Registration No. 333-37277
811-8411
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No.
Post-Effective Amendment No. 4
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and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 4
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The James Advantage Funds
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(Exact Name of Registrant as Specified in Charter)
P.O. Box 8, Alpha, Ohio 45301
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (937) 426-7640
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Donald S. Mendelsohn, Esq.
Brown, Cummins & Brown LPA
3500 Carew Tower
441 Vine Street
Cincinnati, Ohio 45202
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective:
/ / immediately upon filing pursuant to Rule 485(b)
/X/ on November 1, 1999 pursuant to Rule 485(b)
/ / ___ days after filing pursuant to Rule 485(a)
/ / on ( ) pursuant to Rule 485(a)
The Registrant has registered an indefinite number of shares under the
Securities Act of 1933, as amended, pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended.
<PAGE>
THE JAMES ADVANTAGE FUNDS
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Cross-Reference Sheet Pursuant to Rule 495(a)
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Part A Prospectus
Form Item Cross-Reference
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1. Front and Back Cover Pages Cover Pages
2. Risk/Return Summary: Investments, Risk/Return
Risks, and Performance Summary
3. Risk/Return Summary: Fee Table Expense Information;
Synopsis of Costs and
Expenses
4. Investment Objectives, Principal Investment Objectives,
Investment Strategies, and Principal Investment
Related Risk Considerations Strategies and Related
Risks
5. Management's Discussion of Fund Inapplicable (Included
Performance in Annual Report)
6. Management, Organization, and Management of
Capital Structure the Fund
7. Shareholder Information How to Purchase Shares;
How to Redeem Shares;
How Net Asset Value is
Determined; Dividend
and Capital Gain
Distributions;
Dividends,
Distributions and
Taxes; Tax Status
Application
8. Distribution Arrangements None
9. Financial Highlights Information Financial Highlights
<PAGE>
PART B
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Caption in
Statement of
Additional
Item No. Registration Statement Caption Information
- -------- ------------------------------ -----------
10. Cover Page and Table of Contents Cover Page; Table of
Contents
11. Fund History Capital Shares and
Voting
12. Description of the Fund and Its Investment Objective
Investments and Risks and Policies;
Investment Limitations;
Allocation of Trust
Expenses
13. Management of the Fund Trustees and Officers
14. Control Persons and Principal Holders Trustees and Officers
of Securities
15. Investment Advisory and Other Services The Investment Adviser;
Administrator; Other
Services
16. Brokerage Allocation and Other Brokerage
Practices
17. Capital Stock and Other Securities Capital Shares and
Voting
18. Purchase, Redemption and Pricing of Net Asset Value
Shares Determination; Special
Shareholder Services;
Purchase of Shares;
Redemption of Shares
19. Taxation of the Fund Additional Tax
Information
20. Underwriters Distributor
<PAGE>
21. Calculation of Performance Data Calculation of
Performance Data
22. Financial Statements Financial Statements
PART C
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The information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
JAMES ADVANTAGE
FUNDS
Advised by
James Investment Research, Inc.
November 1, 1999
Prospectus
THE GOLDEN RAINBOW FUND
THE JAMES SMALL CAP FUND
THE JAMES LARGE CAP PLUS FUND
THE JAMES MARKET NEUTRAL FUND
These securities have not been approved nor disapproved by the Securities and
Exchange Commission nor has the Securities and Exchange Commission passed upon
the accuracy or adequacy of this Prospectus. Any representation to the contrary
is a criminal offense.
<PAGE>
Prospectus
November 1, 1999
THE GOLDEN RAINBOW FUND
THE JAMES SMALL CAP FUND
THE JAMES LARGE CAP PLUS FUND
THE JAMES MARKET NEUTRAL FUND
P.O. Box 8
Alpha, Ohio 45301
For Information, Shareholder Services and Requests:
(800) 99 JAMES
(800) 995-2637
[email protected]
The James Advantage Funds (the "Trust") currently offers four series of
shares to investors: The Golden Rainbow Fund, The James Small Cap Fund, The
James Large Cap Plus Fund and The James Market Neutral Fund. The investment
adviser to each series of the Trust is James Investment Research, Inc. (the
"Adviser").
THE GOLDEN RAINBOW FUND seeks to provide total return through a combination
of growth and income and preservation of capital in declining markets.
THE JAMES SMALL CAP FUND seeks to provide long-term capital appreciation.
THE JAMES LARGE CAP PLUS FUND seeks to provide long-term capital
appreciation and outperform the Standard & Poor's 500 Index (the "S&P 500
Index").
THE JAMES MARKET NEUTRAL FUND seeks to provide positive returns regardless
of the direction of the stock markets.
TABLE OF CONTENTS
RISK/RETURN SUMMARY........................................................... 2
EXPENSE INFORMATION............................................................7
HISTORICAL PERFORMANCE OF THE ADVISER'S PRIVATE ACCOUNTS.......................9
MANAGEMENT OF THE FUNDS.......................................................11
HOW TO PURCHASE SHARES........................................................12
FREE REPURCHASE, SYSTEMATIC WITHDRAWAL, DIRECT DEPOSITS
AND EXCHANGE PRIVILEGE......................................................17
HOW TO REDEEM SHARES..........................................................18
DIVIDENDS AND DISTRIBUTIONS...................................................19
TAXES.........................................................................20
DISTRIBUTION PLANS............................................................20
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE..........................21
FINANCIAL HIGHLIGHTS..........................................................22
<PAGE>
RISK/RETURN SUMMARY
WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES?
THE GOLDEN RAINBOW FUND seeks to provide total return through a combination
of growth and income and preservation of capital in declining markets.
THE JAMES SMALL CAP FUND seeks to provide long-term capital appreciation.
THE JAMES LARGE CAP PLUS FUND seeks to provide long-term capital
appreciation and outperform the S&P 500 Index.
THE JAMES MARKET NEUTRAL FUND seeks to provide positive returns regardless
of the direction of the stock markets.
WHAT ARE THE FUNDS' PRINCIPAL INVESTMENT STRATEGIES?
The Adviser does much of its own research using quantitative databases and
statistical expertise. It uses a number of elements to help predict future stock
and bond price movements. The Adviser uses a proprietary investment model to
select stocks for the Funds that it believes are undervalued and more likely to
appreciate. The Adviser focuses on value, neglect or stocks which are
underrepresented by institutional investors, as well as on management
commitment, and assesses a number of fundamental factors such as earnings,
earnings trend, price earnings multiples, return on assets, and balance sheet
data as well as other proprietary calculations. The model evaluates over 6,000
companies of all capitalization ranges. For The Small Cap Fund, the Adviser
refines the model by using a small cap screen and evaluates thousands of small
capitalization companies. For The Large Cap Plus Fund, the Adviser uses a
modified version of the model designed for large capitalization stocks.
For temporary defensive purposes, under adverse market conditions, each
Fund may hold all or a substantial portion of its assets in a combination of
short-term U.S. Government or high quality money market instruments, repurchase
agreements collateralized by such securities, money market funds or other cash
equivalents. If a Fund acquires shares of another mutual fund, including a money
market fund, you will be subject to additional management fees. Each Fund may
also invest a substantial portion of its assets in such instruments at any time
to maintain liquidity or pending selection of investments in accordance with its
policies. When and to the extent a Fund assumes such a temporary defensive
position, it may not pursue or achieve its investment objective.
THE GOLDEN RAINBOW FUND invests primarily in common stocks and/or debt
securities that the Adviser believes are undervalued. The Fund will normally
hold both common stocks and debt securities, generally with 40%-60% invested in
common stocks and 40%-60% invested in debt securities. The Fund may invest up to
90% of its assets in either common stocks or debt securities. The Fund will
attempt to provide total return in excess of the rate of inflation over the long
term (3 to 5 years).
2
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The Adviser expects that the fixed income portion of the Fund's portfolio
will consist primarily of U.S. government securities or high-grade corporate
bonds. When the Adviser believes that interest rates will fall, it may extend
maturities in anticipation of capital appreciation in the bonds. If the Adviser
believes that interest rates may rise, it expects to seek capital preservation
through the purchase of shorter term bonds. The Fund may invest in debt
securities of any maturity, consistent with the Fund's anticipated needs for
liquidity. The Fund will limit its holdings of debt securities to issues rated,
at the time of purchase, "A" or better by either Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Ratings Group ("S&P"), or if unrated, which are
determined by the Adviser to be of equivalent quality.
THE JAMES SMALL CAP FUND invests primarily in common stocks of small
capitalization companies, defined by the Adviser as those companies with market
capitalizations of $1.5 billion or less at the time of purchase. The Adviser
will normally sell a security when the market capitalization exceeds $2 billion.
THE JAMES LARGE CAP PLUS FUND normally will be fully invested (subject to
liquidity needs) in common stocks the Adviser deems most likely to outperform
the S&P 500 Index. The name "Large Cap Plus Fund" is intended to suggest that
the Fund seeks performance which exceeds that of the S&P 500 Index through its
selection of common stocks of large capitalization companies. Normally, at least
65% of the Fund's assets will be invested in common stocks of large
capitalization companies, defined by the Adviser as those companies with market
capitalizations of $2 billion or more at the time of purchase. The Fund
generally buys stocks in the S&P 500 index and will typically hold 25-30 stocks.
Market capitalization is not a factor in stock selection; most stocks in
the S&P 500 Index are, however, mid or large cap by current definition. The
Adviser does not intend to weight the Fund's portfolio by market capitalization
or any other method. It would not be reasonable, therefore, to expect a stock
position in the Fund to have the same weighting, or relative weighting, as it
does in the S&P 500. The Fund is not an S&P 500 index fund.
THE JAMES MARKET NEUTRAL FUND seeks to limit market risk (the effects of
general market movements on the Fund's performance) by using a market neutral
strategy. The Fund invests in common stocks that the Adviser believes are
undervalued and more likely to appreciate, and sells short common stocks that
the Adviser believes are overvalued and more likely to depreciate. There is no
assurance that the Adviser will be able to limit market risk for the Fund.
The term "selling short" means the Fund sells a stock that it does not own,
borrows the same stock from a broker or other institution to complete the sale,
and buys the same stock at a later date to repay the lender. When selling stock
short, if the stock is overvalued, and the price declines before the Fund buys
the stock, the Fund makes a profit. If the price of the stock increases before
the Fund buys the stock, the Fund loses money.
The Adviser attempts to control the risk inherent in short selling through
several processes. One way is to decrease the relative weighting of each stock
sold short while increasing the number of shorted stocks, thus reducing the
impact each stock has on overall performance without reducing the market
neutrality of the Fund. The Adviser also employs various proprietary procedures
to eliminate stocks which have risen in price above a loss threshold. The
Adviser will attempt to diversify the Fund among industries and market sectors,
but this is a secondary consideration.
3
<PAGE>
The Fund will hold short positions in stocks which, in the aggregate, will
approximately equal the long positions in the Fund. Due to the continuous
changes in the prices of the short positions and long positions, the market
value of the short positions and long positions will not be equal and can become
unequal to a significant degree. For example, if the Fund is successful, it is
likely that the long positions will increase in value while the short positions
decrease in value, thus reducing the market neutrality of the Fund. It is the
intention of the Adviser to take action to rebalance the long and short
positions to maintain a market neutral exposure when the imbalance reaches
proprietary thresholds, pre-established by the Adviser. This can be done by
adding or eliminating short or long positions depending on the rebalancing
needs.
When selling securities short, 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 Adviser may also use the Fund's long equity positions as
collateral. It is the intention of the Adviser that the Fund NOT borrow money to
provide this collateral. Therefore, the Fund will always maintain high levels of
cash or high-grade liquid assets (e.g., U.S. Treasury bills, money market funds,
repurchase agreements, certificates of deposit and high quality commercial
paper) for collateral needs.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUNDS?
INVESTMENT RISKS COMMON TO ALL FUNDS
MARKET RISK. The risk of losing money due to general market movements is
called market risk. The return on and value of an investment in the Funds will
fluctuate in response to stock market movements. Common stocks and other equity
securities are subject to market risks, such as a rapid increase or decrease in
a stock's value or liquidity, and the fluctuations due to a company's earnings,
economic conditions and other factors beyond the control of the Adviser. As a
result, there is a risk that you could lose money by investing in the Funds.
STOCK SELECTION RISK. The risk that the Adviser will fail to correctly
identify overvalued and undervalued stocks is called stock selection risk. The
success of the Funds' strategy is dependent on the Adviser's ability to
correctly identify undervalued and overvalued stocks. If the Adviser is not
successful, the Funds may experience losses regardless of the overall
performance of the stock markets.
An investment in the Funds is not a deposit of a bank and it is not insured
or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
THE GOLDEN RAINBOW FUND
Investments in debt securities are subject to inherent market risks and
fluctuations in value due to changes in earnings, economic conditions, quality
ratings and other factors beyond the control of the Adviser. Debt securities are
also subject to price fluctuations based upon changes
4
<PAGE>
in the level of interest rates, which will generally result in all those
securities experiencing appreciation when interest rates decline and
depreciation when interest rates rise. As a result, the return and net asset
value of the Fund will fluctuate.
THE JAMES SMALL CAP FUND
The Fund will be subject to the risks associated with investing in small
capitalization companies. Smaller capitalization companies may experience higher
growth rates and higher failure rates than do larger capitalization companies.
Such companies may have limited product lines, markets or financial resources
and may lack management depth. The trading volume of securities of smaller
capitalization companies is normally less than that of larger capitalization
companies, and therefore may disproportionately affect their market price,
tending to make them rise more in response to buying demand and fall more in
response to selling pressure than is the case with larger capitalization
companies. The Adviser seeks to reduce risk by selecting securities it believes
to be undervalued relative to the market; however, the Fund's investments might
be focused on one or more economic sectors, and some stocks may have liquidity
concerns. The Fund will not invest more than 15% of its net assets in illiquid
securities.
THE JAMES LARGE CAP PLUS FUND
As a non-diversified fund, the Fund may invest greater than 5% of its total
assets in the securities of one or more issuers. Because a relatively high
percentage of the assets of the Fund may be invested in the securities of a
limited number of issuers, the value of shares of the Fund may be more sensitive
to any single economic, business, political or regulatory occurrence than the
value of shares of a diversified investment company. This fluctuation, if
significant, may affect the performance of the Fund.
THE JAMES MARKET NEUTRAL FUND
STOCK SELECTION RISK. Although the Fund attempts to be market neutral, the
success of the Fund's strategy is dependent on the Adviser's ability to
correctly identify undervalued and overvalued stocks. If the Adviser is not
successful, the Fund may experience losses regardless of the overall performance
of the stock markets. In strong "bull" markets, when the prices of nearly all
stocks are rising regardless of the underlying value of the companies, the Fund
is expected to underperform the general markets because the Fund's short
positions will likely lose money.
SHORT SELLING RISK. The Market Neutral Fund engages in short selling
activities that are significantly different from the investment activities
commonly associated with conservative stock funds. Positions in shorted
securities are more risky than long positions (purchases) in stocks because the
maximum sustainable loss on a stock purchased is limited to the amount paid for
the stock plus the transactions costs, whereas there is no maximum attainable
price of the shorted stock. Therefore, in theory, stocks sold short have
unlimited risk. You should be aware of the intrinsic risk involved in the Fund
and be cognizant that any strategy which includes selling stocks short can
suffer significant losses.
5
<PAGE>
PORTFOLIO TURNOVER RISK. As the Adviser adjusts the composition of the
portfolio to deal with the risk discussed above, the Fund may have a high
portfolio turnover rate. A high portfolio turnover rate can result in increased
brokerage commission costs and may expose taxable shareholders to higher current
realization of capital gains and a potentially larger current tax liability.
PERFORMANCE SUMMARY
The bar chart and performance table shown below provide an indication of
the risks of investing in The Golden Rainbow Fund by showing the changes in the
performance of the Fund from year to year and by showing how the annual returns
of the Fund compare with those of a broad-based securities market index. The
Golden Rainbow Fund is the successor to another mutual fund and a common trust
fund managed by the Adviser, and the performance information includes the past
performance of the predecessor mutual fund and the common trust fund. Sales
loads are not reflected in the bar chart. If they were, returns would be less
than those shown. The Fund's performance in the past is not necessarily an
indication of how the Fund will perform in the future.
[bar chart]
25.69% 16.43% 18.71% 12.38% 16.64% 1.41% 19.35%
1985* 1986* 1987* 1988* 1989* 1990* 1991*
9.87% 13.00% -4.16% 22.69% 8.69% 12.80% 12.79%
1992 1993 1994 1995 1996 1997 1998
* The Adviser began managing a common trust fund, which fund was the predecessor
of The Golden Rainbow Fund, in 1984. The assets of this common trust fund became
a registered investment company in 1991. The Golden Rainbow Fund is the
successor to this registered investment company. Note that prior to July 1,
1991, the performance is that of the common trust fund; from July 1, 1991
forward, the performance is that of a registered investment company. It should
be noted that: (1) the quoted performance data includes performance for periods
before the Securities Act registration statement became effective; (2) the
common trust fund was not registered under the Investment Company Act of 1940
(the "1940 Act") during such periods and therefore was not subject to certain
investment restrictions imposed by the 1940 Act and restrictions of Sub-Chapter
M of the Internal Revenue Code; (3) if the common trust fund had been registered
under the 1940 Act and subject to Sub-Chapter M of the Internal Revenue Code
during such periods, performance may have been adversely affected; and (4) the
common trust fund performance was adjusted for expenses of 1.16% (the percentage
of expenses estimated for The Golden Rainbow Fund in its original prospectus.)
During the period shown in the bar chart, the highest return for a quarter was
16.53% during the quarter ended March 31, 1986 and the lowest return for a
quarter was -9.03% during the quarter ended December 31, 1987.
The Golden Rainbow Fund's year-to-date return as of September 30, 1999 is -.10%.
6
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 1998
One Five Ten
Year Years Years
---- ----- -----
The Golden Rainbow Fund 8.05% 9.27% _____%
S&P 500 Index* 28.58% 24.06% _____%
Blended 25/25/50 Index** 11.49% 12.48% _____%
* The S&P 500 Index is a widely recognized, unmanaged index of common stock
prices.
** The Blended Index is comprised of a 25% weighting in the S&P 500 Index, a
25% weighting in the Russell 2000 Index (a widely recognized index of
market activity based on the aggregate performance of small to mid-sized
publicly traded common stocks) and a 50% weighting in the Lehman Brothers
Intermediate Government/Corporate Bond Index (an unmanaged index generally
representative of intermediate term bonds).
Each of The James Small Cap Fund, The James Large Cap Plus Fund and The
James Market Neutral Fund is not permitted to report performance information in
this section because it has not completed one full calendar year of operation.
EXPENSE INFORMATION
SHAREHOLDER FEES (fees paid directly from your investment):
<TABLE>
<CAPTION>
Class A Shares Class C Shares(a) Class R Shares(a)
-------------- ----------------- -----------------
<S> <C> <C> <C>
Maximum Sales Load
Imposed on Purchases 5.75% None None
Maximum Deferred Sales Load
Imposed on Purchases None(b) 1%(c) None
</TABLE>
ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets):
<TABLE>
<CAPTION>
DISTRIBUTION TOTAL FUND FEE WAIVER
MANAGEMENT (12B-1) OTHER OPERATING AND EXPENSE NET
FEE FEE EXPENSES EXPENSES REIMBURSEMENT EXPENSES
- --------------------------------------------------------------------------------------------------------------------
THE GOLDEN RAINBOW FUND
<S> <C> <C> <C> <C> <C> <C>
Class A Shares........................ .74%(d) .25% .20% 1.19%(d) .10%(d) 1.09%(d)
Class C Shares(a)..................... .74%(d) .85%(e) .75% 2.34%
Class R Shares(a)..................... .74%(d) .00% .75% 1.49%
THE JAMES SMALL CAP FUND
Class A Shares........................ 1.17% .25% .07% 1.49%
Class C Shares(a)..................... 1.17% .85%(e) .07% 2.09%
Class R Shares(a)..................... 1.17% .00% .07% 1.24%
THE JAMES LARGE CAP PLUS FUND(f)
Class A Shares........................ 1.22% .25% .03% 1.50%
Class C Shares(a)..................... 1.22% .85%(e) .03% 2.10%
Class R Shares(a)..................... 1.22% .00% .03% 1.25%
7
<PAGE>
THE JAMES MARKET NEUTRAL FUND
Class A Shares........................ 1.64% .25% .41% 2.30%
Class C Shares(a)..................... 1.64% .85%(e) .41% 2.90%
Class R Shares(a)..................... 1.64% .00% .41% 2.05%
</TABLE>
(a) As of the date of this Prospectus, these classes have not yet commenced
operations.
(b) Purchases at net asset value of amounts totaling $1 million or more may be
subject to a contingent deferred sales load of 1% if a redemption occurred
within 18 months of purchase and a commission was paid to a participating
unaffiliated dealer.
(c) This sales load applies if you redeem your shares within 1 year of
purchase.
(d) The Adviser has contractually agreed to waive a portion of its fee and/or
reimburse Fund expenses to the extent necessary to maintain Class A
expenses of The Golden Rainbow Fund at or below 1.09% of its average daily
net assets, through June 26, 2000.
(e) Of this amount, 0.75% is an asset based sales charge and 0.10% is a service
fee.
(f) The expenses of the James Large Cap Plus Fund are based on estimated
amounts for the current fiscal year. The management fee is equal to (i) an
annual rate of 1.25% of the Fund's average net assets, minus (ii) the fees
and expenses of the non-interested person Trustees incurred by the Fund.
Because Trustee fees and expenses are estimated to be .03%, the management
fee is estimated to be 1.22%.
EXAMPLE
This Example is intended to help you compare the cost of investing in the
Funds with the cost of investing in other mutual funds. It assumes that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Costs after 5 and 10 years are not provided for Class C and
Class R shares because the public offering of these classes has not yet
commenced as of the date of this prospectus. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
THE GOLDEN RAINBOW FUND
Class A Shares $680 $902 $1,141 $1,827
Class C Shares 337 730
Class R Shares 152 471
THE JAMES SMALL CAP FUND
Class A Shares $718 $1,019 $1,341 $2,252
Class C Shares 312 655
Class R Shares 126 393
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THE JAMES LARGE CAP PLUS FUND
Class A Shares $719 $1,022
Class C Shares 313 658
Class R Shares 127 397
THE JAMES MARKET NEUTRAL FUND
Class A Shares $795 $1,252 $1,734 $3,059
Class C Shares $357 791
Class R Shares $172 533
HISTORICAL PERFORMANCE OF THE ADVISER'S PRIVATE ACCOUNTS
SMALL CAP STRATEGY. James Investment Research, Inc. (the "Adviser") has
been managing small capitalization securities since its origin in 1972 and has
focused on this as a management style since July 1, 1996. The performance below
includes all accounts with investment objectives, policies and strategies
substantially similar to the Small Cap Fund. The data is provided to illustrate
past performance of the Adviser in managing such accounts, as compared to the
Russell 2000 Index.
Small Capitalization Russell 2000
Accounts1 Index2
-------------------- ------------
Year ended June 30, 1999 -5.72% 1.50%
Year ended June 30, 1998 20.83% 16.51%
Year ended June 30, 1997 23.07% 16.33%
Since inception July 1, 1996
through June 30, 1999 11.90%3 11.22%3
1 On July 1, 1996, the Adviser began managing this style with one account
totaling $200,000. As of June 30, 1999, the composite consisted of 14
accounts totaling approximately $12.3 million. The composite rate of return
is asset weighted, reflecting the relative size of each eligible account,
at the beginning of the relevant period. Performance figures reflected are
net of the estimated management fees of the Small Cap Fund (not the actual
management fees charged to the accounts) and all other expenses, including
transaction costs and commissions. Results include the reinvestment of
dividends and capital gains, but exclude the effect of applicable sales
loads. If the effect of sales loads had been included, returns would have
been lower. The performance was calculated by the Adviser using methods
which differ from the Securities and Exchange Commission's ("SEC") methods
of calculation.
2 The Russell 2000 Index is a widely recognized index of market activity
based on the aggregate performance of small to mid-sized publicly traded
common stocks. The Index reflects the total return of securities comprising
the Index, including changes in market prices as well as accrued investment
income, which is presumed to be reinvested. Performance figures for the
Index do not reflect deduction of transaction costs or expenses, including
management fees.
3 Annualized.
9
<PAGE>
The performance of the accounts managed by the Adviser does not represent
the historical performance of the Fund and should not be considered indicative
of future performance of the Fund. Results may differ because of, among other
things, differences in brokerage commissions, account expenses, including
management fees, the size of positions taken in relation to account size and
diversification of securities, timing of purchases and sales, and availability
of cash for new investments. In addition, the managed accounts are not subject
to certain investment limitations, diversification requirements, and other
restrictions imposed by the Investment Company Act of 1940 (the "1940 Act") and
the Internal Revenue Code which, if applicable, may have adversely affected the
performance results of the managed accounts composite. The results for different
periods may vary.
LARGE CAP PLUS STRATEGY. James Investment Research, Inc. (the "Adviser")
has been managing larger capitalization stocks since its inception in 1972, and
has done considerable modeling in this style. It began managing an account under
the Large Cap Plus style on June 30, 1998. The account has an investment
objective and investment policies and strategies substantially similar to the
Large Cap Plus Fund. The performance of the account is provided below to
illustrate past performance of the Adviser in managing the account, as compared
with the S&P 500 Index.
Large Cap Plus Account1 S&P 500 Index2
----------------------- --------------
Quarter ended 6/30/99 4.36% 7.05%
Quarter ended 3/31/99 19.78% 4.98%
Quarter ended 12/31/98 26.42% 21.30%
Since inception June 30, 1998
through June 30, 1999 43.55%3 22.76%3
1 On June 30, 1998, the account totaled $329,582. As of June 30, 1999, the
account totaled approximately $1.2 million. Performance figures are net of
the estimated management fees of the Large Cap Plus Fund (the account was
not charged a management fee) and all other expenses, including transaction
costs and commissions. Results include the reinvestment of dividends and
capital gains, but exclude the effect of applicable sales loads. If the
effect of sales loads had been included, returns would have been lower. The
performance was calculated by the Adviser using methods which differ from
the SEC's methods of calculation.
2 The S&P 500 Index is a widely recognized, unmanaged index of common stock
prices. The Index reflects the total return of securities comprising the
Index, including changes in market price as well as accrued income, which
is presumed to be reinvested. Performance figures for the Index do not
reflect deduction of transaction costs or expenses, including management
fees.
3 Annualized.
The performance of the account managed by the Adviser does not represent
the historical performance of the Fund and should not be considered indicative
of future performance of the Fund. Results may differ because of, among other
things, differences in brokerage commissions, account expenses, including
management fees, the size of positions taken in relation to account size and
diversification of securities, timing of purchases and sales, and availability
of cash for new investments. In addition, the managed account is not subject to
certain investment limitations or other restrictions imposed by the 1940 Act and
the Internal Revenue Code which, if applicable, may have adversely affected the
performance results of the managed account. The results for different periods
may vary.
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MARKET NEUTRAL STRATEGY. James Investment Research, Inc. (the "Adviser")
has been managing an account using its market neutral strategy since October 31,
1995. The account has an investment objective and investment policies and
strategies substantially similar to the Market Neutral Fund. The performance of
the account is provided below to illustrate past performance of the Adviser in
managing the account, as compared to 90-day U.S. Treasury Bill return, which the
Adviser considers to be an approximation of the risk-free rate of return.
Market
Neutral Account1 90-Day T-bills2
---------------- ---------------
Year ended June 30, 1999 -5.86% 4.88%
Year ended June 30, 1998 24.84% 5.29%
Year ended June 30, 1997 13.05% 5.43%
Since inception October 31, 1995
through June 30, 1999 7.83%3 ___%3
1 On October 31, 1995, the account totaled $500,000. As of June 30, 1999,
the composite consisted of 3 accounts totaling approximately $11.5 million.
Performance figures reflected are net of the estimated management fees of
the Market Neutral Fund (the account was not charged a management fee) and
all other expenses, including transaction costs and commissions. Results
include the reinvestment of dividends and capital gains, but exclude the
effect of applicable sales loads. If the effect of sales loads had been
included, returns would have been lower. The performance was calculated by
the Adviser using methods which differ from the SEC's methods of
calculation.
2 An investment in 90-day U.S. Treasury Bills is different from an
investment in the Fund or in the Account because Treasury Bills are backed
by the full faith and credit of the United States, have a fixed rate of
return and a short duration, and investors in Treasury Bills do not risk
losing capital. It has been standard for market neutral managers of private
accounts, including the Adviser, to use the 90-day Treasury Bill as a
benchmark. Traditional benchmarks for stock funds are not appropriate
because market neutral returns are not tied to the direction of the stock
market. Moreover, part of the return from a market neutral strategy is from
interest on the proceeds from short sales, which often approximates the
90-day Treasury Bill return. Unlike Treasury Bills, however, please keep in
mind that market neutral investing involves substantial risk. Stock prices
are more volatile and there is a risk of losing your capital.
3 Annualized.
The performance of the account managed by the Adviser does not represent
the historical performance of the Fund and should not be considered indicative
of future performance of the Fund. Results may differ because of, among other
things, differences in brokerage commissions, account expenses, including
management fees, the size of positions taken in relation to account size and
diversification of securities, timing of purchases and sales, and availability
of cash for new investments. In addition, the managed account is not subject to
certain investment limitations, diversification requirements, and other
restrictions imposed by the 1940 Act and the Internal Revenue Code which, if
applicable, may have adversely affected the performance results of the managed
account. The results for different periods may vary.
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MANAGEMENT OF THE FUNDS
The Golden Rainbow Fund, the Small Cap Fund and the Market Neutral Fund are
each a diversified, open-end mutual fund. The Large Cap Plus Fund is a
non-diversified, open-end mutual fund. Each Fund is a series of The James
Advantage Funds, an open-end management investment company organized as an Ohio
business trust. The Board of Trustees supervises the business activities of the
Funds. Like other mutual funds, the Funds retain various organizations to
perform specialized services.
INVESTMENT ADVISER. The Funds retain James Investment Research, Inc. (the
"Adviser"), P.O. Box 8, Alpha, Ohio 45301, to manage each Fund's investments. A
committee of the Adviser makes the investment decisions for the Funds, and is
primarily responsible for the day-to-day management of each Fund's portfolio.
The Adviser was established in 1972 and provides advice to institutional as well
as individual clients.
The Golden Rainbow Fund is authorized to pay the Adviser a fee equal to an
annual rate of 0.74% of its average daily net assets. The Adviser has
contractually agreed waive a portion of its advisory fee and/or reimburse Fund
expenses to the extent necessary to maintain Class A expenses at or below 1.09%
of the Fund's average daily net assets through June 26, 2000.
The Adviser is authorized to receive a fee (a) equal to an annual rate of
1.25% of the average daily net assets of the Small Cap Fund, 1.25% of the Large
Cap Plus Fund and 1.70% of the Market Neutral Fund, minus (b) the fees and
expenses of the non-interested person Trustees incurred by the applicable Fund.
The Adviser is responsible for the payment of all operating expenses of the
Small Cap Fund, the Large Cap Plus Fund and Market Neutral Fund, except for
brokerage fees and commissions, taxes, interest (including dividend expense on
securities sold short), 12b-1 expenses, fees and expenses of non-interested
person trustees and extraordinary expenses.
YEAR 2000 READINESS. Like other mutual funds, financial and business
organizations and individuals around the world, the Funds could be adversely
affected if the computer systems used by the Adviser or the Funds' various
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000. This is commonly known as the "Year
2000 Issue." The Adviser has taken steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to computer systems that
are used and to obtain reasonable assurances that comparable steps are being
taken by the Funds' major service providers. At this time, however, there can be
no assurance that these steps will be sufficient to avoid any adverse impact on
the Funds. In addition, the Adviser cannot make any assurances that the Year
2000 Issue will not affect the companies in which the Funds invest or worldwide
markets and economies.
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<PAGE>
HOW TO PURCHASE SHARES
Shares of each Fund are sold on a continuous basis, and you may invest any
amount you choose, as often as you wish, subject to a minimum initial investment
in the Fund of $2,000 ($500 for qualified plans and $1 million for Class R
shares). Shares of each Fund are offered continuously at a public offering price
that is equal to net asset value ("NAV") per share next determined after a
purchase order is received by the Fund plus any applicable sales load.
INITIAL PURCHASE
You may open an account and make an initial investment through securities
dealers having a sales agreement with CW Fund Distributors, Inc., the Funds'
distributor (the "Distributor"). You may also make a direct initial investment
by completing and signing the investment application form which accompanies this
Prospectus and mailing it, in proper form, together with a check made payable to
the appropriate Fund, to the P.O. Box listed below. If you prefer overnight
delivery, use the overnight address listed below.
U.S. MAIL: OVERNIGHT:
The James Advantage Funds The James Advantage Funds
P.O. Box 5354 312 Walnut Street, 21st floor
Cincinnati, Ohio 45201-5354 Cincinnati, Ohio 45202
The sales load, at the election of the purchaser, may be imposed (1) at the
time of purchase (Class A Shares) or (2) on a contingent deferred basis (Class C
shares). The Class R shares are designed for institutional investors and are
sold at NAV with no front-end sales load, no contingent deferred sales load and
no Rule 12b-1 fees. When placing purchase orders, investors should specify the
name of the Fund and whether the order is for Class A, Class C or Class R
shares. All purchase orders that fail to specify a class will automatically be
invested in Class A shares.
CLASS A SHARES
Class A shares of each Fund are purchased at the public offering price. The
public offering price is the next determined NAV per share plus a sales load as
shown in the table below. Class A shares are subject to a continuing .25% annual
distribution fee.
The following table illustrates the initial sales load breakpoints for the
purchase of shares of each Fund for accounts opened after October 31, 1999:
Sales Load as of % of:
Public Net Dealer Reallowance
Offering Amount as % of Public
Amount of Investment Price Invested Offering Price
================================================================================
Less than $50,000 5.75% 6.10% 5.25%
$50,000 but less than $100,000 4.00% 4.18% 3.50%
$100,000 but less than $250,000 3.50% 3.65% 3.00%
$250,000 but less than $500,000 2.50% 2.61% 2.00%
$500,000 but less than $1,000,000 2.00% 2.09% 1.50%
$1,000,000 or more None None None
================================================================================
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The following table illustrates the initial sales load breakpoints for the
purchase of shares The Golden Rainbow Fund, the James Small Cap Fund and the
James Market Neutral Fund before November 1, 1999:
Sales Load as of % of:
Public Net Dealer Reallowance
Offering Amount as % of Public
Amount of Investment Price Invested Offering Price
================================================================================
Less than $50,000 4.20% 4.38% 3.70%
$50,000 but less than $100,000 4.00% 4.18% 3.50%
$100,000 but less than $250,000 3.50% 3.65% 3.00%
$250,000 but less than $500,000 2.50% 2.61% 2.00%
$500,000 but less than $1,000,000 2.00% 2.09% 1.50%
$1,000,000 or more None None None
================================================================================
For initial purchases of Class A shares of the Funds of $1 million or more and
subsequent purchases further increasing the size of the account, a dealer's
commission of 1% of such purchases may be paid by the Distributor to
participating unaffiliated dealers through whom such purchases are effected. A
contingent deferred sales load is imposed upon redemptions of such Class A
shares if the dealer's commission described above was paid by the Distributor
and the shares are redeemed within 18 months from the date of purchase. The
contingent deferred sales load paid to the Distributor will be 1% of the NAV at
the time of purchase of the Class A shares being redeemed. If a purchase of
Class A shares is subject to the contingent deferred sales load, you will be so
notified on the confirmation you receive for such purchase. Redemptions of such
Class A shares of the Fund held for 18 months or more will not be subject to the
contingent deferred sales load.
CLASS C SHARES
Class C shares are offered at NAV, without an initial sales load, subject
to a maximum annual distribution fee of 1% (of which .75% is an asset based
sales charge and .25% is a service fee). The current authorized distribution fee
is .85%. Class C shares are subject to a contingent deferred sales load of 1% if
redeemed within 1 year of the purchase date.
CLASS R SHARES
Class R shares are no-load and are not subject to distribution fees or
service fees. Class R shares are available to those investing $1 million or
more. Dividends and capital gains distributions on Class R shares may be
reinvested as Class R shares.
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<PAGE>
ADDITIONAL PURCHASES
After an initial investment in a Fund, you may purchase additional shares
of the Fund at any time either through a securities dealer or by sending a check
payable to the applicable Fund to one of the addresses listed above. You may
also purchase shares of a Fund by bank wire. Please telephone the Trust's
transfer agent at 800-995-2637 for instructions. Your bank may impose a charge
for sending a wire. There is presently no fee for receipt of wired funds, but
the Trust's transfer agent reserves the right to charge shareholders for this
service upon 30 days' prior notice to shareholders.
Each additional purchase request must contain the name of the account and
the account number to permit proper crediting to the account. While there is no
minimum amount required for subsequent investments, the Trust reserves the right
to impose such a requirement. All additional purchases are made at NAV next
determined after receipt of a purchase order by the Trust, plus any applicable
sales load. If a broker-dealer received concessions for selling shares of a Fund
to a current shareholder, such broker-dealer will receive the concessions with
respect to additional investments by the shareholder.
GENERAL PURCHASE INFORMATION
Shares of a Fund may be purchased, in amounts less than the minimum
purchase amount, by officers, directors, trustees and employees of the Funds,
the Adviser, or the Distributor, and any such person's spouse, children, and
trustees or custodians of any qualified pension or profit sharing plan or IRA
established for the benefit of such person. Such persons should request
instructions on how to invest or redeem from the Distributor.
Under certain circumstances, the Distributor may change the reallowance to
dealers and may also compensate dealers out of its own assets. Dealers engaged
in the sale of shares of a Fund may be deemed to be underwriters under the
Securities Act of 1933. The Distributor retains the entire sales load on all
direct initial investments in the Fund and on all investments in accounts with
no designated dealer of record.
You may purchase Class A shares without a sales load at NAV if you are
within the following specified categories of investors: officers, service
providers and current and former trustees of the Trust; full-time and retired
employees of the Adviser and subsidiaries thereof, or their immediate family
members; persons who, for at least 90 days, have been an officer, director or
employee of any authorized dealer with a sales agreement, or their immediate
family members; officers and directors of banks, bank holding companies or other
financial institutions that make a Fund's shares available directly or through
subsidiaries or bank affiliates; bank or broker-affiliated trust departments;
and clients of investment advisers, financial planners or other financial
intermediaries. In addition, the Adviser and the Adviser's Pension and Profit
Sharing Plan may purchase shares at NAV.
If you are eligible to purchase either Class R shares or Class A shares at
NAV, you should be aware of the differences between these two classes of shares.
Class A shares are subject to an annual distribution fee to compensate the
Distributor for distribution costs associated with each Fund and to an annual
service fee to compensate authorized dealers for
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<PAGE>
providing you with ongoing account services. Class R shares are not subject to a
distribution or service fee and, consequently, holders of Class R shares may not
receive the same types or levels of services from authorized dealers. In
deciding between Class A shares and Class R shares, you should weigh the
benefits of the services to be provided by authorized dealers against the annual
service fee imposed upon the Class A shares.
Shares of each Fund are sold on a continuous basis at the public offering
price next determined after receipt of a purchase order by the Trust. Purchase
orders received by dealers prior to 4:00 p.m., Eastern time, on any business day
and transmitted to the Distributor by 5:00 p.m., Eastern time, that day are
confirmed at the public offering price determined as of the close of the regular
session of trading on the New York Stock Exchange on that day. It is the
responsibility of dealers to transmit properly completed orders so that they
will be received by the Distributor by 5:00 p.m., Eastern time. Dealers may
charge a fee for effecting purchase orders. Direct purchase orders received by
4:00 p.m., Eastern time, are confirmed at that day's public offering price.
Direct investments received after 4:00 p.m. and orders received from dealers
after 5:00 p.m. are confirmed at the public offering price next determined on
the following business day. Any change in price due to the failure of the Fund
to receive an order prior to the close of the Exchange must be settled between
the investor and the dealer placing the order.
RIGHT OF ACCUMULATION AND LETTER OF INTENT (CLASS A SHARES ONLY)
You may use the Right of Accumulation to combine the cost or current NAV
(whichever is higher) of your existing Class A shares of any Fund in The James
Advantage Funds with the amount of your current purchases in order to take
advantage of the reduced sales loads set forth in the table above. Purchases
made pursuant to a Letter of Intent may also be eligible for the reduced sales
loads. The minimum initial investment under a Letter of Intent is $10,000. You
should contact the Transfer Agent for information about the Right of
Accumulation and Letter of Intent.
AUTOMATIC INVESTMENT PLAN
The Funds offer current shareholders who receive a quarterly the
convenience of automatic monthly investing. On the 15th (or the business day
preceding the 15th if it falls on a weekend or holiday) and/or last business day
of each month, the amount you specify will be transferred from your bank to the
Fund. To initiate the automatic investment plan, complete the application form
and attach a voided check.
Each Fund pays the cost associated with these transfers, but reserves the
right, upon 90 days written notice, to make reasonable charges for this service.
Your bank may charge for debiting your account. Shareholders can change the
amount or discontinue their participation in the plan by written notice to the
Transfer Agent 30 days prior to the transfer date. Because a sales charge is
applied on new shares purchased, it would be disadvantageous to purchase shares
while also making withdrawals.
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<PAGE>
FREE REPURCHASE, SYSTEMATIC WITHDRAWAL, DIRECT DEPOSITS AND
EXCHANGE PRIVILEGE
FREE REPURCHASE
If you have redeemed shares, you may repurchase shares at NAV without
incurring the applicable sales charge. Such a purchase must be in an amount
between the stated minimum investment of such fund and the amount of the
proceeds of redemption within one year of the redemption. You may exercise this
feature only twice per calendar year. Exercising the reinvestment privilege will
not affect the character of any gain or loss realized on the redemption for
federal income tax purposes, except that if the redemptions resulted in a loss,
the reinvestment may result in the loss being disallowed under the "wash sale"
rules.
SYSTEMATIC WITHDRAWAL PLAN
If your account has a value greater than $10,000, you may establish a
Systematic Withdrawal Plan ("SWP") and receive monthly or quarterly checks for
$100 or more as you specify. To establish a SWP, all distributions must be in
the form of shares. Such payments are drawn from the proceeds of the redemption
shares held in your account. To the extent that SWP redemptions exceed dividend
income reinvested in the account, such redemptions will reduce, and may
ultimately exhaust, the number of shares in the account. Maintaining a SWP
concurrently with an investment program would be disadvantageous because of the
sales charges included in share purchases. You should not, therefore, have a SWP
in effect at the same time you are making recurring purchases of Fund shares.
You may withdraw from the program, change the payee or change the dollar amount
of each payment, by written instructions to the Transfer Agent. The Transfer
Agent may charge your account for services rendered and expenses incurred beyond
those normally assumed by the Fund with respect to the liquidation of shares. No
charge is currently assessed against the account, but could be instituted by the
Transfer Agent on 60 days' notice in writing to you. The Fund reserves the right
to amend or terminate the SWP on thirty days' notice.
DIRECT DEPOSITS
You can have dividends or SWP redemption proceeds deposited electronically
into a bank account. Under normal circumstances, direct deposits are credited to
the account on the second business day of the month following normal payment. In
order to utilize this option, your bank must be a member of Automated Clearing
House. In addition, you must (1) fill out the appropriate section of the
application attached to this Prospectus and (2) include with the completed
application a voided check from the bank account into which funds are to be
deposited. Once the Transfer Agent has received the application and the voided
check, your dividends and redemptions will be credited to the designated bank
account. You may terminate a direct deposit program at any time by written
notice to the Transfer Agent.
EXCHANGE PRIVILEGE
Shares in the James Money Market Account and shares of any of the James
Advantage Funds may be exchanged for each other. A sales load may be imposed (if
applicable) equal to the
17
<PAGE>
excess, if any, of the sales load rate applicable to the shares being acquired
over the sales load rate, if any, previously paid on the shares being exchanged.
The following are the funds of the James Advantage Funds currently offered to
the public.
JAMES ADVANTAGE FUNDS
The Golden Rainbow Fund
The James Small Cap Fund
The James Large Cap Plus Fund
The James Market Neutral Fund
You may request an exchange by sending a written request to the Transfer Agent.
The request must be signed exactly as your name appears on the Transfer Agent's
records. Exchanges also may be requested by telephone. If you are unable to
execute your exchange by telephone (for example during times of unusual market
activity) consider requesting your exchange by mail or by visiting the Transfer
Agent's offices at 312 Walnut Street, 21st Floor, Cincinnati, Ohio 45202. An
exchange will be effected at the next determined net asset value (or offering
price if a sales load is applicable) after receipt of request by the Transfer
Agent.
Exchanges may only be made for shares of Funds then offered for sale in
your state of residence and are subject to the applicable minimum initial
investment requirements. The exchange privilege may be modified or terminated by
the Board of Trustees upon 60 days' prior notice to shareholders. An exchange
results in a sale of Fund shares, which may cause you to recognize a capital
gain or loss. Before making an exchange, contact the Transfer Agent to obtain
more information about exchanges.
HOW TO REDEEM SHARES
You may redeem shares of a Fund on each day that the Trust is open for
business by sending a written request to the Transfer Agent. The request must
state the number of shares or the dollar amount to be redeemed and the account
number. The request must be signed exactly as your name appears on the Trust's
account records. Upon receipt by a Fund of a proper redemption request, the Fund
will redeem shares at their next determined NAV. Neither the Distributor nor the
Fund charges a fee or a commission for redemption, except that the Fund may
charge a fee for wiring redemption proceeds and Class C shares may be subject to
a contingent deferred sales load.
You may also redeem shares by placing a wire redemption request through a
securities broker or dealer. You will receive the NAV per share next determined
after the Transfer Agent receives the wire redemption request. It is the
responsibility of broker-dealers to properly transmit wire redemption orders.
The Funds' Custodian charges a $9 processing fee for wire redemptions,
which may be changed upon 30 days' written notice. All charges will be deducted
from your account by redemption of shares in the account. Your bank or brokerage
firm may also impose a charge for
18
<PAGE>
processing the wire. In the event that wire transfer of funds is impossible or
impractical, the redemption proceeds will be sent by mail to the designated
account.
Payment is normally made within 3 business days after receipt of a proper
redemption request, provided that payment in redemption of shares purchased by
check will be effected only after the check has cleared, which may take up to 15
calendar days from the purchase date. To eliminate this delay, you may purchase
shares of a Fund by certified check or wire.
Neither the Trust, the Transfer Agent, nor their respective affiliates will
be liable for complying with telephone instructions they reasonably believe to
be genuine or for any loss, damage, cost or expenses in acting on such telephone
instructions. You will bear the risk of any such loss. The privilege of
exchanging shares by telephone is automatically available to you. The Trust or
the Transfer Agent, or both, will employ reasonable procedures to determine that
telephone instructions are genuine. If the Trust and/or the Transfer Agent do
not employ such procedures, they may be liable for losses due to unauthorized or
fraudulent instructions. The procedures may include, among others, requiring
forms of personal identification prior to acting upon telephone instructions,
providing written confirmation of the transactions and/or tape recording
telephone instructions. At the discretion of the Trust or the Transfer Agent,
corporate investors and other associations may be required to furnish an
appropriate certification authorizing redemptions to ensure proper
authorization.
SIGNATURE GUARANTEE
The Transfer Agent will require a signature guarantee if the shares to be
redeemed have a value of $25,000 or more, if the address where the redemption is
to be mailed is other than your address of record or if the name(s) or address
or your account has been changed within 30 days. A signature guarantee may be
executed by any eligible guarantor. Eligible guarantors include member firms of
a domestic stock exchange, commercial banks, trust companies, savings
associations and credit unions as defined by the Federal Deposit Insurance Act.
You should verify with the institution that they are an eligible guarantor prior
to signing.
ADDITIONAL INFORMATION
Because the Funds incur certain fixed costs in maintaining shareholder
accounts, each Fund reserves 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 in the
Fund is less than $2,000 due to redemption, or such other minimum amount as the
Fund 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 a Fund to
the minimum amount within the 30 day period. Each share of each 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 shareholders of the Funds.
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<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Each Fund intends to distribute substantially all of its net investment
income as dividends to its shareholders on a quarterly basis, and intends to
distribute its net long-term capital gains and its net short-term capital gains
at least once a year.
Income dividends and capital gain distributions are automatically
reinvested in additional shares at the NAV per share on the distribution date.
You may elect to receive a cash payment of dividends and/or capital gain
distributions in the application to purchase shares or by separate written
notice to the Transfer Agent. You will receive a confirmation statement
reflecting the payment and reinvestment of dividends and summarizing all other
transactions. If cash payment is requested, a check normally will be mailed
within 5 business days after the payable date. If you withdraw your entire
account, all dividends accrued to the time of withdrawal, including the day of
withdrawal, will be paid at that time. 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
Each Fund intends to qualify each year as a "regulated investment company"
under the Internal Revenue Code of 1986, as amended. By so qualifying, a 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.
For federal income tax purposes, dividends paid by each Fund from ordinary
income are taxable to you as ordinary income, but may be eligible in part for
the dividends received deduction for corporations. Pursuant to the Tax Reform
Act of 1986 (the "Tax Reform Act"), all distributions of net short-term capital
gains to individuals are taxed at the same rate as ordinary income. All
distributions of net capital gains to corporations are taxed at regular
corporate rates. Any distributions designated as being made from net realized
long-term capital gains are taxable to shareholders as long-term capital gains
regardless of the holding period of the shareholder. Due to the nature of the
investment strategies used, the distributions of the Small Cap Fund, the Large
Cap Plus Fund and the Market Neutral Fund are generally expected to consist
primarily of net capital gains; however the nature of each Fund's distributions
could vary in any given year.
Each Fund will mail to each shareholder after the close of the calendar
year a statement setting forth the federal income tax status of distributions
made during the year. Dividends and capital gains distributions may also be
subject to state and local taxes. You are urged to consult your own tax adviser
regarding specific questions as to federal, state or local taxes and the tax
effect of distributions and withdrawals from the Fund.
On the application or other appropriate form, the Funds will request your
certified taxpayer identification number (social security number for
individuals) and a certification that you are not subject to backup withholding.
Unless you provide this information, the Fund will be required to withhold and
remit to the U.S. Treasury 31% of the dividends, distributions and redemption
proceeds payable to you. You should be aware that, under regulations promulgated
by the Internal
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<PAGE>
Revenue Service, a Fund may be fined $50 annually for each account for which a
certified taxpayer identification number is not provided. In the event that such
a fine is imposed with respect to a specific account in any year, the applicable
Fund may make a corresponding charge against the account.
DISTRIBUTION PLANS
Each Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act for
Class A and Class C shares (collectively, the "Plans") which permits the Fund to
pay for certain distribution and promotion expenses related to marketing its
shares. Such expenses may include certain fees to broker-dealers of record for
shareholders of the Fund, but such fees shall not, when aggregated with other
expenses reimbursed to the Distributor in accordance with the Plan, exceed the
maximum 12b-1 fee set forth in this Prospectus. Each Plan authorizes the Fund to
expend its monies in an amount equal to the aggregate for all such expenditures
to such percentage of the Fund's daily NAV as may be determined from time to
time by vote cast in person at a meeting called for such purpose, by a majority
of the Fund's disinterested Trustees. The scope of the foregoing shall be
interpreted by the Trustees, which decision shall be conclusive except to the
extent it contravenes established legal authority. Without in any way limiting
the discretion of the Trustees, the following activities are hereby declared to
be primarily intended to result in the sale of shares of the applicable Fund:
o advertising the Fund or the Adviser's mutual fund activities;
o compensating underwriters, dealers, brokers, banks and other selling
entities and sales and marketing personnel of any of them for sales of
shares of the Fund, whether in a lump sum or on a continuous, periodic,
contingent, deferred or other basis;
o compensating underwriters, dealers, brokers, banks and other servicing
entities (including the Adviser) and servicing personnel of any of them for
providing services to shareholders of the Fund relating to their investment
in the Fund, including assistance in connection with inquiries relating to
shareholder accounts;
o the production and dissemination of prospectuses and statements of
additional information of the Fund and the preparation, production and
dissemination of sales, marketing and shareholder servicing materials;
o ordinary or capital expense, such as equipment, rent, fixtures, salaries,
bonuses, reporting and recordkeeping and third party consultancy or similar
expenses relating to any activity for which payment is authorized by the
Trustees; and
o the financing of any activity for which payment is authorized by the
Trustees.
Pursuant to the Plan, each Fund, through authorized officers, may make similar
payments for marketing services and shareholder services to non-broker-dealers
who enter into service agreements with the Fund.
The maximum amount payable by a Fund under the Plan and related agreements
on an annual basis for Class A shares is .40% of average daily net assets for
the year. In the case of broker-dealers and others, such as banks, who have
selling or service agreements with the Distributor or a Fund, the maximum amount
payable to any recipient is .20%, on an annualized basis, of the portion of
daily net assets represented by such person's customers. The maximum
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<PAGE>
amount payable for Class C shares is 1.00% of its average daily net assets for
the year (of which .75% is an asset-based sales charge and .25% is a service
fee). The Board of Trustees have currently authorized a .75% asset-based sales
charge and a .10% service fee for Class C shares. The Board of Trustees may
reduce these amounts at any time. Expenditures pursuant to the Plan and related
agreements may reduce current yield after expenses. Because these fees are paid
out of the Funds' 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 loads.
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE
The NAV per share of a Fund is calculated by dividing the total value of
the Fund's investments and other assets (including cash and accrued income),
less any liabilities (including estimated accrued expenses), by the number of
shares outstanding, rounded to the nearest cent. The public offering price (NAV
plus applicable sales load) of Class A shares and the share price of Class C and
Class R shares is determined as of the close of the New York Stock Exchange
(4:00 p.m., Eastern time) on each day that the exchange is open for business
(except for Ohio bank holidays), and on any other day on which there is
sufficient trading in a Fund's securities to materially affect the NAV.
Generally, the New York Stock Exchange is closed and the share price of each
Fund is not calculated on Saturdays, Sundays and the following holidays: New
Year's Day, President's Day, Martin Luther King, Jr. Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving and Christmas. The NAV per share
of each Fund will fluctuate.
Securities 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, and when the Adviser determines that the last bid price does
not accurately reflect the current value or when restricted securities are being
valued, such securities are valued at their fair value as determined in good
faith in accordance with consistently applied procedures established by and
under the general supervision of the Board of Trustees.
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
market quotations are not readily available. 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 their fair value as determined in good faith in accordance with consistently
applied procedures established by and under the general supervision 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.
22
<PAGE>
FINANCIAL HIGHLIGHTS
On June 26, 1998, The Golden Rainbow Fund acquired the assets and
liabilities of The Golden Rainbow A James Advised Mutual Fund (the "Predecessor
Fund") in a tax free reorganization. As a result of this reorganization, The
Golden Rainbow Fund assumed the financial history of the Predecessor Fund. The
Golden Rainbow Fund had no operating history prior to the reorganization.
The financial highlights tables are intended to help you understand The
Golden Rainbow Fund's financial performance for the past 5 years and the Small
Cap Fund's and the Market Neutral Fund's performance since their inception.
Certain information reflects financial results for a single Fund share. The
total returns in the table represent the rate that you would have earned on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information was audited by Deloitte & Touche LLP, whose
report, along with the Funds' financial statements, are included in the annual
report, which is available upon request.
Information is not provided for the Large Cap Plus Fund because the public
offering of the shares of the Fund has not yet commenced as of the date of this
Prospectus.
<TABLE>
<CAPTION>
THE GOLDEN RAINBOW FUND
FINANCIAL HIGHLIGHTS
==================================================================================================================================
Per Share Data for a Share Outstanding Throughout Each Year
- ----------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of year ............... $ 18.96 $ 19.31 $ 17.56 $ 18.27 $ 16.67
---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income ........................... 0.49 0.65 0.66 0.73 0.69
Net realized and unrealized gains on investments 0.91 1.08 2.16 0.61 1.94
---------- ---------- ---------- ---------- ----------
Total from investment operations ................... 1.40 1.73 2.82 1.34 2.63
---------- ---------- ---------- ---------- ----------
Less distributions:
From net investment income ...................... (0.49) (0.65) (0.68) (0.74) (0.68)
From net realized gains on investments .......... (2.59) (1.43) (0.39) (1.31) (0.35)
---------- ---------- ---------- ---------- ----------
Total distributions ................................ (3.08) (2.08) (1.07) (2.05) (1.03)
---------- ---------- ---------- ---------- ----------
Net asset value at end of year ..................... $ 17.28 $ 18.96 $ 19.31 $ 17.56 $ 18.27
========== ========== ========== ========== ==========
Total return(A) .................................... 7.97% 9.47% 16.55% 7.76% 16.54%
========== ========== ========== ========== ==========
Net assets at end of year (000's) .................. $ 107,802 $ 132,094 $ 157,183 $ 184,307 $ 191,473
========== ========== ========== ========== ==========
Ratios/Supplemental Data:
Ratio of net expenses to average net assets(B) ..... 1.00% 1.08% 1.09% 1.06% 1.04%
Ratio of net investment income to average net assets 2.71% 3.29% 3.63% 4.01% 4.05%
Portfolio turnover rate ............................ 38% 54% 56% 83% 48%
</TABLE>
(A) Total returns exclude the effect of applicable sales loads.
(B) Absent fee waivers and/or expense reimbursements, the ratios of expenses to
average net assets would have been 1.19%, 1.23%, 1.24%, 1.26% and 1.27% for
the years ended June 30, 1999, 1998, 1997, 1996 and 1995, respectively.
<PAGE>
THE JAMES SMALL CAP FUND
FINANCIAL HIGHLIGHTS
================================================================================
Per Share Data for a Share Outstanding Throughout the Period
- --------------------------------------------------------------------------------
Period Ended
June 30,
1999(A)
- --------------------------------------------------------------------------------
Net asset value at beginning of period ...................... $ 10.00
----------
Income (loss) from investment operations:
Net investment loss ...................................... (0.00)
Net realized and unrealized gains on investments ......... 1.87
----------
Total from investment operations ............................ 1.87
----------
Less distributions:
Return of capital ........................................ (0.00)
----------
Net asset value at end of period ............................ $ 11.87
==========
Total return(B) ............................................. 18.74%
==========
Net assets at end of period (000's) ......................... $ 6,564
==========
Ratios/Supplemental Data:
Ratio of net expenses to average net assets ................. 1.49%(C)
Ratio of net investment loss to average net assets .......... (0.11%)(C)
Portfolio turnover rate ..................................... 42%(C)
(A) Represents the period from the initial public offering of shares (October
2, 1998) through June 30, 1999.
(B) Total return excludes the effect of applicable sales loads and is not
annualized.
(C) Annualized.
<PAGE>
THE JAMES MARKET NEUTRAL FUND
FINANCIAL HIGHLIGHTS
================================================================================
Per Share Data for a Share Outstanding Throughout the Period
- --------------------------------------------------------------------------------
Period Ended
June 30,
1999(A)
- --------------------------------------------------------------------------------
Net asset value at beginning of period ...................... $ 10.00
----------
Income (loss) from investment operations:
Net investment income .................................... 0.13
Net realized and unrealized losses on investments ........ (0.70)
----------
Total from investment operations ............................ (0.57)
----------
Less distributions:
From net investment income ............................... (0.13)
----------
Net asset value at end of period ............................ $ 9.30
==========
Total return(B) ............................................. (5.74)%
==========
Net assets at end of period (000's) ......................... $ 8,284
==========
Ratios/Supplemental Data:
Ratio of net expenses to average net assets,
excluding dividends on securities sold short ............. 1.94%(C)
Expenses from dividends on securities sold short ............ 0.36%(C)
Ratio of net expenses to average net assets ................. 2.30%(C)
Ratio of net investment income to average net assets ........ 2.31%(C)
Portfolio turnover rate ..................................... 54%(C)
(A) Represents the period from the initial public offering of shares (October
2, 1998) through June 30, 1999.
(B) Total return excludes the effect of applicable sales loads and is not
annualized.
(C) Annualized.
<PAGE>
Additional information about the Funds are included in the Statement of
Additional Information ("SAI"), which is hereby incorporated by reference in its
entirety. Additional information about the Funds' investments is available in
the Funds' annual and semiannual reports to shareholders. In the Funds' annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Funds' performance during the last
fiscal year.
To obtain a free copy of the SAI, the annual and semiannual reports or
other information about the Funds, or to make inquires about the Funds, please
call 1-800-99 JAMES (1-800-995-2637).
Information about the Funds, including the SAI, can be reviewed and copied
at the Securities and Exchange Commission's public reference room in Washington,
D.C. Information on the operation of the public reference room may be obtained
by calling the Commission at 1-800-SEC-0330. Reports and other information about
the Funds are available on the Commission's Internet site at http:/www.sec.gov.
Copies of information on the Commission's Internet site may be obtained upon
payment of a duplicating fee, by writing the Public Reference Section of the
Commission, Washington, D.C. 20549-6009.
File No. 811-8411
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE GOLDEN RAINBOW FUND
November 1, 1999
A Series of
The James Advantage Funds
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202
1-800-995-2637
TABLE OF CONTENTS
DESCRIPTION OF THE TRUST...................................................... 1
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS................................ 1
INVESTMENT LIMITATIONS........................................................13
TRUSTEES AND OFFICERS.........................................................16
INVESTMENT ADVISER............................................................17
TRANSFER AGENT AND DISTRIBUTOR................................................18
OTHER SERVICES................................................................19
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................19
SHARES OF THE FUND............................................................20
DETERMINATION OF SHARE PRICE..................................................22
ADDITIONAL TAX INFORMATION....................................................23
DISTRIBUTION PLANS............................................................23
PERFORMANCE INFORMATION.......................................................24
FINANCIAL STATEMENTS..........................................................26
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the Prospectus of the Golden Rainbow Fund dated
November 1, 1999. A Prospectus can be obtained by writing the Transfer Agent at
312 Walnut Street, Cincinnati, Ohio 45202, or by calling 888-99 JAMES
(888-995-2637).
<PAGE>
DESCRIPTION OF THE TRUST
The Golden Rainbow Fund (the "Fund") was organized as a series of The James
Advantage 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 August 29, 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.
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.
Upon 60 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. For
other information concerning the purchase and redemption of shares of the Fund,
see "How to Purchase Shares" and "How to Redeem Shares" in the Fund's
Prospectus. For a description of the methods used to determine the share price
and value of the Fund's assets, see "Calculation of Share Price and Public
Offering Price" in the Fund's Prospectus.
DEFINITIONS, POLICIES 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, as described in the
Prospectus.
- 1 -
<PAGE>
A. Equity Securities.
The Fund may invest in common stock, in addition to which, the Fund may
invest in 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 preferred
stock rated A or higher by Standard & Poor's Corporation ("S&P") or by Moody's
Investors Services, Inc. ("Moody's").
B. U.S. Government Obligations.
The Fund may invest in U.S. government obligations. These securities may be
backed by the credit of the government as a whole or only by the issuing agency.
U.S. Treasury bonds, notes, and bills and some agency securities, such as those
issued by the Federal Housing Administration and the Government National
Mortgage Association (GNMA), are backed by the full faith and credit of the U.S.
government as to payment of principal and interest and are the highest quality
government securities. Other securities issued by U.S. government agencies or
instrumentalities, such as securities issued by the Federal Home Loan Banks and
the Federal Home Loan Mortgage Corporation, are supported only by the credit of
the agency that issued them, and not by the U.S. government. Securities issued
by the Federal Farm Credit System, the Federal Land Banks, and the Federal
National Mortgage Association (FNMA) are supported by the agency's right to
borrow money from the U.S. Treasury under certain circumstances, but are not
backed by the full faith and credit of the U.S. government.
C. Repurchase Agreements.
The Fund may invest in repurchase agreements fully collateralized by U.S.
Government obligations. A repurchase agreement is a short-term investment in
which the purchaser (i.e., the Fund) acquires ownership of a U.S. Government
obligation (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 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 with which the Fund engages in repurchase
transactions.
- 2 -
<PAGE>
D. Illiquid Securities.
The Fund may normally invest up to 5% of its assets (valued at the purchase
date) in 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. 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 the 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.
E. Loans of Securities.
The Fund may make short and long term loans of its portfolio securities in
order to realize additional income. Under the lending policy authorized by the
Board of Trustees and implemented by the Adviser in responses to requests of
broker-dealers or institutional investors which the Adviser deems qualified, the
borrower must agree to maintain collateral, in the form of cash or U.S.
government obligations, with the Fund on a daily market-to-market basis in an
amount at least equal to the value of the loaned securities. The Fund will
continue to receive dividends or interest on the loaned securities and may
terminate such loans at any time or reacquire such securities in time to vote on
any matter which the Adviser determines to be important. With respect to loans
of securities, there is the risk that the borrower may fail to return the loaned
securities or that the borrower may not be able to provide additional
collateral.
F. Borrowing and Leverage; Reverse Repurchase Agreements.
The Fund may borrow from banks, from time to time on a temporary basis, up
to 5% of its net assets, and the Fund may pledge assets in connection with such
borrowings. The Fund also may engage in reverse repurchase agreements in which
the Fund sells a security to another party, such as a bank, broker-dealer or
other financial institution, and simultaneously agrees to buy it back later at a
higher price. While a reverse repurchase agreement is outstanding, the Fund
generally will direct its custodian to segregate cash and appropriate liquid
assets to cover its obligations under the agreement. The Fund will enter into
reverse repurchase agreements only with parties whose creditworthiness has been
reviewed and deemed satisfactory by the Adviser. The Fund aggregates reverse
repurchase agreements with its bank borrowings for purposes of limiting
borrowings to 5% of its net assets.
If the Fund makes additional investments while borrowings are outstanding,
this may be construed as a form of leverage. The Fund's objective would be to
pursue investment opportunities with returns that exceed the cost of the
borrowings. This leverage may exaggerate changes in the Fund's share value and
the gains and losses on the Fund's investment. Leverage also creates interest
expenses that may exceed the return on investments made with the borrowings.
- 3 -
<PAGE>
G. Foreign Securities
The Fund may invest, without limitation, in foreign securities. Foreign
fixed income securities include corporate debt obligations issued by foreign
companies and debt obligations of foreign governments or international
organizations. This category may include floating rate obligations, variable
rate obligations, Yankee dollar obligations (U.S. dollar denominated obligations
issued by foreign companies and traded on U.S. markets) and Eurodollar
obligations (U.S. dollar denominated obligations issued by foreign companies and
American depository receipts ("ADR's"). ADRs are certificates of ownership
issued by a U.S. bank as a convenience to investors in lieu of the underlying
shares which its holds in custody.
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 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.
H. When Issued Securities and Forward Commitments.
The Fund may buy and sell securities on a when-issued or delayed delivery
basis, with payment and delivery taking place at a future date. The price and
interest rate that will be received on the securities are each fixed at the time
the buyer enters into the commitment. The Fund may enter into such forward
commitments if it holds, and maintains until the settlement date in a separate
account at the Fund's Custodian, cash or U.S. government securities in an amount
sufficient to meet the purchase price. Forward commitments involve a risk of
loss if the value of the security to be purchased declines prior to the
settlement date. Any change in value could increase fluctuations in the Fund's
share price and yield. Although the Fund will generally enter into forward
commitments with the intention of acquiring securities for its portfolio, the
Fund may dispose of a commitment prior to the settlement if the Adviser deems it
appropriate to do so.
I. Portfolio Turnover
The Fund does not intend to purchase or sell securities for short term
trading purposes. The Fund may, however, sell any portfolio security (without
regard to the length of time it has been held) when the Adviser believes that
market conditions, creditworthiness factors or general economic conditions
warrant such action. The Fund's portfolio turnover rate is not expected to
exceed 100%.
- 4 -
<PAGE>
J. Hedging Transactions.
The Fund may utilize various other investment strategies as described below
to hedge various market risks (such as interest rates, currency exchange rates,
and broad or specific equity market movements), or to manage the effective
maturity or duration of fixed-income securities. Such strategies are generally
accepted by modern portfolio managers and are regularly utilized by many mutual
funds and other institutional investors. Techniques and instruments may change
over time as new instruments and strategies are developed or regulatory changes
occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell exchange-listed and over-the-counter put and call options on
securities, equity and fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currencies or currency
futures (collectively, all the above are called "Hedging Transactions"). Hedging
Transactions may be used to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect the Fund's unrealized gains in the value of its portfolio securities, to
facilitate the sale of such securities for investment purposes, to manage the
effective maturity or duration of the Fund's portfolio, or to establish a
position in the derivatives markets as a temporary substitute for purchasing or
selling particular securities. No more than 5% of the Fund's assets will be
committed to Hedging Transactions entered into for non-hedging purposes. Any or
all of these investment techniques may be used at any time and there is no
particular strategy that dictates the use of one technique rather than another,
as use of any Hedging Transaction is a function of numerous variables including
market conditions. The ability of the Fund to utilize these Hedging Transactions
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments. Hedging Transactions involving financial futures and options
thereon will be purchased, sold or entered into only for bona fide hedging, risk
management or portfolio management purposes and not for speculative purposes.
- 5 -
<PAGE>
Hedging Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Hedging Transactions would result in losses greater than if they
had not been used. Use of put and call options may result in losses to the Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, limit the amount the appreciation of the
Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Hedging Transactions would reduce net
asset value, and possibly income, and such losses can be greater than if the
Hedging Transactions had not been utilized.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging Transactions involving options
require segregation of Fund assets in special accounts, as described below under
"Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For example, the Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
the Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. The Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect the
Fund against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
such instrument. The Fund is authorized to purchase and sell exchange-listed
options and over-the-counter options ("OTC options"). Exchange-listed options
are issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties to
such options.
- 6 -
<PAGE>
With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange-listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days. The
Fund expects generally to enter into OTC options that have cash settlement
provisions, although it is not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. While this type of arrangement allows the Fund greater flexibility to
tailor an option to its need, OTC options generally involve greater credit risk
than exchange-traded options, which are guaranteed by the clearing organization
of the exchanges where they are traded. The risk of illiquidity also is greater
with OTC options, since these options generally can be closed out only by
negotiation with the other party to the option.
- 7 -
<PAGE>
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by the Fund must be "covered" (i.e., the Fund must own
the securities or futures contract subject to the call) or must meet the asset
segregation requirements described below as long as the call is outstanding.
Even though the Fund will receive the option premium to help protect it against
loss, a call sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying security or instrument and may require the Fund to hold a security or
instrument which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio) and
on securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the fund may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES
The Fund may enter into financial futures contracts, or purchase or sell
put and call options on such futures, as a hedge against anticipated interest
rate, currency or equity market changes, for duration management, and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by the
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract and
obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining
- 8 -
<PAGE>
a futures contract or selling an option thereon requires the Fund to deposit
with a financial intermediary as security for its obligations an amount of cash
or other specified assets (initial margin) which initially is typically 1% to
10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark-to-market value of the
contract fluctuates. The purchase of an option on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract, it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction, but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur. The segregation requirements with respect to futures contracts and
options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Fund also may purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss of an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with Counterparties in order
to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value. Currency transactions include forward
currency contracts, exchange-listed currency futures, exchange-listed and OTC
options on currencies, and currency swaps. A forward currency contract involves
a privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, at a price set at the time of
the contract. A currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and operates similarly to
an interest rate swap, which is described below. The Fund may enter into
currency transactions with Counterparties which have received (or the guarantors
of the obligations of such Counterparties have received) a credit rating of A-1
or P-1 by S&P or Moody's, respectively, or that have an equivalent rating from
an NRSRO or (except for OTC currency options) are determined to be of equivalent
credit quality by the Adviser.
- 9 -
<PAGE>
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currency convertible into such currently
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering to a forward contract to sell a currency whose changes
in value are generally considered to be linked to a currency or currencies in
which some or all of the Fund's portfolio securities are or are expected to be
denominated, and to buy U.S. dollars. The amount of the contract would not
exceed the value of the Fund's securities denominated in linked currencies. For
example, if the Adviser considers the Austrian schilling linked to the German
deutschemark (the "D-mark"), the Fund holds securities denominated in schillings
and the Adviser believes that the value of schillings will decline against the
U.S. dollar, the Adviser may enter into a contract to sell D-marks and buy
dollars. Currency hedging involves some of the same risks and considerations as
other transactions with similar instruments. Further, there is the risk that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
If the Fund enters into a currency hedging transaction, the Fund will comply
with the asset segregation requirements described below.
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risk that
apply to
- 10 -
<PAGE>
the use of futures generally. Further, settlement of a currency futures contract
for the purchase of most currencies must occur at a bank based in the issuing
nation. Trading options on currency futures is relatively new, and the ability
to establish and close out positions on such options is subject to the
maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and any combination of futures, options
and currency transactions ("component" transactions), instead of a single
Hedging Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its competent transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the Hedging Transactions into which the Fund may enter are interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, for example, an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch
- 11 -
<PAGE>
as these swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least "A" by S&P or Moody's or has an
equivalent rating from an NRSRO or is determined to be of equivalent credit
quality by the Adviser. If there is a default by the Counterparty, the Fund may
have contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors, and collars are more recent innovations
for which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
EURODOLLAR INSTRUMENTS
The Fund may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many Hedging Transactions, in addition to other requirements, require that
the Fund segregate liquid high-grade assets with its Custodian to the extent
Fund obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restriction, an amount of cash or
liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the Custodian. The segregated
- 12 -
<PAGE>
assets cannot be sold or transferred unless equivalent assets are substituted in
their place or it is no longer necessary to segregate them. For example, a call
option written by the Fund will require the Fund to hold the securities subject
to the call (or securities convertible into the needed securities without
additional consideration) or to segregate liquid high-grade securities
sufficient to purchase and deliver the securities if the call is exercised. A
call option sold by the Fund on an index will require the Fund to own portfolio
securities which correlate with the index or to segregate liquid high grade
assets equal to the excess of the index value over the exercise price on a
current basis. A put option written by the Fund requires the Fund to segregate
liquid, high-grade assets equal to the exercise price.
Except when the Fund enters into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract that obligates the Fund to buy or sell currency
will generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high-grade assets equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC-issued and exchange-listed
index options will generally provide for cash settlement. As a result, when the
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a noncash settled put, the same as an
OCC-guaranteed listed option sold by the Fund, or the in-the-money amount plus
any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC-issued and exchange-listed options sold by the Fund other than
those above generally settle with physical delivery, or with an election of
either physical delivery or cash settlement, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index-based futures contract. Such assets may consist of cash, cash equivalents,
liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlement with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
- 13 -
<PAGE>
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Hedging
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Hedging Transactions may also be offset in combinations. If
the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
INVESTMENT LIMITATIONS
FUNDAMENTAL. The investment limitations described below have been adopted
by the Trust with respect to the Fund and are fundamental ("Fundamental"), that
is, 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 that 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 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.
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.
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<PAGE>
4. REAL ESTATE. The Fund will not purchase or sell real estate. This
limitation is not applicable to investments in marketable securities that 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 except as
described in the Prospectus and Statement of Additional Information. This
limitation does not preclude the Fund from acquiring commodities as a result of
ownership of securities or other investments; from entering into options,
futures, currency, swap, cap, floor, collar or similar transactions; from
investing in securities or other instruments backed by commodities; or from
investing in companies that 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.
8. DIVERSIFICATION. The Fund will comply with the standards for
diversification as required by the then-current Investment Company Act of 1940,
as amended, the rules and regulations promulgated thereunder and interpretations
of the Securities and Exchange Commission or its staff.
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.
With respect to the Fund's diversification, the current standards require
that the Fund may not purchase the securities of any one issuer, other than the
U.S. government or any of its instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in such
issuer, or the Fund would own more than 10% of the outstanding voting securities
of such issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to such 5% and 10% limitations.
NON-FUNDAMENTAL. The following limitations have been adopted by the Trust
with respect to the Fund and are Non-Fundamental (see "Investment Limitations"
above).
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<PAGE>
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% 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. SHORT SALES. The Fund will not effect short sales of securities.
6. ILLIQUID SECURITIES. The Fund will not invest more than 5% of its assets
in securities that are restricted as to resale or otherwise illiquid. For this
purpose, illiquid securities generally include securities that cannot be
disposed of within seven days in the ordinary course of business without taking
a reduced price.
TRUSTEES AND OFFICERS
The Board of Trustees has overall responsibility for management of the Fund
under the laws of Ohio governing the responsibilities of trustees of business
trusts. Following are the Trustees and executive officers of the Trust, their
present occupation with the Trust or Fund, age, principal occupation during the
past 5 years and their aggregate compensation from the Trust for the fiscal year
ended June 30, 1999.
<TABLE>
<CAPTION>
Name, Age, Position Principal Occupation Compensation From
And Address During Past 5 Years The Trust
- ----------- ------------------- ---------
<S> <C> <C>
Barry R. James, CFA * (42) Executive Vice President, James $0
President and Trustee of the Trust Investment Research, Inc. (1985 to
P.O. Box 8 Present).
Alpha, Ohio 45301
Thomas L. Mangan (49) Vice president, James Investment $0
Vice President, Treasurer and Research, Inc. (1994 to Present).
Secretary of the Trust;
P.O. Box 8
Alpha, Ohio 45301
- 16 -
<PAGE>
Anthony P. D'Angelo, Ph.D. (68) Professor, Graduate School of Logistics $4,000
Trustee and Acquisition Management, Air Force
Dept. of the Air Force, Building 641 Institute of Technology,
2950 P Street Wright-Patterson AFB, Ohio (1983 to
Wright-Patterson AFB Ohio 45433 present).
Hazel L. Eichelberger (61) Retired Sr. Vice President, Citizens $4,000
Trustee Federal Bank, Dayton, Ohio (1955 to
9438 Atchison Road 1997).
Dayton, Ohio 45458
James F. Zid (64) Retired Partner, Ernst & Young, LLP, $4,000
Trustee Columbus, Ohio (1968 to 1993).
1083 N. Collier Blvd.
Marco Island, Florida 34145
</TABLE>
* Indicates that Trustee is an Interested Person for purposes of the Investment
Company Act of 1940.
PRINCIPAL HOLDERS OF VOTING SECURITIES. As of October 15, 1999, the officers and
Trustees of the Fund as a group owned less than 1% of the then-outstanding
shares of the Fund.
As of October 15, 1999 The Fifth Third Bank, P.O. Box 630074, Cincinnati,
Ohio 45263, owned of record 13.88% of the shares of the Fund.
THE INVESTMENT ADVISER
James Investment Research, Inc., P.O. Box 8, Alpha, Ohio 45301 (the
"Adviser") supervises the Fund's investments pursuant to a Management Agreement
(the "Management Agreement") subject to the approval of the Board of Trustees.
Francis E. James is the controlling shareholder of the Adviser. The Advisory
Agreement is effective for an initial two-year term until 2000 and will be
renewed thereafter for one year periods only so long as such renewal and
continuance is specifically approved at least annually by the Board of Trustees
or by vote of a majority of the Fund's outstanding voting securities, provided
the continuance is also approved by a majority of the Trustees who are not
"interested persons" of the Trust or the Adviser by vote cast in person at a
meeting called for the purpose of voting on such approval. The Management
Agreement is terminable without penalty on sixty days notice by the Board of
Trustees of the Trust or by the Adviser. The Management Agreement provides that
it will terminate automatically in the event of its assignment.
- 17 -
<PAGE>
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
0.74% of the average daily net assets of the Fund. The Adviser has contractually
agreed to waive a portion of its fee and/or reimburse Fund expenses to the
extent necessary to maintain Class A expenses of the Fund at or below 1.09% of
average daily net assets through June 26, 2000. For the fiscal year ended June
30, 1999, the Fund paid the adviser advisory fees of $892,188, for the period
June 26, 1998 (commencement of operations for the Fund) to June 30, 1998, the
Fund paid the adivser advisory fees of $10,681. In order to reduce operating
expenses of the Fund, the Adviser waived $108,490 of its fees, so that through
June 30, 1999 the fee after waiver was 0.65% of the Fund's average daily net
assets.
The Fund is responsible for the payment of all operating expenses of the
Fund, including brokerage fees and commissions; taxes or governmental fees;
interest fees and expenses of the non-interested person trustees; clerical and
shareholder service staff salaries; office space and other office expenses; fees
and expenses incurred by the Fund in connection with membership in investment
company organizations; legal, auditing and accounting expenses; expenses of
registering shares under federal and state securities laws; insurance expenses;
fees and expenses of the custodian, transfer agent, dividend disbursing agent,
shareholder service agent, administrator, accounting and pricing services agent
and underwriter of the Fund; expenses, including clerical expenses, of issue,
sale, redemption or repurchase of shares of the Fund; the cost of preparing and
distributing reports and notices to shareholders, the cost of printing or
preparing prospectuses and statements of additional information for delivery to
the Fund's shareholders; the cost of printing or preparing statements, reports
or other documents to shareholders; expenses of shareholders' meetings and proxy
solicitations; and such extraordinary or non-recurring expenses as may arise,
including litigation to which the Fund may be a party and indemnification of the
Trust's trustees and officers with respect thereto.
The Adviser retains the right to use the names "Golden Rainbow", "James
Advantage" or any variation thereof 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 "Golden Rainbow," and "James
Advantage" or any variation thereof automatically ceases 90 days after
termination of the Agreement and may be withdrawn by the Adviser on 90 days
written notice.
The Adviser may make payments to banks or other financial institutions that
provide shareholder services and administer shareholder accounts. The
Glass-Steagall Act prohibits banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of this
prohibition under the Glass-Steagall Act has not been clearly defined by the
courts or appropriate regulatory agencies, management of the Fund believes that
the Glass-Steagall Act should not preclude a bank from providing such services.
However, state securities laws on this issue may differ from the interpretations
of federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law. 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.
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<PAGE>
TRANSFER AGENT AND DISTRIBUTOR
The Fund retains Countrywide Fund Services, Inc., 312 Walnut Street,
Cincinnati, Ohio 45202 (the "Transfer Agent"), to serve as transfer agent,
dividend paying agent and shareholder service agent. The Fund also retains the
Transfer Agent to provide the Fund with administrative services, including
regulatory reporting and necessary office equipment, personnel and facilities.
For its services as administrator, the Transfer Agent receives a monthly fee at
an annual rate of .10% of the Fund's average daily net assets up to $25 million;
.075% of such assets from $25 million to $50 million; and .05% of such assets in
excess of $50 million, subject to a minimum monthly fee of $1,000.
The Fund retains CW Fund Distributors, Inc., 312 Walnut Street, Cincinnati,
Ohio 45202 (the "Distributor"), to act as the exclusive agent for distribution
of the Fund's shares. The Distributor is obligated to sell shares of the Funds
on a best efforts basis only against purchase orders for the shares. Shares of
the Funds are offered to the public on a continuous basis. The Transfer Agent
and the Distributor are subsidiaries of Countrywide Financial Services, Inc.
Robert L. Bennett, Tina D. Hosking and Theresa M. Samocki are officers of both
the Distributor and the Trust.
For the fiscal year ended June 30, 1999, the aggregate commissions
collected on sales of shares of the Fund were $10,281, of which the Distributor
paid $8,512 to unaffiliated broker-dealers in the selling network, paid $545 to
affiliated broker-dealers in the selling network and earned $1,224 from
underwriting and broker commissions.
OTHER SERVICES
The firm of Deloitte & Touche LLP, 1700 Courthouse Plaza N.E., Dayton, Ohio
45402, has been selected as independent auditors for the Trust for the fiscal
year ending June 30, 2000. Deloitte & Touche LLP performs an annual audit of the
Fund's financial statements and provides financial, tax and accounting
consulting services as requested.
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, is Custodian
of the Fund's investments. The Custodian holds all cash and securities of the
Fund (either in the Custodian's possession or in its favor through "book entry
systems" authorized by the Trustee in accordance with the Investment Company Act
of 1940), collects all income and effects all securities transactions on behalf
of 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.
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<PAGE>
Consistent with the Rules of Fair Practice 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 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.
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.
The Adviser makes investment decisions for the Fund independently from
those of the other accounts the Adviser manages; investments of the type the
Fund may make, however, may also be made by those other accounts. When the Fund
and one or more other accounts the Adviser manages are prepared to invest in, or
desire to dispose of, the same security, the Adviser will allocate available
investments or opportunities for sales in a manner the Adviser believes to be
equitable to each. In some cases, this procedure may adversely affect the price
paid or received by the Fund or the size of the position obtained or disposed of
by the Fund. Orders placed for the Fund will not be combined ("blocked") with
other orders.
For the fiscal year ended June 30, 1999, the Fund paid brokerage
commissions of $131,134.
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<PAGE>
SHARES OF THE FUND
The Funds do not issue share certificates. All shares are held in
non-certificate form registered on the books of the Fund and the Transfer Agent
for the account of the shareholder. The rights to limit the amount of purchases
and to refuse to sell to any person are reserved by the Fund. 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, the Fund 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.
Four classes of shares, Class A Shares, Class B Shares, Class C Shares, and
Class R Shares are authorized for the Fund. Currently, the Fund is offering
Class A shares only, but others may be offered in the future. The four classes
of shares each represent an interest in the same portfolio of investments of the
Fund and have the same rights, except (i) Class B and Class C Shares bear the
expenses of the deferred sales arrangement and any expenses (including a higher
distribution services fee) resulting from such sales arrangement, (ii) each
class that is subject to a distribution fee has exclusive voting rights with
respect to those provisions of the Fund's Rule 12b-1 distribution plan which
relate only to such class and (iii) the classes have different exchange
privileges. Additionally, Class B Shares will automatically convert into Class A
Shares after a specified period of years (as described below). The net income
attributable to Class B and Class C Shares and the dividends payable on Class B
and Class C Shares will be reduced by the amount of the higher distribution
services fee and certain other incremental expenses associated with the deferred
sales charge arrangement. The net asset value per share of Class A Shares, Class
B Shares, Class C Shares and Class R Shares is expected to be substantially the
same, but it may differ from time to time.
For purposes of conversion of Class A Shares, Class B Shares purchased
through the reinvestment of dividends and distributions paid in respect of Class
B Shares in stockholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the stockholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The conversion of Class B Shares to Class A Shares is subject to the
continuing determination that (i) the assessment of the higher distribution
services fee and transfer agency cost with respect to Class B Shares does not
result in the Fund's dividends or distributions constituting "preferential
dividends" under the Internal Revenue Code, and (ii) that the conversion of
Class B Shares does not constitute a taxable event under federal income tax law.
The conversion of Class B Shares to Class A Shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
Shares would occur, and Class B Shares might continue to be subject to the
higher distribution services fee for an indefinite period, which period may
extend beyond the conversion period after the end of the month in which the
shares were issued.
The contingent deferred sales load ("CDSL") will not be imposed on amounts
representing increases in net asset value above the initial purchase price.
Additionally, no charge will be
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<PAGE>
assessed on Class B or Class C Shares derived from reinvestment of dividends or
capital gains distributions. The CDSL will be waived (i) on redemption of shares
following the disability (as determined in writing by the Social Security
Administration) or death of a stockholder and (ii) on certain redemptions in
connection with IRAs and other qualified retirement plans. In the case of an
exchange, the length of time that the investor held the original Class B or
Class C Shares is counted towards satisfaction of the period during which a
deferred sales charge is imposed on the Class B or Class C for which the
exchange was made.
LETTER OF INTENT. A shareholder may qualify for reduced sales charges by sending
to the Fund (within 90 days after the first purchase desired to be included in
the purchase program) the signed, non-binding Letter of Intent section on the
application form. All investments in retail shares of the Fund count toward the
indicated goal. It is understood that 5% of the dollar amount checked on the
application will be held in a special escrow account. These shares will be held
by an escrow agent subject to the terms of the escrow. All dividends and capital
gains distributions on the escrowed shares will be credited to the shareholder's
account in shares. If the total purchases, less redemptions by the shareholder,
his spouse, children and parents, equal the amount specified under this Letter,
the shares held in escrow will be deposited to the shareholder's open account or
delivered to the shareholder or to his or her order. If the total purchases,
less redemptions, exceed the amount specified under this Letter and an amount
which would qualify for a further quantity discount, a retroactive price
adjustment will be made by the Distributor and the dealer through whom purchases
were made pursuant to this Letter of Intent (to reflect such further quantity
discount). The resulting difference in offering price will be applied to the
purchase of additional shares at the offering price applicable to a single
purchase of the dollar amount of the total purchases. If the total purchases
less redemptions are less than the amount specified under this Letter, the
shareholder will remit to the Distributor an amount equal to the difference in
the dollar amount of sales charge actually paid and the amount of sales charge
which would have applied to the aggregate purchases if the total of such
purchases had been made at a single time. Upon such remittance the shares held
in escrow for the shareholder's account will be deposited to the shareholder's
open account or delivered to the shareholder or to his or her order. If within
20 days after written request by the Distributor such difference in sales charge
is not paid, the Distributor is hereby authorized to redeem an appropriate
number of shares to realize such difference. The Distributor is hereby
irrevocably constituted under this Letter of Intent to effect such redemption as
agent of the shareholder.
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,
President's Day, Martin Luther King, Jr. Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. For a description of
the methods used to determine the net asset value (share price), see
"Calculation of Share Price and Public Offering Price" in the Prospectus.
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<PAGE>
For valuation purposes, quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the time of pricing. In
computing the net asset value of the Fund, the values of foreign portfolio
securities are generally based upon market quotations which, depending upon the
exchange or market, may be last sale price, last bid price, or the average of
the last bid and asked prices as of, in each case, the close of the appropriate
exchange or another designated time.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day on which the New York Stock Exchange is open. Trading of
these securities may not take place on every New York Stock Exchange business
day. In addition, trading may take place in various foreign markets on Saturdays
or on other days when the New York Stock Exchange is not open and on which the
Fund's share price is not calculated. Therefore, the value of the portfolio of a
fund holding foreign securities may be significantly affected on days when
shares of the Fund may not be purchased or redeemed.
The calculation of the share price of the Fund holding foreign securities
in its portfolio does not take place contemporaneously with the determination of
the values of many of the foreign portfolio securities used in such calculation.
Events affecting the values of foreign portfolio securities that occur between
the time their prices are determined and the calculation of the Fund's share
price will not be reflected in the calculation unless the Adviser determines,
subject to review by the Board of Trustees, that the particular event would
materially affect net asset value, in which case an adjustment will be made.
ADDITIONAL TAX INFORMATION
TAXATION OF THE FUNDS. The Fund has qualified and intends to continue to qualify
as a "regulated investment company" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). Among its requirements to qualify under
Subchapter M, each Fund must distribute annually at least 90% of its net
investment income. In addition to this distribution requirement, the Fund must
derive at least 90% of its gross income each taxable year from dividends,
interest, payments with respect to securities' loans, gains from the disposition
of stock or securities, and certain other income.
While the above requirements are aimed at qualification of the Fund as a
regulated investment company under Subchapter M of the Code, the Fund also
intends to comply with certain requirements of the Code to avoid liability for
federal income and excise tax. If the Fund remains qualified under Subchapter M,
it will not be subject to federal income tax to the extent it distributes its
taxable net investment income and net realized capital gains. A nondeductible 4%
federal excise tax will be imposed on the Fund to the extent it does not
distribute at least 98% of its ordinary taxable income for a calendar year, plus
98% of its capital gain net taxable income for the one year period ending each
October 31, plus certain undistributed amounts from prior
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<PAGE>
years. While the Fund intends to distribute its taxable income and capital gains
in a manner so as to avoid imposition of the federal excise and income taxes,
there can be no assurance that the Fund indeed will make sufficient
distributions to avoid entirely imposition of federal excise or income taxes.
Should additional series, or funds, be created by the Trustees, each fund would
be treated as a separate tax entity for federal income tax purposes.
DISTRIBUTION PLANS
With respect to the Fund, the Trust has adopted a Plan for each class of
shares, pursuant to Rule 12b-1 which was promulgated by the Securities and
Exchange Commission pursuant to the Investment Company Act of 1940 (the
"Plans"). Each Plan provides for payment of fees to the Distributor to finance
any activity that is principally intended to result in the sale of the Fund's
shares subject to the Plans. Such activities are described in the Prospectus.
Pursuant to the Plans, the Distributor may pay fees to brokers and others for
such services. The Trustees expect that the adoption of the Plans will result in
the sale of a sufficient number of shares so as to allow the Fund to achieve
economic viability. 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 maximum amounts payable by the
Fund under the Plans are described in the Prospectus.
The Trust's Board of Trustees, including a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the Plans or any related agreement, approved the Plans,
the Distribution Agreement, the Selling Agreements and the Service Agreements of
the Fund by a vote cast in person at a meeting called for the purpose of voting
on the Plans and such agreements and by the shareholders on August 20, 1998.
Continuation of the Plans and the related agreements must be approved annually
in the same manner, and the Plans or any related agreement may be terminated at
any time without penalty by a majority of such independent Trustees or by a
majority of a class' outstanding shares. Any amendment increasing the maximum
percentage payable under a Plan or other material change must be approved by a
majority of the respective class' outstanding shares, and all other material
amendments to a Plan or any related agreement must be approved by a majority of
the independent Trustees.
Various state and federal laws limit the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of securities. In the event these laws are
deemed to prohibit depository institutions from acting in the capacities
described above or should Congress relax current restrictions on depository
institutions, the Board of Trustees will consider appropriate changes in the
services. State securities laws governing the ability of depository institutions
to act as underwriters or distributors of securities may differ from
interpretations given to federal law and, therefore, banks and financial
institutions may be required to register as dealers pursuant to state law.
- 24 -
<PAGE>
For the fiscal period ended June 30, 1999, the Trust incurred $301,414
under the Plan on behalf of the Class A shares of the Fund for payments to
broker-dealers and others for the sale or retention of Fund shares. In order to
reduce operating expenses of the Fund, the Adviser waived $114,489 of this fee.
PERFORMANCE INFORMATION
"Average annual total return," as defined by the Securities and Exchange
Commission, is computed by finding the average annual compounded rates of return
for the period indicated that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
n
P(1+T) = 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 and that a complete redemption
occurs at the end of the applicable period.
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 initial public offering
of the Fund's shares) as of the end of a specified period. A non-standardized
quotation 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.
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<PAGE>
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, the Dow Jones Industrial Average, the
Value Line Stock Index or a blend of stock and bond indices.
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.
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 well-known indices of market performance including the Standard &
Poor's (S&P) 500 Index, the Dow Jones Industrial Average or the Russell 2000
Index.
The Golden Rainbow Fund is the successor to another mutual fund referred to
herein as the Predecessor Fund. The Predecessor Fund is the successor to the
portfolio of two common trust funds managed by the Adviser. At the Predecessor
Fund's commencement of operations, the assets from both common trust funds were
transferred to the Predecessor Fund in exchange for Class A shares. The Adviser
has represented that The Golden Rainbow Fund's and Predecessor Fund's investment
objectives, policies and limitations are in all material respects identical to
those of both common trust funds.
The Golden Rainbow Fund's average annual total return for the 1, 5 and 10
year periods ending June 30, 1999 was 8.05%, 9.27% and ____%, respectively. The
Golden Rainbow Fund's average annual total return for the period September 30,
1984 (commencement of operations) through June 30, 1999 was ____%. The quoted
performance data includes the performance of the Predecessor Fund. The quoted
performance data also includes the performance of the common trust funds for the
periods before the Predecessor Fund's registration statement became effective,
as adjusted to reflect the Predecessor Fund's estimated expenses as set forth in
its original prospectus. The common trust fund was not registered under the 1940
Act and therefore was not subject to certain investment restrictions that are
imposed by the 1940 Act. If the common trust fund had been registered under the
1940 Act, the performance may have been adversely affected.
The advertised performance data of the Fund is based on historical
performance and is not intended to indicate future performance. Rates of total
return quoted by the Fund may be higher or lower than past quotations, and there
can be no assurance that any rate of total return
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<PAGE>
will be maintained. The principal value of an investment in the Fund will
fluctuate so that a shareholder's shares, when redeemed, may be worth more or
less than the shareholder's original investment.
FINANCIAL STATEMENTS
The financial statements and independent auditors' report required to be
included herein are hereby incorporated by reference to the annual report of The
James Advantage Funds for the period ended June 30, 1999.
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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
THE JAMES SMALL CAP FUND
THE JAMES MARKET NEUTRAL FUND
THE JAMES LARGE CAP PLUS FUND
November 1, 1999
Series of
The James Advantage Funds
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202
1-800-995-2637
TABLE OF CONTENTS
DESCRIPTION OF THE TRUST...................................................... 2
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS................................ 2
INVESTMENT LIMITATIONS........................................................14
TRUSTEES AND OFFICERS.........................................................16
INVESTMENT ADVISER............................................................17
TRANSFER AGENT AND DISTRIBUTOR................................................18
OTHER SERVICES................................................................19
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................19
SHARES OF THE FUND............................................................20
DETERMINATION OF SHARE PRICE..................................................22
ADDITIONAL TAX INFORMATION....................................................23
DISTRIBUTION PLANS............................................................24
PERFORMANCE INFORMATION.......................................................24
FINANCIAL STATEMENTS..........................................................26
This Statement of Additional Information is not a prospectus and should
only be read in conjunction with the Prospectus of The James Small Cap Fund, The
James Large Cap Plus Fund and The James Market Neutral Fund dated November 1,
1999. A Prospectus can be obtained by writing the Transfer Agent at 312 Walnut
Street, Cincinnati, Ohio 45202, or by calling 888-99 JAMES (888-995-2637).
<PAGE>
DESCRIPTION OF THE TRUST
The James Small Cap Fund, The James Large Cap Plus Fund and The James
Market Neutral Fund (collectively the "Funds") were organized as series of The
James Advantage 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 August 29, 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. Each Fund is one of a series of 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
a 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.
Upon 60 days prior written notice to shareholders, the Funds 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. For
other information concerning the purchase and redemption of shares of the Funds,
see "How to Purchase Shares" and "How to Redeem Shares" in the Funds'
Prospectus. For a description of the methods used to determine the share price
and value of the Funds' assets, see "Calculation of Share Price and Public
Offering Price" in the Funds' Prospectus.
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
This section contains a more detailed discussion of some of the investments
the Funds may make and some of the techniques it may use, as described in the
Prospectus.
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<PAGE>
A. Equity Securities.
The Funds may invest in common stock, in addition to which, the Funds may
invest in 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 preferred
stock rated A or higher by Standard & Poor's Corporation ("S&P") or by Moody's
Investors Services, Inc. ("Moody's").
B. U.S. Government Obligations.
The Fund may invest in U.S. government obligations. These securities may be
backed by the credit of the government as a whole or only by the issuing agency.
U.S. Treasury bonds, notes, and bills and some agency securities, such as those
issued by the Federal Housing Administration and the Government National
Mortgage Association (GNMA), are backed by the full faith and credit of the U.S.
government as to payment of principal and interest and are the highest quality
government securities. Other securities issued by U.S. government agencies or
instrumentalities, such as securities issued by the Federal Home Loan Banks and
the Federal Home Loan Mortgage Corporation, are supported only by the credit of
the agency that issued them, and not by the U.S. government. Securities issued
by the Federal Farm Credit System, the Federal Land Banks, and the Federal
National Mortgage Association (FNMA) are supported by the agency's right to
borrow money from the U.S. Treasury under certain circumstances, but are not
backed by the full faith and credit of the U.S. government.
C. Repurchase Agreements.
The Funds may invest in repurchase agreements fully collateralized by U.S.
Government obligations. A repurchase agreement is a short-term investment in
which the purchaser (i.e., a Fund) acquires ownership of a U.S. Government
obligation (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 a 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, a Fund could experience both delays in liquidating the underlying
security and losses in value. However, the Funds intends to enter into
repurchase agreements only with 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 with which the Funds engage
in repurchase transactions.
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D. Illiquid Securities.
The portfolio of each Fund may contain up to 15% of its assets (valued at
the purchase date) in 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. 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 the Act. Where registration is
required, the Funds 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 Funds might obtain a less favorable price than the price it could have
obtained when it decided to sell.
E. Loans of Securities.
The Funds may make short and long term loans of its portfolio securities in
order to realize additional income. Under the lending policy authorized by the
Board of Trustees and implemented by the Adviser in responses to requests of
broker-dealers or institutional investors which the Adviser deems qualified, the
borrower must agree to maintain collateral, in the form of cash or U.S.
government obligations, with the Funds on a daily market-to-market basis in an
amount at least equal to the value of the loaned securities. The Funds will
continue to receive dividends or interest on the loaned securities and may
terminate such loans at any time or reacquire such securities in time to vote on
any matter which the Adviser determines to be important. With respect to loans
of securities, there is the risk that the borrower may fail to return the loaned
securities or that the borrower may not be able to provide additional
collateral.
F. Borrowing and Leverage; Reverse Repurchase Agreements.
The Funds may borrow from banks, from time to time on a temporary basis, up
to 5% of their respective total assets, and the Funds may pledge assets in
connection with such borrowings. The Funds also may engage in reverse repurchase
agreements in which the Funds sell a security to another party, such as a bank,
broker-dealer or other financial institution, and simultaneously agrees to buy
it back later at a higher price. While a reverse repurchase agreement is
outstanding, a Fund generally will direct its custodian to segregate cash and
appropriate liquid assets to cover its obligations under the agreement. The
Funds will enter into reverse repurchase agreements only with parties whose
creditworthiness has been reviewed and deemed satisfactory by the Adviser. A
Fund aggregates reverse repurchase agreements with its bank borrowings for
purposes of limiting borrowings to 5% of its net assets. The borrowing of
securities for short sales is excluded for purposes of this limitation.
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If the Funds make additional investments while borrowings are outstanding,
this may be construed as a form of leverage. The Funds' objectives would be to
pursue investment opportunities with returns that exceed the cost of the
borrowings. This leverage may exaggerate changes in a Fund's share value and the
gains and losses on a Fund's investment. Leverage also creates interest expenses
that may exceed the return on investments made with the borrowings.
G. Foreign Securities
The Funds may invest, without limitation, in foreign securities. Foreign
fixed income securities include corporate debt obligations issued by foreign
companies and debt obligations of foreign governments or international
organizations. This category may include floating rate obligations, variable
rate obligations, Yankee dollar obligations (U.S. dollar denominated obligations
issued by foreign companies and traded on U.S. markets) and Eurodollar
obligations (U.S. dollar denominated obligations issued by foreign companies and
American depository receipts ("ADR's"). ADRs are certificates of ownership
issued by a U.S. bank as a convenience to investors in lieu of the underlying
shares which its holds in custody.
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 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.
H. Portfolio Turnover
Neither The Small Cap Fund nor The Market Neutral Fund intends to purchase
or sell securities for short term trading purposes. The Funds may, however, sell
any portfolio security (without regard to the length of time it has been held)
when the Adviser believes that market conditions, creditworthiness factors or
general economic conditions warrant such action. The portfolio turnover rate is
not expected to exceed 100% for The Small Cap Fund nor The Large Cap Plus Fund,
or 300% for The Market Neutral Fund.
I. Investment Techniques Specific to The Market Neutral Fund
The James Market Neutral Fund may utilize various other investment
strategies as described below. Such strategies are generally accepted by modern
portfolio managers and are regularly utilized by many mutual funds and other
institutional investors. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur.
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In the course of pursuing these investment strategies, the Fund may
purchase and sell financial futures contracts and options thereon, and enter
into various interest rate transactions such as swaps, caps, floors or collars.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any techniques is a function of numerous variables including
market conditions. The ability of the Fund to utilize these techniques
successfully will depend on the Adviser's ability to predict pertinent market
movements, which cannot be assured. The Fund will comply with applicable
regulatory requirements when implementing these strategies, techniques and
instruments.
These techniques have risks associated with them including possible default
by the other party to the transaction, illiquidity and, to the extent the
Adviser's view as to certain market movements is incorrect, the risk that the
use of such techniques would result in losses greater than if they had not been
used. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Finally, the daily
variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of such techniques would reduce net asset value, and possibility income,
and such losses can be greater than if the techniques had not been utilized.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Hedging Transactions involving options
require segregation of a Fund's assets in special accounts, as described below
under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For example, a Fund's purchase of a put option on a security might be designed
to protect its holdings in the underlying instrument (or, in some cases, a
similar instrument) against a substantial decline in the market value by giving
the Fund the right to sell such instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
future, index, currency or other instrument might be intended to protect the
Fund against an increase in the price of the underlying instrument that it
intends to purchase in the future by fixing the price at which it may purchase
such instrument. The Funds are authorized to purchase and sell exchange-listed
options and over-the-counter options ("OTC options"). Exchange-listed options
are issued by a regulated intermediary such as the Options Clearing Corporation
("OCC"), which guarantees the performance of the obligations of the parties to
such options.
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With certain exceptions, OCC-issued and exchange-listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange-listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Funds will only sell OTC options (other than OTC currency options) that are
subject to a buy-back provision permitting the Funds to require the Counterparty
to sell the option back to the Funds at a formula price within seven days. The
Funds expect generally to enter into OTC options that have cash settlement
provisions, although they are not required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with a Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. While this type of arrangement allows the Funds greater flexibility
to tailor
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an option to their needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded. The risk of illiquidity also is greater
with OTC options, since these options generally can be closed out only by
negotiation with the other party to the option.
If a Fund sell a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Funds may purchase and sell call options on securities, including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and on securities indices, currencies and futures
contracts. All calls sold by the Funds must be "covered" (i.e., the Funds must
own the securities or futures contract subject to the call) or must meet the
asset segregation requirements described below as long as the call is
outstanding. Even though a Fund will receive the option premium to help protect
it against loss, a call sold by the Fund exposes the Fund during the term of the
option to possible loss of opportunity to realize appreciation in the market
price of the underlying security or instrument and may require the Fund to hold
a security or instrument which it might otherwise have sold.
The Funds may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, corporate debt
securities, equity securities (including convertible securities) and Eurodollar
instruments (whether or not it holds the above securities in its portfolio) and
on securities indices, currencies and futures contracts other than futures on
individual corporate debt and individual equity securities. The Fund will not
sell put options if, as a result, more than 50% of the Fund's assets would be
required to be segregated to cover its potential obligations under such put
options other than those with respect to futures and options thereon. In selling
put options, there is a risk that the fund may be required to buy the underlying
security at a disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES
The Funds may enter into financial futures contracts, or purchase or sell
put and call options on such futures, as a hedge against anticipated interest
rate, currency or equity market changes, for duration management, and for risk
management purposes. Futures are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The sale of a futures contract creates a firm obligation by a
Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or, with respect to index futures and Eurodollar instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract and
obligates the seller to deliver such option.
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The Funds' use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires a Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark-to-market value of the contract
fluctuates. The purchase of an option on financial futures involves payment of a
premium for the option without any further obligation on the part of a Fund. If
a Fund exercises an option on a futures contract, it will be obligated to post
initial margin (and potential subsequent variation margin) for the resulting
futures position just as it would for any position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Funds also may purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss of an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Funds may engage in currency transactions with Counterparties in order
to hedge the value of portfolio holdings denominated in particular currencies
against fluctuations in relative value. Currency transactions include forward
currency contracts, exchange-listed currency futures, exchange-listed and OTC
options on currencies, and currency swaps. A forward currency contract involves
a privately negotiated obligation to purchase or sell (with delivery generally
required) a specific currency at a future date, at a price set at the time of
the contract. A currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and operates similarly to
an interest rate swap, which is described below. The Funds may enter into
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currency transactions with Counterparties which have received (or the guarantors
of the obligations of such Counterparties have received) a credit rating of A-1
or P-1 by S&P or Moody's, respectively, or that have an equivalent rating from
an NRSRO or (except for OTC currency options) are determined to be of equivalent
credit quality by the Adviser.
The Funds' dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Funds will not enter into a transaction to hedge currency exposure to
an extent greater, after netting all transactions intended to wholly or
partially offset other transactions, than the aggregate market value (at the
time of entering into the transaction) of the securities held in its portfolio
that are denominated or generally quoted in or currency convertible into such
currently other than with respect to proxy hedging as described below.
The Funds may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Funds have or in which the Funds
expect to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Funds may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Funds'
respective portfolios are exposed is difficult to hedge or to hedge against the
dollar. Proxy hedging entails entering to a forward contract to sell a currency
whose changes in value are generally considered to be linked to a currency or
currencies in which some or all of a Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of a Fund's securities denominated in linked
currencies. For example, if the Adviser considers the Austrian schilling linked
to the German deutschemark (the "D-mark"), a Fund holds securities denominated
in schillings and the Adviser believes that the value of schillings will decline
against the U.S. dollar, the Adviser may enter into a contract to sell D-marks
and buy dollars. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Further, there is
the risk that the perceived linkage between various currencies may not be
present or may not be present during the particular time that a Fund is engaging
in proxy hedging. If a Fund enters into a currency hedging transaction, the Fund
will comply with the asset segregation requirements described below.
RISKS OF CURRENCY TRANSACTIONS
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs.
Buyers and sellers of currency futures are subject to the same risk that apply
to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close out positions on such options is subject to the
maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
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COMBINED TRANSACTIONS
The Funds may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts) and any combination of futures, options
and currency transactions ("component" transactions), instead of a single
Hedging Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of a Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its competent transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the Hedging Transactions into which the Funds may enter are interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars. The Funds expect to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities a Fund
anticipates purchasing at a later date. The Funds intend to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Funds may be obligated to pay.
Interest rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest, for example, an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Funds will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with a Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Funds believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Funds will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
rating from an NRSRO
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or is determined to be of equivalent credit quality by the Adviser. If there is
a default by the Counterparty, a Fund may have contractual remedies pursuant to
the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps, floors, and collars are more recent innovations for which standardized
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
EURODOLLAR INSTRUMENTS
The Funds may make investments in Eurodollar instruments. Eurodollar
instruments are U.S. dollar-denominated futures contracts or options thereon
which are linked to the London Interbank Offered Rate ("LIBOR"), although
foreign currency-denominated instruments are available from time to time.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. The Funds
might use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps and fixed income instruments
are linked.
RISKS OF HEDGING TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Hedging Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during nonbusiness hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many Hedging Transactions, in addition to other requirements, require that
a Fund segregate liquid high-grade assets with its Custodian to the extent Fund
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by a Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restriction, an amount of cash or
liquid high grade securities at least equal to the current amount of the
obligation must be segregated with the Custodian. The segregated assets cannot
be sold or transferred unless equivalent assets are substituted in their place
or it is no longer necessary to segregate them. For example, a call option
written by a Fund will require the Fund to hold the securities subject to the
call (or securities convertible into the needed securities without additional
consideration) or to segregate liquid high-grade securities sufficient to
purchase and deliver the securities if the call is exercised. A call option sold
by a Fund on an index will require the Fund to own portfolio securities which
correlate with the index or to segregate liquid high grade assets equal to the
excess of the index value over the exercise price on a current basis. A put
option written by a Fund requires the Fund to segregate liquid, high-grade
assets equal to the exercise price.
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Except when the Funds enter into a forward contract for the purchase or
sale of a security denominated in a particular currency, which requires no
segregation, a currency contract that obligates a Fund to buy or sell currency
will generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high-grade assets equal to the amount of the Fund's obligation.
OTC options entered into by the Funds, including those on securities,
currency, financial instruments or indices and OCC-issued and exchange-listed
index options will generally provide for cash settlement. As a result, when a
Fund sells these instruments it will only segregate an amount of assets equal to
its accrued net obligations, as there is no requirement for payment or delivery
of amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a noncash settled put, the same as an
OCC-guaranteed listed option sold by a Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when a Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC-issued and exchange-listed options sold by a Fund other than those
above generally settle with physical delivery, or with an election of either
physical delivery or cash settlement, and the Fund will segregate an amount of
assets equal to the full value of the option. OTC options settling with physical
delivery, or with an election of either physical delivery or cash settlement,
will be treated the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, a Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index-based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, a Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlement with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Hedging Transactions may be covered by other means when consistent with
applicable regulatory policies. The Funds may also enter into offsetting
transactions so that their respective combined position, coupled with any
segregated assets, equals their net outstanding obligation in related options
and Hedging Transactions. For example, a Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets if a Fund held
a futures or forward contract, it could purchase a put option on the same
futures or forward contract with a strike price as high or higher
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<PAGE>
than the price of the contract held. Other Hedging Transactions may also be
offset in combinations. If the offsetting transaction terminates at the time of
or after the primary transaction no segregation is required, but if it
terminates prior to such time, assets equal to any remaining obligation would
need to be segregated.
INVESTMENT LIMITATIONS
FUNDAMENTAL. The investment limitations described below have been adopted
by the Trust with respect to the Funds and are fundamental ("Fundamental"), that
is, they may not be changed without the affirmative vote of a majority of the
outstanding shares of the Funds. As used in the Prospectus and this Statement of
Additional Information, the term "majority" of the outstanding shares of the
Funds 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 Funds are present or represented at such meeting; or (2) more than 50% of
the outstanding shares of the Fund. Other investment practices that 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 Funds 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 Funds; 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 Funds' total assets at the time when the
borrowing is made. This limitation does not preclude the Funds from entering
into reverse repurchase transactions, provided that the Funds have an asset
coverage of 300% for all borrowings and repurchase commitments of the Funds
pursuant to reverse repurchase transactions.
2. SENIOR SECURITIES. The Funds 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 Funds, provided that the Funds'
engagement in such activities is 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.
3. UNDERWRITING. The Funds 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 Funds may be deemed an underwriter under certain federal
securities laws.
4. REAL ESTATE. The Funds will not purchase or sell real estate. This
limitation is not applicable to investments in marketable securities that are
secured by or represent interests in real estate. This limitation does not
preclude the Funds 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).
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<PAGE>
5. COMMODITIES. The Funds will not purchase or sell commodities except as
described in the Prospectus and Statement of Additional Information. This
limitation does not preclude the Funds from acquiring commodities as a result of
ownership of securities or other investments; from entering into options,
futures, currency, swap, cap, floor, collar or similar transactions; from
investing in securities or other instruments backed by commodities; or from
investing in companies that are engaged in a commodities business or have a
significant portion of their assets in commodities.
6. LOANS. The Funds 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 Funds 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.
8. DIVERSIFICATION. The Small Cap Fund and the Market Neutral Fund will
comply with the standards for diversification as required by the then-current
Investment Company Act of 1940, as amended, the rules and regulations
promulgated thereunder and interpretations of the Securities and Exchange
Commission or its staff.
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.
With respect to the Funds' diversification, the current standards require
that the Funds may not purchase the securities of any one issuer, other than the
U.S. government or any of its instrumentalities, if immediately after such
purchase more than 5% of the value of its total assets would be invested in such
issuer, or the Funds would own more than 10% of the outstanding voting
securities of such issuer, except that up to 25% of the value of the Funds'
total assets may be invested without regard to such 5% and 10% limitations.
NON-FUNDAMENTAL. The following limitations have been adopted by the Trust
with respect to the Funds and are Non-Fundamental (see "Investment Limitations"
above).
1. PLEDGING. The Funds will not mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any assets of the Funds 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.
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<PAGE>
2. BORROWING. The Funds will not purchase any security while borrowings
(including reverse repurchase agreements) representing more than 5% its total
assets are outstanding.
3. MARGIN PURCHASES. The Funds will not purchase securities or evidences of
interest thereon on "margin." This limitation is not applicable to short-term
credit obtained by the Funds 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 Funds will not purchase or sell puts, calls, options or
straddles, except as described in the Prospectus and the Statement of Additional
Information.
5. SHORT SALES. The James Small Cap Plus Fund and The James Large Cap Plus
Fund will not effect short sales of securities.
6. ILLIQUID SECURITIES. The Funds will not invest more than 5% of its
assets in securities that are restricted as to resale or otherwise illiquid. For
this purpose, illiquid securities generally include securities that cannot be
disposed of within seven days in the ordinary course of business without taking
a reduced price.
TRUSTEES AND OFFICERS
The Board of Trustees has overall responsibility for management of the
Funds under the laws of Ohio governing the responsibilities of trustees of
business trusts. Following are the Trustees and executive officers of the Trust,
their present occupation with the Trust or Funds, age, principal occupation
during the past 5 years and their aggregate compensation from the Trust for the
fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Name, Age, Position Principal Occupation Compensation From
And Address During Past 5 Years The Trust
- ----------- ------------------- ---------
<S> <C> <C>
Barry R. James, CFA * (42) Executive Vice President, James $0
President and Trustee of the Trust Investment Research, Inc. (1985 to
P.O. Box 8 Present).
Alpha, Ohio 45301
Thomas L. Mangan (49) Vice president, James Investment $0
Vice President, Treasurer and Research, Inc. (1994 to Present).
Secretary of the Trust;
P.O. Box 8
Alpha, Ohio 45301
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<PAGE>
Anthony P. D'Angelo, Ph.D. (68) Professor, Graduate School of Logistics $4,000
Trustee and Acquisition Management, Air Force
Dept. of the Air Force, Building 641 Institute of Technology,
2950 P Street Wright-Patterson AFB, Ohio (1983 to
Wright-Patterson AFB Ohio 45433 present).
Hazel L. Eichelberger (61) Retired Sr. Vice President, Citizens $4,000
Trustee Federal Bank, Dayton, Ohio (1955 to
9438 Atchison Road 1997).
Dayton, Ohio 45458
James F. Zid (64) Retired Partner, Ernst & Young, LLP, $4,000
Trustee Columbus, Ohio (1968 to 1993).
1083 N. Collier Blvd.
Marco Island, Florida 34145
</TABLE>
* Indicates that Trustee is an Interested Person for purposes of the Investment
Company Act of 1940.
PRINCIPAL HOLDERS OF VOTING SECURITIES. As of October 15, 1999, the officers and
Trustees of the Fund as a group owned less than 1% of the then-outstanding
shares of the Fund.
As of October 15, 1999, the following persons owned more than 5% of the
outstanding voting shares of The James Small Cap Fund: James Investment
Research, Profit Sharing Retirement Account, P.O. Box 8, Alpha, Ohio 45301,
owned of record 19.32%; Frank James, Trustee, P.O. Box 8, Alpha, Ohio 45301,
owned beneficially 5.33% and the Iris R. James Trust, ATTN: Diane Rose, P.O. Box
8, Alpha, Ohio 45301, owned beneficially 7.72%.
As of October 15, 1999, the following persons owned more than 5% of the
outstanding voting shares of The James Market Neutral Fund: James Investment
Research, Inc., Pension and Profit Sharing Plan, P.O. Box 8, Alpha, Ohio 45301,
owned of record 14.94%; Frank James, Trustee, P.O. Box 8, Alpha, Ohio 45301,
owned beneficially 12.15%; First Cinco Rein, P.O. Box 640229, Cincinnati, Ohio
45264, owned of record 12.09% and the Iris R. James Trust, ATTN: Diane Rose,
P.O. Box 8, Alpha, Ohio 45301, owned beneficially 6.20%.
THE INVESTMENT ADVISER
James Investment Research, Inc., P.O. Box 8, Alpha, Ohio 45301 (the
"Adviser") supervises the Funds' investments pursuant to a Management Agreement
(the "Management Agreement") subject to the approval of the Board of Trustees.
Francis E. James is the controlling shareholder of the Adviser. The Management
Agreement is effective for initial two-year term until 2000 and will be renewed
thereafter for one year periods only so long as such renewal and continuance is
specifically approved at least annually by the Board of Trustees or by vote of a
majority of the Funds' outstanding voting securities, provided the continuance
is also approved by a majority of the Trustees who are not "interested persons"
of the Trust or the Adviser by vote
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<PAGE>
cast in person at a meeting called for the purpose of voting on such approval.
The Management Agreement is terminable without penalty on sixty days notice by
the Board of Trustees of the Trust or by the Adviser. The Management Agreement
provides that it will terminate automatically in the event of its assignment.
As compensation for its management services, the Adviser is authorized to
receive a fee computed and accrued daily and paid monthly (a) at an annual rate
of 1.25% of the average daily net assets of The James Small Cap Fund and The
James Large Cap Plus Fund and 1.70% of The James Market Neutral Fund minus (b)
the fees and expenses of the non-interested person trustees incurred by the
Fund. The Adviser may waive all or part of its fee, at any time, and at its sole
discretion, but such action shall not obligate the Adviser to waive any fees in
the future. For the fiscal years ended June 30, 1999, The James Small Cap Fund
paid the Adviser advisory fees of $32,819 and the James Market Neutral Fund paid
the Adviser advisory fees of $67,728.
The Adviser retains the right to use the names "James Advantage," "James
Small Cap Fund," "James Market Neutral Fund" or "James Large Cap Plus Fund" or
any variation thereof 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 "James Advantage," "James Small Cap Fund," "James Market
Neutral Fund" or "James Large Cap Plus Fund" or any variation thereof
automatically ceases 90 days after termination of the Agreement and may be
withdrawn by the Adviser on 90 days written notice.
The Adviser may make payments to banks or other financial institutions that
provide shareholder services and administer shareholder accounts. The
Glass-Steagall Act prohibits banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of this
prohibition under the Glass-Steagall Act has not been clearly defined by the
courts or appropriate regulatory agencies, management of the Funds believes that
the Glass-Steagall Act should not preclude a bank from providing such services.
However, state securities laws on this issue may differ from the interpretations
of federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law. If a bank were prohibited
from continuing to perform all or a part of such services, management of the
Funds believes that there would be no material impact on the Funds or their
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 Funds may from time to time
purchase securities issued by banks which provide such services; however, in
selecting investments for the Funds, no preference will be shown for such
securities.
TRANSFER AGENT AND DISTRIBUTOR
The Funds retain Countrywide Fund Services, Inc., 312 Walnut Street,
Cincinnati, Ohio 45202 (the "Transfer Agent"), to serve as transfer agent,
dividend paying agent and shareholder service agent. The Funds also retain the
Transfer Agent to provide the Funds with administrative services, including
regulatory reporting and necessary office equipment, personnel and facilities.
For its services as administrator, the Transfer Agent receives a monthly fee
- 18 -
<PAGE>
.10% of each Fund's average daily net assets up to $25 million; .075% of such
assets from $25 million to $50 million; and .05% of such assets in excess of $50
million, subject to a minimum monthly fee of $1,000.
The Funds retain CW Fund Distributors, Inc., 312 Walnut Street, Cincinnati,
Ohio 45202 (the "Distributor"), to act as the exclusive agent for distribution
of the Funds' shares. The Distributor is obligated to sell shares of the Funds
on a best efforts basis only against purchase orders for the shares. Shares of
the Funds are offered to the public on a continuous basis. The Transfer Agent
and the Distributor are subsidiaries of Countrywide Financial Services, Inc.
Robert L. Bennett, Tina D. Hosking and Theresa M. Samocki are officers of both
the Distributor and the Trust.
For the fiscal period ended June 30, 1999, the aggregate commissions
collected on sales of shares of the James Small Cap Fund were $7,222, of which
the Distributor paid $6,086 to unaffiliated broker-dealers in the selling
network, paid $74 to affiliated broker-dealers in the selling network and earned
$1,062 from underwriting and broker commissions. For the fiscal period ended
June 30, 1999, the aggregate commissions collected on sales of shares of the
James Market Neutral Fund were $46,000, of which the Distributor paid $40,413 to
unaffiliated broker-dealers in the selling network and earned $5,587 from
underwriting and broker commissions.
OTHER SERVICES
The firm of Deloitte & Touche LLP, 1700 Courthouse Plaza N.E., Dayton, Ohio
45402, has been selected as independent auditors for the Trust for the fiscal
year ending June 30, 2000. Deloitte & Touche LLP performs an annual audit of the
Funds' financial statements and provides financial, tax and accounting
consulting services as requested.
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, is Custodian
of the Funds' investments. The Custodian holds all cash and securities of the
Funds (either in the Custodian's possession or in its favor through "book entry
systems" authorized by the Trustee in accordance with the Investment Company Act
of 1940), collects all income and effects all securities transactions on behalf
of the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees of the Trust, the
Adviser is responsible for the Funds' portfolio decisions and the placing of the
Funds' portfolio transactions. In placing portfolio transactions, the Adviser
seeks the best qualitative execution for the Funds, 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.
- 19 -
<PAGE>
Consistent with the Rules of Fair Practice 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 is specifically authorized to select brokers or dealers who
also provide brokerage and research services to the Funds 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 Funds effect 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 Funds.
Although research services and other information are useful to the Funds 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 Funds under the
Agreement.
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.
The Adviser makes investment decisions for the Funds independently from
those of the other accounts the Adviser manages; investments of the type the
Funds may make, however, may also be made by those other accounts. When the
Funds and one or more other accounts the Adviser manages are prepared to invest
in, or desire to dispose of, the same security, the Adviser will allocate
available investments or opportunities for sales in a manner the Adviser
believes to be equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Funds or the size of the position
obtained or disposed of by the Fund. Orders placed for the Funds will not be
combined ("blocked") with other orders.
For the fiscal year ended June 30, 1999, The James Small Cap Fund and The
James Market Neutral Fund paid brokerage commissions of $25,956 and $58,053,
respectively.
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<PAGE>
SHARES OF THE FUND
The Funds do not issue share certificates. All shares are held in
non-certificate form registered on the books of the Funds and the Transfer Agent
for the account of the shareholder. The rights to limit the amount of purchases
and to refuse to sell to any person are reserved by the Funds. If your check or
wire does not clear, you will be responsible for any loss incurred by the Funds.
If you are already a shareholder, the Funds can redeem shares from any
identically registered account in the Funds as reimbursement for any loss
incurred. You may be prohibited or restricted from making future purchases in
the Funds.
Four classes of shares, Class A Shares, Class B Shares, Class C Shares, and
Class R Shares are authorized for the Fund. Currently, the Funds are offering
Class A shares only, but others may be offered in the future. The four classes
of shares each represent an interest in the same respective portfolios of
investments of the Funds and have the same rights, except (i) Class B and Class
C Shares bear the expenses of the deferred sales arrangement and any expenses
(including a higher distribution services fee) resulting from such sales
arrangement, (ii) each class that is subject to a distribution fee has exclusive
voting rights with respect to those provisions of the Funds' Rule 12b-1
distribution plan which relate only to such class and (iii) the classes have
different exchange privileges. Additionally, Class B Shares will automatically
convert into Class A Shares after a specified period of years (as described
below). The net income attributable to Class B and Class C Shares and the
dividends payable on Class B and Class C Shares will be reduced by the amount of
the higher distribution services fee and certain other incremental expenses
associated with the deferred sales charge arrangement. The net asset value per
share of Class A Shares, Class B Shares, Class C Shares and Class R Shares is
expected to be substantially the same, but it may differ from time to time.
For purposes of conversion of Class A Shares, Class B Shares purchased
through the reinvestment of dividends and distributions paid in respect of Class
B Shares in stockholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the stockholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The conversion of Class B Shares to Class A Shares is subject to the
continuing determination that (i) the assessment of the higher distribution
services fee and transfer agency cost with respect to Class B Shares does not
result in the Fund's dividends or distributions constituting "preferential
dividends" under the Internal Revenue Code, and (ii) that the conversion of
Class B Shares does not constitute a taxable event under federal income tax law.
The conversion of Class B Shares to Class A Shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
Shares would occur, and Class B Shares might continue to be subject to the
higher distribution services fee for an indefinite period, which period may
extend beyond the conversion period after the end of the month in which the
shares were issued.
The contingent deferred sales load ("CDSL") will not be imposed on amounts
representing increases in net asset value above the initial purchase price.
Additionally, no charge will be assessed on Class B or Class C Shares derived
from reinvestment of dividends or capital gains distributions. The CDSL will be
waived (i) on redemption of shares following the disability (as
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<PAGE>
determined in writing by the Social Security Administration) or death of a
stockholder and (ii) on certain redemptions in connection with IRAs and other
qualified retirement plans. In the case of an exchange, the length of time that
the investor held the original Class B or Class C Shares is counted towards
satisfaction of the period during which a deferred sales charge is imposed on
the Class B or Class C for which the exchange was made.
LETTER OF INTENT. A shareholder may qualify for reduced sales charges by sending
to the respective Funds (within 90 days after the first purchase desired to be
included in the purchase program) the signed, non-binding Letter of Intent
section on the application form. All investments in retail shares of the
respective Funds count toward the indicated goal. It is understood that 5% of
the dollar amount checked on the application will be held in a special escrow
account. These shares will be held by an escrow agent subject to the terms of
the escrow. All dividends and capital gains distributions on the escrowed shares
will be credited to the shareholder's account in shares. If the total purchases,
less redemptions by the shareholder, his spouse, children and parents, equal the
amount specified under this Letter, the shares held in escrow will be deposited
to the shareholder's open account or delivered to the shareholder or to his or
her order. If the total purchases, less redemptions, exceed the amount specified
under this Letter and an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made by the Distributor and the
dealer through whom purchases were made pursuant to this Letter of Intent (to
reflect such further quantity discount). The resulting difference in offering
price will be applied to the purchase of additional shares at the offering price
applicable to a single purchase of the dollar amount of the total purchases. If
the total purchases less redemptions are less than the amount specified under
this Letter, the shareholder will remit to the Distributor an amount equal to
the difference in the dollar amount of sales charge actually paid and the amount
of sales charge which would have applied to the aggregate purchases if the total
of such purchases had been made at a single time. Upon such remittance the
shares held in escrow for the shareholder's account will be deposited to the
shareholder's open account or delivered to the shareholder or to his or her
order. If within 20 days after written request by the Distributor such
difference in sales charge is not paid, the Distributor is hereby authorized to
redeem an appropriate number of shares to realize such difference. The
Distributor is hereby irrevocably constituted under this Letter of Intent to
effect such redemption as agent of the shareholder.
DETERMINATION OF SHARE PRICE
The price (net asset value) of the shares of the Funds 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,
President's Day, Martin Luther King, Jr. Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas. For a description of
the methods used to determine the net asset value (share price), see
"Calculation of Share Price and Public Offering Price" in the Prospectus.
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<PAGE>
For valuation purposes, quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the time of pricing. In
computing the net asset value of the Funds, the values of foreign portfolio
securities are generally based upon market quotations which, depending upon the
exchange or market, may be last sale price, last bid price, or the average of
the last bid and asked prices as of, in each case, the close of the appropriate
exchange or another designated time.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day on which the New York Stock Exchange is open. Trading of
these securities may not take place on every New York Stock Exchange business
day. In addition, trading may take place in various foreign markets on Saturdays
or on other days when the New York Stock Exchange is not open and on which the
Funds' share price is not calculated. Therefore, the value of the portfolio of a
fund holding foreign securities may be significantly affected on days when
shares of the Funds may not be purchased or redeemed.
The calculation of the share price of the Funds holding foreign securities
in its portfolio does not take place contemporaneously with the determination of
the values of many of the foreign portfolio securities used in such calculation.
Events affecting the values of foreign portfolio securities that occur between
the time their prices are determined and the calculation of the Funds' share
price will not be reflected in the calculation unless the Adviser determines,
subject to review by the Board of Trustees, that the particular event would
materially affect net asset value, in which case an adjustment will be made.
ADDITIONAL TAX INFORMATION
TAXATION OF THE FUNDS. The James Small Cap Fund and The James Market Neutral
Funds have qualified and intend to continue to qualify as "regulated investment
companies" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"). The James Large Cap Plus Fund intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). Among its requirements to qualify under Subchapter M, each
Fund must distribute annually at least 90% of its net investment income. In
addition to this distribution requirement, the Fund must derive at least 90% of
its gross income each taxable year from dividends, interest, payments with
respect to securities' loans, gains from the disposition of stock or securities,
and certain other income.
While the above requirements are aimed at qualification of the Funds as
regulated investment companies under Subchapter M of the Code, the Funds also
intend to comply with certain requirements of the Code to avoid liability for
federal income and excise tax. If the Funds remains qualified under Subchapter
M, they will not be subject to federal income tax to the extent they distributes
their taxable net investment income and net realized capital gains. A
nondeductible 4% federal excise tax will be imposed on the Funds to the extent
they do not distribute at least 98% of their ordinary taxable income for a
calendar year, plus 98% of their capital gain net taxable income for the one
year period ending each October 31, plus certain undistributed amounts from
prior years. While the Funds intend to distribute their taxable
- 23 -
<PAGE>
income and capital gains in a manner so as to avoid imposition of the federal
excise and income taxes, there can be no assurance that the Funds indeed will
make sufficient distributions to avoid entirely imposition of federal excise or
income taxes.
Should additional series, or funds, be created by the Trustees, each fund
would be treated as a separate tax entity for federal income tax purposes.
As of June 30, 1999, The James Small Cap Fund had capital loss
carryforwards for federal income tax purposes of $794, which expire in the year
2007. In addition, during the period from November 1, 1998 through June 30,
1999, The James Small Cap Fund and The James Market Neutral Fund had net
realized capital losses of $13,288 and $853,779, respectively, which are treated
for federal income tax purposes as arising during the Funds' tax year ending
June 30, 2000. These capital loss carryforwards and "post-October" losses may be
utilized in future years to offset net realized capital gains.
DISTRIBUTION PLANS
With respect to the Funds, the Trust has adopted a Plan for each class of
shares, pursuant to Rule 12b-1 which was promulgated by the Securities and
Exchange Commission pursuant to the Investment Company Act of 1940 (the
"Plans"). Each Plan provides for payment of fees to the Distributor to finance
any activity that is principally intended to result in the sale of the Funds'
shares subject to the Plans. Such activities are described in the Prospectus.
Pursuant to the Plans, the Distributor may pay fees to brokers and others for
such services. The Trustees expect that the adoption of the Plans will result in
the sale of a sufficient number of shares so as to allow the Funds to achieve
economic viability. It is also anticipated that an increase in the size of the
Funds will facilitate more efficient portfolio management and assist the Funds
in seeking to achieve its investment objective. The maximum amounts payable by
the Funds under the Plans are described in the Prospectus.
The Trust's Board of Trustees, including a majority of the Trustees who are
not "interested persons" of the Trust and who have no direct or indirect
financial interest in the Plans or any related agreement, approved the Plans,
the Distribution Agreement, the Selling Agreements and the Service Agreements of
the respective Funds by a vote cast in person at a meeting called for the
purpose of voting on the Plans and such agreements and by the shareholders on
August 20, 1998. Continuation of the Plans and the related agreements must be
approved annually in the same manner, and the Plans or any related agreement may
be terminated at any time without penalty by a majority of such independent
Trustees or by a majority of a class' outstanding shares. Any amendment
increasing the maximum percentage payable under a Plan or other material change
must be approved by a majority of the respective class' outstanding shares, and
all other material amendments to a Plan or any related agreement must be
approved by a majority of the independent Trustees.
Various state and federal laws limit the ability of a depository
institution (such as a commercial bank or a savings and loan association) to
become an underwriter or distributor of
- 24 -
<PAGE>
securities. In the event these laws are deemed to prohibit depository
institutions from acting in the capacities described above or should Congress
relax current restrictions on depository institutions, the Board of Trustees
will consider appropriate changes in the services. State securities laws
governing the ability of depository institutions to act as underwriters or
distributors of securities may differ from interpretations given to federal law
and, therefore, banks and financial institutions may be required to register as
dealers pursuant to state law.
For the fiscal period ended June 30, 1999, The James Small Cap Fund and The
James Market Neutral Fund incurred $6,978 and $10,265, respectively, under the
Plans on behalf of the Class A shares of the Funds for payments to
broker-dealers and others for the sale or retention of Fund shares.
PERFORMANCE INFORMATION
"Average annual total return," as defined by the Securities and Exchange
Commission, is computed by finding the average annual compounded rates of return
for the period indicated that would equate the initial amount invested to the
ending redeemable value, according to the following formula:
n
P(1+T) = 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 and that a complete redemption
occurs at the end of the applicable period. For the period ended June 30, 1999,
The James Small Cap Fund's and The James Market Neutral Fund's average annual
returns since inception (October 2, 1998) were 13.76% and -9.70%, respectively.
Each 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 initial public offering
of the Fund's shares) as of the end of a specified period. A non-standardized
quotation will always be accompanied by the Fund's "average annual total return"
as described above.
The James Small Cap Fund's total return since its inception on October 2,
1998, is 18.74%. The James Market Neutral Fund's total return since its
inception on October 2, 1998 is -5.74%.
The Funds' investment performance will vary depending upon market
conditions, the composition of the Funds' respective portfolios and operating
expenses of the Funds. These factors and possible differences in the methods and
time periods used in calculating non-standardized
- 25 -
<PAGE>
investment performance should be considered when comparing the Funds'
performance to those of other investment companies or investment vehicles. The
risks associated with the Funds' 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.
From time to time, in advertisements, sales literature and information
furnished to present or to prospective shareholders, the performance of the
Funds may be compared to indices of broad groups of unmanaged securities
considered to be representative of or similar to the portfolio holdings of the
Funds or considered to be representative of the stock market in general. The
Funds may use the Standard & Poor's 500 Stock Index, the Dow Jones Industrial
Average, the Value Line Stock Index or a blend of stock and bond indices.
In addition, the performance of the Funds 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 Funds. Performance rankings and ratings reported periodically in
national financial publications such as Barron's and Fortune also may be used.
The Funds 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 well-known indices of market performance including the Standard &
Poor's (S&P) 500 Index, the Dow Jones Industrial Average or the Russell 2000
Index.
The advertised performance data of each Fund is based on historical
performance and is not intended to indicate future performance. Rates of total
return quoted by a Fund may be higher or lower than past quotations, and there
can be no assurance that any rate of total return will be maintained. The
principal value of an investment in each Fund will fluctuate so that a
shareholder's shares, when redeemed, may be worth more or less than the
shareholder's original investment.
FINANCIAL STATEMENTS
The financial statements and independent auditors' report required to be
included herein are hereby incorporated by reference to the annual report of The
James Advantage Funds for the period ended June 30, 1999.
- 26 -
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits:
---------
a. Declaration of Trust*
(i) Amendment No. 4
b. Bylaws*
c. Not Applicable
d. (i) Investment Advisory Agreement for The Golden
Rainbow Fund*
(ii) Investment Advisory Agreement for The James Small
Cap Fund*
(iii) Investment Advisory Agreement for The James Market
Neutral Fund*
(iv) Form of Investment Advisory Agreement for The
James Large Cap Plus Fund
e. Underwriting Agreement between The James Advantage Funds and
CW Fund Distributors*
f. Not Applicable
g. Custodian Agreement with Firstar Bank, N.A.*
h. Administration, Accounting and Transfer Agency Agreement*
i. Consent of Counsel*
(i) Consent to Incorporate by Reference and to Use
j. Consent of Accountant
k. Not Applicable
l. Agreement Relating to Initial Capital*
m. (i) Plans of Distribution Pursuant to Rule 12b-1 for
The Golden Rainbow Fund*
(ii) Plans of Distribution Pursuant to Rule 12b-1 for
The James Small Cap Fund*
(iii) Plans of Distribution Pursuant to Rule 12b-1 for
The James Market Neutral Fund*
(iv) Plans of Distribution Pursuant to Rule 12b-1 for
The James Large Cap Plus Fund
n. Not Applicable
o. Rule 18f-3 Plan Adopted With Respect to the Multiple Class
Distribution System*
* Previously filed as Exhibit to Registration Statement on Form N-1A.
<PAGE>
Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
No person is directly or indirectly controlled by or under common
control with the Registrant.
Item 25. Indemnification.
----------------
Article VI of the Registrant's Agreement and Declaration of Trust
provides for indemnification of officers and trustees as follows:
"SECTION 6.4 Indemnification of Trustees, Officers, etc. Subject
to and except as otherwise provided in the Securities Act of
1933, as amended, and the 1940 Act, the Trust shall indemnify
each of its Trustees and officers (including persons who serve at
the Trust's request as directors, officers or trustees of another
organization in which the Trust has any interest as a
shareholder, creditor or otherwise (hereinafter referred to as a
"Covered Person") against all liabilities, including but not
limited to amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and expenses, including
reasonable accountants' and counsel fees, incurred by any Covered
Person in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal,
before any court or administrative or legislative body, in which
such Covered Person may be or may have been involved as a party
or otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being or
having been such a Trustee or officer, director or trustee, and
except that no Covered Person shall be indemnified against any
liability to the Trust or its Shareholders to which such Covered
Person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such Covered Person's
office.
"SECTION 6.5 Advances of Expenses. The Trust shall advance
attorneys' fees or other expenses incurred by a Covered Person in
defending a proceeding to the full extent permitted by the
Securities Act of 1933, as amended, the 1940 Act, and Ohio
Revised Code Section 1701.13(E), as amended, these laws, and not
Ohio Revised Code Section 1701.13(E), shall govern.
"SECTION 6.6 Indemnification Not Exclusive, etc. The right of
indemnification provided by this Article VI shall not be
exclusive of or affect any other rights to which any such Covered
Person may be entitled. As used in this Article VI, "Covered
Person" shall include such person's heirs, executors and
administrators. Nothing contained in this article shall affect
any rights to indemnification to which personnel of the Trust,
other than Trustees and officers, and other persons may be
entitled by contract or otherwise under law, nor the power of the
Trust to purchase and maintain liability insurance on behalf of
any such person."
The Trust maintains a standard mutual fund and investment advisory
professional and directors and officers liability policy. Coverage under the
policy includes losses by reason of any act, error, omission, misstatement,
misleading statement, neglect or breach of duty. The Trust may not pay for
insurance which protects its Trustees and officers against liabilities arising
from action involving willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of their offices.
Item 26. Business and Other Connections of Investment Advisor
----------------------------------------------------
James Investment Research, Inc. is a registered investment advisor
providing general investment advisory services to the series of The
James Advantage Funds: The Golden Rainbow Fund, The James Small Cap
Fund, The James Market Neutral Fund and The James Market Plus Fund.
James Investment Research, Inc. also provides investment advisory
services to corporations, trusts, pension and profit sharing plans,
other business and institutional accounts and individuals. The
following list sets forth the business and other connections of the
directors and officers of James Investment Research, Inc., P.O. Box 8,
Alpha, Ohio 45301.
<PAGE>
(1) Francis E. James, Jr. - President of James Investment Research,
Inc.
(2) Barry R. James - Executive Vice President of James Investment
Research, Inc.
(a) President and Trustee of The James Advantage Funds.
(3) Ann Marie Shaw - Senior Vice President of James Investment
Research, Inc.
(4) Thomas L. Mangan - First Vice President and Compliance Officer of
James Investment Research, Inc.
(a) Treasurer and Secretary of The James Advantage Funds.
(5) Suzanne Smith - Treasurer of James Investment Research, Inc.
(6) Rae James - Secretary of James Investment Research, Inc.
(7) Jerome G. Peppers - Director of James Investment Research, Inc.
(8) Robert G. Hawkins - Director of James Investment Research, Inc.
Item 27. Principal Underwriter
---------------------
(a) CW Fund Distributors, Inc. (the "Distributor") also acts as
principal underwriter for other open-end investment companies:
Brundage, Story and Rose Investment Trust, The Caldwell & Orkin
Funds, Inc., Profit Funds Investment Trust, Firsthand Funds, the
Lake Shore Family of Funds, UC Investment Trust, The Winter
Harbor Fund and The Williamsburg Investment Trust.
(b) The following list sets forth the directors and executive
officers of the Distributor. Unless otherwise noted with an
asterisk(*), the address of the persons named below is 312 Walnut
Street, Cincinnati, Ohio 45202.
*The address is 4500 Park Granada Boulevard, Calabasas,
California 91302.
Position Position
with with
Name Distributor Registrant
---- ----------- ----------
*Angelo R. Mozilo Chairman of None
the Board/Director
*Andrew S. Bielanski Director None
*Thomas H. Boone Director None
*Marshall M. Gates Director None
Robert H. Leshner President/ Vice Chairman/ None
Chief Executive Officer/Director
Maryellen Peretzky Vice President, Secretary None
Robert L. Bennett Vice President, Treasurer
Chief Operations Officer
Terrie A. Wiedenheft Vice President, None
Chief Financial Officer, Treasurer
(c) Inapplicable
<PAGE>
Item 28. Locations of Accounts and Records
---------------------------------
The Registrant maintains the records required by Section 31(a) of the
Investment Company Act of 1940 and Rules 31a-1 to 31a-3 inclusive
thereunder at its principal executive office at 312 Walnut Street,
Cincinnati, Ohio 45202. Certain records, including records relating to
the physical possession of its securities, may be maintained pursuant
to Rule 31a-3 at the main offices of the Registrant's investment
advisors and custodians.
Item 29. Management Services
-------------------
Not Applicable
Item 30. Undertakings
------------
Not Applicable
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933, as amended, and
the Investment Company Act of 1940, as amended, the Registrant certifies that it
meets all of the requirements for effectiveness of this Registration Statement
pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cincinnati and the State of Ohio on
the 1st day of November, 1999.
THE JAMES ADVANTAGE FUNDS
By: /s/ Tina D. Hosking
-------------------
Tina D. Hosking,
Attorney-in-Fact
The term "The James Advantage Funds" means and refers to the Trustees from
time to time serving under the Agreement and Declaration of Trust of the
Registrant dated August 29, 1997, as amended, a copy of which is on file with
the Secretary of State of The State of Ohio. The obligations of the Registrant
hereunder are not binding personally upon any of the Trustees, shareholders,
nominees, officers, agents or employees of the Registrant, but bind only the
trust property of the Registrant, as provided in the Agreement and Declaration
of Trust of the Registrant. The execution of this Registration Statement has
been authorized by the Trustees of the Registrant and this Registration
Statement has been signed by an authorized officer of the Registrant, acting as
such, and neither such authorization by such Trustees nor such execution by such
officer shall be deemed to have been made by any of them, but shall bind only
the trust property of the Registrant as provided in its Declaration of Trust.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
Signature Title Date
- --------- ----- ----
/s/ Barry R. James Trustee and President November 1, 1999
- ----------------------------- (principal executive
Barry R. James officer)
/s/ Robert L. Bennett Treasurer November 1, 1999
- ----------------------------- (principal financial and
Robert L. Bennett accounting officer)
Barry R. James* Trustee
Thomas L. Mangan* Trustee
Anthony P. D'Angelo* Trustee
Hazel L. Eichelberger* Trustee
James F. Zid* Trustee
*By: /s/ Tina D. Hosking
-------------------
Tina D. Hosking
Attorney-in-Fact
November 1, 1999
<PAGE>
INDEX TO EXHIBITS
-----------------
Exhibit
Number Description of Exhibit
- ------ ----------------------
a. Declaration of Trust*
(i) Amendment No. 4
b. Bylaws*
c. Not Applicable
d. (i) Investment Advisory Agreement for The Golden Rainbow Fund*
(ii) Investment Advisory Agreement for The James Small Cap Fund*
(iii) Investment Advisory Agreement for The James Market Neutral Fund*
(iv) Form of Investment Advisory Agreement for The James Market Plus Fund
e. Underwriting Agreement between The James Advantage Funds and CW Fund
Distributors *
f. Not Applicable
g. Custodian Agreement with Firstar Bank, N.A.*
h. Administration, Accounting and Transfer Agency Agreement*
i. Consent of Counsel*
(i) Consent to Incorporate by Reference and to Use
j. Consent of Accountant
k. Not Applicable
l. Agreement Relating to Initial Capital*
m. (i) Plans of Distribution Pursuant to Rule 12b-1 for The Golden Rainbow
Fund*
(ii) Plans of Distribution Pursuant to Rule 12b-1 for The James Small Cap
Fund*
(iii) Plans of Distribution Pursuant to Rule 12b-1 for The James Market
Neutral Fund*
(iv) Plans of Distribution Pursuant to Rule 12b-1 for The James Large Cap
Plus Fund
n. Not Applicable
o. Rule 18f-3 Plan Adopted With Respect to the Multiple Class
Distribution System*
* Previously filed as Exhibit to Registration Statement on Form N-1A
THE JAMES ADVANTAGE FUNDS AMENDMENT NO. 4
AGREEMENT AND DECLARATION OF TRUST
1. Pursuant to Sections 4.1 and 7.3 of the Agreement and Declaration of
Trust of The James Advantage Funds and effective upon execution of this
document, the undersigned, being a majority of the trustees of The James
Advantage Funds, hereby; (a) establish one new series of shares of the Trust and
designate such series "The James Large Cap Plus Fund" (the "Series"); and (b)
establish three new classes of The James Large Cap Plus Fund and designate such
classes: "Class A," "Class C" and "Class R."
2. The relative rights and preferences of such series shall be those rights
and preferences set forth in Section 4.2 of the Agreement and Declaration of
Trust of The James Advantage Funds.
3. This document shall have the status of an Amendment to said Agreement
and Declaration of Trust, and may be executed in one or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
/s/ Barry R. James
------------------------
Barry R. James
/s/ James F. Zid
------------------------
James F. Zid
/s/ Anthony P. D'Angelo
------------------------
Anthony P. D'Angelo
/s/ Hazel Eichelberger
------------------------
Hazel Eichelberger
Dated: August 24, 1999
MANAGEMENT AGREEMENT
TO: James Investment Research, Inc.
P.O. Box 8
Alpha, Ohio 45301
Dear Sirs:
The James Advantage Funds (the "Trust") herewith confirms our agreement
with you.
The Trust has been organized to engage in the business of an investment
company. The Trust currently offers several series of shares to investors, one
of which is the James Large Cap Plus Fund (the "Fund").
You have been selected to act as the sole investment adviser of the Fund
and to provide certain other services, as more fully set forth below, and you
are willing to act as such investment adviser and to perform such services under
the terms and conditions hereinafter set forth. Accordingly, the Trust agrees
with you as follows upon the date of the execution of this Agreement.
1. ADVISORY SERVICES
-----------------
You will regularly provide the Fund with such investment advice as you
in your discretion deem advisable and will furnish a continuous investment
program for the Fund consistent with the Fund's investment objectives and
policies. You will determine the securities to be purchased for the Fund, the
portfolio securities to be held or sold by the Fund and the portion of the
Fund's assets to be held uninvested, subject always to the Fund's investment
objectives, policies and restrictions, as each of the same shall be from time to
time in effect, and subject further to such policies and instructions as the
Board of Trustees of the Trust (the "Board") may from time to time establish.
You will advise and assist the officers of the Trust in taking such steps as are
necessary or appropriate to carry out the decisions of the Board and the
appropriate committees of the Board regarding the conduct of the business of the
Fund.
2. ALLOCATION OF CHARGES AND EXPENSES
----------------------------------
You will pay all organizational, offering and operating expenses
(other than expenses specifically assumed by the Fund) of the Fund, including
the compensation and expenses of any employees of the Fund and of any other
persons rendering any services to the Fund; clerical and shareholder service
staff salaries; office space and other office expenses; fees and expenses
incurred by the Fund in connection with membership in investment company
organizations; legal, auditing and accounting expenses; expenses of registering
shares under federal and state securities laws; insurance expenses; fees and
expenses of the custodian, transfer agent, dividend disbursing agent,
shareholder service agent, plan agent, administrator, accounting and pricing
services agent and underwriter of the Fund; expenses, including clerical
expenses, of issue, sale redemption or repurchase of shares of the Fund; the
cost of preparing and distributing reports and notices to shareholders, the cost
of printing or preparing prospectuses
<PAGE>
and statements of additional information for delivery to the Fund's current
shareholders; the cost of printing or preparing stock certificates or any other
documents, statements or reports to shareholders; expenses of shareholders'
meetings and proxy solicitations; and all other operating expenses not
specifically assumed by the Fund.
The Fund will pay all brokerage fees and commissions, taxes, interest,
fees and expenses of the non-interested person trustees and such extraordinary
or non-recurring expenses as may arise, including litigation to which the Fund
may be a party and indemnification of the Trust's trustees and officers with
respect thereto. The Fund will pay all expenses which may be incurred pursuant
to the Fund's Rule 12b-1 Distribution Plan (the "12b-1 Expenses"). You may
obtain reimbursement from the Fund, at such time or times as you may determine
in your sole discretion, for any of the expenses advanced by you, which the Fund
is obligated to pay, and such reimbursement shall not be considered to be part
of your compensation pursuant to this Agreement.
3. COMPENSATION OF THE ADVISER
---------------------------
For all of the services to be rendered and payments to be made as
provided in this Agreement, as of the last business day of each month, the Fund
will pay you a fee (a) at the annual rate of 1.25% of the average value of its
daily net assets, minus (b) the fees and expenses of the non-interested person
trustees incurred by the Fund.
The average value of the daily net assets of the Fund shall be
determined pursuant to the applicable provisions of the Declaration of Trust of
the Trust or a resolution of the Board, if required. If, pursuant to such
provisions, the determination of net asset value of the fund is suspended for
any particular business day, then for the purposes of this paragraph, the value
of the net assets of the Fund as last determined shall be deemed to be the value
of the net assets as of the close of the business day, or as of such other time
as the value of the Fund's net assets may lawfully be determined, on that day.
If the determination of the net asset value of the Fund has been suspended for a
period including such month, your compensation payable at the end of such month
shall be computed on the basis of the value of the net assets of the Fund as
last determined (whether during or prior to such month).
4. EXECUTION OF PURCHASE AND SALE ORDERS
-------------------------------------
In connection with purchases or sales of portfolio securities for the
account of the Fund, it is understood that you will arrange for the placing of
all orders for the purchase and sale of portfolio securities for the account
with brokers or dealers selected by you, subject to review of this selection by
the Board from time to time. You will be responsible for the negotiation and the
allocation of principal business and portfolio brokerage. In the selection of
such brokers or dealers and the placing of such orders, you are directed at all
times to seek for the Fund the best qualitative execution, 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.
- 2 -
<PAGE>
You should generally seek favorable prices and commission rates that
are reasonable in relation to the benefits received. In seeking best qualitative
execution, you are authorized to select brokers or dealers who also provide
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) to the Fund and/or the other accounts over
which you exercise investment discretion. You are authorized to pay a broker or
dealer who provides such brokerage and research services a commission for
executing a Fund portfolio transaction which is in excess of the amount of
commission another broker or dealer would have charged for effecting that
transaction if you determine in good faith that the amount of the commission is
reasonable in relation to the value of the brokerage and research services
provided by the executing broker or dealer. The determination may be viewed in
terms of either a particular transaction or your overall responsibilities with
respect to the Fund and to accounts over which you exercise investment
discretion. The Fund and you understand and acknowledge that, although the
information may be useful to the Fund and you, it is not possible to place a
dollar value on such information. The Board shall periodically review the
commissions paid by the Fund to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits to
the Fund.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., and subject to seeking best qualitative execution
as described above, you may give consideration to sales of shares of the Fund as
a factor in the selection of brokers and dealers to execute Fund portfolio
transactions.
Subject to the provisions of the Investment Company Act of 1940, as
amended (the "Act"), and other applicable law, you, any of your affiliates or
any affiliates of your affiliates may retain compensation in connection with
effecting the Fund's portfolio transactions, including transactions effected
through others. If any occasion should arise in which you give any advice to
clients of yours concerning the shares of the Fund, you will act solely as
investment counsel for such client and not in any way on behalf of the Fund.
Your services to the Fund pursuant to this Agreement are not to be deemed to be
exclusive and it is understood that you may render investment advice, management
and other services to others, including other registered investment companies.
5. LIMITATION OF LIABILITY OF ADVISER
----------------------------------
You may rely on information reasonably believed by you to be accurate
and reliable. Except as may otherwise be required by the Act or the rules
thereunder, neither you nor your officers, directors, employees, agents, control
persons or affiliates of any thereof shall be subject to any liability for, or
any damages, expenses or losses incurred by the Trust in connection with, any
error of judgement, mistake of law, any act or omission connected with or
arising out of any services rendered under, or payments made pursuant to, this
Agreement or any other matter to which this Agreement relates, except by reason
of willful misfeasance, bad faith or gross negligence on the part of any such
persons in the performance of your duties under this Agreement, or by reason of
reckless disregard by any of such persons of your obligations and duties under
this Agreement.
- 3 -
<PAGE>
Any person, even though also a director, officer, employee or agent of
you, who may be or become an officer, director, trustee, employee or agent of
the Trust, shall be deemed, when rendering services to the Trust or acting on
any business of the Trust (other than services or business in connection with
your duties hereunder), to be rendering such services to or acting solely for
the Trust and not as a director, officer, employee or agent of you, or one under
your control or direction, even though paid by you.
6. DURATION AND TERMINATION OF THIS AGREEMENT
------------------------------------------
This Agreement shall take effect on the date of its execution by you,
and shall remain in force for a period of two (2) years from the date of its
execution, and from year to year thereafter, subject to annual approval by (i)
the Board or (ii) a vote of a majority (as defined in the Act) of the
outstanding voting securities of the Fund, provided that in either event
continuance is also approved by a majority of the trustees who are not
"interested persons," as defined in the Act, of you or the Trust, by a vote cast
in person at a meeting called for the purpose of voting such approval.
If the shareholders of the Fund fail to approve the Agreement in the
manner set forth above, upon request of the Board, you will continue to serve or
act in such capacity for the Fund for the period of time pending required
approval of the Agreement, of a new agreement with you or a different adviser or
other definitive action; provided that the compensation to be paid by the Fund
to you for your services to and payments on behalf of the Fund will be equal to
the lesser of your actual costs incurred in furnishing such services and
payments or the amount you would have received under this Agreement for
furnishing such services and payments.
This Agreement may, on sixty (60) days written notice, be terminated
with respect to the Fund, at any time without the payment of any penalty, by the
Board, by a vote of a majority of the outstanding voting securities of the Fund,
or by you. This Agreement shall automatically terminate in the event of its
assignment.
7. USE OF NAME
-----------
The Trust and you acknowledge that all rights to the name "James Large
Cap Plus," or any variation thereof, belongs to you, and that the Trust is being
granted a limited license to use such words in its Fund name or in any class
name. In the event you cease to be the adviser to the Fund, the Trust's right to
use the name "James Large Cap Plus," or any variation thereof, shall
automatically cease on the ninetieth (90th) day following the termination of
this Agreement. The right to the name may also be withdrawn by you during the
term of this Agreement upon ninety (90) days' written notice by you to the
Trust. Nothing contained herein shall impair or diminish in any respect, your
right to use the name "James Large Cap Plus," or any variation thereof, in the
name of, or in connection with, any other business enterprises with which you
are or may become associated. There is no charge to the Trust for the right to
use these names.
- 4 -
<PAGE>
8. AMENDMENT OF THIS AGREEMENT
---------------------------
No provision of this Agreement may be changed, waived, discharged or
terminated orally, and no amendment of this Agreement shall be effective until
approved by the Board, including a majority of the trustees who are not
interested persons of you or of the Trust, cast in person at a meeting called
for the purpose of voting on such approval, and (if required under
interpretations of the Act by the Securities and Exchange Commission) by vote of
the holders of a majority of the outstanding voting securities of the series to
which the amendment relates.
9. LIMITATION OF LIABILITY TO TRUST PROPERTY
-----------------------------------------
The term "The James Advantage Funds" means and refers to the Trustees
from time to time serving under the Trust's Declaration of Trust as the same may
subsequently thereto have been, or subsequently hereto be, amended. It is
expressly agreed that the obligations of the Trust hereunder shall not be
binding upon any of the trustees, shareholders, nominees, officers, agents or
employees of the Trust personally, but bind only the trust property of the
Trust, as provided in the Declaration of Trust of the Trust. The execution and
delivery of this Agreement have been authorized by the trustees and shareholders
of the Trust and signed by officers of the Trust, acting as such, and neither
such authorization by such trustees and shareholders nor such execution and
delivery by such officers shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the trust property of the Trust as provided in its Declaration of
Trust. A copy of the Agreement and Declaration of Trust of the Trust is on file
with the Secretary of the State of Ohio.
10. SEVERABILITY
------------
In the event any provision of this Agreement is determined to be void
or unenforceable, such determination shall not affect the remainder of this
Agreement, which shall continue to be in force.
11. QUESTIONS OF INTERPRETATION
---------------------------
(a) This Agreement shall be governed by the laws of the State of Ohio.
(b) Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the Act shall be resolved by reference to such term or provision of the Act
and to interpretation thereof, if any, by the United States courts or in the
absence of any controlling decision of any such court, by rules, regulations or
orders of the Securities and Exchange Commission issued pursuant to said Act. In
addition, where the effect of a requirement of the Act, reflected in any
provision of this Agreement is revised by rule, regulation or order of the
Securities and Exchange Commission, such provision shall be deemed to
incorporate the effect of such rule, regulation or order.
- 5 -
<PAGE>
12. NOTICES
-------
Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further notice
to the other party, it is agreed that the address of the Trust is 1349
Fairground Road, Beavercreek, Ohio 45385, and your address for this purpose
shall be P.O. Box 8, Alpha, Ohio 45301.
13. COUNTERPARTS
------------
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
14. BINDING EFFECT
--------------
Each of the undersigned expressly warrants and represents that he has
the full power and authority to sign this Agreement on behalf of the party
indicated, and that his signature will operate to bind the party indicated to
the foregoing terms.
15. CAPTIONS
--------
The captions in this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
If you are in agreement with the foregoing, please sign the form of
acceptance on the accompanying counterpart of this letter and return such
counterpart to the Trust, whereupon this letter shall become a binding contract
upon the date thereof.
Yours very truly,
James Advantage Funds
By __________________________
Barry Ray James, President
Dated: ________________, 1999
ACCEPTANCE
- ----------
The foregoing Agreement is hereby accepted.
James Investment Research, Inc.
By ________________________________
Francis E. James, Jr., President
Dated: __________________, 1999
- 6 -
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 4 to the Registration
Statement of The James Advantage Funds under the Securities Act of 1933, filed
under Registration Statement No. 33-37277 of our report dated July 30, 1999,
relating to The Golden Rainbow Fund, The James Small Cap Fund and The James
Market Neutral Fund included in the Statements of Additional Information, which
is part of such Registration Statement, and to the references to us under the
captions "Financial Highlights" and "Other Services" in such Registration
Statement.
DELOITTE & TOUCHE LLP
Dayton, Ohio
October 29, 1999
FORM OF DISTRIBUTION PLAN
CLASS A SHARES
THE JAMES LARGE CAP PLUS FUND
1. This Plan (the "Plan") is the written plan contemplated by Rule 12b-1 (the
"Rule") under the Investment Company Act of 1940 (the "Act") of the Class A
Shares (the "Class") of The James Large Cap Plus Fund (the "Fund"). This Plan
describes the material terms and conditions under which Fund assets may be used
in connection with financing distribution of shares of the Class (the "Shares").
This Plan will be implemented by certain related agreements with the Fund's
distributor or distributors ("Distribution Agreements"), broker-dealers
("Selling Agreements") and non-broker-dealers ("Service Agreements").
2. The Fund is hereby authorized, for the purposes and on the further terms and
conditions set forth herein, to expend its monies in an amount equal in the
aggregate for all such expenditures to such percentage (not in excess of .40%
per annum) of the Class's average daily net asset values as may be determined
from time to time, by vote cast in person at a meeting called for the purpose of
voting on such determination, but a majority of the members of the Board of
Trustees of the James Advantage Funds (the "Trust") who are not "interested
persons" of the Trust (as such term is defined in the Act) and have no direct or
indirect financial interest in the operation of this Plan or any of the
agreements contemplated hereby (the "Disinterested Trustees").
3. The Fund is hereby authorized to pay all fees and expenses payable by the
Fund to the Fund's distributor or distributors pursuant to the Distribution
Agreement. In addition, the Fund is hereby authorized to reimburse any
underwriter, distributor or selling agent (a "Seller") of Shares for
out-of-pocket costs and expenditures actually incurred by any such Seller for
(a) printing and distributing copies of any prospectuses and annual and interim
reports of the Fund (after the Fund has prepared and set in type such materials)
that are used by such Seller in connection with the offering of Shares; (b)
preparing, printing and distributing any other literature used by such Seller in
connection with the offering of Shares; (c) advertising, promoting and selling
Shares to the public and (d) performing Selling Agreements with other persons.
Such reimbursement shall be made only to Sellers with which the Fund has entered
into a Distribution Agreement that permits payments by the Fund only in
accordance with the foregoing provisions and the form of which has the approval
of both a majority of the Board of Trustees of the Trust and a majority of the
Disinterested Trustees as required by the Rule. Such reimbursement shall be made
monthly upon receipt by the Fund of a written expenses report showing the
expenses qualifying for such reimbursement and the purposes thereof and shall
not, for any Seller or for all Sellers in the aggregate if there are more than
one such Seller at any time, exceed the amount determined pursuant to Section 2.
4. The Selling Agreements contemplated by paragraph 3(d) above shall permit
payments by a Seller only in accordance with the provisions of this paragraph
and the form of such agreement shall have the approval of a majority of the
Board of Trustees of the Trust and a majority of the Disinterested Trustees by
vote cast in person at a meeting called for the purpose of voting on such
Selling Agreement. A Seller may pay the other party to such a Selling Agreement
<PAGE>
a monthly fee (and no other compensation of any sort whatsoever) for
distribution and marketing services provided by such other party. Such monthly
fee shall be payable in arrears in an amount equal to such percentage (not in
excess of .001096% per day) of the aggregate net asset value of the Shares held
by such other party's customers or clients at the close of each day as
determined from time to time by such Seller. The distribution and marketing
services contemplated hereby shall include answering inquiries regarding the
Fund, assisting in selecting dividend payment options, account designations and
addresses, maintaining the investment of such other party's assistance in
maintaining such investment by its customers or clients, such Seller may take
into account the possibility that the Shares held by such other party's
customers or clients would be redeemed in the absence of such monthly fee.
5. The Fund is hereby authorized to pay a monthly fee, subject to the same
limitations (including the amount of such fee) and for the same purposes as set
forth in paragraphs 3 and 4 above, to any person that is not an "affiliated
person" or "interested person" of the Fund or of its "investment adviser" or
"principal underwriter" (as such terms are defined in the Act) who provides
marketing and distribution services to the Fund. Such monthly fee shall be paid
only pursuant to Service Agreements between the Fund and such other persons that
permit payments to such person, only in accordance with the provisions of this
paragraph 5 and the form of which has the approval of a majority of the Board of
Trustees of the Trust and a majority of the Disinterested Trustees by vote cast
in person at a meeting called for the purpose of voting on such Service
Agreement.
6. The Fund and each Seller making any payments pursuant to a Selling Agreement
shall prepare separate written reports to the Board of Trustees on a quarterly
basis summarizing all payments made by them pursuant to this Plan and the
agreements contemplated hereby, the purposes for which such payments were made
and such other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time.
7. This Plan shall become effective upon its approval by (a) a majority of the
outstanding voting securities (as such phrase is defined in the Act) of the
Class and (b) a majority of the Board of Trustees of the Trust and a majority of
the Disinterested Trustees by vote cast in person at a meeting called for the
purpose of voting on this Plan.
8. Upon receipt of the approvals required by paragraph 7 above, this Plan and
any agreement contemplated hereby shall continue in effect beyond the first
anniversary of its adoption by the Board of Trustees of the Trust only so long
as (a) its continuation is approved at least annually in the manner set forth in
clause (b) of paragraph 7 above and (b) the selection and nomination of those
Trustees of the Trust who are not "interested persons" of the Trust are
committed to the discretion of such Trustees.
9. This Plan may be terminated without penalty at any time by a majority of the
Disinterested Trustees or by a "majority of the outstanding voting securities"
of the Class.
10. This Plan may not be amended to increase materially the maximum amount
permitted to be expended hereunder except with the approval of a "majority of
the outstanding voting securities" of the Class and may not be amended in any
other material respect except with the approval of a majority of the
Disinterested Trustees. Amendments required to conform this Plan to changes in
the Rule shall not be deemed to be material amendments.
2
<PAGE>
THE JAMES LARGE CAP PLUS FUND
CLASS C PLAN OF DISTRIBUTION
PURSUANT TO RULE 12B-1
----------------------
WHEREAS, The James Advantage Funds, an Ohio business trust (the `Trust"),
engages in business as an open-end management investment company and is
registered as such under the Investment Company Act of 1940, as amended (the
"Act"); and
WHEREAS, the Trust is authorized to issue an unlimited number of shares of
beneficial interest without par value (the "Shares"), which may be divided into
one or more series of Shares; and
WHEREAS, the Trustees of the Trust as a whole, and the Trustees who are not
interested persons of the Trust (as defined in the Act) and who have no direct
or indirect financial interest in the operation of this Plan or in any agreement
relating hereto (the "Qualified Trustees'), having determined, in the exercise
of reasonable business judgment and in light of their fiduciary duties under
state law and under Section 36(a) and (b) of the Act, that there is a reasonable
likelihood that this Plan will benefit The James Large Cap Plus Fund (the
"Fund") and the Class C shareholders of the Fund, have approved this Plan by
votes cast in person at a meeting called for the purpose of voting hereon and on
any agreements related hereto;
NOW THEREFORE, the Trust hereby adopts this Plan for the Class C Shares of
the Fund, in accordance with Rule 12b-1 under the Act, on the following terms
and conditions:
1. DISTRIBUTION ACTIVITIES. Subject to the supervision of the Trustees of the
Trust, the Trust may, directly or indirectly, engage in any activities related
to the distribution of Class C Shares of the Fund, which activities may include,
but are not limited to, the following: (a) payments, including incentive
compensation, to securities dealers or other financial intermediaries, financial
institutions, investment advisers and others that are engaged in the sale of
Class C Shares, or that may be advising shareholders of the Trust regarding the
purchase, sale or retention of Class C Shares; (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
Class C Shares; (c) costs of preparing, printing and distributing prospectuses
and statements of additional information and reports of the Fund for recipients
other than existing shareholders of the Fund; (d) costs of formulating and
implementing marketing and promotional activities, including, but not limited
to, 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, from time to time, deem advisable; and (g) costs of implementing and
operating this Plan. The Trust is authorized to engage in the activities listed
above, and in any other activities related to the distribution of Class C
Shares, either directly or through other persons with which the Trust has
entered into agreements related to this Plan.
<PAGE>
2. MAXIMUM EXPENDITURES. The expenditures to be made by the Trust pursuant to
Section 1 of this Plan and the basis upon which payment of such expenditures
will be made shall be determined by the Trustees of the Trust, but in no event
may such expenditures exceed in any fiscal year an amount calculated at the rate
of .75% of the average daily net asset value of Class C Shares of the Fund. Such
payments for distribution activities may be made directly by the Trust, or the
Trust's investment adviser or principal underwriter may incur such expenses and
obtain reimbursement from the Trust.
3. SERVICE FEES. In addition to the payments of compensation provided for in
Section 2 and in order to further enhance the distribution of the Fund's Class C
Shares, the Fund may compensate securities dealers or other financial
intermediaries, financial institutions, investment advisers and others that (a)
hold Class C 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 (b) render shareholder support services not otherwise
provided by the Trust's transfer agent, including, but not limited to, 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
reasonably request. These service fees shall be paid in an amount determined by
the Trustees, but in no event to exceed an annual rate of .25% of the daily net
assets of the Class C Shares of the Fund. If the National Association of
Securities Dealers ("NASD") adopts a definition of "service fees" for purposes
of Section 26(d) of the Rules of Fair Practice of the NASD (or any successor to
such rule) that differs from the definition of service fees hereunder, the
definition of service fees hereunder shall be automatically amended, without
further action of the parties, to conform to such NASD definition.
4. TERM AND TERMINATION.
(a) This Plan shall become effective upon the first issuance of Class C shares
after the fund has commenced operations.
(b) Unless terminated as herein provided, this Plan shall continue in effect for
one year from the effective date and shall continue in effect for successive
periods of one year thereafter, but only so long as each such continuance is
specifically approved by votes of a majority of both (i) the Trustees of the
Trust and (ii) the Qualified Trustees, cast in person at a meeting called for
the purpose of voting on such approval.
(c) This Plan may be terminated at any time by the vote of a majority of the
Rule 12b-1 Trustees or by vote of a majority of the outstanding voting
securities (as defined in the Act) of the Class C Shares of the Fund. If this
Plan is terminated, the Fund will not be required to make any payments for
expenses incurred after the date of termination.
5. AMENDMENTS. All material amendments to this Plan must be approved in the
manner provided for annual renewal of this Plan in Section 4(b) hereof. In
addition, this Plan may not be amended to increase materially the amount of
expenditures provided for in Sections 2 and 3 hereof unless such amendment is
approved by a vote of the majority of the outstanding voting securities of the
Class C Shares of the Fund (as defined in the Act).
2
<PAGE>
6. SELECTION AND NOMINATION OF TRUSTEES. While this Plan is in effect, the
selection and nomination of Trustees who are not interested persons (as defined
in the Act) of the Trust shall be committed to the discretion of the Trustees
who are not interested persons of the Trust.
7. QUARTERLY REPORTS. The Treasurer of the Trust shall provide to the Trustees
and the Trustees shall review, at least quarterly, a written report of the
amounts expended pursuant to this Plan and any related agreement and the
purposes for which such expenditures were made.
8. RECORDKEEPING. The Trust shall preserve copies of this Plan and any related
agreement and all reports made pursuant Section 7 hereof, for a period of not
less than six years from the date of this Plan, the agreements or such reports,
as the case may be, the first two years in an easily accessible place.
9. LIMITATION OF LIABILITY. A copy of the Trust's Agreement and Declaration of
Trust is on file with the Secretary of the State of Ohio and notice is hereby
given that this Plan is executed on behalf of the Trustees of the Trust as
trustees and not individually and that the obligations of this instrument are
not binding upon the Trustees, the shareholders of the Trust individually or the
assets or property of any other series of the Trust, but are binding only upon
the assets and property of the Fund.
IN WITNESS WHEREOF, the Trust has caused this Plan to be executed as of the
date set forth below.
Date: ___________, 1999
Attest: THE JAMES ADVANTAGE FUNDS
_________________________ By: _________________________
Secretary President
BROWN, CUMMINS & BROWN CO., L.P.A.
ATTORNEYS AND COUNSELORS AT LAW
3500 CAREW TOWER
441 VINE STREET
Cincinnati, Ohio 45202
TELEPHONE (513) 381-2121
TELECOPIER (513) 381-2125
J. W. BROWN (1911-1995)
JAMES R. CUMMINS JOANN M. STRASSER
ROBERT S BROWN AARON A. VANDERLAAN
DONALD S. MENDELSOHN ----------
LYNNE SKILKEN OF COUNSEL
AMY G. APPLEGATE GILBERT BETTMAN
KATHRYN KNUE PRZYWARA
MELANIE S. CORWIN
October 28, 1999
The James Advantage Funds
1349 Fairground Road
Beavercreek, Ohio 45385
Ladies and Gentlemen:
A legal opinion that we prepared was filed with the Trust's Registration
Statement (the "Legal Opinion"). We hereby give you our consent to incorporate
by reference the Legal Opinion into Post-Effective Amendment No. 4 to your
Registration Statement (the "Amendment"), and consent to all references to us in
the Amendment.
Very truly yours,
Brown, Cummins & Brown Co., L.P.A.
