Rule 497(c)
SEC File Nos. 333-22075
811-8061
THE BANC STOCK GROUP FUND
PROSPECTUS DECEMBER 1, 2000
1105 Schrock Road, Suite 437
Columbus, Ohio 43229
For Information, Shareholder Services and Requests:
(888) BANK-595
Banc Stock Group Fund seeks to provide long-term capital appreciation.
AS WITH ALL MUTUAL FUND SHARES AND PROSPECTUSES, THE SECURITIES AND EXCHANGE
COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SHARES OR THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
PAGE
ABOUT THE FUND ..................................................... 3
COSTS OF INVESTING IN THE FUND ..................................... 6
ADDITIONAL INFORMATION ABOUT INVESTMENT STRATEGIES
AND RELATED RISKS ................................................ 7
HOW TO BUY SHARES .................................................. 8
HOW TO SELL SHARES ................................................. 11
HOW TO EXCHANGE SHARES ............................................. 12
DIVIDENDS AND DISTRIBUTIONS ........................................ 13
TAXES .............................................................. 13
OPERATION OF THE FUND .............................................. 14
FINANCIAL HIGHLIGHTS ............................................... 15
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ABOUT THE FUND
INVESTMENT OBJECTIVE
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The investment objective of the Fund is to provide long-term capital
appreciation.
HOW THE FUND PURSUES ITS OBJECTIVE
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The Fund pursues its objective by normally investing at least 65% of its
total assets in equity securities of community banks, lending institutions and
financial services companies believed to offer superior prospects for long term
growth. The Fund's adviser selects stocks of banks with low price to earnings
ratios, minimal loan losses and long histories of profitability, located in
stable communities with growth potential.
PRINCIPAL RISKS OF INVESTING IN THE FUND
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All investments carry risks to some degree. The Fund's portfolio is subject
to the risks associated with common stock investing, such as selecting
individual companies that do not perform as anticipated. Overall stock market
risks may also affect the value of the Fund. Factors such as domestic economic
growth and market conditions, interest rate levels, and political events affect
the securities markets. As with any mutual fund investment, the Fund's returns
may vary and you could lose money.
Because the Fund's portfolio is concentrated in the banking industry, it is
subject to risks in addition to those that apply to the general equity market.
Economic, legislative or regulatory developments may occur which significantly
affect the entire banking industry. This may cause the Fund's net asset value to
fluctuate more than that of a fund that does not concentrate in a particular
industry. For example:
o Extensive governmental regulation may limit both the amounts and types
of loans and other financial commitments banks and other lending
institutions can make, and the interest rates and fees they can
charge.
o Profitability is largely dependent on the availability and cost of
capital funds, and can fluctuate significantly when interest rates
change.
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o Credit losses resulting from financial difficulties of borrowers can
negatively impact the industry.
As you can see, a number of factors, in addition to general economic
conditions, can adversely affect the financial performance and condition of the
institutions in which the Fund invests.
In addition, because many community banks and other lending institutions
are smaller capitalization companies, the Fund may be subject to the risks
associated with such companies. For example, less frequent trading, with smaller
volume than larger capitalization companies, may make it difficult for the Fund
to buy and sell shares. Also, the market price of smaller capitalization
companies tends to rise more in response to buying demand and fall more in
response to selling pressure than is the case with larger capitalization
companies.
An investment in the Fund is not a deposit or obligation of any bank, is
not endorsed or guaranteed by any bank, and is not insured by the Federal
Deposit Insurance Corporation (FDIC) or any other government agency.
IS THIS FUND RIGHT FOR YOU?
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The Fund is designed for:
o long term investors seeking a fund with long term capital appreciation
o investors willing to accept price fluctuations and market cycles
o investors looking to diversify their portfolio into the banking
industry
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HOW THE FUND HAS PERFORMED
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The chart and table below show the variability of the Fund's returns, which
is one indicator of the risks of investing in the Fund. The bar chart shows
changes in the Fund's returns since the Fund's inception. Sales loads are not
reflected in the bar chart and, if these amounts were reflected, returns would
be less than those shown. The table shows how the Fund's average annual total
returns compare over time to those of a broad-based securities market index. Of
course, the Fund's past performance is not necessarily an indication of its
future performance.
Insert bar chart with the following plot points*:
(Total return as of December 31, 19__)
1998...............(9.13)%
1999...............(3.71)%
*The Fund's year-to-date return as of September 30, 2000 was (1.08)%
UPDATE: Since August 1, 1997 (the Fund's inception), the highest return for a
quarter was 9.34% (Q2, 1999) and the lowest return was (19.87)% (Q3, 1998).
AVERAGE ANNUAL TOTAL RETURNS:
(AS OF DECEMBER 31, 1999)
ONE YEAR SINCE INCEPTION
Class A Shares (3.71)% 3.43%
S&P Index 21.04% 22.26%
NASDAQ Combined Bank Index (5.72)% 1.06%
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COSTS OF INVESTING IN THE FUND
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The following table describes the expenses and fees that you may pay if you
buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)1 CLASS A CLASS C
------- -------
Maximum Front End Sales Load Imposed on Purchases...............5.75%.....NONE
Maximum Contingent Deferred Sales Charge .......................NONE......2.00%
Sales Load Imposed on Reinvested Dividends......................NONE......NONE
Redemption Fee..................................................NONE......NONE
Exchange Fee....................................................NONE......NONE
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)2
Management Fees........................................1.00%.....1.00%
Distribution (12b-1) Fees..............................0.25%.....1.00%
Other Expenses ........................................0.59%.....0.60%
Total Fund Operating Expenses...................................1.84%.....2.60%
Expense Reimbursement3................................(0.09)%...(0.10)%
Net Fund Operating Expenses.................................... 1.75%.....2.50%
1 Processing organizations may impose transactional fees on shareholders.
2 The expense information in this table has been restated to reflect current
fees.
3 The Adviser has made an irrevocable commitment to reimburse the Fund's
trustee expenses through June 30, 2003.
EXAMPLE:
The example below is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example uses the
same assumptions as other mutual fund prospectuses: a $10,000 initial
investment, 5% annual total return, constant operating expenses, and sale of all
shares at the end of each time period. Your actual expenses may be different.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Class A ......................... $743 $1,094 $1,478 $2,575
Class C
if you sold your shares
at the end of the period.. $453 $778 $1,340 $2,895
if you stayed in the fund....... $253 $778 $1,340 $2,895
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ADDITIONAL INFORMATION ABOUT INVESTMENT
STRATEGIES AND RELATED RISKS
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o General
The Adviser typically follows from 150 to 400 banks at any one time as
candidates for investment. The Adviser researches these equity securities on the
basis of the fundamentals of return on equity, return on assets, low loan loss
experience, prosperous market conditions, special niche services,
consumer-oriented staff, and experienced and seasoned management. The Adviser
also considers the portion of insider ownership as it believes this is one
indicator of the care and concern a bank's management and board of directors
bring to the institution and it shareholders. The Fund may invest in banks that
are not members of the Federal Reserve System or whose deposits are not insured
by the Federal Deposit Insurance Corporation.
Up to 15% of the Fund's portfolio may consist of illiquid securities.
Illiquid securities generally include securities that cannot be disposed of
promptly and in the ordinary course of business without taking a reduced price.
The investment objective of the Fund may be changed without the affirmative
vote of a majority of the outstanding shares of the Fund. Any such change may
result in the Fund having an investment objective different from the objective
that the shareholders considered appropriate at the time of investment in the
Fund.
o Temporary strategies
From time to time, the Fund may take temporary defensive positions which
are inconsistent with the Fund's principal investment strategies, in attempting
to respond to adverse market, economic, political, or other conditions. For
example, the Fund may hold all or a portion of its assets in money market
instruments (high quality income securities with maturities of less than one
year), securities of money market funds or U.S. government repurchase
agreements. The Fund may also invest in such investments at any time to maintain
liquidity or pending selection of investments in accordance with its policies.
As a result, the Fund may not achieve its investment objective. If the Fund
acquires securities of money market funds, the shareholders of the Fund will be
subject to duplicative management fees.
PRICING YOUR SHARES
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When you buy and sell shares, the price of the shares is based on the
Fund's net asset value per share (NAV). The NAV is calculated at the close of
trading (normally 4:00 p.m. Eastern time) on each day the New York Stock
Exchange is open for business. The NAV is calculated by dividing the value of
the Fund's total assets (including interest and dividends accrued but not yet
received) minus liabilities (including accrued expenses) by the total number of
shares outstanding. The Fund's assets are generally valued at their market
value. If market prices are not available, or if an event occurs after the close
of the trading market that materially affects the
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values, assets may be valued at their fair value. Requests to buy and sell
shares are processed at the NAV next calculated after we receive your order in
the form described below.
HOW TO BUY SHARES
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INITIAL PURCHASE
The minimum initial investment is $2,500 ($1,000 for shareholders
participating in the continuing automatic transfer program). There is no minimum
for qualified retirement accounts and medical savings accounts.
You may open an account and make an initial investment through securities
dealers who have a sales agreement with Banc Stock Financial Services, Inc., the
Fund's distributor. You may also make a direct initial investment by following
these steps:
o complete and sign the investment application form which accompanies
this Prospectus;
o draft a check made payable to Banc Stock Group Fund;
o identify on the check and the application the Class in which you would
like to invest;
o mail the application and check to:
Banc Stock Group Fund
c/o Mutual Funds Service Co.
6000 Memorial Drive
Dublin, OH 43017
CAT PROGRAM
When making your initial investment, you may choose to participate in the
Fund's continuing automatic transfer ("CAT") program by completing the separate
CAT Investment Application Form. The CAT Program offers reduced investment
minimums and helps investors make additional purchases of the Fund over a period
of years. Purchase amounts are automatically debited each month from your bank
account through ACH (automated clearing house).
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SALES LOADS
o CLASS A SHARES
Shares of the Fund are purchased at the public offering price. The public
offering price for Class A shares is the next determined NAV plus a sales load
as shown in the following table.
=================================== ============================================
Sales Load as % of:
Public Net Dealer Reallowance
Offering Amount as % of
Amount of Investment Price Invested Public Offering Price
=================================== ============================================
Less than $50,000 5.75% 6.10% 5.25%
$50,000 but less than $100,000 5.25% 5.54% 5.00%
$100,000 but less than $250,000 4.75% 4.99% 4.25%
$250,000 but less than $500,000 3.00% 3.09% 2.50%
$500,000 but less than $1,000,000 1.00% 1.01% .75%
$1,000,000 or more None None None
=================================== ============================================
o CLASS C SHARES
Class C shares are subject to a contingent deferred sales charge ("CDSC")
(based on the lower of the shares' cost and current NAV) of 2% if redeemed
within one year of the purchase date or 1% if redeemed after one year but before
two years of the purchase date. The holding period for the CDSC begins on the
day you buy your shares. Your shares will age one month on that same date the
next month and each following month. For example: if you buy shares on the 18th
of the month, they will age one month on the 18th day of the next month and each
following month. In determining whether the CDSC applies to a redemption of C
Shares, C Shares not subject to a CDSC are redeemed first.
The CDSC will be waived (i) on redemption of shares following the death of
the shareholder and (ii) on certain redemptions in connection with IRAs and
other qualified retirement plans.
DISTRIBUTION PLANS
Each class has adopted a plan under Rule 12b-1 that allows the class to pay
distribution fees for the sale and distribution of its shares. The Distribution
Plan for Class C shares also allows the class to pay for services provided to
shareholders. Class A shares pay annual 12b-1 expenses of 0.25% and Class C
shares pay annual 12b-1 expenses of 1.00% (of which 0.75% is an asset based
sales charge and 0.25% is a service fee). 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 than paying other types of sales
charges.
ADDITIONAL PURCHASES
The minimum additional purchase is $500 ($100 for CAT purchases). You may
buy additional shares at any time through your securities dealer. Or you may buy
additional shares directly from the Fund, by mail or wire. Mail your request,
with the following information, to the address above:
o the name of your account;
o your account number; and
o a check made payable to Banc Stock Group Fund.
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To purchase shares of the Fund by wire, call the Transfer Agent at (888)
BANK-595 for instructions. Then, provide your bank with the following wiring
information:
Firstar Bank, N.A.
ABA #0420-0001-3
Attn: Banc Stock Group Fund
D.D.A. #486448004
Account Name _________________ (write in shareholder name)
For Account # ______________ (write in account number)
The Fund will accept wire orders only on a day on which the Fund, the
Custodian and the Transfer Agent are open for business. A wire purchase will be
considered made when the wired money is received and the purchase is accepted by
the Fund. Any delays that may occur in wiring money, including delays that may
occur in processing by the banks, are not the responsibility of the Fund or the
Transfer Agent. There is presently no fee for the receipt of wired funds, but
the Fund may charge a fee in the future.
TAX SHELTERED RETIREMENT PLANS
Since the Fund is oriented to longer term investments, shares of the Fund
may be an appropriate investment medium for tax sheltered retirement plans,
including: individual retirement plans (IRAs); simplified employee pensions
(SEPs); 401(k) plans; qualified corporate pension and profit sharing plans (for
employees); tax deferred investment plans (for employees of public school
systems and certain types of charitable organizations); and other qualified
retirement plans.
Call us at 888-BANK-595 to open an IRA or SEP plan or obtain more specific
information regarding these retirement plan options. Custodial fees for an IRA
will be paid by redemption of Fund shares from the IRA unless you pay these fees
directly to the IRA custodian.
OTHER PURCHASE INFORMATION
We reserve the right to limit the amount of purchases and to refuse to sell
to any person. If your check or wire does not clear, you will be responsible for
any loss incurred by the Fund. If you are already a shareholder, we can redeem
shares from any identically registered account in the Fund as reimbursement for
any loss incurred. You may be prohibited or restricted from making future
purchases in the Fund.
Trustees, directors, officers and employees of the Trust, the Adviser,
service providers of the Trust, including members of the immediate family of
such individuals and employee benefit plans established by such entities, may
purchase and redeem shares of the Fund without paying a sales charge.
Broker-dealers with selling agreements with the Distributor and employee benefit
plans established by same, may purchase and redeem shares of the Fund without
paying a sales charge. In addition, shares of the Fund may be purchased at net
asset value through processing organizations (broker-dealers, banks or other
financial institutions) that have a sales agreement with the Distributor. When
shares are purchased this way, the processing organization, rather than its
customer, may be the shareholder of record of the shares. The minimum initial
and subsequent investments in the Fund for shareholders who invest through a
processing organization generally will be set by the processing organization.
Processing organizations may also impose other charges and restrictions in
addition to or different from those applicable to investors who remain the
shareholder of record of their shares. Thus, an investor contemplating investing
with the Fund through a processing organization should read materials provided
by the processing organization in conjunction with this Prospectus. Under
certain circumstances, shareholders of the Adviser's parent company, Banc Stock
Group, Inc., may purchase shares of the Fund during certain promotional periods
without paying a sales charge. Contact the Fund's distributor, Banc Stock
Financial Services, Inc., at 1-800-347-BANK for additional information.
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HOW TO SELL SHARES
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You may sell all or part of your investment on any day that the New York
Stock Exchange is open for trading. You may receive proceeds of your sale in a
check or federal wire transfer. The proceeds may be more or less than the
purchase price of your shares, depending on the market value of the Fund's
securities at the time of your sale. A broker may charge a transaction fee to
sell shares. Presently, there is no charge for wire sales, but we may charge for
this service in the future. Any charges for wire sales will be deducted from
your Fund by redemption of shares.
BY MAIL - To sell any part of your account in the Fund by mail, send a
written request, with the following information, to the address above:
o the Fund name;
o your account number; o the name(s) on your account;
o your address;
o the dollar amount or number of shares you wish to redeem; and
o the signatures of all registered account owners, signed in the exact
name(s) and any special capacity in which they are registered and
guaranteed by an "eligible guarantor institution."
An eligible guarantor institution is an institution that is a member of a
Medallion Program, located in or having a correspondent in New York City. Such
institutions generally include national or state banks, savings associations,
savings and loan associations, trust companies, savings banks, credit unions and
members of a recognized stock exchange. Signature guarantees are for your
protection. In certain instances, we may require you to furnish additional legal
documents to insure proper authorization.
BY TELEPHONE - If you have completed the Optional Telephone Redemption and
Exchange section of your investment application, you may sell any part of your
account by calling us at (888) BANK-595. The Fund, the Transfer Agent and the
Custodian are not liable for following instructions communicated by telephone
that they reasonably believe to be genuine. They will use reasonable procedures
to confirm that telephone instructions are genuine.
We may terminate the telephone sale procedures at any time. During periods
of extreme market activity it is possible that you may encounter some difficulty
in telephoning us, although we have never experienced difficulties in receiving
or in a timely fashion responding to telephone requests. If you are unable to
reach us by telephone, you may request a sale by mail.
ADDITIONAL INFORMATION - If you are not certain of the requirements for a
sale please call us at (888) BANK-595. We cannot accept, and will return,
requests specifying a certain date or share price. We will normally mail you the
proceeds on or before the fifth business day following your sale. However, we
will not mail any proceeds unless your investment check has cleared the bank,
which normally may take up to fifteen calendar days. Also, when the New York
Stock Exchange is closed (or when trading is restricted) for any reason other
than its customary weekend or holiday closing or under any emergency
circumstances, as determined by the Securities and Exchange Commission, we may
suspend sales or postpone payment dates.
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Because the Fund incurs certain fixed costs in maintaining shareholder
accounts, we reserve the right to require you to redeem all of your shares in
the Fund on 30 days' written notice if the value of your shares is less than
$2,500 due to sales, or such other minimum amount as we may determine from time
to time. An involuntary redemption constitutes a sale. You should consult your
tax adviser concerning the tax consequences of involuntary redemptions. You may
increase the value of your shares in the Fund to the minimum amount within the
30-day period.
HOW TO EXCHANGE SHARES
You may exchange, without charge, any or all of your shares in the Fund for
shares in
o the Fund's Money Market Account with the Flex Fund's Money Market
Fund, a separately managed money market fund, or
o the Diamond Hill Focus Fund;
and shares in those funds may be exchanged for shares in the Fund, subject to
any applicable sales charge.
You may request the exchange by telephoning (888) 226-5595 or writing the
Transfer Agent at 6000 Memorial Drive, Dublin, OH 43017. Exchanges may be made
only if the exchanging fund is registered in your state of residence. The
exchange privilege does not constitute an offering or recommendation of the
Money Market Fund or the Diamond Hill Focus Fund. It is your responsibility to
obtain and read a prospectus of the exchanging fund before you make an exchange.
o If you exchange shares into or out of the Fund, the exchange is made
at the net asset value per share of each fund next determined after
the exchange request is received, subject to any applicable sales
charge.
o If you exchange Class C shares of the Fund, the time you own Money
Market Account shares or Diamond Hill Focus Fund shares will not be
included when the holding period for the CDSC is calculated.
o If you exchange only a portion of your Class C shares of the Fund,
shares not subject to a CDSC are exchanged first.
o If you redeem shares from the Money Market Account or the Diamond Hill
Focus Fund that were previously Class C shares of the Fund, the
redemption is made at the net asset value per share next determined
after the redemption request is received, less any CDSC that applied
to the Fund shares.
In times of extreme economic or market conditions, exchanging fund shares
by telephone may be difficult. To receive a specific day's price, your letter or
call must be received before that day's close of the New York Stock Exchange.
Each exchange represents the sale of shares from one fund and the purchase of
shares in another, which may produce a gain or loss for Federal income tax
purposes.
Exchanges will be accepted only if the registration of the two accounts is
identical. The Fund, the Transfer Agent and the Custodian are not liable for
following instructions communicated by telephone that they reasonably believe to
be genuine. They will use reasonable procedures to confirm that telephone
instructions are genuine.
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DIVIDENDS AND DISTRIBUTIONS
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Although the Adviser primarily seeks opportunities for capital
appreciation, some of the banks in which the Fund may invest pay regular
dividends. Accordingly, the Fund expects to receive moderate income in the form
of cash or stock dividends.
The Fund typically distributes substantially all of its net investment
income in the form of dividends and taxable capital gains to its shareholders
every December. These distributions are automatically reinvested in the Fund
unless you request cash distributions on your application or through a written
request. Dividends paid by the Fund may be eligible in part for the dividends
received deduction for corporations. If you sell your entire account, you will
be paid all dividends accrued to the time of sale, including the day of sale.
You may elect to have distributions on shares held in IRAs and 403(b) plans paid
in cash only if you are 59 1/2 years old or permanently and totally disabled or
if you otherwise qualify under the applicable plan.
TAXES
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In general, selling shares of the Fund and receiving distributions (whether
reinvested or taken in cash) are taxable events. Depending on the purchase price
and the sale price, you may have a gain or a loss on any shares sold. Any tax
liabilities generated by your transactions or by receiving distributions are
your responsibility. The Fund expects that its distributions will primarily
consist of capital gains (which may be taxable at different rates depending on
the length of time the Fund holds its assets). Because distributions of long
term capital gains are subject to capital gains taxes, regardless of how long
you have owned your shares, you may want to avoid making a substantial
investment when the Fund is about to make a long term capital gains
distribution.
Early each year, we will mail to you a statement setting forth the federal
income tax information for all distributions made during the previous year. If
you do not provide your taxpayer identification number, your account will be
subject to backup withholding.
The tax considerations described in this section do not apply to
tax-deferred accounts or other non-taxable entities. Because each investor's tax
circumstances are unique, please consult with your tax adviser about your Fund
investment.
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OPERATION OF THE FUND
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Effective November 30, 2000, Banc Stock Financial Services, Inc., 1105
Schrock Road, Suite 437, Columbus, Ohio 43229 (the "Adviser") manages the Fund's
investments. Prior to November 30, 2000, Diamond Hill Capital Management, Inc.
(the "Former Adviser"), an affiliate of the Adviser, served as the Fund's
investment adviser. Since December 1997, the Adviser has acted as investment
adviser for individually managed customer accounts, specializing in regional and
community banks nationwide. As of December 1, 2000, the Adviser manages accounts
in excess of $130 million. Effective July 1, 2000, Mark Davis is the portfolio
manager primarily responsible for the day-to-day management of the Fund's
portfolio. From the inception of the Fund in August 1997 through June 30, 2000,
Mr. Davis was a member of the committee of the Former Adviser that managed the
Fund's portfolio. Mr. Davis is Director of Research for the Adviser and has been
associated with the Adviser since 1983 through its parent company, The Banc
Stock Group, Inc. Mr. Davis has been researching and analyzing the stocks of
financial institutions since 1978. He attended Yale College.
Effective July 1, 1999, the Former Adviser agreed to permanently waive its
management fee of 2.25% to an annual rate of 1.70% of the Fund's average daily
net assets. Effective July 1, 2000, the Former Adviser agreed to reduce its
management fee to an annual rate of 1.50% of the Fund's average daily net
assets. Under the terms of its management agreement with the Fund, the Former
Adviser provided both investment management services and certain administrative
services, including paying most of the operating expenses of the Fund.
Effective November 30, 2000, the Fund's shareholders approved a management
agreement with the Adviser whereby the Adviser receives an annual management fee
of 1.00% of the Fund's average daily net assets. The Fund's management agreement
with the Adviser covers only investment management services. In addition, the
Fund has entered into an administration agreement with the Adviser whereby the
Adviser has agreed to provide the same administrative services that the Former
Adviser provided under the terms of its management agreement. Pursuant to the
administration agreement, the Adviser receives a fee at an annual rate of 0.50%
of the Fund's average daily net assets and pays most of the Fund's operating
expenses. It should be noted that most investment companies pay their own
operating expenses directly.
INVESTMENT ADVISER AND DISTRIBUTOR TRANSFER AGENT AND ADMINISTRATOR
Banc Stock Financial Services, Inc. (ALL REDEMPTION REQUESTS)
1105 Schrock Road, Suite 437 Mutual Funds Service Co.
Columbus, Ohio 43229 6000 Memorial Drive
Dublin, OH 43017
CUSTODIAN AUDITORS
Firstar Bank, N.A. McCurdy & Associates CPA's, Inc.
425 Walnut Street, ML 6118 27955 Clemens Road
Cincinnati, Ohio 45202 Westlake, Ohio 44145
LEGAL COUNSEL
Brown, Cummins & Brown Co., L.P.A.
3500 Carew Tower, 441 Vine Street
Cincinnati, Ohio 45202
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FINANCIAL HIGHLIGHTS
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The following condensed supplementary financial information for the period
August 1, 1997 (commencement of operations) through February 28, 1998, and for
the fiscal years ended February 28, 1999 and February 29, 2000, is derived from
the audited financial statements of the Fund. The financial statements of the
Fund have been audited by McCurdy & Associates CPA's, Inc., independent public
accountants, and are included in the Fund's Annual Report. The Annual Report
contains additional performance information and is available upon request and
without charge.
<TABLE>
<CAPTION>
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
CLASS A CLASS C CLASS A CLASS A
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
For the period For the period
For the year June 3, 1999 For the year August 1, 1997
ended (commencement of ended (commencement of
February 29, operations) through February 28, operations) through
2000 February 29, 2000 1999 February 28, 1998
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.72 $11.23 $12.75 $10.00
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Net Investment loss (0.06) (0.05) (0.15) (0.07)
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Net realized and unrealized gains (losses)
on investments (1.19) (1.77) (1.22) 2.82
------ ------ ------ ----
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Total from investment operations (1.25) (1.82) (1.37) 2.75
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
LESS DISTRIBUTIONS
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
From net capital gains (0.07) (0.07) (0.66) --
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Total Distributions (0.07) (0.07) (0.66) --
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
NET ASSET VALUE, END OF PERIOD $ 9.40 $ 9.34 $10.72 $12.75
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Total return (excludes sales and
redemption charges) -11.75% -16.29%(1) -10.79% 27.50%(1)
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RATIOS/SUPPLEMENTARY DATA
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Net assets at end of period (000) $9,411 $71 $15,716 $13,702
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Ratio of expenses to average net assets 2.17% 2.74%(2) 2.50% 2.50%(2)
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Ratio of net investment loss to average net
assets -0.40% - 0.82%(2) -1.27% -1.07%(2)
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Ratio of expenses to average net assets
before reimbursement of trustee fees 2.26% 2.84%(2) 2.50% 2.50%(2)
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Ratio of net investment loss to average net
assets before reimbursement of trustee fees -0.49% -0.92% -1.27% -1.07%(2)
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
Portfolio turnover rate 119.13% 119.13%(1) 54.07% 26.65%(1)
--------------------------------------------- ----------------- --------------------- ----------------- ---------------------
<FN>
(1) Not annualized.
(2) Annualized.
</FN>
</TABLE>
15
<PAGE>
[BACK COVER PAGE]
Several additional sources of information are available to you. The
Statement of Additional Information (SAI), incorporated into this prospectus by
reference, contains detailed information on Fund policies and operations.
Shareholder reports contain management's discussion of market conditions,
investment strategies and performance results as of the Funds' latest
semi-annual or annual fiscal year end.
Call the Fund at 888-BANK-595 to request free copies of the SAI and the
Funds' annual and semi-annual reports, to request other information about the
Funds and to make shareholder inquiries.
You may review and copy information about the Fund (including the SAI and
other reports) at the Securities and Exchange Commission (SEC) Public Reference
Room in Washington, D.C. Call the SEC at 1-202-942-8090 for room hours and
operation. You may also obtain reports and other information about the Fund on
the EDGAR Database on the SEC's Internet site at HTTP.//WWW.SEC.GOV, and copies
of this information may be obtained, after paying a duplicating fee, by
electronic request at the following e-mail address: [email protected], or by
writing the SEC's Public Reference Section, Washington, D.C. 20549-0102.
Investment Company Act #811-8061
[LOGO]
THE BANC STOCK
GROUP FUND
Investing in America through
America's community banks
PROSPECTUS
&
APPLICATION
December 1, 2000
1105 Schrock Road
Suite 437
Columbus, Ohio 43229
<PAGE>
BANC STOCK GROUP FUND
STATEMENT OF ADDITIONAL INFORMATION
December 1, 2000
This Statement of Additional Information ("SAI") is not a prospectus. It
should be read in conjunction with the Prospectus of Banc Stock Group Fund dated
December 1, 2000. This SAI incorporates by reference the Trust's Annual Report
to Shareholders for the fiscal year ended February 29, 2000 ("Annual Report"). A
free copy of the Prospectus or Annual Report can be obtained by writing the
Transfer Agent at 6000 Memorial Drive, Dublin, Ohio 43017, or by calling
1-888-BANK-595.
TABLE OF CONTENTS
PAGE
DESCRIPTION OF THE TRUST................................................... 2
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK CONSIDERATIONS...... 3
INVESTMENT LIMITATIONS..................................................... 4
SHARES OF THE FUND......................................................... 6
THE INVESTMENT ADVISER..................................................... 7
TRUSTEES AND OFFICERS...................................................... 8
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................... 9
DISTRIBUTION PLANS ........................................................ 11
DETERMINATION OF SHARE PRICE............................................... 12
TAXES...................................................................... 13
INVESTMENT PERFORMANCE..................................................... 13
CUSTODIAN.................................................................. 14
TRANSFER AGENT............................................................. 14
ACCOUNTANTS................................................................ 15
DISTRIBUTOR................................................................ 15
PRINCIPAL HOLDERS OF OUTSTANDING SHARES.................................... 16
FINANCIAL STATEMENTS....................................................... 16
<PAGE>
DESCRIPTION OF THE TRUST
Banc Stock Group Fund (the "Fund") was organized as a series of The BSG
Funds (the "Trust"). The Trust is an open-end investment company established
under the laws of Ohio by an Agreement and Declaration of Trust dated January
14, 1997 (the "Trust Agreement"). The Trust Agreement permits the Trustees to
issue an unlimited number of shares of beneficial interest of separate series
without par value (the "Shares"). The Fund is one of two funds currently
authorized by the Trustees. There are currently two classes of Shares: Class A
and Class C.
Each share of a series represents an equal proportionate interest in the
assets and liabilities belonging to that series with each other share of that
series and is entitled to such dividends and distributions out of income
belonging to the series as are declared by the Trustees. The shares do not have
cumulative voting rights or any preemptive or conversion rights, and the
Trustees have the authority from time to time to divide or combine the shares of
any series into a greater or lesser number of shares of that series so long as
the proportionate beneficial interest in the assets belonging to that series and
the rights of shares of any other series are in no way affected. In case of any
liquidation of a series, the holders of shares of the series being liquidated
will be entitled to receive as a class a distribution out of the assets, net of
the liabilities, belonging to that series. Expenses attributable to any series
are borne by that series. Any general expenses of the Trust not readily
identifiable as belonging to a particular series are allocated by or under the
direction of the Trustees in such manner as the Trustees determine to be fair
and equitable. No shareholder is liable to further calls or to assessment by the
Trust without his or her express consent.
Any Trustee of the Trust may be removed by vote of the shareholders holding
not less than two-thirds of the outstanding shares of the Trust. The Trust does
not hold an annual meeting of shareholders. When matters are submitted to
shareholders for a vote, each shareholder is entitled to one vote for each whole
share he owns and fractional votes for fractional shares he owns. All shares of
the Fund have equal voting rights and liquidation rights. The Declaration of
Trust can be amended by the Trustees, except that any amendment that adversely
effects the rights of shareholders must be approved by the shareholders
affected. Each share of the Fund is subject to redemption at any time if the
Board of Trustees determines in its sole discretion that failure to so redeem
may have materially adverse consequences to all or any of the Fund's
shareholders.
The differing sales charges and other expenses applicable to the different
classes of the Fund's shares may affect the performance of those classes.
Broker/dealers and others entitled to receive compensation for selling or
servicing Fund shares may receive more with respect to one class than another.
The Board of Trustees of the Trust does not anticipate that there will be any
conflicts among the interests of the holders of the different classes of Fund
shares. On an ongoing basis, the Board will consider whether any such conflict
exists and, if so, take appropriate action.
Upon sixty days prior written notice to shareholders, the Fund may make
redemption payments in whole or in part in securities or other property if the
Trustees determine that existing conditions make cash payments undesirable.
As of November 30, 2000, the officers and trustees as a group beneficially
owned less than 1% of the Fund.
2
<PAGE>
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK CONSIDERATIONS
This section contains a more detailed discussion of some of the investments
the Fund may make and some of the techniques it may use.
A. SHORT SALES. The Fund may sell a security short in anticipation of a
decline in the market value of the security. When the Fund engages in a short
sale, it sells a security which it does not own. To complete the transaction,
the Fund must borrow the security by purchasing it at the market price at the
time of replacement, which may be more or less than the price at which the Fund
sold the security. The Fund will incur a loss as a result of the short sale if
the price of the security increases between the date of the short sale and the
date on which the Fund replaces the borrowed security. The Fund will realize a
profit if the security declines in price between those dates.
In connection with its short sales, the Fund will be required to maintain a
segregated account with its Custodian of cash or high grade liquid assets equal
to the market value of the securities sold less any collateral deposited with
its broker. The Fund will limit its short sales so that no more than 5% of its
net assets (less all its liabilities other than obligations under the short
sales) will be deposited as collateral and allocated to the segregated account.
However, the segregated account and deposits will not necessarily limit the
Fund's potential loss on a short sale, which is unlimited.
B. OPTION TRANSACTIONS. The Fund may engage in option transactions
involving individual securities and market indexes. An option involves either
(a) the right or the obligation to buy or sell a specific instrument at a
specific price until the expiration date of the option, or (b) the right to
receive payments or the obligation to make payments representing the difference
between the closing price of a market index and the exercise price of the option
expressed in dollars times a specified multiple until the expiration date of the
option. Options are sold (written) on securities and market indexes. The
purchaser of an option on a security pays the seller (the writer) a premium for
the right granted but is not obligated to buy or sell the underlying security.
The purchaser of an option on a market index pays the seller a premium for the
right granted, and in return the seller of such an option is obligated to make
the payment. A writer of an option may terminate the obligation prior to
expiration of the option by making an offsetting purchase of an identical
option. Options are traded on organized exchanges and in the over-the-counter
market. Call options on securities which the Fund sells (writes) will be covered
or secured, which means that it will own the underlying security in the case of
a call option. The Fund will sell (write) put options only if the Fund is
selling an equivalent amount of the same security short. When the Fund writes
options, it may be required to maintain a margin account, to pledge the
underlying securities or U.S. government obligations or to deposit assets in
escrow with the Custodian.
The purchase and writing of options involves certain risks. The purchase of
options limits the Fund's potential loss to the amount of the premium paid and
can afford the Fund the opportunity to profit from favorable movements in the
price of an underlying security to a greater extent than if transactions were
effected in the security directly. However, the purchase of an option could
result in the Fund losing a greater percentage of its investment than if the
transaction were effected directly. When the Fund writes a covered call option,
it will receive a premium, but it will give up the opportunity to profit from a
price increase in the underlying security above the exercise price as long as
its obligation as a writer continues, and it will retain the risk of loss should
the price of the security decline.
When the Fund writes a put option, it will assume the risk that the price
of the underlying security or instrument will fall below the exercise price, in
which case the Fund may be required to purchase the security or instrument at a
higher price than the market price of the security or instrument. In addition,
there can be no assurance that the Fund can effect a closing transaction on a
particular option it has written. Further, the
3
<PAGE>
total premium paid for any option may be lost if the Fund does not exercise the
option or, in the case of over-the-counter options, the writer does not perform
its obligations.
C. ILLIQUID SECURITIES. The portfolio of the Fund may contain illiquid
securities. Illiquid securities generally include securities which cannot be
disposed of promptly and in the ordinary course of business without taking a
reduced price. Securities may be illiquid due to contractual or legal
restrictions on resale or lack of a ready market. The following securities are
considered to be illiquid: repurchase agreements maturing in more than seven
days, nonpublicly offered securities and restricted securities. Restricted
securities are securities the resale of which is subject to legal or contractual
restrictions. Restricted securities may be sold only in privately negotiated
transactions, in a public offering with respect to which a registration
statement is in effect under the Securities Act of 1933 or pursuant to Rule 144
or Rule 144A promulgated under such Act. Where registration is required, the
Fund may be obligated to pay all or part of the registration expense, and a
considerable period may elapse between the time of the decision to sell and the
time such security may be sold under an effective registration statement. If
during such a period adverse market conditions were to develop, the Fund might
obtain a less favorable price than the price it could have obtained when it
decided to sell. The Fund will not invest more than 15% of its net assets in
illiquid securities.
D. EQUITY SECURITIES. The Fund may invest in common stock, preferred stock
and common stock equivalents (such as convertible preferred stock and
convertible debentures). Convertible preferred stock is preferred stock that can
be converted into common stock pursuant to its terms. Convertible debentures are
debt instruments that can be converted into common stock pursuant to their
terms. The Adviser intends to invest only in convertible debentures rated A or
higher by Standard & Poor's Corporation ("S&P") or by Moody's Investors
Services, Inc. ("Moody's"). The Fund may hold warrants and rights issued in
conjunction with common stock, but in general will sell any such warrants or
rights as soon as practicable after they are received. Warrants are options to
purchase equity securities at a specified price valid for a specific time
period. Rights are similar to warrants, but normally have a short duration and
are distributed by the issuer to its shareholders.
INVESTMENT LIMITATIONS
FUNDAMENTAL. The investment limitations described below have been adopted
by the Trust with respect to the Fund and are fundamental ("Fundamental"), I.E.,
they may not be changed without the affirmative vote of a majority of the
outstanding shares of the Fund. As used in the Prospectus and this Statement of
Additional Information, the term "majority" of the outstanding shares of the
Fund means the lesser of (1) 67% or more of the outstanding shares of the Fund
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund are present or represented at such meeting; or (2) more than 50% of
the outstanding shares of the Fund. Other investment practices which may be
changed by the Board of Trustees without the approval of shareholders to the
extent permitted by applicable law, regulation or regulatory policy are
considered non-fundamental ("Non-Fundamental").
1. BORROWING MONEY. The Fund will not borrow money, except (a) from a bank,
provided that immediately after such borrowing there is an asset coverage of
300% for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that such temporary borrowings are in an
amount not exceeding 5% of the Fund's total assets at the time when the
borrowing is made. This limitation does not preclude the Fund from entering into
reverse repurchase transactions, provided that the Fund has an asset coverage of
300% for all borrowings and repurchase commitments of the Fund pursuant to
reverse repurchase transactions.
2. SENIOR SECURITIES. The Fund will not issue senior securities. This
limitation is not applicable to activities that may be deemed to involve the
issuance or sale of a senior security by the Fund, provided that
4
<PAGE>
the Fund's engagement in such activities is (a) consistent with or permitted by
the Investment Company Act of 1940, as amended, the rules and regulations
promulgated thereunder or interpretations of the Securities and Exchange
Commission or its staff and (b) as described in the Prospectus and the Statement
of Additional Information.
3. UNDERWRITING. The Fund will not act as underwriter of securities issued
by other persons. This limitation is not applicable to the extent that, in
connection with the disposition of portfolio securities (including restricted
securities), the Fund may be deemed an underwriter under certain federal
securities laws.
4. REAL ESTATE. The Fund will not purchase or sell real estate. This
limitation is not applicable to investments in marketable securities which are
secured by or represent interests in real estate. This limitation does not
preclude the Fund from investing in mortgage-related securities or investing in
companies engaged in the real estate business or that have a significant portion
of their assets in real estate (including real estate investment trusts).
5. COMMODITIES. The Fund will not purchase or sell commodities unless
acquired as a result of ownership of securities or other investments. This
limitation does not preclude the Fund from purchasing or selling options or
futures contracts, from investing in securities or other instruments backed by
commodities or from investing in companies which are engaged in a commodities
business or have a significant portion of their assets in commodities.
6. LOANS. The Fund will not make loans to other persons, except (a) by
loaning portfolio securities, (b) by engaging in repurchase agreements, or (c)
by purchasing nonpublicly offered debt securities. For purposes of this
limitation, the term "loans" shall not include the purchase of a portion of an
issue of publicly distributed bonds, debentures or other securities.
7. CONCENTRATION. The Fund will not invest 25% or more of its total assets
in any particular industry other than the banking and financial institutions
industry. This limitation is not applicable to investments in obligations issued
or guaranteed by the U.S. government, its agencies and instrumentalities or
repurchase agreements with respect thereto.
With respect to the percentages adopted by the Trust as maximum limitations
on its investment policies and limitations, an excess above the fixed percentage
will not be a violation of the policy or limitation unless the excess results
immediately and directly from the acquisition of any security or the action
taken. This paragraph does not apply to the borrowing policy set forth in
paragraph 1 above.
Notwithstanding any of the foregoing limitations, any investment company,
whether organized as a trust, association or corporation, or a personal holding
company, may be merged or consolidated with or acquired by the Trust, provided
that if such merger, consolidation or acquisition results in an investment in
the securities of any issuer prohibited by said paragraphs, the Trust shall,
within ninety days after the consummation of such merger, consolidation or
acquisition, dispose of all of the securities of such issuer so acquired or such
portion thereof as shall bring the total investment therein within the
limitations imposed by said paragraphs above as of the date of consummation.
NON-FUNDAMENTAL. The following limitations have been adopted by the Trust
with respect to the Fund and are Non-Fundamental (see "Investment Restrictions"
above).
1. PLEDGING. The Fund will not mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any assets of the Fund except as
may be necessary in connection with borrowings described in limitation (1)
above. Margin deposits, security interests, liens and collateral arrangements
with respect to transactions involving options, futures contracts, short sales
and other permitted investments and
5
<PAGE>
techniques are not deemed to be a mortgage, pledge or hypothecation of assets
for purposes of this limitation.
2. BORROWING. The Fund will not purchase any security while borrowings
(including reverse repurchase agreements) representing more than 5% of its total
assets are outstanding.
3. MARGIN PURCHASES. The Fund will not purchase securities or evidences of
interest thereon on "margin." This limitation is not applicable to short term
credit obtained by the Fund for the clearance of purchases and sales or
redemption of securities, or to arrangements with respect to transactions
involving options, futures contracts, short sales and other permitted
investments and techniques.
4. OPTIONS. The Fund will not purchase or sell puts, calls, options or
straddles, except as described in the Prospectus and the Statement of Additional
Information.
5. LOANS. The Fund will not loan its portfolio securities.
6. REVERSE REPURCHASE AGREEMENTS. The Fund will not enter into reverse
repurchase agreements.
SHARES OF THE FUND
Two classes of Shares, Class A shares and Class C shares, are authorized
for the Fund. Both classes of shares represent an interest in the same portfolio
of investments of the Fund and have the same rights, except that each class has
exclusive voting rights with respect to its Rule 12b-1 distribution plan. The
net asset value per share of both classes is expected to differ from time to
time.
A contingent deferred sales charge ("CDSC"), based on the lower of the
shares' cost and current net asset value, of 2% will be charged if the shares
are redeemed within one year of the purchase date or 1% if redeemed after one
year but before two years of the purchase date.
The CDSC imposed on Class C shares will be waived (i) on redemption of
shares following the death of the shareholder and (ii) on certain redemptions in
connection with IRAs and other qualified retirement plans.
Trustees, directors, officers and employees of the Trust, the Adviser,
service providers of the Trust, including members of the immediate family of
such individuals and employee benefit plans established by such entities, may
also purchase and redeem shares of the Fund without paying a sales charge.
Broker-dealers with selling agreements with the Distributor and employee benefit
plans established by same, may purchase and redeem shares of the Fund without
paying a sales charge. In addition, shares of the Fund may be purchased at net
asset value through processing organizations (broker-dealers, banks or other
financial institutions) that have a sales agreement with the Distributor. When
shares are purchased this way, the processing organization, rather than its
customer, may be the shareholder of record of the shares. The minimum initial
and subsequent investments in the Fund for shareholders who invest through a
processing organization generally will be set by the processing organization.
Processing organizations may also impose other charges and restrictions in
addition to or different from those applicable to investors who remain the
shareholder of record of their shares. Thus, an investor contemplating investing
with the Fund through a processing organization should read materials provided
by the processing organization in conjunction with this Prospectus. Under
certain circumstances, shareholders of the Adviser's parent company, Banc Stock
Group, Inc., may purchase shares of the Fund during certain promotional periods
without paying a sales charge. The Trustees have determined that the Fund incurs
no appreciable distribution expenses in connection with sales to these investors
and that it is therefore appropriate to waive sales changes for these investors.
6
<PAGE>
THE INVESTMENT ADVISER
Effective November 30, 2000, the Fund's investment adviser is Bank Stock
Financial Services, Inc., 1105 Schrock Road, Suite 427, Columbus, Ohio 43229
(the "Adviser"). The Adviser is a wholly owned subsidiary of The Banc Stock
Group, Inc. and also serves as the Fund's distributor. Prior to November 30,
2000, Diamond Hill Capital Management, Inc., 1105 Schrock Road, Suite 427,
Columbus, Ohio 43229, an affiliate of the Adviser, served as the Fund's
investment adviser.
Under the terms of the management agreement with the Adviser (the
"Management Agreement"), the Adviser manages the Fund's investments subject to
approval of the Board of Trustees. As compensation for its management services,
the Fund is obligated to pay the Adviser a fee computed and accrued daily and
paid monthly at an annual rate of 1.00% of the average daily net assets of the
Fund.
For the period from August 1, 1997 (commencement of operations) through
February 28, 1998 and for the fiscal years ended February 28, 1999 and February
29, 2000, the Fund paid investment management fees to Diamond Hill Capital
Management, Inc. of $110,653, $435,072, and $277,238, respectively.
The Adviser retains the right to use the names "BSG" and "Banc Stock Group"
in connection with another investment company or business enterprise with which
the Adviser is or may become associated. The Trust's right to use the names
"BSG" and "Banc Stock Group" automatically ceases ninety days after termination
of the Management Agreement and may be withdrawn by the Adviser on ninety days
written notice.
The Adviser may make payments to banks or other financial institutions that
provide shareholder services and administer shareholder accounts. If a bank were
prohibited from continuing to perform all or a part of such services, management
of the Fund believes that there would be no material impact on the Fund or its
shareholders. Banks may charge their customers fees for offering these services
to the extent permitted by applicable regulatory authorities, and the overall
return to those shareholders availing themselves of the bank services will be
lower than to those shareholders who do not. The Fund may from time to time
purchase securities issued by banks which provide such services; however, in
selecting investments for the Fund, no preference will be shown for such
securities.
Under the terms of an administration agreement with the Adviser (the
"Administration Agreement"), the Adviser renders all administrative and
supervisory services to the Fund. The Adviser oversees the maintenance of all
books and records with respect to the Fund's securities transactions and the
Fund's book of accounts in accordance with all applicable federal and state laws
and regulations. The Adviser also arranges for the preservation of journals,
ledgers, corporate documents, brokerage account records and other records which
are required pursuant to Rule 31a-1 promulgated under the 1940 Act. The Adviser
is also responsible for the equipment, staff, office space and facilities
necessary to perform its obligations.
Under the Administration Agreement, the Adviser assumes and pays all
ordinary expenses of the Fund not assumed by the Fund. The Fund pays all
brokerage fees and commissions, taxes, borrowing costs (such as (a) interest and
(b) dividend expenses on securities sold short), fees and expenses of the
non-interested person trustees and extraordinary or non-recurring expenses. The
Fund also pays expenses which it is authorized to pay pursuant to Rule 12b-1
under the Act.
Pursuant to the Administration Agreement, the Adviser receives a fee which
is paid monthly at an annual rate of 0.50% of the Fund's average daily net
assets.
7
<PAGE>
TRUSTEES AND OFFICERS
The names of the Trustees and executive officers of the Trust are shown
below. Each Trustee or officer who is an "interested person" of the Trust, as
defined in the Investment Company Act of 1940, is indicated by an asterisk.
<TABLE>
<CAPTION>
===================================== ========================== ===========================================================
NAME, AGE POSITION PRINCIPAL OCCUPATIONS
AND ADDRESS DURING PAST 5 YEARS
------------------------------------- -------------------------- -----------------------------------------------------------
<S> <C> <C>
Roderick H. Dillon, Jr. * President and Trustee President, Chief Executive Officer and Chief Investment
Age: 44 Officer of The Banc Stock Group, Inc., Columbus, Ohio,
1105 Schrock Road, Suite 437 since April 2000; Vice President with Loomis, Sayles &
Columbus, Ohio 43229 Company, a financial services company, from October 1997
to April 2000; President and Chief Investment Officer of
Dillon Capital Management, an investment advisory firm,
from July 1993 to October 1997.
------------------------------------- -------------------------- -----------------------------------------------------------
Lisa R. Hunter * Trustee, Treasurer, Vice president of Banc Stock Financial Services, Inc. and
Age: 46 Secretary and Chief Director of Compliance. Prior to 1995, compliance
1105 Schrock Road, Suite 437 Financial Officer administrator of VESTAX Securities Corp, 1932 Georgetown
Columbus, Ohio 43229 Rd., Hudson, Ohio 44256.
------------------------------------- -------------------------- -----------------------------------------------------------
John M. Bobb Trustee Director of Headwaters Group, 8200 Clouse Road, New
Age: 58 Albany, Ohio, a fine arts consulting agency, 1994 to
8200 Clouse Road present. Prior to 1994, sales and marketing director
New Albany, Ohio 43054 with Bush Brothers, a food company in Knoxville,
Tennessee.
------------------------------------- -------------------------- -----------------------------------------------------------
George A. Skestos Trustee President of Homewood Corporation, 750 Northlawn Drive,
Age: 31 Columbus, Ohio 43214, a real estate development firm,
750 Northlawn Drive since September 1999; Director of the Midland Life
Columbus, Ohio 43214 Insurance Company since April 1998; Officer of Huntington
Capital Corp. from April 1994 to September 1997.
------------------------------------- -------------------------- -----------------------------------------------------------
William P. Zox Trustee Partner with Schottenstein, Zox and Dunn Co. LPA, 41 S.
Age: 33 High St., Columbus, Ohio 43215, a law firm, since
41 S. High St. January 2000; Associate with Schottenstein, Zox and Dunn
Columbus, Ohio 43215 Co. LPA from July 1993 to January 2000.
===================================== ========================== ===========================================================
</TABLE>
Trustee fees are Trust expenses. The compensation paid to the Trustees for
the year ended February 29, 2000 is set forth in the following table:
================================ ==============================
TOTAL COMPENSATION
FROM TRUST (THE TRUST IS
NAME NOT IN A FUND COMPLEX)
-------------------------------- ------------------------------
Michael E. Guirlinger 0
-------------------------------- ------------------------------
Lisa R. Hunter 0
-------------------------------- ------------------------------
John M. Bobb $4,000
-------------------------------- ------------------------------
Virginia H. Rader $4,000
-------------------------------- ------------------------------
Gary A. Radville $4,000
================================ ==============================
8
<PAGE>
The Trust, the Adviser and its affiliates have adopted a Code of Ethics
that permits personnel subject to the Code to invest in securities, including,
under certain circumstances and subject to certain restrictions, securities that
may be purchased or held by the Fund. However, the Code restricts personal
investing practices by directors, officers and employees of the Adviser and its
affiliates and officers of the Trust. The Code of Ethics also restricts personal
investing practices of trustees of the Trust who have knowledge about recent
Fund trades. The Code of Ethics prohibits acquisition of securities without
preclearance in, among other events, an initial public offering or a limited
offering. These provisions are designed to put the interests of Fund
shareholders before the interest of people who manage the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees of the Trust, the
Adviser is responsible for the Fund's portfolio decisions and the placing of the
Fund's portfolio transactions. In placing portfolio transactions, the Adviser
seeks the best qualitative execution for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), the execution capability, financial responsibility and responsiveness
of the broker or dealer and the brokerage and research services provided by the
broker or dealer. The Adviser generally seeks favorable prices and commission
rates that are reasonable in relation to the benefits received.
The Adviser is specifically authorized to select brokers or dealers who
also provide brokerage and research services to the Fund and/or the other
accounts over which the Adviser exercises investment discretion and to pay such
brokers or dealers a commission in excess of the commission another broker or
dealer would charge if the Adviser determines in good faith that the commission
is reasonable in relation to the value of the brokerage and research services
provided. The determination may be viewed in terms of a particular transaction
or the Adviser's overall responsibilities with respect to the Trust and to other
accounts over which it exercises investment discretion.
Research services include supplemental research, securities and economic
analyses, statistical services and information with respect to the availability
of securities or purchasers or sellers of securities and analyses of reports
concerning performance of accounts. The research services and other information
furnished by brokers through whom the Fund effects securities transactions may
also be used by the Adviser in servicing all of its accounts. Similarly,
research and information provided by brokers or dealers serving other clients
may be useful to the Adviser in connection with its services to the Fund.
Although research services and other information are useful to the Fund and the
Adviser, it is not possible to place a dollar value on the research and other
information received. It is the opinion of the Board of Trustees and the Adviser
that the review and study of the research and other information will not reduce
the overall cost to the Adviser of performing its duties to the Fund under the
Agreement.
While the Fund does not deem it practicable and in its best interests to
solicit competitive bids for commission rates on each transaction, consideration
is regularly given to posted commission rates as well as other information
concerning the level of commissions charged on comparable transactions by
qualified brokers.
The Fund has no obligation to deal with any broker or dealer in the
execution of its transactions. However, it is contemplated that the Adviser, in
its capacity as a registered broker-dealer, will effect substantially all
securities transactions which are executed on a national securities exchange and
over-the-counter transactions conducted on an agency basis. Such transactions
will be executed at competitive commission rates through Mesirow Financial, Inc.
Over-the-counter transactions will be placed either directly with principal
market makers or with broker-dealers, if the same or a better price, including
commissions and executions, is available. Fixed
9
<PAGE>
income securities are normally purchased directly from the issuer, an
underwriter or a market maker. Purchases include a concession paid by the issuer
to the underwriter and the purchase price paid to a market maker may include the
spread between the bid and asked prices.
Under the Investment Company Act of 1940, persons affiliated with the
Adviser may be prohibited from dealing with the Fund as a principal in the
purchase and sale of securities. Therefore, the Adviser will not serve as the
Fund's dealer in connection with over-the-counter transactions. However, the
Adviser may serve as the Fund's broker in over-the-counter transactions
conducted on an agency basis and will receive brokerage commissions in
connection with such transactions. Such agency transactions will be executed
through Mesirow Financial, Inc.
The Fund will not effect any brokerage transactions in its portfolio
securities with the Adviser if such transactions would be unfair or unreasonable
to Fund shareholders, and the commissions will be paid solely for the execution
of trades and not for any other services. The Agreement provides that
affiliates, or any affiliates of affiliates, of the Adviser may receive
brokerage commissions in connection with effecting such transactions for the
Fund. In determining the commissions to be paid to the Adviser, it is the policy
of the Fund that such commissions will, in the judgment of the Trust's Board of
Trustees, be (a) at least as favorable to the Fund as those which would be
charged by other qualified brokers having comparable execution capability and
(b) at least as favorable to the Fund as commissions contemporaneously charged
by the Adviser on comparable transactions for its most favored unaffiliated
customers, except for customers of the Adviser considered by a majority of the
Trust's disinterested Trustees not to be comparable to the Fund. The
disinterested Trustees from time to time review, among other things, information
relating to the commissions charged by the Adviser to the Fund and its other
customers, and rates and other information concerning the commissions charged by
other qualified brokers.
The Agreement does not provide for a reduction of the Adviser's fee by the
amount of any profits earned by the Adviser from brokerage commissions generated
from portfolio transactions of the Fund.
While the Fund contemplates no ongoing arrangements with any other
brokerage firms, brokerage business may be given from time to time to other
firms. The Adviser will not receive reciprocal brokerage business as a result of
the brokerage business placed by the Fund with others.
When the Fund and another of the Adviser's clients seek to purchase or sell
the same security at or about the same time, the Adviser may execute the
transaction on a combined ("blocked") basis. Blocked transactions can produce
better execution for the Fund because of the increased volume of the
transaction. If the entire blocked order is not filled, the Fund may not be able
to acquire as large a position in such security as it desires or it may have to
pay a higher price for the security. Similarly, the Fund may not be able to
obtain as large an execution of an order to sell or as high a price for any
particular portfolio security if the other client desires to sell the same
portfolio security at the same time. In the event that the entire blocked order
is not filled, the purchase or sale will normally be allocated on a pro rata
basis. Transactions of advisory clients (including the Fund) may also be blocked
with those of the Adviser or any of its affiliates. The Adviser and its
affiliates will be permitted to participate in the blocked transaction only
after all orders of advisory clients (including the Fund) are filled.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to its obligation of seeking best qualitative
execution, the Adviser may give consideration to sales of shares of the Fund as
a factor in the selection of brokers and dealers to execute portfolio
transactions. The Adviser (not the Fund) may pay certain financial institutions
(which may include banks, brokers, dealers and other industry professionals) a
"servicing fee" for performing certain administrative functions for the Fund
shareholders to the extent these institutions are allowed to do so by applicable
statute, rule or regulation. In addition, the Adviser (not the Fund), in its
capacity as distributor for the Fund, may compensate brokers and
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other intermediaries for directing assets to or retaining assets in the Fund.
The Adviser is a registered broker-dealer and it is anticipated that it will
receive brokerage commissions from the Fund. The Adviser is wholly owned by Banc
Stock Group, Inc., a corporation which invests in financial services companies.
For the period from August 1, 1997 (commencement of operations) through
February 28, 1998 and for the fiscal year ended February 28, 1999, the Fund paid
total brokerage commissions of $197,647 and $204,588, respectively. For the
fiscal year ended February 29, 2000, the Fund paid total brokerage commissions
of $144,454. For the period from April 1, 1997, (commencement of operations)
through February 28, 1998, the Adviser was paid $196,987 (99.67% of all
brokerage commissions) for effecting 98.66% of the Fund's brokerage
transactions. For the fiscal year ended February 28, 1999, the Adviser was paid
$204,558 for effecting 100% of the Fund's brokerage transactions. For the fiscal
year ended February 29, 2000, the Adviser was paid $144,454 in commissions for
effecting 100% of the Fund's brokerage transactions.
DISTRIBUTION PLANS
Effective March 1, 1999, each class has adopted a plan pursuant to Rule
12b-1 under the Investment Company Act of 1940, which permits the Fund to pay
for certain distribution and promotion expenses related to marketing its shares.
Pursuant to the Plans, the Fund will pay the Adviser a fee for the Adviser's
services in connection with the sales and promotion of the Fund, including its
expenses in connection therewith, at an annual rate of 0.25% of the average
daily net assets of the Class A shares and 0.75% of the average daily net assets
of the Class C shares. In addition, the Fund will pay the Adviser a service fee
at the annual rate of 0.25% of the average daily net assets of the Class C
shares. Payments received by the Adviser pursuant to either Plan may be greater
or less than distribution expenses incurred by the Adviser with respect to the
applicable class and are in addition to fees paid by the Fund pursuant to the
Management Agreement.
Under the Plans, the Trust may engage in any activities related to the
distribution of Fund shares, including without limitation the following: (a)
payments, including incentive compensation, to securities dealers or other
financial intermediaries, financial institutions, investment advisors and others
that are engaged in the sale of Shares, or that may be advising shareholders of
the Trust regarding the purchase, sale or retention of Shares, or that hold
Shares for shareholders in omnibus accounts or as shareholders of record or
provide shareholder support or administrative services to the Fund and its
shareholders, or for rendering shareholder support services, including allocated
overhead, office space and equipment, telephone facilities and expenses,
answering routine inquiries regarding the Trust, processing shareholder
transactions, and providing such other shareholder services as the Trust may
request; (b) expenses of maintaining personnel (including personnel of
organizations with which the Trust has entered into agreements related to this
Plan) who engage in or support distribution of Shares; (c) costs of preparing,
printing and distributing Fund prospectuses and statements of additional
information and reports for recipients other than existing Fund shareholders;
(d) costs of formulating and implementing marketing and promotional activities,
including sales seminars, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising; (e) costs of preparing,
printing and distributing sales literature; (f) costs of obtaining such
information, analyses and reports with respect to marketing and promotional
activities as the Trust may deem advisable; and (g) costs of implementing and
operating the Plans. The Fund does not participate in any joint distribution
activities with other mutual funds.
The Trustees expect that the Plans will significantly enhance the Fund's
ability to expand distribution. It is also anticipated that an increase in the
size of the Fund will facilitate more efficient portfolio management and assist
the Fund in seeking to achieve its investment objective.
The Plans have been approved by the Fund's Board of Trustees, including a
majority of the
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Trustees who are not "interested persons" of the Fund and who have no direct or
indirect financial interest in the Plans or any related agreement, by a vote
cast in person. Continuation of the Plans and the related agreements must be
approved by the Trustees annually, in the same manner, and a Plan or any related
agreement may be terminated at any time without penalty by a majority of such
independent Trustees or by a majority of the outstanding shares of the
applicable class. Any amendment increasing the maximum percentage payable under
a Plan or other material change must be approved by a majority of the
outstanding shares of the applicable class, and all other material amendments to
a Plan or any related agreement must be approved by a majority of the
independent Trustees. Roderick H. Dillon, Jr. and Lisa R. Hunter, officers of
the Trust, may benefit indirectly from payments received by the Adviser under
the Plans because of their relationships with the Adviser and its affiliates.
The table below states the amounts paid under the Fund's distribution plans
for the year ended February 29, 2000.
DISTRIBUTION PLAN EXPENSES PAID BY THE FUND
TYPE OF EXPENSE AMOUNT PAID
Class A Shares Class C Shares
Advertising $0 $0
Printing and Mailing of Prospectuses $0 $0
Compensation to Underwriters $0 $0
Compensation to Broker-Dealers $24,596 $489
Compensation to Sales Personnel $0 $0
Interest, Carrying, or Other Financial Charges $0 $0
Total $24,596 $489
DETERMINATION OF SHARE PRICE
The price (net asset value) of the shares of the Fund is determined as of
4:00 p.m., Eastern time on each day the Trust is open for business and on any
other day on which there is sufficient trading in the Fund's securities to
materially affect the net asset value. The Trust is open for business on every
day except Saturdays, Sundays and the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Securities which are traded on any exchange or on the NASDAQ
over-the-counter market are valued at the last quoted sale price. Lacking a last
sale price, a security is valued at its last bid price except when, in the
Adviser's opinion, the last bid price does not accurately reflect the current
value of the security. All other securities for which over-the-counter market
quotations are readily available are valued at their last bid price. When market
quotations are not readily available, when the Adviser determines the last bid
price does not accurately reflect the current value or when restricted
securities are being valued, such securities are valued as determined in good
faith by the Adviser, subject to review of the Board of Trustees of the Trust.
Fixed income securities generally are valued by using market quotations,
but may be valued on the basis of prices furnished by a pricing service when the
Adviser believes such prices accurately reflect the fair market value of such
securities. A pricing service utilizes electronic data processing techniques
based on yield spreads relating to securities with similar characteristics to
determine prices for normal institutional-size trading units of debt securities
without regard to sale or bid prices. When prices are not readily available from
a pricing service, or when restricted or illiquid securities are being valued,
securities are valued at fair value as determined in good faith by the Adviser,
subject to review of the Board of Trustees. Short term investments in fixed
income securities with maturities of less than 60 days when acquired, or which
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subsequently are within 60 days of maturity, are valued by using the amortized
cost method of valuation, which the Board has determined will represent fair
value.
TAXES
The Fund intends to qualify each year as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended. By so qualifying, the Fund
will not be subject to federal income taxes to the extent that it distributes
substantially all of its net investment income and any realized capital gains.
INVESTMENT PERFORMANCE
The Fund may periodically advertise "average annual total return." The
"average annual total return" of the Fund refers to the average annual
compounded rate of return over the stated period that would equate an initial
amount invested at the beginning of a stated period to the ending redeemable
value of the investment.
"Average annual total return," as defined by the Securities and Exchange
Commission, is computed by finding the average annual compounded rates of return
(over the one, five and ten year periods) that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
P(1+T)n=ERV
Where: P = a hypothetical $1,000 initial investment
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
applicable period of the hypothetical $1,000
investment made at the beginning of the
applicable period.
The computation assumes that all dividends and distributions are reinvested at
the net asset value on the reinvestment dates, that the maximum sales load is
deducted from the initial $1,000 and that a complete redemption occurs at the
end of the applicable period. If the Fund has been in existence less than one,
five or ten years, the time period since the date of the initial public offering
of shares will be substituted for the periods stated. The average annual total
return for Class A shares of the Fund for the fiscal year ended February 29,
2000 and for the period from August 1, 1997 (inception) to February 29, 2000 was
-11.75% and 0.15%, respectively. The average annual total return for Class C
shares of the Fund for the period from June 3, 1999 (commencement of operations)
to February 29, 2000 was -16.29%.
The Fund may also advertise performance information (a "non-standardized
quotation") which is calculated differently from average annual total return. A
non-standardized quotation of total return may be a cumulative return which
measures the percentage change in the value of an account between the beginning
and end of a period, assuming no activity in the account other than reinvestment
of dividends and capital gains distributions. The total return of Class A shares
of the Fund as calculated in this manner for the period from August 1, 1997
(inception) to February 29, 2000 was 0.38%. The total return of Class C shares
of the Fund as calculated in this manner for the period from June 3, 1999
(commencement of operations) to February 29, 2000 was -16.29%. A
non-standardized quotation may also be an average annual compounded rate of
return over a specified period, which may be a period different from those
specified for average annual total return. In addition, a non-standardized
quotation may be an indication of the value of a $10,000 investment (made on the
date of the commencement of operations of each class of shares of the Fund) as
of the end of a specified period. This value, for Class A shares and Class C
shares of the Fund for the period ended February 29, 2000, was $10,038 and
$8,371, respectively. These non-standardized quotations do not
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<PAGE>
include the effect of the applicable sales load which, if included, would reduce
the quoted performance. A non-standardized quotation of total return will always
be accompanied by the Fund's average annual total return as described above.
The Fund's investment performance will vary depending upon market
conditions, the composition of the Fund's portfolio and operating expenses of
the Fund. These factors and possible differences in the methods and time periods
used in calculating non-standardized investment performance should be considered
when comparing the Fund's performance to those of other investment companies or
investment vehicles. The risks associated with the Fund's investment objective,
policies and techniques should also be considered. At any time in the future,
investment performance may be higher or lower than past performance, and there
can be no assurance that any performance will continue.
The Fund may also include in advertisements data comparing performance with
other mutual funds as reported in non-related investment media, published
editorial comments and performance rankings compiled by independent
organizations and publications that monitor the performance of mutual funds
(such as Lipper Analytical Services, Inc., Morningstar, Inc., Fortune or
Barron's). Performance information may be quoted numerically or may be presented
in a table, graph or other illustration. In addition, Fund performance may be
compared to the NASDAQ Combined Bank Index (the "Bank Index"), and the
performance of the Bank Index as well as the Fund may be compared to other
well-known indices of market performance including the Standard & Poor's (S&P)
500 Index or the Dow Jones Industrial Average. With respect to the Bank Index,
shareholders should be aware that the Fund invests in banks and other securities
that are not included in the Bank Index. The performance of the Bank Index
should not be considered indicative of future performance of the Fund.
From time to time, in advertisements, sales literature and information
furnished to present or to prospective shareholders, the performance of the Fund
may be compared to indices of broad groups of unmanaged securities considered to
be representative of or similar to the portfolio holdings of the Fund or
considered to be representative of the stock market in general. The Fund may use
the Standard & Poor's 500 Stock Index or the Dow Jones Industrial Average.
In addition, the performance of the Fund may be compared to other groups of
mutual funds tracked by any widely used independent research firm which ranks
mutual funds by overall performance, investment objectives and assets, such as
Lipper Analytical Services, Inc. or Morningstar, Inc. The objectives, policies,
limitations and expenses of other mutual funds in a group may not be the same as
those of the Fund. Performance rankings and ratings reported periodically in
national financial publications such as Barron's and Fortune also may be used.
CUSTODIAN
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, is Custodian
of the Fund's investments. The Custodian acts as the Fund's depository,
safekeeps its portfolio securities, collects all income and other payments with
respect thereto, disburses funds at the Fund's request and maintains records in
connection with its duties.
TRANSFER AGENT
Effective March 1, 1999, Mutual Funds Service Co. (MFSCo.), 6000 Memorial
Drive, Dublin, Ohio 43017 acts as the Fund's transfer agent and, in such
capacity, maintains the records of each shareholder's account, answers
shareholders' inquiries concerning their accounts, processes purchases and
redemptions of the Fund's shares, acts as dividend and distribution disbursing
agent and performs other accounting and shareholder service functions. MFSCo.
also acts as the Fund's administrator and, in such capacity, manages
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<PAGE>
the Fund's business affairs. In addition, MFSCo., in its capacity as fund
accountant, provides the Fund with certain monthly reports, record-keeping and
other management-related services. For its services as fund accountant, MFSCo.
receives an annual fee from the Adviser equal to 0.05% of the Fund's assets up
to $100 million (subject to a minimum annual fee of $20,000, which increases as
additional classes are added). Prior to March 1, 1999, American Data Services,
Inc. ("ADS"), P.O. Box 5536, Hauppauge, New York 11788-0132 served as fund
accountant and administrator. For the period from August 1, 1997 (commencement
of operations) through February 28, 1999, ADS received $54,881 from the Adviser
(not the Fund) for its services to the Fund.. For the fiscal year ended February
29, 2000, MFSCo. received $94,556 from the Adviser (not the Fund) for its
services to the Fund.
ACCOUNTANTS
The firm of McCurdy & Associates, CPA's, 27955 Clemens Road, Westlake, Ohio
44145, has been selected as independent public accountants for the Trust for the
fiscal year ending February 28, 2001. McCurdy & Associates performs an annual
audit of the Fund's financial statements and provides financial, tax and
accounting consulting services as requested.
DISTRIBUTOR
Banc Stock Financial Services, Inc., 1105 Schrock Road, Suite 437,
Columbus, Ohio 43229 (the "Adviser"), which also serves the Fund's investment
adviser, is the exclusive agent for distribution of shares of the Fund. The
Adviser is obligated to sell shares of the Fund on a best efforts basis only
against purchase orders for the shares. Shares of the Fund are offered to the
public on a continuous basis. The total amount of underwriting commissions paid
by the Fund with respect to Class A shares for the period from August 1, 1997
(commencement of operations) through February 28, 1998 and for the fiscal year
ended February 28, 1999, were $38,598 and $52,455, respectively, of which the
Adviser, in its capacity as distributor for the Fund, retained $13,704 and
$17,762 in total underwriting commissions for the respective periods. The total
amount of underwriting commissions paid by the Fund with respect to Class A
shares for the fiscal year ended February 29, 2000 was $20,422, of which the
Adviser, in its capacity as distributor for the Fund, retained $1,545 in total
underwriting commissions. The total amount of underwriting commissions paid by
the fund with respect to Class C shares for the period from June 3, 1999
(commencement of operations) through February 29, 2000 was $845, of which the
Adviser, in its capacity as distributor for the Fund, retained $0 in total
underwriting commissions.
Banc Stock Financial Services, Inc., the principal underwriter and
investment adviser of the Fund, received the following commissions and other
brokerage compensation from the Fund during the fiscal year ended February 29,
2000:
Net Underwriting Compensation on
Name of Principal Discounts and Redemptions and Brokerage Other
UNDERWRITER COMMISSIONS PURCHASES COMMISSIONS COMPENSATION
----------- ----------- --------- ----------- ------------
CLASS A SHARES CLASS A SHARES
Banc Stock Financial
Services, Inc. $20,422 $0 $144,454 $0
CLASS C SHARES CLASS C SHARES
$845 $0
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PRINCIPAL HOLDERS OF OUTSTANDING SHARES
As of November 30, 2000, the following persons owned 5% or more of a class
of the Fund's outstanding shares:
----------- ----------------------------------- --------------------------
FUND CLASS NAME AND ADDRESS OF OWNER PERCENTAGE OF OWNERSHIP
----------- ----------------------------------- --------------------------
Class C NFSC FEBO #01A-150665 38.11%
575 W. College Ave.
Suite 101
Santa Rosa, CA 95401
Class C Charles W. Kurvin 26.27%
85640 Tumacacori
Sarasota, FL 34233
Class C Advanced Clearing FBO 3650165001 15.28%
P.O. Box 2226
Omaha, NE 68103
Class C NFSC FEBO # 0BX-029386 12.70%
82 Devonshire
Mail Zone L 17C
Boston, MA 02109
Class C Advanced Clearing FBO 3650206761 5.09%
P.O. Box 2226
Omaha, NE 68103
----------- ----------------------------------- --------------------------
To the knowledge of the Trust, the shareholders listed above own shares for
investment purposes and have no known intention of exercising any control of the
Fund.
FINANCIAL STATEMENTS
The financial statements and independent accountants' report required to be
included in this Statement of Additional Information are incorporated herein by
reference to the Trust's Annual Report to Shareholders for the fiscal year ended
February 29, 2000. The Fund will provide the Annual Report without charge at
written request or request by telephone.
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DIAMOND HILL FOCUS FUND
STATEMENT OF ADDITIONAL INFORMATION
December 1, 2000
This Statement of Additional Information ("SAI") is not a prospectus. It
should be read in conjunction with the Prospectus of Diamond Hill Focus Fund
dated December 1, 2000. A free copy of the Prospectus can be obtained by writing
the Transfer Agent at 6000 Memorial Drive, Dublin, Ohio 43017, or by calling
1-888-226-5595.
TABLE OF CONTENTS
PAGE
DESCRIPTION OF THE TRUST................................................... 2
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK CONSIDERATIONS...... 2
INVESTMENT LIMITATIONS..................................................... 4
THE INVESTMENT ADVISER..................................................... 6
TRUSTEES AND OFFICERS...................................................... 7
PORTFOLIO TRANSACTIONS AND BROKERAGE....................................... 8
DISTRIBUTION PLAN ......................................................... 10
DETERMINATION OF SHARE PRICE............................................... 11
TAXES ..................................................................... 11
INVESTMENT PERFORMANCE..................................................... 11
CUSTODIAN.................................................................. 13
TRANSFER AGENT............................................................. 13
ACCOUNTANTS................................................................ 13
DISTRIBUTOR................................................................ 13
<PAGE>
DESCRIPTION OF THE TRUST
Diamond Hill Focus Fund (the "Fund") was organized as a non-diversified
series of The BSG Funds (the "Trust") on June 23, 2000. The Trust is an open-end
investment company established under the laws of Ohio by an Agreement and
Declaration of Trust dated January 14, 1997 (the "Trust Agreement"). The Trust
Agreement permits the Trustees to issue an unlimited number of shares of
beneficial interest of separate series without par value (the "Shares"). The
Fund is one of two funds currently authorized by the Trustees.
Each share of a series represents an equal proportionate interest in the
assets and liabilities belonging to that series with each other share of that
series and is entitled to such dividends and distributions out of income
belonging to the series as are declared by the Trustees. The shares do not have
cumulative voting rights or any preemptive or conversion rights, and the
Trustees have the authority from time to time to divide or combine the shares of
any series into a greater or lesser number of shares of that series so long as
the proportionate beneficial interest in the assets belonging to that series and
the rights of shares of any other series are in no way affected. In case of any
liquidation of a series, the holders of shares of the series being liquidated
will be entitled to receive as a class a distribution out of the assets, net of
the liabilities, belonging to that series. Expenses attributable to any series
are borne by that series. Any general expenses of the Trust not readily
identifiable as belonging to a particular series are allocated by or under the
direction of the Trustees in such manner as the Trustees determine to be fair
and equitable. No shareholder is liable to further calls or to assessment by the
Trust without his or her express consent.
Any Trustee of the Trust may be removed by vote of the shareholders holding
not less than two-thirds of the outstanding shares of the Trust. The Trust does
not hold an annual meeting of shareholders. When matters are submitted to
shareholders for a vote, each shareholder is entitled to one vote for each whole
share he owns and fractional votes for fractional shares he owns. All shares of
the Fund have equal voting rights and liquidation rights. The Declaration of
Trust can be amended by the Trustees, except that any amendment that adversely
effects the rights of shareholders must be approved by the shareholders
affected. Each share of the Fund is subject to redemption at any time if the
Board of Trustees determines in its sole discretion that failure to so redeem
may have materially adverse consequences to all or any of the Fund's
shareholders.
Upon sixty days prior written notice to shareholders, the Fund may make
redemption payments in whole or in part in securities or other property if the
Trustees determine that existing conditions make cash payments undesirable.
As of November 30, 2000, the officers and trustees as a group beneficially
owned 4.66%, and the Fund's investment adviser, Diamond Hill Capital Management,
Inc., 1105 Schrock Road, Suite 437, Columbus, OH 43229, beneficially owned
16.89%, of the outstanding shares of the Fund.
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK CONSIDERATIONS
This section contains a more detailed discussion of some of the investments
the Fund may make and some of the techniques it may use.
A. EQUITY SECURITIES. Equity securities consist of common stock, rights and
warrants. Common stocks, the most familiar type, represent an equity (ownership)
interest in a corporation. Warrants are options to purchase equity securities
at a specified price for a specific time period. Rights are similar to warrants,
but normally have a short duration and are distributed by the issuer to its
shareholders. Although equity securities have a history of long term growth in
value, their prices fluctuate based on changes in a company's financial
condition and on overall market and economic conditions.
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Equity securities include S&P Depositary Receipts ("SPDRs") and other
similar instruments. SPDRs are shares of a publicly traded unit investment trust
which owns the stock included in the S&P 500 Index, and changes in the price of
the SPDRs track the movement of the Index relatively closely. Similar
instruments may track the movement of other stock indexes.
The Fund may invest in foreign equity securities by purchasing American
Depositary Receipts (ADRs). ADRs are certificates evidencing ownership of shares
of a foreign-based issuer held in trust by a bank or similar financial
institution. They are alternatives to the direct purchase of the underlying
securities in their national markets and currencies. To the extent that the Fund
does invest in ADRs, such investments may be subject to special risks. For
example, there may be less information publicly available about a foreign
company than about a U.S. company, and foreign companies are not generally
subject to accounting, auditing and financial reporting standards and practices
comparable to those in the U.S. Other risks associated with investments in
foreign securities include changes in restrictions on foreign currency
transactions and rates of exchanges, changes in the administrations or economic
and monetary policies of foreign governments, the imposition of exchange control
regulations, the possibility of expropriation decrees and other adverse foreign
governmental action, the imposition of foreign taxes, less liquid markets, less
government supervision of exchanges, brokers and issuers, difficulty in
enforcing contractual obligations, delays in settlement of securities
transactions and greater price volatility. In addition, investing in foreign
securities will generally result in higher commissions than investing in similar
domestic securities.
Investments in equity securities are subject to inherent market risks and
fluctuations in value due to earnings, economic conditions and other factors
beyond the control of the Adviser. As a result, the return and net asset value
of the Fund will fluctuate. Securities in the Fund's portfolio may decrease in
value or not increase as much as the market as a whole. Although profits in some
Fund holdings may be realized quickly, it is not expected that most investments
will appreciate rapidly.
At times, a portion of the Fund may be invested in companies with short
operating histories ("new issuers") and in initial public offerings ("IPOs"),
and such investments could be considered speculative. New issuers are relatively
unseasoned and may lack sufficient resources, may be unable to generate
internally the funds necessary for growth and may find external financing to be
unavailable on favorable terms or even totally unavailable. New issuers will
often be involved in the development or marketing of a new product with no
established market, which could lead to significant losses. To the extent the
Fund invests in smaller capitalization companies, the Fund will also be subject
to the risks associated with such companies. Smaller capitalization companies,
IPOs and new issuers may experience lower trading volumes than larger
capitalization, established companies and may experience higher growth rates and
higher failure rates than larger capitalization companies. Smaller
capitalization companies, IPOs and new issuers also may have limited product
lines, markets or financial resources and may lack management depth.
B. REPURCHASE AGREEMENTS. A repurchase agreement is a short-term investment
in which the purchaser (i.e., the Fund) acquires ownership of an obligation
issued by the U.S. Government or by an agency of the U.S. Government ("U.S.
Government Obligations") (which may be of any maturity) and the seller agrees to
repurchase the obligation at a future time at a set price, thereby determining
the yield during the purchaser's holding period (usually not more than seven
days from the date of purchase). Any repurchase transaction in which the Fund
engages will require full collateralization of the seller's obligation during
the entire term of the repurchase agreement. In the event of a bankruptcy or
other default of the seller, the Fund could experience both delays in
liquidating the underlying security and losses in value. However, the Fund
intends to enter into repurchase agreements only with the Custodian, other banks
with assets of $1 billion or more and registered securities dealers determined
by the Adviser (subject to review by the Board of Trustees) to be creditworthy.
The Adviser monitors the creditworthiness of the banks and securities dealers
3
<PAGE>
with which the Fund engages in repurchase transactions.
C. LEVERAGING. The Fund may borrow up to five percent of the value of its
total assets from banks to increase its holdings of portfolio securities. Under
the Investment Company Act of 1940, as amended, the Fund is required to maintain
continuous asset coverage of 300% with respect to such borrowings and to sell
(within three days) sufficient Fund holdings to restore such coverage if it
should decline to less than 300% due to market fluctuations or otherwise, even
if such liquidations of the Fund's holdings may be disadvantageous from an
investment standpoint. Leveraging a Fund creates an opportunity for increased
net income but, at the same time, creates special risk considerations. For
example, leveraging may exaggerate changes in the net asset value of Fund
shares. Although the principal of such borrowings will be fixed, the Fund's
assets may change in value during the time the borrowing is outstanding.
Leveraging will create interest expenses for the Fund, which can exceed the
income from the assets retained. To the extent the income derived from
securities purchased with borrowed funds exceeds the interest the Fund will have
to pay, the Fund's net income will be greater than if leveraging were not used.
Conversely, if the income from the assets retained with borrowed funds is not
sufficient to cover the cost of leveraging, the net income of the Fund will be
less than if leveraging were not used, and therefore the amount available for
distribution to shareholders will be reduced.
INVESTMENT LIMITATIONS
FUNDAMENTAL. The investment limitations described below have been adopted
by the Trust with respect to the Fund and are fundamental ("Fundamental"), I.E.,
they may not be changed without the affirmative vote of a majority of the
outstanding shares of the Fund. As used in the Prospectus and this Statement of
Additional Information, the term "majority" of the outstanding shares of the
Fund means the lesser of (1) 67% or more of the outstanding shares of the Fund
present at a meeting, if the holders of more than 50% of the outstanding shares
of the Fund are present or represented at such meeting; or (2) more than 50% of
the outstanding shares of the Fund. Other investment practices which may be
changed by the Board of Trustees without the approval of shareholders to the
extent permitted by applicable law, regulation or regulatory policy are
considered non-fundamental ("Non-Fundamental").
1. BORROWING MONEY. The Fund will not borrow money, except (a) from a bank,
provided that immediately after such borrowing there is an asset coverage of
300% for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that such temporary borrowings are in an
amount not exceeding 5% of the Fund's total assets at the time when the
borrowing is made. This limitation does not preclude the Fund from entering into
reverse repurchase transactions, provided that the Fund has an asset coverage of
300% for all borrowings and repurchase commitments of the Fund pursuant to
reverse repurchase transactions.
2. SENIOR SECURITIES. The Fund will not issue senior securities. This
limitation is not applicable to activities that may be deemed to involve the
issuance or sale of a senior security by the Fund, provided that the Fund's
engagement in such activities is (a) consistent with or permitted by the
Investment Company Act of 1940, as amended, the rules and regulations
promulgated thereunder or interpretations of the Securities and Exchange
Commission or its staff and (b) as described in the Prospectus and the Statement
of Additional Information.
3. UNDERWRITING. The Fund will not act as underwriter of securities issued
by other persons. This limitation is not applicable to the extent that, in
connection with the disposition of portfolio securities (including restricted
securities), the Fund may be deemed an underwriter under certain federal
securities laws.
4
<PAGE>
4. REAL ESTATE. The Fund will not purchase or sell real estate. This
limitation is not applicable to investments in marketable securities which are
secured by or represent interests in real estate. This limitation does not
preclude the Fund from investing in mortgage-related securities or investing in
companies engaged in the real estate business or that have a significant portion
of their assets in real estate (including real estate investment trusts).
5. COMMODITIES. The Fund will not purchase or sell commodities unless
acquired as a result of ownership of securities or other investments. This
limitation does not preclude the Fund from purchasing or selling options or
futures contracts, from investing in securities or other instruments backed by
commodities or from investing in companies which are engaged in a commodities
business or have a significant portion of their assets in commodities.
6. LOANS. The Fund will not make loans to other persons, except (a) by
loaning portfolio securities, (b) by engaging in repurchase agreements, or (c)
by purchasing nonpublicly offered debt securities. For purposes of this
limitation, the term "loans" shall not include the purchase of a portion of an
issue of publicly distributed bonds, debentures or other securities.
7. CONCENTRATION. The Fund will not invest 25% or more of its total assets
in any particular industry. This limitation is not applicable to investments in
obligations issued or guaranteed by the U.S. government, its agencies and
instrumentalities or repurchase agreements with respect thereto.
With respect to the percentages adopted by the Trust as maximum limitations
on its investment policies and limitations, an excess above the fixed percentage
will not be a violation of the policy or limitation unless the excess results
immediately and directly from the acquisition of any security or the action
taken. This paragraph does not apply to the borrowing policy set forth in
paragraph 1 above.
Notwithstanding any of the foregoing limitations, any investment company,
whether organized as a trust, association or corporation, or a personal holding
company, may be merged or consolidated with or acquired by the Trust, provided
that if such merger, consolidation or acquisition results in an investment in
the securities of any issuer prohibited by said paragraphs, the Trust shall,
within ninety days after the consummation of such merger, consolidation or
acquisition, dispose of all of the securities of such issuer so acquired or such
portion thereof as shall bring the total investment therein within the
limitations imposed by said paragraphs above as of the date of consummation.
NON-FUNDAMENTAL. The following limitations have been adopted by the Trust with
respect to the Fund and are Non-Fundamental (see "Investment Restrictions"
above).
1. PLEDGING. The Fund will not mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any assets of the Fund except as
may be necessary in connection with borrowings described in limitation (1)
above. Margin deposits, security interests, liens and collateral arrangements
with respect to transactions involving options, futures contracts, short sales
and other permitted investments and techniques are not deemed to be a mortgage,
pledge or hypothecation of assets for purposes of this limitation.
2. BORROWING. The Fund will not purchase any security while borrowings
(including reverse repurchase agreements) representing more than 5% of its total
assets are outstanding.
3. MARGIN PURCHASES. The Fund will not purchase securities or evidences of
interest thereon on "margin." This limitation is not applicable to short term
credit obtained by the Fund for the clearance of purchases and sales or
redemption of securities, or to arrangements with respect to transactions
involving options, futures contracts, short sales and other permitted
investments and techniques.
5
<PAGE>
4. OPTIONS. The Fund will not purchase or sell puts, calls, options or
straddles, except as described in the Prospectus and the Statement of Additional
Information.
5. LOANS. The Fund will not loan its portfolio securities.
6. REVERSE REPURCHASE AGREEMENTS. The Fund will not enter into reverse
repurchase agreements.
THE INVESTMENT ADVISER
The Fund's investment adviser is Diamond Hill Capital Management, Inc.,
formerly known as Heartland Advisory Group, Inc., 1105 Schrock Road, Suite 437,
Columbus, Ohio 43229 (the "Adviser"). The Adviser is a wholly owned subsidiary
of The Banc Stock Group, Inc.
Under the terms of the management agreement with the Adviser (the
"Management Agreement"), the Adviser manages the Fund's investments. As
compensation for its management services, the Fund is obligated to pay the
Adviser a fee computed and accrued daily and paid monthly at an annual rate of
1.00% of the average daily net assets of the Fund.
The Adviser retains the right to use the name "Diamond Hill" in connection
with another investment company or business enterprise with which the Adviser is
or may become associated. The Trust's right to use the name "Diamond Hill"
automatically ceases ninety days after termination of the Agreement and may be
withdrawn by the Adviser on ninety days written notice.
The Adviser may make payments to banks or other financial institutions that
provide shareholder services and administer shareholder accounts. If a bank were
prohibited from continuing to perform all or a part of such services, management
of the Fund believes that there would be no material impact on the Fund or its
shareholders. Banks may charge their customers fees for offering these services
to the extent permitted by applicable regulatory authorities, and the overall
return to those shareholders availing themselves of the bank services will be
lower than to those shareholders who do not. The Fund may from time to time
purchase securities issued by banks which provide such services; however, in
selecting investments for the Fund, no preference will be shown for such
securities.
Under the terms of an administration agreement with the Adviser (the
"Administration Agreement"), the Adviser renders all administrative and
supervisory services to the Fund. The Adviser oversees the maintenance of all
books and records with respect to the Fund's securities transactions and the
Fund's book of accounts in accordance with all applicable federal and state laws
and regulations. The Adviser also arranges for the preservation of journals,
ledgers, corporate documents, brokerage account records and other records which
are required pursuant to Rule 31a-1 promulgated under the 1940 Act. The Adviser
is also responsible for the equipment, staff, office space and facilities
necessary to perform its obligations.
Under the Administration Agreement, Diamond Hill assumes and pays all
ordinary expenses of the Fund not assumed by the Fund. The Fund pays all
brokerage fees and commissions, taxes, borrowing costs (such as (a) interest and
(b) dividend expenses on securities sold short), fees and expenses of the
non-interested person trustees and extraordinary or non-recurring expenses. The
Fund also pays expenses which it is authorized to pay pursuant to Rule 12b-1
under the Act.
Pursuant to the Administration Agreement, Diamond Hill receives a fee which
is paid monthly at an annual rate of 0.50% of the Fund's average daily net
assets.
6
<PAGE>
TRUSTEES AND OFFICERS
The names of the Trustees and executive officers of the Trust are shown
below. Each Trustee or officer who is an "interested person" of the Trust, as
defined in the Investment Company Act of 1940, is indicated by an asterisk.
<TABLE>
<CAPTION>
===================================== ========================== ===========================================================
NAME, AGE POSITION PRINCIPAL OCCUPATIONS
AND ADDRESS DURING PAST 5 YEARS
------------------------------------- -------------------------- -----------------------------------------------------------
<S> <C> <C>
Roderick H. Dillon, Jr. * President and Trustee President, Chief Executive Officer and Chief Investment
Age: 44 Officer of The Banc Stock Group, Inc., Columbus, Ohio,
1105 Schrock Road, Suite 437 since April 2000; Vice President with Loomis, Sayles &
Columbus, Ohio 43229 Company, a financial services company, from October 1997
to April 2000; President and Chief Investment Officer of
Dillon Capital Management, an investment advisory firm,
from July 1993 to October 1997.
------------------------------------- -------------------------- -----------------------------------------------------------
Lisa R. Hunter * Trustee, Treasurer, Vice president of Banc Stock Financial Services, Inc. and
Age: 46 Secretary and Chief Director of Compliance.** Prior to 1995, compliance
1105 Schrock Road, Suite 437 Financial Officer administrator of VESTAX Securities Corp, 1932 Georgetown
Columbus, Ohio 43229 Rd., Hudson, Ohio 44256.
------------------------------------- -------------------------- -----------------------------------------------------------
John M. Bobb Trustee Director of Headwaters Group, 8200 Clouse Road, New
Age: 58 Albany, Ohio, a fine arts consulting agency, 1994 to
8200 Clouse Road present. Prior to 1994, sales and marketing director
New Albany, Ohio 43054 with Bush Brothers, a food company in Knoxville,
Tennessee.
------------------------------------- -------------------------- -----------------------------------------------------------
George A. Skestos Trustee President of Homewood Corporation, 750 Northlawn Drive,
Age: 31 Columbus, Ohio 43214, a real estate development firm,
750 Northlawn Drive since September 1999; Director of the Midland Life
Columbus, Ohio 43214 Insurance Company since April 1998; Officer of Huntington
Capital Corp. from April 1994 to September 1997.
------------------------------------- -------------------------- -----------------------------------------------------------
William P. Zox Trustee Partner with Schottenstein, Zox and Dunn Co. LPA, 41 S.
Age: 33 High St., Columbus, Ohio 43215, a law firm, since
41 S. High St. January 2000; Associate with Schottenstein, Zox and Dunn
Columbus, Ohio 43215 Co. LPA from July 1993 to January 2000.
===================================== ========================== ===========================================================
<FN>
** Banc Stock Financial Services, Inc. is the Trust's principal underwriter (the
"Distributor"). The Adviser and The Banc Stock Group, Inc. are affiliates of the
Distributor.
</FN>
</TABLE>
Trustee fees are Trust expenses. The compensation paid to the Trustees for
the year ended February 29, 2000 is set forth in the following table:
================================ ==============================
TOTAL COMPENSATION
FROM TRUST (THE TRUST IS
NAME NOT IN A FUND COMPLEX)
-------------------------------- ------------------------------
Lisa R. Hunter 0
-------------------------------- ------------------------------
John M. Bobb $4,000
-------------------------------- ------------------------------
Virginia H. Rader $4,000
-------------------------------- ------------------------------
Gary A. Radville $4,000
================================ ==============================
7
<PAGE>
The Trust, the Adviser and its affiliates have adopted a Code of Ethics
that permits personnel subject to the Code to invest in securities, including,
under certain circumstances and subject to certain restrictions, securities that
may be purchased or held by the Fund. However, the Code restricts personal
investing practices by directors, officers and employees of the Adviser and its
affiliates and officers of the Trust. The Code of Ethics also restricts personal
investing practices of trustees of the Trust who have knowledge about recent
Fund trades. The Code of Ethics prohibits acquisition of securities without
preclearance in, among other events, an initial public offering or a limited
offering. These provisions are designed to put the interests of Fund
shareholders before the interest of people who manage the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees of the Trust, the
Adviser is responsible for the Fund's portfolio decisions and the placing of the
Fund's portfolio transactions. In placing portfolio transactions, the Adviser
seeks the best qualitative execution for the Fund, taking into account such
factors as price (including the applicable brokerage commission or dealer
spread), the execution capability, financial responsibility and responsiveness
of the broker or dealer and the brokerage and research services provided by the
broker or dealer. The Adviser generally seeks favorable prices and commission
rates that are reasonable in relation to the benefits received.
The Adviser is specifically authorized to select brokers or dealers who
also provide brokerage and research services to the Fund and/or the other
accounts over which the Adviser exercises investment discretion and to pay such
brokers or dealers a commission in excess of the commission another broker or
dealer would charge if the Adviser determines in good faith that the commission
is reasonable in relation to the value of the brokerage and research services
provided. The determination may be viewed in terms of a particular transaction
or the Adviser's overall responsibilities with respect to the Trust and to other
accounts over which it exercises investment discretion.
Research services include supplemental research, securities and economic
analyses, statistical services and information with respect to the availability
of securities or purchasers or sellers of securities and analyses of reports
concerning performance of accounts. The research services and other information
furnished by brokers through whom the Fund effects securities transactions may
also be used by the Adviser in servicing all of its accounts. Similarly,
research and information provided by brokers or dealers serving other clients
may be useful to the Adviser in connection with its services to the Fund.
Although research services and other information are useful to the Fund and the
Adviser, it is not possible to place a dollar value on the research and other
information received. It is the opinion of the Board of Trustees and the Adviser
that the review and study of the research and other information will not reduce
the overall cost to the Adviser of performing its duties to the Fund under the
Agreement.
While the Fund does not deem it practicable and in its best interests to
solicit competitive bids for commission rates on each transaction, consideration
is regularly given to posted commission rates as well as other information
concerning the level of commissions charged on comparable transactions by
qualified brokers.
The Fund has no obligation to deal with any broker or dealer in the
execution of its transactions. However, it is contemplated that Banc Stock
Financial Services, Inc. ("BSFS"), in its capacity as a registered
broker-dealer, will effect substantially all securities transactions which are
executed on a national securities exchange and over-the-counter transactions
conducted on an agency basis. Such transactions will be executed at competitive
commission rates through Mesirow Financial, Inc.
8
<PAGE>
Over-the-counter transactions will be placed either directly with principal
market makers or with broker-dealers, if the same or a better price, including
commissions and executions, is available. Fixed income securities are normally
purchased directly from the issuer, an underwriter or a market maker. Purchases
include a concession paid by the issuer to the underwriter and the purchase
price paid to a market maker may include the spread between the bid and asked
prices.
Under the Investment Company Act of 1940, persons affiliated with an
affiliate of the Adviser (such as BSFS) may be prohibited from dealing with the
Fund as a principal in the purchase and sale of securities. Therefore, BSFS will
not serve as the Fund's dealer in connection with over-the-counter transactions.
However, BSFS may serve as the Fund's broker in over-the-counter transactions
conducted on an agency basis and will receive brokerage commissions in
connection with such transactions. Such agency transactions will be executed
through Mesirow Financial, Inc.
The Fund will not effect any brokerage transactions in its portfolio
securities with BSFS if such transactions would be unfair or unreasonable to
Fund shareholders, and the commissions will be paid solely for the execution of
trades and not for any other services. The Agreement provides that affiliates,
or any affiliates of affiliates, of the Adviser may receive brokerage
commissions in connection with effecting such transactions for the Fund. In
determining the commissions to be paid to BSFS, it is the policy of the Fund
that such commissions will, in the judgment of the Trust's Board of Trustees, be
(a) at least as favorable to the Fund as those which would be charged by other
qualified brokers having comparable execution capability and (b) at least as
favorable to the Fund as commissions contemporaneously charged by BSFS on
comparable transactions for its most favored unaffiliated customers, except for
customers of BSFS considered by a majority of the Trust's disinterested Trustees
not to be comparable to the Fund. The disinterested Trustees from time to time
review, among other things, information relating to the commissions charged by
BSFS to the Fund and its other customers, and rates and other information
concerning the commissions charged by other qualified brokers.
The Agreement does not provide for a reduction of the Adviser's fee by the
amount of any profits earned by BSFS from brokerage commissions generated from
portfolio transactions of the Fund.
While the Fund contemplates no ongoing arrangements with any other
brokerage firms, brokerage business may be given from time to time to other
firms. BSFS will not receive reciprocal brokerage business as a result of the
brokerage business placed by the Fund with others.
When the Fund and another of the Adviser's clients seek to purchase or sell
the same security at or about the same time, the Adviser may execute the
transaction on a combined ("blocked") basis. Blocked transactions can produce
better execution for the Fund because of the increased volume of the
transaction. If the entire blocked order is not filled, the Fund may not be able
to acquire as large a position in such security as it desires or it may have to
pay a higher price for the security. Similarly, the Fund may not be able to
obtain as large an execution of an order to sell or as high a price for any
particular portfolio security if the other client desires to sell the same
portfolio security at the same time. In the event that the entire blocked order
is not filled, the purchase or sale will normally be allocated on a pro rata
basis. Transactions of advisory clients (including the Fund) may also be blocked
with those of the Adviser, the Distributor or any of their affiliates. The
Adviser, the Distributor and their affiliates will be permitted to participate
in the blocked transaction only after all orders of advisory clients (including
the Fund) are filled.
Consistent with the Conduct Rules of the National Association of Securities
Dealers, Inc., and subject to its obligation of seeking best qualitative
execution, the Adviser may give consideration to sales of shares of the Fund as
a factor in the selection of brokers and dealers to execute portfolio
transactions. The Adviser (not the Fund) may pay certain financial institutions
(which may include banks, brokers, dealers and other industry professionals) a
"servicing fee" for performing certain administrative functions for the Fund
9
<PAGE>
shareholders to the extent these institutions are allowed to do so by applicable
statute, rule or regulation. In addition, the Distributor (not the Fund) may
compensate brokers and other intermediaries for directing assets to or retaining
assets in the Fund. The Distributor is a registered broker-dealer and it is
anticipated that it will receive brokerage commissions from the Fund. Both the
Adviser and the Distributor are wholly owned by Banc Stock Group, Inc., a
corporation which invests in financial services companies.
DISTRIBUTION PLAN
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment
Company Act of 1940, pursuant to which the Fund pays the Adviser an annual fee
equal to 0.25% of average daily net assets of the Fund for certain distribution
and promotion activities related to marketing its shares. Payments received by
the Adviser pursuant to the Plan may be greater or less then distribution
expenses incurred by the Adviser and are in addition to fees paid by the Fund
pursuant to the Management Agreement and Administration Agreement.
Under the Plan, the Trust may engage in any activities related to the
distribution of Fund shares, including without limitation the following: (a)
payments, including incentive compensation, to securities dealers or other
financial intermediaries, financial institutions, investment advisors and others
that are engaged in the sale of Shares, or that may be advising shareholders of
the Trust regarding the purchase, sale or retention of Shares, or that hold
Shares for shareholders in omnibus accounts or as shareholders of record or
provide shareholder support or administrative services to the Fund and its
shareholders, or for rendering shareholder support services, including allocated
overhead, office space and equipment, telephone facilities and expenses,
answering routine inquiries regarding the Trust, processing shareholder
transactions, and providing such other shareholder services as the Trust may
request; (b) expenses of maintaining personnel (including personnel of
organizations with which the Trust has entered into agreements related to this
Plan) who engage in or support distribution of Shares; (c) costs of preparing,
printing and distributing Fund prospectuses and statements of additional
information and reports for recipients other than existing Fund shareholders;
(d) costs of formulating and implementing marketing and promotional activities,
including sales seminars, direct mail promotions and television, radio,
newspaper, magazine and other mass media advertising; (e) costs of preparing,
printing and distributing sales literature; (f) costs of obtaining such
information, analyses and reports with respect to marketing and promotional
activities as the Trust may deem advisable; and (g) costs of implementing and
operating the Plans. The Fund does not participate in any joint distribution
activities with other mutual funds.
The Trustees expect that the Plan will significantly enhance the Fund's
ability to expand distribution. It is also anticipated that an increase in the
size of the Fund will facilitate more efficient portfolio management and assist
the Fund in seeking to achieve its investment objective.
The Plan has been approved by the Fund's Board of Trustees, including a
majority of the Trustees who are not "interested persons" of the Fund and who
have no direct or indirect financial interest in the Plans or any related
agreement, by a vote cast in person. Continuation of the Plans and the related
agreements must be approved by the Trustees annually, in the same manner, and a
Plan or any related agreement may be terminated at any time without penalty by a
majority of such independent Trustees or by a majority of the outstanding shares
of the applicable class. Any amendment increasing the maximum percentage payable
under the Plan or other material change must be approved by a majority of the
outstanding shares of the applicable class, and all other material amendments to
the Plan or any related agreement must be approved by a majority of the
independent Trustees. Anthony J. Reilly and Lisa R. Hunter, officers of the
Trust, may benefit indirectly from payments received by the Adviser under the
Plan because of their relationships with the Adviser and its affiliates.
10
<PAGE>
DETERMINATION OF SHARE PRICE
The price (net asset value) of the shares of the Fund is determined as of
4:00 p.m., Eastern time on each day the Trust is open for business and on any
other day on which there is sufficient trading in the Fund's securities to
materially affect the net asset value. The Trust is open for business on every
day except Saturdays, Sundays and the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas.
Securities which are traded on any exchange or on the NASDAQ
over-the-counter market are valued at the last quoted sale price. Lacking a last
sale price, a security is valued at its last bid price except when, in the
Adviser's opinion, the last bid price does not accurately reflect the current
value of the security. All other securities for which over-the-counter market
quotations are readily available are valued at their last bid price. When market
quotations are not readily available, when the Adviser determines the last bid
price does not accurately reflect the current value or when restricted
securities are being valued, such securities are valued as determined in good
faith by the Adviser, subject to review of the Board of Trustees of the Trust.
Fixed income securities generally are valued by using market quotations,
but may be valued on the basis of prices furnished by a pricing service when the
Adviser believes such prices accurately reflect the fair market value of such
securities. A pricing service utilizes electronic data processing techniques
based on yield spreads relating to securities with similar characteristics to
determine prices for normal institutional-size trading units of debt securities
without regard to sale or bid prices. When prices are not readily available from
a pricing service, or when restricted or illiquid securities are being valued,
securities are valued at fair value as determined in good faith by the Adviser,
subject to review of the Board of Trustees. Short term investments in fixed
income securities with maturities of less than 60 days when acquired, or which
subsequently are within 60 days of maturity, are valued by using the amortized
cost method of valuation, which the Board has determined will represent fair
value.
TAXES
The Fund intends to qualify each year as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended. By so qualifying, the Fund
will not be subject to federal income taxes to the extent that it distributes
substantially all of its net investment income and any realized capital gains.
INVESTMENT PERFORMANCE
The Fund may periodically advertise "average annual total return." The
"average annual total return" of the Fund refers to the average annual
compounded rate of return over the stated period that would equate an initial
amount invested at the beginning of a stated period to the ending redeemable
value of the investment.
"Average annual total return," as defined by the Securities and Exchange
Commission, is computed by finding the average annual compounded rates of return
(over the one, five and ten year periods) that would equate the initial amount
invested to the ending redeemable value, according to the following formula:
11
<PAGE>
P(1+T)n=ERV
Where: P = a hypothetical $1,000 initial investment
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
applicable period of the hypothetical $1,000
investment made at the beginning of the
applicable period.
The computation assumes that all dividends and distributions are reinvested at
the net asset value on the reinvestment dates, that the maximum sales load is
deducted from the initial $1,000 and that a complete redemption occurs at the
end of the applicable period. If the Fund has been in existence less than one,
five or ten years, the time period since the date of the initial public offering
of shares will be substituted for the periods stated.
The Fund may also advertise performance information (a "non-standardized
quotation") which is calculated differently from average annual total return. A
non-standardized quotation of total return may be a cumulative return which
measures the percentage change in the value of an account between the beginning
and end of a period, assuming no activity in the account other than reinvestment
of dividends and capital gains distributions. A non-standardized quotation may
also be an average annual compounded rate of return over a specified period,
which may be a period different from those specified for average annual total
return. In addition, a non-standardized quotation may be an indication of the
value of a $10,000 investment (made on the date of the commencement of
operations of each class of shares of the Fund) as of the end of a specified
period. These non-standardized quotations do not include the effect of the
applicable sales load which, if included, would reduce the quoted performance. A
non-standardized quotation of total return will always be accompanied by the
Fund's average annual total return as described above.
The Fund's investment performance will vary depending upon market
conditions, the composition of the Fund's portfolio and operating expenses of
the Fund. These factors and possible differences in the methods and time periods
used in calculating non-standardized investment performance should be considered
when comparing the Fund's performance to those of other investment companies or
investment vehicles. The risks associated with the Fund's investment objective,
policies and techniques should also be considered. At any time in the future,
investment performance may be higher or lower than past performance, and there
can be no assurance that any performance will continue.
The Fund may also include in advertisements data comparing performance with
other mutual funds as reported in non-related investment media, published
editorial comments and performance rankings compiled by independent
organizations and publications that monitor the performance of mutual funds
(such as Lipper Analytical Services, Inc., Morningstar, Inc., Fortune or
Barron's). Performance information may be quoted numerically or may be presented
in a table, graph or other illustration.
From time to time, in advertisements, sales literature and information
furnished to present or to prospective shareholders, the performance of the Fund
may be compared to indices of broad groups of unmanaged securities considered to
be representative of or similar to the portfolio holdings of the Fund or
considered to be representative of the stock market in general. The Fund may use
the Standard & Poor's 500 Stock Index or the Dow Jones Industrial Average.
In addition, the performance of the Fund may be compared to other groups of
mutual funds tracked by any widely used independent research firm which ranks
mutual funds by overall performance, investment objectives and assets, such as
Lipper Analytical Services, Inc. or Morningstar, Inc. The objectives, policies,
limitations and expenses of other mutual funds in a group may not be the same as
those of the Fund.
12
<PAGE>
Performance rankings and ratings reported periodically in national financial
publications such as Barron's and Fortune also may be used.
CUSTODIAN
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, is Custodian
of the Fund's investments. The Custodian acts as the Fund's depository,
safekeeps its portfolio securities, collects all income and other payments with
respect thereto, disburses funds at the Fund's request and maintains records in
connection with its duties.
TRANSFER AGENT
Mutual Funds Service Co. (MFSCo.), 6000 Memorial Drive, Dublin, Ohio 43017
acts as the Fund's transfer agent and, in such capacity, maintains the records
of each shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of the Fund's shares, acts as
dividend and distribution disbursing agent and performs other accounting and
shareholder service functions. MFSCo. also acts as the Fund's administrator and,
in such capacity, manages the Fund's business affairs. In addition, MFSCo., in
its capacity as fund accountant, provides the Fund with certain monthly reports,
record-keeping and other management-related services. For its services as fund
accountant, MFSCo. receives an annual fee from the Adviser equal to 0.05% of the
Fund's assets up to $100 million (subject to a minimum annual fee of $20,000,
which increases as additional classes are added).
ACCOUNTANTS
The firm of McCurdy & Associates, CPA's, 27955 Clemens Road, Westlake, Ohio
44145, has been selected as independent public accountants for the Trust for the
fiscal year ending February 29, 2001. McCurdy & Associates performs an annual
audit of the Fund's financial statements and provides financial, tax and
accounting consulting services as requested.
DISTRIBUTOR
Banc Stock Financial Services, Inc. ("BSFS"), 1105 Schrock Road, Suite 437,
Columbus, Ohio 43229, is the exclusive agent for distribution of shares of the
Fund. The Distributor is obligated to sell shares of the Fund on a best efforts
basis only against purchase orders for the shares. Shares of the Fund are
offered to the public on a continuous basis.
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