
(A) (B) (C)
NET ASSETS SHARES OUTSTANDING OFFERING PRICE (A) / (B)
---------- ------------------ ------------------------
<S> <C> <C>
$118,655,908 5,409,776 $21.93
</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 tax
considerations that 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 (i.e., the income that it earns from
dividends and interest on its investments, and any short-term capital gains, net
of Fund expenses) and net realized capital gains, if any, to its shareholders.
Unless requested otherwise by a shareholder, dividends and other distributions
will be automatically reinvested in additional shares of the Fund at the net
asset value per share in effect on the day after the record date.
The Fund intends to qualify as a regulated investment company under the
provisions of the Internal Revenue Code of 1986, as amended (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. 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. To qualify for
such tax treatment, the Fund must generally, in addition to making the required
distributions, among
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<PAGE> 47
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 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 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 long-term capital gains 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 20%. 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.
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.
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<PAGE> 48
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
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 an
investment in the Fund.
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 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
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<PAGE> 49
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
B-28
<PAGE> 50
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 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. During the
fiscal year ended October 31, 1998, the Fund paid aggregate brokerage
commissions of $96,463.
PERFORMANCE INFORMATION
The following information supplements and should be read in conjunction
with the section in the Fund's Prospectus entitled "FUND PERFORMANCE
INFORMATION."
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<PAGE> 51
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 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.
The average annual total return for the one year period ending October 31,
1998 was (6.24)%. The Fund's average annual total return for the period May 1,
1997 (commencement of operations) through October 31, 1998 was 6.32%. Quotations
of total return for a five year and ten year period ended on the date of the
most recent
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<PAGE> 52
balance sheet included in the Trust's registration statement will be provided at
such times as the registration statement has been in effect for such periods.
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.
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."
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.
The trustees and officers of the Trust owned 2.38% of the outstanding
shares of the Fund as of November 30, 1998.
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.
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<PAGE> 53
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 100 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, are the independent accountants of the Trust. The independent accountants
are responsible for auditing the financial statements of the Fund. The selection
of the independent accountants is approved annually by the Board of Trustees.
CUSTODIAN
Firstar Bank Milwaukee, N.A., 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 Mutual Fund Services, LLC, 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. The Fund pays the Administrator an annual fee for administrative
services of $30,000 on the first $40 million of assets, 0.06% on the next $200
million of the Fund's average net assets; 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 Mutual Funds
Services, LLC 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. A text-only version of the Registration Statement is
available on the Securities and Exchange Commission's Internet website,
http://www.sec.gov.
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<PAGE> 54
FINANCIAL STATEMENTS
The following audited financial statements of the Fund and the notes
thereto and the report of PricewaterhouseCoopers LLP with respect to such
financial statements, are incorporated herein by reference to the Fund's Annual
Report to shareholders for the fiscal year ended October 31, 1998:
Schedule of Investments as of October 31, 1998;
Statement of Assets and Liabilities as of October 31, 1998;
Statement of Operations for the fiscal year ended October 31, 1998;
Statement of Changes in Net Assets for the fiscal year ended October
31, 1998; and
Financial Highlights.
The financial statements of the Fund incorporated by reference in this
Statement of Additional Information have been audited by PricewaterhouseCoopers
LLP, 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.
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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.
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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
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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.
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.
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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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