Filed pursuant to Rule 497(c)
for File No. 333-35821
PROSPECTUS
THE WESTPORT FUNDS
WESTPORT FUND
WESTPORT SMALL CAP FUND
December 31, 1997
The Westport Funds (the "Trust") is a no-load, open-end, management
investment company with two different investment portfolios -- Westport Fund and
Westport Small Cap Fund (each, a "Fund" and, collectively, the "Funds"). Each
Fund has a distinct investment objective, but both Funds are managed with the
same value-oriented strategy. There can be no assurance that either Fund will
achieve its investment objective. This prospectus describes the following Funds:
Westport Fund
The Westport Fund seeks a return composed of capital
appreciation by investing in the securities of companies
which are undervalued relative to such company's assets or
long-term earnings potential. The Fund invests primarily in
equity securities and current income is a secondary
consideration. The median market capitalization of the
companies the Fund invests in is expected to be mid range --
between $1 billion and $5 billion.
Westport Small Cap Fund
The Westport Small Cap Fund seeks long-term capital
appreciation by investing in the securities of companies
which are undervalued relative to such company's assets or
long-term earnings potential. The Fund invests primarily in
equity securities of companies with market capitalizations
less than or equal to $1 billion.
Shares of both Funds are offered to investors without any sales charge.
Each Fund offers two classes of shares to investors, with each class subject to
differing expenses and minimum investment amounts.
This Prospectus offers shares of the Funds and sets forth concisely the
information concerning the Trust and the Funds that a prospective investor ought
to consider before investing. Investors are advised to read this Prospectus and
retain it for future reference. The Trust has filed with the Securities and
Exchange Commission a Statement of Additional Information ("SAI"), dated
December 31, 1997, which contains more detailed information about the Trust and
the Funds and is incorporated into this Prospectus by reference. A copy of the
SAI may be obtained without charge by contacting The Westport Funds at (888)
593-7878.
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Shares of the Trust are not deposits or obligations of, or guaranteed
or endorsed by, any bank or credit union, and shares of the Trust are not
federally insured by the Federal Deposit Insurance Corporation, the Federal
Reserve Board, or any other agency.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PROSPECTUS SUMMARY
General Description of the Trust and the Funds
The Trust is a diversified, no-load, open-end, management investment
company organized as a Delaware business trust, composed of two separate series:
the Westport Fund and the Westport Small Cap Fund. Each of the Funds has
distinct investment objectives and strategies. There is, of course, no assurance
that either Fund will achieve its investment objectives.
Summary of the Funds
Investment Objective and Policies. The Funds seek long-term capital
appreciation by investing primarily in equity securities of mid and small
capitalization companies. Westport Advisers, LLC, the Funds' investment adviser
(the "Adviser"), employing a modified "value" approach to each Fund's
investments, seeks to identify companies that have experienced fundamental
change, are misunderstood by the investment community leading to undervaluation
in the marketplace, or are intrinsically undervalued relative to their assets or
long-term earnings potential. Companies with mid range ($1 billion to $5
billion) or smaller market capitalizations that are out of favor are often not
closely followed by analysts providing an opportunity for enhanced returns from
analytical and other research efforts. See "Investment Strategy."
Management. Westport Advisers, LLC, an affiliate of, and having the
same portfolio managers as, Westport Asset Management, Inc. ("Westport"), is the
Funds' investment adviser and makes investment decisions for the Funds.
Countrywide Fund Services, Inc. (the "Administrator") and Countrywide
Investments, Inc., or an affiliated company (the "Distributor"), act,
respectively, as the administrator and distributor of the Funds. See
"Management."
Purchases and Redemptions. Shares of either Fund may be purchased or
redeemed, without any sales charges, Monday through Friday, except on days that
the New York Stock Exchange is closed (a "Fund Business Day"). Each Fund
consists of two classes of shares. The minimum initial investment for Class R
shares of either Fund is $5,000, $2,000 for retirement accounts, or $1,000 for
Uniform Gifts or Transfers to Minors and Automatic Investment Plan accounts. For
Class I shares, the minimum initial investment is $1 million for either Fund.
Currently, there is no minimum for subsequent investments in either Class of
either Fund; however, the Adviser reserves the right to change such minimum for
subsequent investments. Other than the minimum initial investment amounts, the
principle difference between the Class R and Class I shares of each Fund is the
expectation of lower operating expenses attributable to the Class I shares over
time. See "Purchases and Redemptions of Shares."
Dividends. Dividends representing the net investment income of a Fund
are declared and paid at least annually. Net capital gains realized by a Fund,
if any, also will be distributed annually. Dividends and distributions are
reinvested in additional shares of the relevant Fund unless a shareholder elects
to have them paid in cash. See "Dividends and Tax Matters."
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Risk Factors and Investment Considerations. The Funds do not invest
primarily for income, although the Westport Fund's investment objective is to
achieve a return composed of capital appreciation and secondarily current
income. The Funds do not by themselves provide a complete or balanced investment
program, although the Westport Fund may be viewed as a "core holding" in an
investor's portfolio due to its investment flexibility across the range of
equity market capitalizations. The Funds may be an appropriate investment for
investors willing to tolerate possibly significant fluctuations in net asset
value while seeking long-term returns that are potentially higher than market
averages. The securities of small and mid capitalization companies typically are
more thinly traded and volatile than those of larger companies. In the long-run,
small capitalization companies generally have greater growth potential than mid
capitalization companies which have greater growth potential than large
capitalization companies. In the shorter term, however, the prices of securities
of small capitalization companies, and mid capitalization companies to a lesser
extent, may fluctuate significantly in response to news about the company, the
markets or the economy.
Other investments and investment techniques of the Funds, such as
investments in securities of foreign issuers, may entail additional risks or
have speculative characteristics. See "Investment Risks" and "Investment
Policies."
Special Risks
There are certain risks associated with the investment policies of each
of the Funds. For instance, to the extent that a Fund invests in the securities
of small to mid range market capitalization companies, or financial instruments
related to such securities, the Fund may be exposed to a higher degree of risk
and price volatility because such investments may lack sufficient liquidity to
enable the Fund to effect sales at an advantageous time or without a substantial
drop in price. To the extent that a Fund invests in securities of non-U.S.
issuers or securities denominated or quoted in foreign currencies, the Fund may
face risks that are different from those associated with investments in domestic
U.S. dollar denominated or quoted securities, including the effects of changes
in currency exchange rates, political and economic developments, the possible
imposition of exchange controls, governmental confiscation or restrictions,
decreased availability of data on companies and a less well-developed securities
industry, as well as less regulation of stock exchanges, brokers and issuers.
For more details on the risks associated with certain investment techniques, see
"Investment Risks." Also see "Additional Investment Practices -- Portfolio
Transactions."
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EXPENSES OF INVESTING IN A WESTPORT FUND
The following table should help you understand the various costs and
expenses that you will bear if you invest in a Fund.
Shareholder Transaction Expenses for All Funds:
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
Annual Fund Operating Expenses: (as a percentage of average net assets)
Westport
Westport Fund Small Cap Fund
Class R Class I Class R Class I
Advisory Fees 0.90% 0.90% 1.00% 1.00%
12b-1 Fees None None None None
Other Expenses(1)
Shareholder Servicing Fees(2) 0.20% None 0.20% None
Miscellaneous Expenses
(After Reimbursement)(3) 0.40% 0.60% 0.30% 0.50%
Total Fund Operating Expenses(4) 1.50% 1.50% 1.50% 1.50%
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(1) The amount of the "Other Expenses" is an estimate for each Fund's first
full fiscal year of operation.
(2) The Trust does not anticipate paying or accruing any service fees at a rate
above 0.20% until December 31, 1998 or later. After such date, service fees
may be accrued at a rate of up to 0.25% of a Fund's average net assets.
(3) The Adviser has voluntarily agreed to limit the total expenses of the Funds
(excluding interest, taxes, brokerage, and extraordinary expenses) to an
annual rate of 1.50% of each Fund's average net assets until December 31,
1998. As long as this temporary expense limitation continues, it may lower
the Funds' expenses and increase its total return. After December 31, 1998,
the expense limitation may be terminated or revised at any time for either
Class of either Fund. Without the expense reimbursement, it is estimated
that the total miscellaneous expenses for the current fiscal year would
have amounted to 0.75% for the Class R shares of each Fund and 0.70% for
the Class I shares of each Fund. Without the expense reimbursement, it is
estimated that the total operating expenses for the current fiscal year
would have amounted to 1.85% for the Class R shares and 1.60% for the Class
I shares of the Westport Fund and 1.95% for the Class R shares and 1.70%
for the Class I shares of the Westport Small Cap Fund.
(4) After the Trust's first fiscal year, it is anticipated that the total
operating expenses of the Class I shares of each Fund will be lower than
such expenses of the Class R shares of the Fund. For a further description
of the various costs and expenses incurred in a Fund's operation, see
"Management."
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Example
The following is a hypothetical example that indicates the dollar
amount of expenses that an investor in a Fund would pay assuming a $1,000
investment in the Fund, a 5% annual return, and the reinvestment of all
dividends and distributions:
One Year Three Years
Westport Fund
Class R $15 $48
Class I $15 $48
Westport Small Cap Fund
Class R $15 $48
Class I $15 $48
The example is based on the expenses listed in the expense table above.
The five percent annual return is not predictive of and does not represent the
Fund's projected returns; rather, it is required by government regulation. The
example should not be considered a representation of past or future expenses or
returns. Actual expenses and returns may be greater or less than indicated.
INVESTMENT OBJECTIVES
The Westport Fund's investment objective is to achieve a return
composed of capital appreciation and secondarily current income. The Fund seeks
to achieve this objective by investing in undervalued equity securities of
attractive companies. Based on the value the stock market assigns all of a
company's shares, a mid cap company has a market capitalization between $1
billion and $5 billion. The Fund will invest on an opportunistic basis in the
securities of attractive companies across the range of market capitalizations,
but it is expected that the majority will be mid or small capitalization
companies with the median market capitalization of the companies in the Fund in
the mid capitalization range.
The Westport Small Cap Fund's investment objective is capital
appreciation which it seeks to achieve by investing at least 65% of its total
assets in the equity securities of small capitalization companies. A small
capitalization company has a market capitalization of $1 billion or less at the
time of the Fund's investment. Companies whose capitalization exceeds $1 billion
after purchase will continue to be considered small cap for purposes of this 65%
limitation. The Fund may also invest to a limited degree in companies that have
larger market capitalizations.
Both Funds will invest primarily in common stocks within the market
capitalization ranges indicated above. However, both Funds may invest in
securities convertible into, or exchangeable for, common stock, and, investments
in these securities will contribute to a Fund's return primarily through capital
appreciation. In addition, a Fund may invest in non-convertible preferred stocks
and debt securities with the expectation that a Fund's investments in these
securities will also produce capital appreciation, but, the current income
component of return is a more significant factor in their selection. A Fund will
invest in such non-convertible preferred
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stock and debt securities only if the anticipated capital appreciation, plus
income, from such investments is equivalent to that anticipated from investments
in equity or equity-related securities.
Neither of the Funds should be considered a balanced or complete
investment program although the Westport Fund may be viewed as a "core"
investment holding. The investment objective of a Fund may not be changed
without the approval of shareholders.
INVESTMENT STRATEGY
The investment discipline practiced by the Adviser is a modified form
of value investing that can be most accurately described as second generation
value investing. Historically, value investors have used statistical criteria to
select a subset from the available investment universe which is expected to
provide superior returns. However, the domestic financial markets have matured
through heightened competition so that simple statistical selection criteria are
no longer effective. Today, forward-looking business analysis is essential for
superior returns.
Often a catalyst or event is necessary for those excess returns. A new
chief executive officer or a change in government regulations which impacts the
economics of the business are examples. For that change to be of investment
significance, it must create a significant increase in earnings or cash flow
within the investment horizon. This is low P/E investing, the focus of classic
value investment, but on a forward-looking basis. This approach is unique in
that it combines low valuation, a value attribute, with improving earnings or
cash flow, a growth attribute.
Second generation value investing provides investors with a less
aggressive way to take advantage of growth opportunities in smaller companies.
Using this approach, the Funds will seek to invest in companies selling at a
discount to fundamental value based on earnings potential or assets. This
variation of value investing therefore may reduce downside risk while offering
potential for capital appreciation as a stock gains favor among other investors
and its stock price rises.
The Funds will be managed by the Adviser in accordance with the
investment disciplines that Westport has employed in managing its equity
portfolios for over thirteen years. The Adviser relies on stock selection to
achieve its results, rather than trying to time market fluctuations. It seeks
out those stocks that are undervalued and, in some cases, neglected by financial
analysts.
The investment process begins with the identification of change in a
company's products, operations, or management. In mid range or small
capitalization companies, dynamic change of this type tends to be material,
which may create misunderstanding in the marketplace and result in a company's
stock becoming undervalued.
Once change is identified, the Adviser evaluates the company from a
number of perspectives: what the market is willing to pay for stock of
comparable companies, what a strategic buyer would pay for the whole company,
and how the company's products are positioned in their various markets.
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Mid cap companies identified by second generation value investing are
often out of favor due to negative operational or financial events which the
Adviser views as transitory or a misinterpretation of various business factors
by the investment community. Unrecognized assets or business opportunities,
changes in regulations, and legal actions, including the initiation of
bankruptcy proceedings, are some of the factors that create these opportunities.
In addition, mid cap companies are often acquisition targets for larger
companies, as they can offer the acquirer a competitive advantage in the form of
economies of scale in manufacturing or distribution or product line additions.
A small cap investment opportunity may be simply unrecognized by the
financial community. Fundamental research, company visits and management
assessment are all very important to the evaluation process. Small cap
portfolios emphasize, but are not limited to, companies with capitalizations of
under $1 billion. Operating in this market segment offers several advantages.
First, there is more opportunity for above-average growth and entrepreneurial
impact. Second, this market segment is less efficiently covered by Wall Street.
Third, like mid cap companies, small cap companies are also often acquisition
targets for larger companies.
In its overall assessment, the Adviser seeks stocks for the Funds that
it believes have a greater upside potential than risk over an 18 to 24 month
holding period. If the securities in which a Fund invests never reach their
perceived potential, or the valuation of such securities in the marketplace does
not in fact reflect significant undervaluation, there may be little or no
appreciation, and possibly depreciation, in the value of such securities.
INVESTMENT RISKS
An investment in either or both Funds is not by itself a complete or
balanced investment program. Nevertheless, the mid and small capitalization
segments of the equity markets may be an important part of an investor's
portfolio, particularly for long-term investors able to tolerate short-term
fluctuations in a Fund's net asset value. Investing in mid or small
capitalization companies can entail more risk than investing in larger, more
established companies, however.
Investment returns from stocks of mid capitalization companies over
long periods of time tend to fall below those of small capitalization companies,
but exceed those from large capitalization companies. The volatility of those
returns is greater than that for the large capitalization issues, but less than
that associated with small capitalization issues. These characteristics result
in part from the ability of mid capitalization companies to react to changes in
the business environment at a faster rate than larger companies. In addition,
they generally have more developed, more mature businesses, and greater
diversity than small capitalization companies providing business stability
relative to such small companies.
A company may have a small capitalization because it is new or has
recently gone public, or because it operates in a new industry or regional
market. These companies may respond more quickly to change in an industry, and
are expected to increase their earnings more rapidly than larger companies.
Historically, small companies have offered greater opportunity for capital
appreciation than larger, more established companies.
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At the same time, investing in small companies can be riskier than
other investments. Small companies may have more limited product lines, markets,
and financial resources, making them more susceptible to economic or market
setbacks. A significant portion of the securities in which the Westport Small
Cap Fund invests are traded in the over-the-counter markets or on a regional
securities exchange, and may be more thinly traded and volatile than the
securities of larger companies. Analysts and other investors typically follow
small companies less actively, and information about these companies is not
always readily available. For these and other reasons, the prices of small
capitalization securities may fluctuate more significantly than the securities
of larger companies in response to news about the company, the markets or the
economy. As a result, the price of the Westport Small Cap Fund's shares may
exhibit a higher degree of volatility than the market averages.
In addition, securities traded in the over-the-counter market or on a
regional securities exchange may not be traded every day or in the volume
typical of securities traded on a national exchange. The Westport Small Cap Fund
therefore may have to sell a portfolio security to meet redemptions (or for
other reasons) at a discount from market prices, sell during periods when
disposition is not desirable, or make many small sales over a lengthy period of
time.
Each Fund may invest up to 10% of its total assets in debt securities
which are below investment grade, commonly known as "junk bonds." Investments of
this type are subject to greater risk of loss and principal. Securities are
considered investment grade if they are rated Baa or better by Moody's Investors
Service, Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation
("Standard & Poor's"). Bonds rated Baa or lower by Moody's or BB or lower by
Standard & Poor's may have speculative characteristics. See Appendix A to the
SAI for a description of the ratings mentioned above that are assigned by
Moody's and Standard & Poor's.
INVESTMENT POLICIES
General. The investment objectives of a Fund may not be changed without
approval of a majority of the outstanding voting securities of that Fund, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act").
There is no assurance that these objectives will be achieved. Investors should
refer to the prospectus section entitled "Investment Risks" and to the
"Investment Objective and Policies, Techniques and Strategies, and Restrictions"
section in the SAI for additional portfolio management discussions.
Each Fund is subject to certain investment restrictions which may not
be changed without the approval of the holders of a majority of that Fund's
outstanding voting securities.
The Funds pursue their investment objectives primarily by investing in
"equity securities," which for this purpose consist of common stock, securities
convertible into common stock, such as bonds and preferred stocks, American
Depositary Receipts and securities such as rights and warrants which permit the
holder to purchase equity securities.
To the extent consistent with their investment objectives and policies,
the Funds may also invest in fixed-income securities for current income and
capital preservation and, in some circumstances, for capital appreciation.
Fixed-income securities may have a fixed or variable rate.
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In general, the value of fixed-income securities will rise when interest rates
fall, and fall when interest rates rise, affecting the net asset value of a
Fund. Either of the Funds may at times, for defensive purposes, temporarily
place all or a portion of their assets in cash, short-term commercial paper,
U.S. government securities, high quality debt securities, including Eurodollar
and Yankee Dollar obligations, and obligations of banks when, in the judgment of
the Funds' Adviser, such investments are appropriate in light of economic or
market conditions.
Equity securities may include common and preferred stock, convertible
securities and warrants. Common stock represents an equity or ownership interest
in a company. Although this interest often gives a Fund the right to vote on
measures affecting the company's organization and operations, neither Fund
intends to exercise control over the management of companies in which it
invests. Common stocks have a history of long-term growth in value, but their
prices tend to fluctuate in the shorter term.
Preferred stock generally does not exhibit as great a potential for
appreciation or depreciation as common stock, although it ranks above common
stock in its claim on income for dividend payments. Convertible securities are
securities that may be converted either at a stated price or rate within a
specified period of time into a specified number of shares of common stock.
Traditionally, convertible securities have paid dividends or interest greater
than on the related common stocks, but less than fixed income non-convertible
securities. By investing in a convertible security, a Fund may participate in
any capital appreciation or depreciation of a company's stock, but to a lesser
degree than if it had invested in that company's common stock.
Warrants are options to purchase an equity security at a specified
price at any time during the life of the warrant. Unlike convertible securities
and preferred stocks, warrants do not pay a fixed dividend. Investments in
warrants involve certain risks, including the possible lack of a liquid market
for the resale of the warrants, potential price fluctuations as a result of
speculation or other factors and failure of the price of the underlying security
to reach a level at which the warrant can be prudently exercised (in which case
the warrant may expire without being exercised, resulting in the loss of a
Fund's entire investment therein).
The market value of all securities, including equity securities, is
based upon the market's perception of value and not necessarily the book value
of an issuer or other objective measure of a company's worth.
American Depositary Receipts ("ADRs"). A Fund may invest in ADRs, which
are receipts issued by an American bank or trust company evidencing ownership of
underlying securities issued by a foreign issuer. ADRs, in registered form, are
designed for use in U.S. securities markets. In a "sponsored" ADR, the foreign
issuer typically bears certain expenses of maintaining the ADR facility.
"Unsponsored" ADRs may be created without the participation of the
foreign issuer. Holders of unsponsored ADRs generally bear all the costs of the
ADR facility. The bank or trust company depository of an unsponsored ADR may be
under no obligation to distribute shareholder communications received from the
foreign issuer or to pass through voting rights.
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Securities of Other Investment Companies. A Fund may invest in shares
of other investment companies to the extent permitted by the 1940 Act. To the
extent a Fund invests in shares of an investment company, it will bear its pro
rata share of the other investment company's expenses, such as investment
advisory and distribution fees, and operating expenses.
Illiquid and Restricted Securities. As a non-fundamental investment
policy, a Fund may not purchase a security if, as a result, more than 15% of its
net assets would be invested in illiquid securities. Over-the-counter options,
repurchase agreements not entitling the holder to payment of principal in seven
days, and certain "restricted securities" may be illiquid.
A security is restricted if it is subject to contractual or legal
restrictions on resale to the general public. A liquid institutional market has
developed, however, for certain restricted securities such as repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
Thus, restrictions on resale do not necessarily indicate a lack of liquidity for
the security. For example, if a restricted security may be sold to certain
institutional buyers in accordance with Rule 144A under the Securities Act of
1933 or another exemption from registration under such Act, the Adviser may
determine that the security is liquid under guidelines adopted by the Board of
Trustees. These guidelines take into account trading activity in the securities
and the availability of reliable pricing information, among other factors. With
other restricted securities, however, there can be no assurance that a liquid
market will exist for the security at any particular time. A Fund might not be
able to dispose of such securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions. The Fund treats such
holdings as illiquid.
When-Issued and Delayed Delivery Transactions. A Fund may purchase
securities on a "when-issued" basis, and may purchase or sell such securities on
a "delayed delivery" basis. These terms refer to securities whose terms and
indenture are available and for which a market exists, but which are not
available for immediate delivery. The Funds do not intend to make such purchases
for speculative purposes. During the period between the purchase and settlement,
the underlying securities are subject to market fluctuations and no interest
accrues prior to delivery of the securities.
Repurchase Agreements. Both Funds may enter into repurchase agreements.
They are primarily used for cash liquidity purposes. In a repurchase
transaction, a Fund buys a security and simultaneously sells it to the vendor
for delivery at a future date. Repurchase agreements must be fully
collateralized. However, if the vendor fails to pay the resale price on the
delivery date, the Fund may incur costs in disposing of the collateral and may
experience losses if there is any delay in its ability to do so. There is no
limit on the amount of a Fund's net assets that may be subject to repurchase
agreements of seven days or less. Repurchase agreements with a maturity beyond
seven days are subject to a Fund's limitations on investments in illiquid and
restricted securities, discussed above.
Loans of Portfolio Securities. To attempt to increase its total return,
a Fund may lend its portfolio securities to certain types of eligible borrowers
approved by the Board of Trustees. Each loan must be collateralized in
accordance with applicable regulatory requirements. After any loan, the value of
the securities loaned is not expected to exceed 10% of a Fund's total assets.
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There are some risks in connection with securities lending. A Fund
might experience a delay in receiving additional collateral to secure a loan or
a delay in recovery of the loaned securities.
HEDGING
General. As described below, a Fund may purchase and sell certain kinds
of futures contracts, put and call options, forward contracts, and options on
securities, futures and broadly-based stock indices. These are all referred to
as "hedging instruments." The Funds do not use hedging instruments for
speculative purposes. The hedging instruments the Funds may use and the limits
on their use are described below and in greater detail in "Investment Objectives
and Policies, Techniques and Strategies, and Restrictions -- Other Investment
Techniques and Strategies" in the SAI.
A Fund may buy and sell options, futures and forward contracts for a
number of purposes. It may do so to try to manage its exposure to the
possibility that the prices of its portfolio securities may decline, or to
establish a position in the securities market as a temporary substitute for
purchasing individual securities. Some of these strategies, such as selling
futures, buying puts and writing covered calls, hedge a Fund's portfolio against
price fluctuations.
Other hedging strategies, such as buying futures and call options, tend
to increase a Fund's exposure to the securities market.
Forward contracts are used to try to manage foreign currency risks on
foreign investments. Foreign currency options are used to try to protect against
declines in the dollar value of foreign securities. Writing covered call options
may also provide income to a Fund for liquidity purposes or to raise cash to
distribute to shareholders.
Futures. A Fund may buy and sell futures contracts that relate to
broadly-based stock indices (these are referred to as "Stock Index Futures") or
foreign currencies (these are called "Forward Contracts"). A Fund will not enter
into any financial futures or options contract unless such transactions are for
bona fide hedging purposes, or for other purposes only if the aggregate initial
margins and related option premiums would not exceed 5% of the Fund's total
assets. The notional value of the futures contracts used for hedging and gaining
exposure to the securities markets may substantially exceed this limitation.
Put and Call Options. A Fund may buy and sell certain kinds of put
options (puts) and call options (calls). Calls a Fund buys or sells must be
listed on a securities or commodities exchange, quoted on the automated
quotation system of NASDAQ, or traded in the over-the-counter market. In the
case of puts and calls on a foreign currency, they must be traded on a
securities or commodities exchange, in the over-the-counter market, or must be
quoted by recognized dealers in those options.
The Funds may buy calls on securities, broadly-based stock indices, or
Stock Index Futures. A Fund may buy calls to terminate its obligation on a call
such Fund previously wrote.
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The Funds may write (that is, sell) covered call options. Each call a
Fund writes must be "covered" while it is outstanding. That means the Fund must
own the investment on which the call was written. A Fund may write calls on
futures contracts it owns, but these calls must be covered by securities or
other liquid assets such Fund owns and segregated to enable it to satisfy its
obligations if the call is exercised. When a Fund writes a call, it receives
cash (called a premium). The call gives the buyer the ability to buy the
investment on which the call was written from the Fund at the call price during
the period in which the call may be exercised. If the value of the investment
does not rise above the call price, it is likely that the call will lapse
without being exercised, while the Fund keeps the cash premium (and the
investment).
A Fund may purchase and sell put options. Buying a put on an investment
gives a Fund the right to sell the investment at a set price to a seller of a
put on that investment. A Fund can buy a put on a Stock Index Future whether or
not the Fund owns the particular Stock Index Future in its portfolio. A Fund may
write puts on broadly-based stock indices or Stock Index Futures, but only if
those puts are covered by segregated liquid assets.
Special Risks. Hedging instruments can be volatile investments and may
involve special risks. The use of hedging instruments requires special skills
and knowledge of investment techniques that are different than what is required
for normal portfolio management. If the Adviser uses a hedging instrument at the
wrong time or judges market conditions incorrectly, hedging strategies may
reduce a Fund's return. A Fund could also experience losses if the prices of its
futures and options positions were not correlated with its other investments or
if it could not close out a position because of an illiquid market for the
future or option. In addition, futures contracts sales involve the risk of
theoretically unlimited loss.
Options trading involves the payment of premiums and has special tax
effects on a Fund. There are also special risks in particular hedging
strategies. If a covered call written by a Fund is exercised on an investment
that has increased in value, such Fund will be required to sell the investment
at the call price and will not be able to realize any profit if the investment
has increased in value above the call price. In writing a put, there is a risk
that a Fund may be required to buy the underlying security at a disadvantageous
price. The use of forward contracts may reduce the gain that would otherwise
result from a change in the relationship between the U.S. dollar and a foreign
currency. These risks are described in greater detail in the SAI.
ADDITIONAL INVESTMENT PRACTICES
Concentration. As a fundamental investment policy, each Fund may not
purchase a security (other than U.S. Government Securities, as such term is
defined below) if, as a result, more than 25% of its net assets would be
invested in a particular industry.
Diversification. As a fundamental investment policy, each Fund may not
purchase a security if, as a result (a) more than 5% of the Fund's total assets
would be invested in the securities of a single issuer, or (b) a Fund would own
more than 10% of the outstanding voting securities of a single issuer. This
limitation applies only with respect to 75% of the Fund's total assets and does
not apply to U.S. Government Securities.
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<PAGE>
Borrowing. As a fundamental investment policy, each Fund may borrow
money for temporary or emergency purposes, including the meeting of redemption
requests, in amounts up to 33 1/3% of the Fund's total assets. As a
non-fundamental investment policy, a Fund may not purchase portfolio securities
if its outstanding borrowings exceed 5% of its total assets or borrow for
purposes other than meeting redemptions in an amount exceeding 5% of the value
of its total assets at the time the borrowing is made.
Borrowing involves special risk considerations. Interest costs on
borrowings may fluctuate with changing market rates of interest and may
partially offset or exceed the earnings on borrowed funds (or on the assets that
were retained rather than sold to meet the needs for which funds were borrowed).
Under adverse market conditions, the Fund might need to sell portfolio
securities to meet interest or principal payments at a time when investment
considerations would not favor such sales.
Cash and Temporary Defensive Positions. Each Fund may hold a certain
portion of its assets in cash or in investment grade cash equivalents to retain
flexibility in meeting redemptions, paying expenses, and timing of new
investments. Cash equivalents may include (i) short-term obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities ("U.S.
Government Securities"), (ii) certificates of deposit, bankers' acceptances and
interest-bearing savings deposits of commercial banks doing business in the
United States that have an A+ rating from Standard & Poor's or an A-1+ rating
from Moody's, (iii) commercial paper rated P-1 by Moody's or A-1 by Standard &
Poor's, (iv) repurchase agreements covering any of the securities in which a
Fund may invest directly, and (v) money market mutual funds.
In addition, when the Adviser believes that business or financial
conditions warrant, a Fund may assume a temporary defensive position. During
such periods, such Fund may invest without limit in cash or cash equivalents.
When and to the extent a Fund assumes a temporary defensive position, it will
not pursue its investment objective.
Portfolio Transactions. The frequency of portfolio transactions is
generally expressed in terms of a portfolio turnover rate. For example, an
annual turnover rate of 100% would occur if all of the securities in a Fund were
replaced once a year. Each Fund's portfolio turnover rate will vary from year to
year depending on market conditions. The Adviser anticipates that, under normal
conditions, neither Fund's portfolio turnover rate will exceed 75%.
MANAGEMENT
Board of Trustees. The overall management of the business and affairs
of the Funds is vested with the Board of Trustees. The Board of Trustees
approves all significant agreements between the Trust and persons or companies
furnishing services to it, including the Trust's agreements with its investment
adviser, administrator, custodian and transfer agent. The management of each
Fund's day-to-day operations is delegated to its officers, the Adviser and the
Funds' administrator, subject always to the investment objective and policies of
the Funds and to general supervision of the Board of Trustees. The Trustees and
officers of the Funds and their principal occupations are set forth below.
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Edmund H. Nicklin, Jr., President and Trustee, is a Managing Member of
the Adviser and a portfolio manager for Westport.
Ronald H. Oliver, Executive Vice President, Secretary, Treasurer and
Trustee, is President and one of the principals of Westport.
Raymond J. Armstrong, Trustee, is Chairman of and a money manager for
Armstrong Shaw Associates, an investment management company.
Stephen E. Milman, Trustee, is currently retired and was a principal of
Neuberger & Berman LLC until the end of December 1996.
D. Bruce Smith, II, Trustee, is an Independent Consultant with Gunn
Partners, Inc., a consulting firm.
Andrew J. Knuth, Executive Vice President, is Chairman and one of the
principals of Westport.
The Adviser. Westport Advisers, LLC, 253 Riverside Avenue, Westport,
Connecticut 06880, serves as the investment adviser to the Funds pursuant to an
investment advisory agreement with the Trust (the "Advisory Agreement"). Subject
to the general control of the Board, the Adviser makes investment decisions for
the Funds. The Adviser is a limited liability corporation organized under the
laws of the State of Connecticut on October 1, 1997, and is a registered
investment adviser under the 1940 Act. Although, as a new entity, the Adviser
has no previous experience managing an investment company, the Managing Members
and portfolio managers of the Adviser have substantial experience in portfolio
management. In addition to being a Managing Member of the Adviser, Westport, an
affiliate of the Adviser that is also a registered investment adviser, provides
investment services to investment companies, pension plans, endowments,
foundations, and individuals. In addition, Edmund H. Nicklin, Jr., the portfolio
manager for the Westport Fund and co-manager for the Westport Small Cap Fund has
more than 10 years experience managing an investment company as the portfolio
manager for the Evergreen Growth and Income Fund. For more information regarding
the portfolio management experience of Mr. Nicklin, please see below.
As of the date of this Prospectus, Westport has over $1.6 billion of
assets under management. The following table presents historical performance of
the portfolios of all private accounts managed by Westport that have an
investment style, objective and policies substantially similar to those of the
Westport Small Cap Fund. This data compares the performance of these accounts
against the Russell 2000 Composite Stock Index (the "Russell 2000"). The
computed total rates of return include the impact of capital appreciation as
well as the reinvestment of interest and dividends. The table does not indicate
how the Westport Small Cap Fund may perform in the future.
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Time Period (Calendar Years) Westport Composite(1) Russell 2000(2)
10 Yrs: 1987-1996 15.1% 12.4%
5 Yrs: 1992-1996 21.6% 15.7%
3 Yrs: 1994-1996 21.1% 13.7%
1 Yr: 1996 36.3% 16.5%
6 Mos: 1997 21.3% 10.2%
- -----------------
(1) The Westport Composite is a dollar-weighted composite of fully
discretionary, separately managed accounts under Westport's management.
Each account included in the Westport Composite has an investment style,
objective and policies substantially similar to the Westport Small Cap
Fund. The performance figures are net of Westport's advisory fee for such
accounts. This advisory fee is an all inclusive fee that covers all of the
expenses of the account over which Westport had control. The effect of
brokerage commissions is also reflected in the Westport Composite results
shown above. The performance presentation was created by using
AIMR-approved techniques to weight the performance results of each account.
The use of the Westport Small Cap Fund's expense structure would have
lowered the performance results shown in the Westport Composite.
The Westport Composite does not reflect all of the assets under Westport's
management and may not accurately reflect the performance of all accounts
Westport manages. In addition to advising institutional separate accounts,
Westport acts as the sub-adviser to three investment companies, each of
which has objectives, policies and strategies which are similar to those of
the Westport Small Cap Fund. These accounts have been omitted from the
Westport Composite because Westport manages only a portion of the assets of
each Fund.
(2) The Russell 2000 is a market weighted index composed of 2000 companies with
market capitalizations from $127 million to $1.7 billion. The index is
unmanaged and reflects the reinvestment of dividends.
All information presented relies on data supplied by the Adviser or is
derived from statistical services, reports or other sources believed by the
Trust to be reliable. It has not been verified or audited.
The principals of Westport and the Adviser have more than 25 years of
collective portfolio management experience. The portfolio managers of the
Adviser are Edmund H. Nicklin, Jr. and Andrew J. Knuth.
Prior to joining Westport, Mr. Nicklin, who will serve as the sole
portfolio manager of the Westport Fund, served as the portfolio manager of the
Evergreen Growth and Income Fund (formerly, the Evergreen Value Timing Fund)
from its inception on October 15, 1986 through August 22, 1997, when that Fund
had $1.4 billion in net assets combining all its share classes. During his
tenure as portfolio manager, Mr. Nicklin was solely responsible for the
day-to-day management of the Evergreen Growth & Income Fund. Mr. Nicklin holds a
Bachelor of Science in Electrical Engineering, a Masters of Science in
Management and a Ph.D. in Operations and Research and Statistics from Rensselaer
Polytechnic Institute. As portfolio manager from inception to August 22, 1997,
and as president of that fund from 1988 through June 30, 1994, Mr. Nicklin had
full discretionary authority over the selection of investments for the Evergreen
Growth and Income Fund. Mr. Nicklin's most important strength in managing
investment portfolios with the value based strategy explained in this prospectus
is the investment ideas
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generated by his original research. Although Evergreen Asset Management Corp.,
the investment manager of the Evergreen Growth & Income Fund, has a numerically
larger in-house analytical staff than Westport and the Adviser combined, Mr.
Nicklin will be able to draw on the special research and analysis resources of
Andrew Knuth and Westport. Mr. Knuth, in his capacity as a securities analyst
and portfolio manager for Westport, employs an original research strategy
similar to Mr. Nicklin's, but he has expertise in many different industries.
Average annual returns for the one, three-, five- and ten-year periods
ended December 31, 1996, the first six months of 1997, and for the period since
inception during which Mr. Nicklin managed the fund are compared in the
following table with the performance of the Standard & Poor's 500 Index
(Reinvested), the Standard & Poor's Mid Cap Index (Reinvested) and the Lipper
Growth and Income Fund Average.
<TABLE>
<CAPTION>
Calendar Years
Inception
3 5 10 through
6 Mos 1 Year Years Years Years 6/30/97(4)
----- ------ ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
Evergreen Growth and Income Fund(1)(2) 15.0% 23.8% 18.7% 16.9% 14.6% 15.1%
Standard & Poor's 500(3) 20.6% 23.0% 19.7% 15.2% 15.3% 16.4%
Standard & Poor's Mid Cap 400(3) 13.0% 19.2% 15.0% 14.2% 16.1%
Lipper Growth and Income Fund Average 15.5% 20.8% 16.2% 13.9% 13.1%
</TABLE>
- -----------------
(1) Average annual total return reflects changes in share prices and
reinvestment of dividends and distributions, and is net of Fund expenses.
(2) The expense ratio of the Evergreen Growth and Income Fund ranged from 1.76%
in 1987 to 1.27% in 1996, reflecting primarily economies of scale
associated with an increase in assets under management. The expenses of the
Evergreen Growth & Income Fund are lower than those of the Westport Fund.
The use of the Westport Fund's expense structure would have lowered the
performance results. The performance shown is for the no-load Class Y
shares of the Evergreen Growth and Income Fund.
(3) The Standard & Poor's indices are unmanaged indices of common stocks issued
by United States companies. The indices are adjusted to reflect
reinvestment of dividends.
(4) The Evergreen Growth and Income Fund commenced operations on October 15,
1986.
It is important to note that Morningstar Inc. classified the Evergreen Growth
and Income Fund as a "medium capitalization blend" for the more than seven years
that it has tracked that fund's performance in its classification scheme that
categorizes funds on the basis of capitalization of holdings and value versus
growth. The value-based, catalyst-dependent investment strategy differentiates
the Evergreen Growth and Income Fund and the Westport Fund from others
suggesting commonalities of portfolio characteristics between the funds. Since
the Westport Fund has the same investment objective, a substantially similar
investment strategy executed by the same portfolio manager and similar
investment risks, the Westport Fund should be similarly classified as a medium
capitalization blend.
Historical performance is not indicative of future performance. The
Evergreen Growth and Income Fund is a separate fund and its historical
performance cannot be presumed to be
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<PAGE>
reflective of the potential performance of the Funds. Investment returns will
fluctuate reflecting market conditions, as well as changes in company specific
fundamentals of portfolio securities.
Mr. Nicklin began his career as an associate in the Corporate Planning
Department of General Foods Corporation where he was employed from 1974 through
1980. Mr. Nicklin was a research associate and investment representative at Alex
Brown and Sons, Inc. from 1980 through 1982 and joined the Evergreen Funds as a
security analyst in 1982.
Andrew J. Knuth founded Westport Asset Management in 1983 and has more
than 35 years of security analysis and portfolio management experience. Mr.
Knuth was an organizing member of the Institutional Equity Group for Lazard
Freres and Company, and spent two years with them specializing in investment
research for institutional clients. From 1969 through 1981, Mr. Knuth was
director of research for Lieber & Company, the investment adviser to the
Evergreen Funds. From 1966 to 1969, Mr. Knuth was a security analyst for Vanden
Broeck, Lieber & Company. From 1962 to 1966, he was involved in portfolio
management with the Mutual Benefit Life Insurance Company. Mr. Knuth holds a
Bachelor's degree in Economics from Dickinson College and a Masters degree in
Business Administration from New York University.
Ronald H. Oliver will also be active in the Funds' day-to-day
management. Mr. Oliver joined Westport Asset Management in 1984. Prior to
joining Westport, Mr. Oliver was president of Starwood Corporation, a registered
investment adviser managing assets for pension funds, charitable foundations,
and high net worth individuals. Mr. Oliver holds a Bachelor's degree in Science
from San Jose State University in California and did graduate work at the
University of Maryland and the University of California.
The Advisory Agreement. Pursuant to the Advisory Agreement, the Adviser
furnishes a continuous investment program for each Fund's portfolio, makes
day-to-day investment decisions for each Fund, and generally manages each Fund's
investments in accordance with the stated policies of each Fund, subject to the
general supervision of the Board of Trustees of the Trust. The Adviser also
selects brokers and dealers to execute purchase and sale orders for the
portfolio transactions of each Fund. Consistent with the Rules of Fair Practice
of the National Association of Securities Dealers, Inc., and subject to seeking
best price and execution, the Adviser may consider sales of shares of the Funds
as a factor in the selection of brokers and dealers to enter into portfolio
transactions with the Funds. The Adviser provides persons satisfactory to the
Trustees of the Trust to serve as officers of the Funds. Such officers, as well
as certain other employees and Trustees of the Trust, may be directors,
officers, or employees of the Adviser. Under the Advisory Agreement, the
Westport Fund and Westport Small Cap Fund each pay the Adviser a monthly
management fee in an amount equal to 1/12th of 0.90% and 1.00%, respectively, of
the average daily net assets of the relevant Fund. Such fees are higher than
those incurred by most other investment companies.
In addition to the payments to the Adviser under the Advisory Agreement
described above, each Fund pays certain other costs of its operations including
(a) custody, transfer and dividend disbursing expenses, (b) shareholder
servicing fees, (c) fees of Trustees who are not affiliated with the Adviser,
(d) legal and auditing expenses, (e) clerical, accounting and other
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<PAGE>
office costs, (f) costs of printing the Funds' prospectuses and shareholder
reports, (g) costs of maintaining the Trust's existence, (h) interest charges,
taxes, brokerage fees and commissions, (i) costs of stationary and supplies, (j)
expenses and fees related to registration and filing with the Securities and
Exchange Commission and with state regulatory authorities, and (k) upon the
approval of the Board of Trustees, costs of personnel of the Adviser or its
affiliates rendering clerical, accounting and other office services.
The Administrator. On behalf of the Funds, the Trust has entered into
an Administration Agreement with Countrywide Fund Services, Inc., 312 Walnut
Street, Cincinnati, Ohio 45202 (the "Administrator"). As provided in this
agreement, the Administrator is responsible for the supervision of the overall
management of the Trust (including the Trust's receipt of services for which it
must pay), providing the Trust with general office facilities and for certain
special functions, and providing persons satisfactory to the Board of Trustees
to serve as officers of the Trust. For these services, the Administrator
receives from each Fund a monthly fee at the annual rate of 0.125% of such
Funds' average daily net assets up to $50 million; 0.10% of such assets from $50
to $100 million; 0.075% of such assets from $100 to $150 million; provided,
however, that the minimum fee shall be $1,000 per month for each Fund.
The Distributor. The Trust has entered into a Distribution Agreement,
on behalf of the Funds, with Countrywide Investments, Inc., or an affiliated
company, 312 Walnut Street, 21st Floor, Cincinnati, Ohio 45202 (the
"Distributor"). Pursuant to the Distribution Agreement, the Distributor acts as
distributor of each Fund's shares. The Distributor acts as the agent of the
Trust in connection with the offering of shares of the Funds. The Distributor
receives no compensation for its services under the Distribution Agreement. The
Distributor may enter into arrangements with banks, broker-dealers or other
financial institutions through which investors may purchase or redeem shares.
The Distributor may, at its own expense and from its own resources, compensate
certain persons who provide services in connection with the sale or expected
sale of shares of the Funds. Investors purchasing or redeeming shares of a Fund
through another financial institution should read any materials and information
provided by the financial institution to acquaint themselves with its procedures
and any fees that it may charge.
Shareholder Services. The Trust has adopted a shareholder services plan
with respect to the Class R shares of each Fund providing that the Trust may
obtain the services of the Adviser and other qualified financial institutions to
act as shareholder servicing agents for their customers. Under this plan, the
Trust (or the Trust's agents) may enter into agreements pursuant to which the
shareholder servicing agent performs certain shareholder services not otherwise
provided by the transfer agent. For these services, the Trust pays the
shareholder servicing agent a fee of up to 0.25% of the average daily net assets
attributable to the Class R shares owned by investors for which the shareholder
servicing agent maintains a servicing relationship.
Among the services provided by shareholder servicing agents are:
answering customer inquiries regarding account matters; assisting shareholders
in designating and changing various account options; aggregating and processing
purchase and redemption orders and transmitting and receiving funds for
shareholder orders; transmitting, on behalf of the Trust, proxy statements,
prospectuses and shareholder reports to shareholders and tabulating proxies;
processing dividend
17
<PAGE>
payments and providing subaccounting services for shares of a Fund held
beneficially; and providing such other services as the Trust or a shareholder
may request.
PURCHASES AND REDEMPTIONS OF SHARES
Purchase of Shares
Shares of the Funds are offered at the next determined net asset value
without any sales charge by the Funds as an investment vehicle for individuals,
institutions, fiduciaries and retirement plans. Prospectuses, sales material and
account applications can be obtained from the Funds at the address listed on the
cover of this Prospectus.
For each shareholder of record, the Transfer Agent, as the
shareholder's agent, establishes an open account to which all shares purchased
are credited, together with any dividends and capital gain distributions which
are paid in additional shares. See "Dividends and Tax Matters." The Trust does
not issue share certificates.
Minimum Investment. Generally, the initial minimum investment for Class
R shares of either Fund is $5,000, or $2,000 for retirement accounts. For
purchases under the Uniform Gifts to Minors Act or Uniform Transfers to Minors
Act or through participation in the Automatic Investment Plan, there is a
minimum initial purchase of $1,000 and a minimum subsequent purchase of $100 for
the Automatic Investment Plan. For a further description of the Automatic
Investment Plan, see "Purchases and Redemptions of Shares -- Automatic
Investment Plan" below. For Class I shares, the minimum initial investment is $1
million for either Fund. Currently, there is no minimum for subsequent
investments in either Class of either Fund, unless the purchase is made through
the Automatic Investment Plan; however, the Adviser reserves the right to change
such minimum for subsequent investments.
Purchase Procedures -- By Mail. To purchase shares of the Funds an
investor should send a check made payable to "The Westport Funds" and a
completed account application to the Transfer Agent at:
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
Checks are accepted subject to collection at full face value in United
States currency.
By Bank Wire. To purchase shares of a Fund using the wire system for
transmittal of money among banks, an investor should first telephone the
Transfer Agent at (888) 593-7878 to obtain an account number. The investor
should then instruct a member commercial bank to wire funds to:
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<PAGE>
Star Bank, NA
Cincinnati, Ohio
ABA #: 042000013
Credit: The Westport Funds
Account #: 4888-77275
Further credit: [Westport Fund/Westport Small Cap Fund]
Shareholder Name: __________________________
Shareholder Account #: _____________________
(Include your name, address and taxpayer identification number.)
The investor should then promptly complete and mail the account
application. Subsequent purchases can be made by bank wire, as indicated above,
by mailing a check to the Transfer Agent at the address listed above or by
electronic funds transfer, described immediately above. Each investment in
shares of a Fund, including dividends and capital gain distributions reinvested,
is acknowledged by a statement showing the number of shares purchased, the net
asset value at which the shares were purchased, and the new balance of Fund
shares owned.
Purchasing Through Your Broker-Dealer. Shareholder accounts may be
maintained through certain broker-dealers. These broker-dealers may make
arrangements for their customers to purchase and redeem shares of the Funds by
telephone and some broker-dealers may impose a charge for their services.
Alternatively, an investor who has not made his initial purchase through a
broker-dealer may purchase and redeem those shares directly through the Transfer
Agent without any such charges.
Automatic Investment Plan. Investors may also purchase shares by
arranging systematic monthly investments into a Fund with either Fund's
Automatic Investment Plan ("AIP"). The minimum initial investment is $1,000 and
the minimum subsequent investment is $100. After investors give a Fund proper
authorization, their bank accounts, which must be with banks that are members of
the Automated Clearing House ("ACH"), will be debited accordingly to purchase
shares. Investors will receive a confirmation for every transaction, and a
withdrawal will appear on their bank statements.
To participate in the AIP, investors must complete the appropriate
sections of the account application or the Automatic Investment Plan form. These
forms may be obtained by calling the Funds' Transfer Agent at (888) 593-7878.
The amount investors specify will automatically be invested in shares at the
relevant Fund's net asset value per share next determined after payment is
received by that Fund.
To change the amount invested, written instructions must be received by
a Fund at least seven Business Days in advance of the next transfer. If the bank
or bank account number is changed, instructions must be received by a Fund at
least 20 Business Days in advance. If there are insufficient funds in the
investor's designated bank account to cover the shares purchased using AIP, the
investor's bank may charge the investor a fee or may refuse to honor the
transfer instruction (in which case no Fund shares will be purchased).
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Investors should check with their banks to determine whether they are
members of the ACH and whether their banks charge a fee for transferring funds
through the ACH. Expenses incurred by a Fund related to AIP are borne by that
Fund and therefore there is no direct charge by such Fund to investors for use
of these services.
Redemption of Shares
Upon receipt by the Transfer Agent of a redemption request in proper
form, shares of a Fund will be redeemed at their next determined net asset
value.
Redemption Procedures -- Written Requests. Redemptions requests may be
made in writing to the Transfer Agent at:
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
The request must specify the name of the Fund, the dollar amount or
number of shares to be redeemed, and the account number. The request must be
signed in exactly the same way the account is registered (if there is more than
one owner of the shares, all must sign). A signature guarantee is required for
any written redemption request for an amount greater than $25,000. Signature
guarantees are described more fully under "Purchases and Redemptions of Shares
- -- Signature Guarantees" below.
Redemptions requests may also be made through the broker-dealer
through whom you purchased your shares.
By Telephone. Shareholders who wish to redeem shares by telephone must
elect this option on their account application. Due to the time required to set
up this service initially, this privilege may not be available until several
weeks after a shareholder's account application is received.
A shareholder who has elected telephone redemption privileges may make
a telephone redemption request by calling the Transfer Agent at (888) 593-7878
and providing the shareholder's account number, the exact name in which the
shareholder's shares are registered and the shareholder's social security or
taxpayer identification number. In response to the telephone redemption
instruction, a Fund will mail a check to the shareholder's record address, or,
if a shareholder has provided bank wire or ACH redemption authorization, a Fund
will wire or electronically transfer the proceeds to the shareholder's
designated bank account. Shareholders must complete the appropriate sections of
the account application to authorize receipt of redemption proceeds by bank wire
or ACH. Redemptions for amounts less than $5,000 will be made by check or by
ACH. Redemptions of $5,000 or more may be made by bank wire. There is a fee on
all redemptions paid by wire, currently $8.00.
In an effort to prevent unauthorized or fraudulent redemption requests
by telephone, the Transfer Agent will follow reasonable procedures to confirm
that such instructions are genuine. If
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<PAGE>
such procedures are followed, neither the Transfer Agent, the Administrator, the
Adviser nor the Funds will be liable for any losses due to unauthorized or
fraudulent redemption requests.
In times of drastic economic or market changes, it may be difficult to
make redemptions by telephone. If a shareholder cannot reach the Transfer Agent
by telephone, redemption requests may be mailed or hand-delivered to the
Transfer Agent.
Signature Guarantees. A signature guarantee is required for any
written request to redeem an amount greater than $25,000. In addition, a
signature guarantee is required for instructions to change a shareholder's (i)
record name or address, (ii) ACH bank or bank account information, (iii)
Systematic Withdrawal Plan information, (iv) dividend election or (v) telephone
purchase, redemption or exchange options. Signature guarantees may be provided
by any bank, broker-dealer, national securities exchange, credit union, or
savings association that is authorized to guarantee signatures and which is
acceptable to the Transfer Agent. Whenever a signature guarantee is required,
each person required to sign for the account must have his signature guaranteed.
Signature guarantees by notaries public are not acceptable.
Systematic Withdrawal Plan. Any shareholder who owns shares of a Fund
with an aggregate value of $10,000 or more may establish a Systematic Withdrawal
Plan under which the shareholder offers to sell to such Fund at net asset value
the number of full and fractional shares which will produce the monthly or
quarterly payments specified (minimum $100 per payment). Depending on the
amounts withdrawn, systematic withdrawals may deplete the investor's principal.
Investors contemplating participation in this Plan should consult their tax
advisers.
Shareholders wishing to utilize this Plan may do so by so indicating
on the account application which may be obtained by writing or calling the
Transfer Agent at (888) 593-7878. No additional charge to the shareholder is
made for this service.
Other Redemption Information. The proceeds of a redemption may be more
or less than the amount invested and, therefore, a redemption may result in a
gain or loss for Federal income tax purposes. Checks for redemption proceeds
normally will be mailed, and bank wire or ACH redemption payments will normally
be made, within seven days, but will not be mailed until all checks (including a
certified or cashier's check) in payment for the purchase of the shares to be
redeemed have been cleared, currently considered by the Funds to occur 15 days
after investment. Unless other instructions are given, a check for the proceeds
of a redemption will be sent to the shareholder's address of record.
The Funds may suspend the right of redemption during any period when
(i) trading on the New York Stock Exchange is restricted or the exchange is
closed, other than customary weekend and holiday closings, (ii) the Securities
and Exchange Commission has by order permitted such suspension or (iii) an
emergency, as defined by rules of the Securities and Exchange Commission, exists
making disposal of portfolio investments or determination of the value of the
net assets of a Fund not reasonably practicable.
To be in a position to eliminate excessive expenses, the Funds reserve
the right to redeem, upon not less than 30 days' notice, all shares of a Fund in
an account (other than an IRA) which
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<PAGE>
has a value below $1,000. However, a shareholder will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.
Proceeds of redemptions normally are paid by check, electronic transfer
or bank wire. However, payments may be made wholly or partially in portfolio
securities if the Board determines that payment in cash would be detrimental to
the best interests of a Fund.
Retirement Plans
The Funds have a master IRA plan described briefly below. Detailed
information concerning the IRA plan including related documentation on
applications and charges of the custodian may be obtained from the Funds.
Contributions to a traditional IRA are deductible for federal income tax
purposes for certain investors and become taxable only upon withdrawal. In
addition, income and capital gains earned in a traditional IRA are sheltered
from taxation until withdrawal.
In general, individuals earning compensation may make IRA contributions
of up to $2,000 per year. The deductibility of an individual's IRA contribution
may be reduced or eliminated if the individual or, in the case of a married
individual, the individual's spouse is an active participant in an
employer-sponsored retirement plan. An individual with a non-working spouse may
establish a separate IRA for the spouse and annually contribute a total of up to
$4,000 to the two IRAs, provided that no more than $2,000 may be contributed to
the IRA of either spouse.
Generally, if an individual is not covered by a qualified retirement
plan, but the individual's spouse is, the amount which can be deducted for IRA
contributions will be phased out if their combined adjusted gross income ("AGI")
is between $150,000 and $160,000.
If an individual is covered by a qualified retirement plan, the amount
of deductible IRA contributions may be reduced or eliminated based on the
individual's AGI for the year. The AGI level at which a single taxpayer's
deduction for 1997 is affected, $25,000, will increase annually to reach $50,000
in 2005. The AGI level at which the deduction for 1997 for a married taxpayer
(other than a married individual filing a separate return) is affected, $40,000,
will increase annually to reach $80,000 in 2007.
The master IRA plan also permits an IRA rollover of a lump sum
distribution from a qualified pension or profit-sharing plan. The participant
may roll over all or part of such a distribution into an IRA plan and thereby
postpone federal income tax on that part of the distribution. The rollover must
be made within 60 days after receipt of the distribution. Rollovers must be made
directly from the plan to avoid certain withholding taxes.
Withdrawals from a traditional IRA, other than that portion, if any, of
the withdrawal considered to be a return of the investor's non-deductible IRA
contribution, are taxed as ordinary income when received. Such withdrawals may
be made without penalty after the participant reaches age 59 1/2, and must
commence shortly after age 70 1/2. Withdrawals before age 59 1/2 or the failure
to commence withdrawals on a timely basis after age 70 1/2 may involve the
payment of certain penalties.
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The Fund may also be used as a funding vehicle for Roth IRAs, 401(k)
and other retirement plans. The minimum investment to establish a traditional or
Roth IRA in The Westport Funds is $2,000.
For more information call the Funds at (888) 593-7878 or write to The
Westport Funds.
DIVIDENDS AND TAX MATTERS
Dividends. Each Fund's policy will be to make distributions at least
annually from the investment company taxable income of such Fund. Net capital
gain (net long-term capital gain in excess of net short-term capital loss), if
any, is also expected to be distributed at least annually. Investment company
taxable income of a Fund consists of all of that Fund's taxable income other
than the excess, if any, of net long-term capital gain over net short-term
capital loss, reduced by deductible expenses of that Fund. The expenses of a
Fund are accrued each day. Unless a shareholder elects to have dividends and
distributions paid in cash, such dividends and distributions will be reinvested
in additional shares of the relevant Fund.
Taxation. The following discussion is intended for general information
only. An investor should consult with his or her own tax advisor as to the tax
consequences of an investment in a Fund, including the status of distributions
under applicable state or local law.
Federal Income Taxes. Each Fund intends to elect and qualify annually
to be treated as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code"). To qualify, each Fund must meet certain
income, distribution and diversification requirements. In any year in which a
Fund qualifies as a regulated investment company and timely distributes all of
its taxable income, the Fund generally will not pay any U.S. federal income or
excise tax.
Dividends paid out of a Fund's investment company taxable income
(including dividends, interest and net short-term capital gains) will be taxable
to a U.S. shareholder as ordinary income. Because a portion of each Fund's
income may consist of dividends paid by U.S. corporations, a portion of the
dividends paid by a Fund may be eligible for the corporate dividends-received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses), if any, designated as capital
gain dividends are taxable at the applicable mid-term or long-term capital gains
rate, regardless of how long the shareholder has held a Fund's shares. Dividends
are taxable to shareholders in the same manner whether received in cash or
reinvested in additional shares of a Fund.
A distribution of an amount in excess of the Funds' current and
accumulated earnings and profits will be treated by a shareholder as a return of
capital which is applied against and reduces the shareholder's basis in his or
her shares. To the extent that the amount of any such distribution exceeds the
shareholder's basis in his or her shares, the excess will be treated by the
shareholder as gain from a sale or exchange of the shares.
A distribution will be treated as paid on December 31 of the current
calendar year if it is declared by a Fund in October, November or December with
a record date in such a month and
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paid by a Fund during January of the following calendar year. Such distributions
will be taxable to shareholders in the calendar year in which the distributions
are declared, rather than the calendar year in which the distributions are
received.
Each year, each Fund will notify its shareholders of the tax status of
dividends and distributions.
Upon the sale or other disposition of shares of a Fund, a shareholder
may realize a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the shares.
The Funds may be required to withhold U.S. federal income tax at the
rate of 31% of all taxable distributions payable to shareholders who fail to
provide a Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the IRS that they are
subject to backup withholding. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability.
Further information relating to tax consequences is contained in the
SAI.
State and Local Taxes. A Fund's distributions also may be subject to
state and local taxes. Shareholders should consult their own tax advisors
regarding the particular tax consequences on an investment in a Fund.
ORGANIZATION AND DESCRIPTION OF
SHARES OF BENEFICIAL INTEREST
The Trust was created on September 17, 1997 as a Delaware business
trust and is authorized to issue an unlimited number of $.001 par shares of
beneficial interest which may be issued in any number of series and classes. All
shares of each Fund will have equal voting rights and each shareholder is
entitled to one vote for each full share held and fractional votes for
fractional shares held and will vote on the election of Trustees and any other
matter submitted to a shareholder vote. The Trust is not required to and does
not intend to hold meetings of shareholders. The Trust will call such special
meetings of shareholders as may be required under the 1940 Act (e.g., to approve
a new investment advisory agreement or changing the fundamental investment
policies) or by the Declaration of Trust. A shareholder's meeting shall,
however, be called by the secretary upon the written request of the holders of
not less than 10% of the outstanding shares of a Fund. The Fund will assist
shareholders wishing to communicate with one another for the purpose of
requesting such a meeting. Shares of each Fund will, when issued, be fully paid
and non-assessable and have no preemptive or conversion rights. Each share is
entitled to participate equally in dividends and distributions declared by the
relevant Fund and in the net assets of such Fund on liquidation or dissolution
after satisfaction of outstanding liabilities.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
Star Bank, NA ("Star Bank"), which has its principal business address
at 425 Walnut Street, M.L. 6118, Cincinnati, Ohio 45202, has been retained to
act as Custodian of the Funds' investments. Star Bank has no part in deciding
the Funds' investment policies or which securities
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are to be purchased or sold for the Funds' portfolios. Countrywide Fund
Services, Inc., 312 Walnut Street, Cincinnati, Ohio 45202, has been retained to
serve as the Funds' transfer agent and dividend disbursing agent.
REPORTS TO SHAREHOLDERS
The fiscal year of the Funds ends on December 31 of each year. The
Funds send to their shareholders, at least semi-annually, reports showing the
investments and other information (including unaudited financial statements). An
annual report, containing financial statements audited by the Funds' independent
accountants, is sent to each Fund's shareholders each year.
THE FUNDS' PERFORMANCE
Total Return. From time to time, the Trust may advertise certain
information about the performance of the Funds. Each Fund may present its
"average annual total return" over various periods of time. Such total return
figures show the average annual percentage change in value of an investment in
such Fund from the beginning date of the measuring period to the end of the
measuring period. These figures reflect changes in the price of such Fund's
shares and assume that any income dividends and/or capital gains distributions
made by that Fund during the period were reinvested in shares of such Fund.
Figures may be given for the most current one-, five- and ten-year periods (or
the life of such Fund, if it has not been in existence for any such period) and
may be given for other periods as well. When considering "average" total return
figures for periods longer than one year, it is important to note that a Fund's
annual total return for any one year in the period might have been greater or
less than the average for the entire period.
Furthermore, in reports or other communications to shareholders or in
advertising material, a Fund may compare its performance with that of other
mutual funds as listed in the rankings prepared by Lipper Analytical Services,
Inc. or similar independent services which monitor the performance of mutual
funds, other industry or financial publications or financial indices or a
composite benchmark index. It is important to note that the total return figures
are based on historical returns and are not intended to indicate future
performance.
ADDITIONAL INFORMATION
Any shareholder inquiries may be directed to the Trust as the address
or telephone number listed on the cover page of this Prospectus. This
Prospectus, including the SAI which has been incorporated by reference herein,
does not contain all the information set forth in the Registration Statement
filed by the Trust with the Securities and Exchange Commission under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the Securities and Exchange Commission or may be
examined, without charge, at the offices of the Securities and Exchange
Commission in Washington, D.C. (http://www.sec.gov).
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Statement of Additional Information
The Westport Funds
Westport Fund
Westport Small Cap Fund
December 31, 1997
253 Riverside Avenue
Westport, Connecticut 06880
203-227-3601
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of The Westport Funds -- Westport Fund and
Westport Small Cap Fund, dated December 31, 1997 (the "Prospectus"), which has
been filed with the Securities and Exchange Commission and can be obtained,
without charge, by writing or calling The Westport Funds at the address and
telephone number given above.
<PAGE>
TABLE OF CONTENTS
Page
Investment Objectives and Policies, Techniques and Strategies,
and Restrictions...........................................................1
Management of the Fund........................................................11
Determination of Net Asset Value..............................................13
Redemption of Shares..........................................................14
Portfolio Turnover............................................................14
Portfolio Transactions and Brokerage..........................................14
Taxation......................................................................15
Calculation of Performance Data...............................................22
Counsel and Independent Accountants...........................................23
Financial Statements..........................................................23
Appendix A....................................................................26
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES, TECHNIQUES
AND STRATEGIES, AND RESTRICTIONS
Investment Objectives and Policies
The Westport Funds (the "Trust") is a no-load, open-end, management
investment company with two different investment portfolios -- Westport Fund and
Westport Small Cap Fund (each, a "Fund" and, collectively, the "Funds"). The
investment objectives, strategy, risks and policies of each Fund, and a
description of the securities in which each Fund may invest is set forth in the
Prospectus. The investment objectives are fundamental and cannot be changed
without the approval of shareholders. The following expands upon the discussion
in the Prospectus regarding certain investments of each Fund.
U.S. Government Securities. All U.S. Treasury obligations are backed
by the full faith and credit of the United States. Obligations of U.S.
Government agencies or instrumentalities (including mortgage-backed securities)
may or may not be guaranteed or supported by the "full faith and credit" of the
United States. Some are backed by the right of the issuer to borrow from the
U.S. Treasury; others are supported by discretionary authority of the U.S.
Government to purchase the agencies' obligations; while still others are
supported only by the credit of the instrumentality. If the securities are not
backed by the full faith and credit of the United States, the owner of the
securities must look principally to the agency issuing the obligation for
repayment and may not be able to assert a claim against the United States in the
event that the agency of instrumentality does not meet its commitment. The Fund
will invest in the securities of such agencies or instrumentalities only when
Westport Advisers, LLC, the Funds' investment adviser (the "Adviser"), is
satisfied that the credit risk with respect to such instrumentality is minimal.
Convertible Securities. The Funds may invest in fixed-income
securities which are convertible into common stock. Convertible securities rank
senior to common stock in a corporation's capital structure and, therefore,
entail less risk than the corporation's common stock. The value of a convertible
security is a function of its "investment value" (its value as if it did not
have a conversion privilege), and its "conversion value" (the security's worth
if it were to be exchanged for the underlying security, at market value,
pursuant to its conversion privilege).
Lower-Grade Securities. Each Fund may invest up to 10% of its total
assets in lower-grade securities. Lower-grade securities (commonly known as
"junk bonds") are rated less than "BBB" by Standard & Poor's Corporation
("Standard & Poor's"), or less than "Baa" by Moody's Investors Service, Inc.
("Moody's"), or have a comparable rating from another rating organization. If
unrated, the security is determined by the Adviser to be of comparable quality
to securities rated less than investment grade.
High yield, lower-grade securities, whether rated or unrated, have
special risks that make them riskier investments than investment grade
securities. They may be subject to greater market fluctuations and risk of loss
of income and principal than lower yielding, investment grade securities. There
may be less of a market for them and, therefore, they may be harder to sell at
an acceptable price. There is a relatively greater possibility that the issuer's
earnings may be
<PAGE>
insufficient to make the payments of interest due on the bonds. The issuer's low
creditworthiness may increase the potential for its insolvency. For more
information about the rating systems of Moody's and Standard & Poor's, see
Appendix A to this SAI.
Rights and Warrants. Warrants basically are options to purchase equity
securities at specific prices valid for a specific period of time. Their prices
do not necessarily move parallel to the prices of the underlying securities.
Rights are similar to warrants, but normally have a short duration and
are distributed directly by the issuer to its shareholders. Rights and warrants
have no voting rights, receive no dividends and have no rights with respect to
the assets of the issuer.
Other Investment Techniques and Strategies
When-Issued Securities. The Funds may take advantage of offerings of
eligible portfolio securities on a "when-issued" basis where delivery of and
payment for such securities takes place sometime after the transaction date on
terms established on such date. The Funds only will make when-issued commitments
on eligible securities with the intention of actually acquiring the securities.
If a Fund chooses to dispose of the right to acquire a when-issued security
prior to its acquisition, it could, as with the disposition of any other
portfolio obligation, incur a gain or loss due to market fluctuation.
When-issued commitments will not be made if, as a result, more than 15% of the
net assets of a Fund would be so committed.
Repurchase Agreements. The Funds may acquire securities subject to
repurchase agreements for liquidity purposes to meet anticipated redemptions, or
pending the investment of the proceeds from sales of Fund shares, or pending the
settlement of purchases of portfolio securities. In a repurchase transaction, a
Fund acquires a security from, and simultaneously agrees to resell it to, an
approved vendor. An "approved vendor" is a U.S. commercial bank or the U.S.
branch of a foreign bank or a broker-dealer that has been designated a primary
dealer in government securities, that must meet credit requirements set by the
Trust's Board of Trustees from time to time. The resale price exceeds the
purchase price by an amount that reflects an agreed-upon interest rate effective
for the period during which the repurchase agreement is in effect. The majority
of these transactions run from day to day, and delivery pursuant to the resale
typically will occur within one to five days of the purchase. Repurchase
agreements are considered "loans" under the Investment Company Act of 1940, as
amended (the "1940 Act"), collateralized by the underlying security.
Illiquid and Restricted Securities. To enable the Funds to sell
restricted securities not registered under the Securities Act of 1933, the Funds
may have to cause those securities to be registered. The expenses of
registration of restricted securities may be negotiated by a Fund with the
issuer at the time such securities are purchased by such Fund, if such
registration is required before such securities may be sold publicly. Securities
having contractual restrictions on their resale might limit a Fund's ability to
dispose of such securities and might lower the amount realizable upon the sale
of such securities.
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Each Fund has percentage limitations that apply to purchases of
illiquid and restricted securities, as stated in the Prospectus. Those
percentage restrictions do not limit purchases of restricted securities that are
eligible for sale to qualified institutional purchasers pursuant to Rule 144A
under the Securities Act of 1933, provided that those securities have been
determined to be liquid by the Board of Trustees of the Trust. Those guidelines
take into account the trading activity for such securities and the availability
of reliable pricing information, among other factors. If there is a lack of
trading interest in a particular Rule 144A security, a Fund's holding of that
security may be deemed to be illiquid.
Foreign Securities. The Funds may invest in securities (which may be
denominated in U.S. dollars or non-U.S. currencies) issued or guaranteed by
foreign corporations, certain supranational entities (described below) and
foreign governments or their agencies or instrumentalities, and in securities
issued by U.S. corporations denominated in non-U.S. currencies. All such
securities are referred to as "foreign securities."
Investing in foreign securities offers potential benefits not
available from investing solely in securities of domestic issuers, including the
opportunity to invest in foreign issuers that appear to offer growth potential,
or in foreign countries with economic policies or business cycles different from
those of the U.S., or to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that do not move in a manner parallel to U.S.
markets. If a Fund's portfolio securities are held abroad, the countries in
which they may be held and the sub-custodians or depositories holding them must
be approved by the Trust's Board of Trustees to the extent that approval is
required under applicable rules of the Securities and Exchange Commission.
Risks of Foreign Investing. Investments in foreign securities present
special additional risks and considerations not typically associated with
investments in domestic securities: reduction of income by foreign taxes;
fluctuation in value of foreign portfolio investments due to changes in currency
rates and control regulations (e.g., currency blockage); transaction charges for
currency exchange; lack of public information about foreign issuers; lack of
uniform accounting, auditing and financial reporting standards comparable to
those applicable to domestic issuers; less volume on foreign exchanges than on
U.S. exchanges; greater volatility and less liquidity on foreign markets than in
the U.S.; less regulation of foreign issuers, stock exchanges and brokers than
in the U.S.; greater difficulties in commencing lawsuits and obtaining judgments
in foreign courts; higher brokerage commission rates than in the U.S.; increased
risks of delays in settlement of portfolio transactions or loss of certificates
for portfolio securities; possibilities in some countries of expropriation,
confiscatory taxation, political, financial or social instability or adverse
diplomatic developments; and unfavorable differences between the U.S. economy
and foreign economies. In the past, U.S. Government policies have discouraged
certain investments abroad by U.S. investors, through taxation or other
restrictions, and it is possible that such restrictions could be re-imposed.
Loans of Portfolio Securities. The Funds may lend their portfolio
securities subject to the restrictions stated in the Prospectus. Under
applicable regulatory requirements (which are subject to change), the loan
collateral on each business day must at least equal the value of the loaned
securities and must consist of cash, bank letters of credit or securities of the
U.S. Government (or its agencies or instrumentalities). To be acceptable as
collateral, letters of credit must obligate a
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bank to pay amounts demanded by a Fund if the demand meets the terms of the
letter. Such terms and the issuing bank must be satisfactory to the Funds. The
terms of each Fund's loans must meet applicable tests under the Internal Revenue
Code of 1986 (the "Code") and must permit a Fund to reacquire loaned securities
on five days' notice or in time to vote on any important matter.
Hedging With Options and Futures Contracts. The Funds may purchase and
sell certain kinds of futures contracts, put and call options, forward
contracts, and options on securities, futures and broadly-based stock indices
for the purposes described in the Prospectus. These are all referred to as
"hedging instruments." When hedging to attempt to protect against declines in
the market value of a Fund's portfolio, or to permit a Fund to retain unrealized
gains in the value of portfolio securities which have appreciated, or to
facilitate selling securities for investment reasons, a Fund may: (i) sell
futures contracts that relate to broadly based stock indices (these are referred
to as "Stock Index Futures"), (ii) buy puts on securities or securities indices,
or (iii) write covered calls on securities, securities indices or Stock Index
Futures (as described in the Prospectus). When hedging to establish a position
in the equity securities markets as a temporary substitute for the purchase of
individual equity securities a Fund may: (i) buy Stock Index Futures, or (ii)
buy calls on securities, securities indices or Stock Index Futures. Normally, a
Fund would then purchase the equity securities and terminate the hedging
portion.
A Fund's strategy of hedging with futures and options on futures will
be incidental to such Fund's investment activities in the underlying cash
market. In the future, a Fund may employ hedging instruments and strategies that
are not presently contemplated, but which may be subsequently developed, to the
extent such investment methods are consistent with such Fund's investment
objective, and are legally permissible and disclosed in the Prospectus.
Additional information about the hedging instruments a Fund may use is provided
below.
Stock Index Futures. As described in the Prospectus, the Fund may
invest in Stock Index Futures only if they relate to broadly-based stock
indices. A stock index is considered to be broadly-based if it includes stocks
that are not limited to issues in any particular industry or group of
industries. A stock index assigns relative values to the common stocks included
in the index and fluctuates with the changes in the market value of those
stocks.
Stock Index Futures are contracts based on the future value of the
basket of securities that comprise the underlying stock index. The contracts
obligate the seller to deliver and the purchaser to take cash to settle the
futures transaction or to enter into an obligation contract. No physical
delivery of the securities underlying the index is made on settling the futures
obligation. No monetary amount is paid or received by a Fund on the purchase or
sale of a Stock Index Future. Upon entering into a futures transaction, a Fund
will be required to deposit an initial margin payment, in cash or U.S. Treasury
bills, with the futures commission merchant (the "futures broker"). Initial
margin payments will be deposited with such Fund's Custodian in an account
registered in the futures broker's name; however, the futures broker can gain
access to that account only under certain specified conditions. As the future is
marked to market (that is, its value on the Fund's books is changed) to reflect
changes in its market value, subsequent margin payments, called variation
margin, will be paid to or by the futures broker on a daily basis.
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<PAGE>
At any time prior to the expiration of the future, a Fund may elect to
close out its position by taking an opposite position, at which time a final
determination of variation margin is made and additional cash is required to be
paid by or released to such Fund. Any gain or loss is then realized by such Fund
on the future for tax purposes. Although Stock Index Futures by their terms call
for settlement by the delivery of cash, in most cases the settlement obligation
is fulfilled without such delivery by entering into an offsetting transaction.
All futures transactions are effected through a clearing house associated with
the exchange on which the contracts are traded.
Writing Call Options. As described in the Prospectus, a Fund may write
covered calls. When a Fund writes a call on an investment, it receives a premium
and agrees to sell the callable investment to a purchaser of a corresponding
call during the call period (usually not more than nine months) at a fixed
exercise price (which may differ from the market price of the underlying
investment) regardless of market price changes during the call period. To
terminate its obligation on a call it has written, a Fund may purchase a
corresponding call in a "closing purchase transaction." A profit or loss will be
realized, depending upon whether the net of the amount of option transaction
costs and the premium received on the call a Fund has written is more or less
than the price of the call such Fund subsequently purchased. A profit may also
be realized if the call lapses unexercised because such Fund retains the
underlying investment and the premium received. Those profits are considered
short-term capital gains for federal income tax purposes, as are premiums on
lapsed calls, and when distributed by a Fund are taxable as ordinary income. If
a Fund could not effect a closing purchase transaction due to the lack of a
market, it would have to hold the callable investment until the call lapsed or
was exercised.
A Fund may also write calls on futures without owning a futures
contract of deliverable securities, provided that at the time the call is
written, such Fund covers the call by segregating in escrow an equivalent dollar
value of deliverable securities or liquid assets. Each Fund will segregate
additional liquid assets if the value of the escrowed assets drops below 100% of
the current value of the future. In no circumstances would an exercise notice as
to a future put a Fund in a short futures position.
Writing Put Options. A put option on securities gives the purchaser
the right to sell, and the writer the obligation to buy, the underlying
investment at the exercise price during the option period. Writing a put covered
by segregated liquid assets equal to the exercise price of the put has the same
economic effect to a Fund as writing a covered call. The premium a Fund receives
from writing a put option represents a profit, as long as the price of the
underlying investment remains above the exercise price. However, such Fund has
also assumed the obligation during the option period to buy the underlying
investment from the buyer of the put at the exercise price, even though the
value of the investment may fall below the exercise price. If the put expires
unexercised, such Fund (as the writer of the put) realizes a gain in the amount
of the premium less transaction costs. If the put is exercised, such Fund must
fulfill its obligation to purchase the underlying investment at the exercise
price, which will usually exceed the market value of the investment at that
time. In that case, such Fund may incur a loss, equal to the sum of the sale
price of the underlying investment and the premium received minus the sum of the
exercise price and any transaction costs incurred.
5
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When writing put options on securities, to secure its obligation to
pay for the underlying security, a Fund will deposit in escrow liquid assets
with a value equal to or greater than the exercise price of the underlying
securities. Such Fund therefore forgoes the opportunity of investing the
segregated assets or writing calls against those assets. As long as the
obligation of such Fund as the put writer continues, it may be assigned an
exercise notice by the exchange or broker-dealer through whom such option was
sold, requiring such Fund to exchange currency at the specified rate of exchange
or to take delivery of the underlying security against payment of the exercise
price. Such Fund may have no control over when it may be required to purchase
the underlying security, since it may be assigned an exercise notice at any time
prior to the termination of its obligation as the writer of the put. This
obligation terminates upon expiration of the put, or such earlier time at which
such Fund effects a closing purchase transaction by purchasing a put of the same
series as that previously sold. Once such Fund has been assigned an exercise
notice, it is thereafter not allowed to effect a closing purchase transaction.
A Fund may effect a closing purchase transaction to realize a profit
on an outstanding put option it has written or to prevent an underlying security
from being put. Furthermore, effecting such a closing purchase transaction will
permit such Fund to write another put option to the extent that the exercise
price thereof is secured by the deposited assets, or to utilize the proceeds
from the sale of such assets for other investments by that Fund. Such Fund will
realize a profit or loss from a closing purchase transaction if the cost of the
transaction is less or more than the premium received from writing the option.
As above for writing covered calls, any and all such profits described herein
from writing puts are considered short-term capital gains for federal tax
purposes, and when distributed by a Fund, are taxable as ordinary income.
The Trustees have adopted a non-fundamental policy that each Fund may
write covered call options or write covered put options with respect to not more
than 5% of the value of its net assets. Similarly, each Fund may only purchase
call options and put options with a value of up to 5% of its net assets.
Purchasing Puts and Calls. A Fund may purchase calls to protect
against the possibility that such Fund's portfolio will not participate in an
anticipated rise in the securities market. When a Fund purchases a call (other
than in a closing purchase transaction), it pays a premium and, except as to
calls on stock indices, has the right to buy the underlying investment from a
seller of a corresponding call on the same investment during the call period at
a fixed exercise price. In purchasing a call, a Fund benefits only if the call
is sold at a profit or if, during the call period, the market price of the
underlying investment is above the sum of the exercise price, transaction costs,
and the premium paid, and the call is exercised. If the call is not exercised or
sold (whether or not at a profit), it will become worthless at its expiration
date and such Fund will lose its premium payment and the right to purchase the
underlying investment. When a Fund purchases a call on a stock index, it pays a
premium, but settlement is in cash rather than by delivery of the underlying
investment to such Fund.
When a Fund purchases a put, it pays a premium and, except as to puts
on stock indices, has the right to sell the underlying investment to a seller of
a corresponding put on the same investment during the put period at a fixed
exercise price. Buying a put on an investment a Fund owns (a "protective put")
enables that Fund to attempt to protect itself during the put period
6
<PAGE>
against a decline in the value of the underlying investment below the exercise
price by selling the underlying investment at the exercise price to a seller of
a corresponding put. If the market price of the underlying investment is equal
to or above the exercise price and, as a result, the put is not exercised or
resold, the put will become worthless at its expiration and such Fund will lose
the premium payment and the right to sell the underlying investment. However,
the put may be sold prior to expiration (whether or not at a profit).
Puts and calls on broadly-based stock indices or Stock Index Futures
are similar to puts and calls on securities or futures contracts except that all
settlements are in cash and gain or loss depends on changes in the index in
question (and thus on price movements in the stock market generally) rather than
on price movements of individual securities or futures contracts. When a Fund
buys a call on a stock index or Stock Index Future, it pays a premium. If a Fund
exercises the call during the call period, a seller of a corresponding call on
the same investment will pay such Fund an amount of cash to settle the call if
the closing level of the stock index or Future upon which the call is based is
greater than the exercise price of the call. That cash payment is equal to the
difference between the closing price of the call and the exercise price of the
call times a specified multiple (the "multiplier") which determines the total
dollar value for each point of difference. When a Fund buys a put on a stock
index or Stock Index Future, it pays a premium and has the right during the put
period to require a seller of a corresponding put, upon such Fund's exercise of
its put, to deliver cash to such Fund to settle the put if the closing level of
the stock index or Stock Index Future upon which the put is based is less than
the exercise price of the put. That cash payment is determined by the
multiplier, in the same manner as described above as to calls.
When a Fund purchases a put on a stock index, or on a Stock Index
Future not owned by it, the put protects such Fund to the extent that the index
moves in a similar pattern to the securities such Fund holds. Such Fund can
either resell the put or, in the case of a put on a Stock Index Future, buy the
underlying investment and sell it at the exercise price. The resale price of the
put will vary inversely with the price of the underlying investment. If the
market price of the underlying investment is above the exercise price, and as a
result the put is not exercised, the put will become worthless on the expiration
date. In the event of a decline in price of the underlying investment, such Fund
could exercise or sell the put at a profit to attempt to offset some or all of
its loss on its portfolio securities.
Each Fund's options activities may affect its portfolio turnover rate
and brokerage commissions. The exercise of calls written by a Fund may cause
that Fund to sell related portfolio securities, thus increasing its turnover
rate. The exercise by a Fund of puts on securities will cause the sale of
underlying investments, increasing portfolio turnover. Although the decision
whether to exercise a put it holds is within each Fund's control, holding a put
might cause a Fund to sell the related investments for reasons that would not
exist in the absence of the put. A Fund will pay a brokerage commission each
time it buys or sells a call, put or an underlying investment in connection with
the exercise of a put or call. Those commissions may be higher than the
commissions for direct purchases or sales of the underlying investments.
Premiums paid for options are small in relation to the market value of
the underlying investments and, consequently, put and call options offer large
amounts of leverage. The leverage
7
<PAGE>
offered by trading in options could result in a Fund's net asset value being
more sensitive to changes in the value of the underlying investments.
Regulatory Aspects of Hedging Instruments. The Funds are required to
operate within certain guidelines and restrictions with respect to its use of
futures and options thereon as established by the Commodities Futures Trading
Commission (the "CFTC"). In particular, each Fund is excluded from registration
as a "commodity pool operator" if it complies with the requirements of Rule 4.5
adopted by the CFTC. Under this rule, neither Fund is limited regarding the
percentage of its assets committed to futures margins and related options
premiums subject to a hedge position. However, aggregate initial futures margins
and related options premiums are limited to 5% or less of each Fund's net asset
value for other than bona fide hedging strategies employed by each Fund within
the meaning and intent of applicable provisions of the Commodity Exchange Act
and CFTC regulations thereunder.
Transactions in options by the Funds are subject to limitations
established by option exchanges governing the maximum number of options that may
be written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
different exchanges or through one or more brokers. Thus the number of options
which a Fund may write or hold may be affected by options written or held by
other entities, including other investment companies having the same adviser as
the Funds (or an adviser that is an affiliate of the Funds' adviser). The
exchanges also impose position limits on futures transactions. An exchange may
order the liquidation of positions found to be in violation of those limits and
may impose certain other sanctions.
Due to requirements under the 1940 Act, when a Fund purchases a Stock
Index Future, such Fund will maintain, in a segregated account or account with
its Custodian, cash or readily-marketable, short-term (maturing in one year or
less) debt instruments in an amount equal to the market value of the securities
underlying such future, less the margin deposit applicable to it.
Additional Information About Hedging Instruments and Their Use. The
Funds' Custodian or a securities depository acting for the Custodian, will act
as the Funds' escrow agent, through the facilities of Options Clearing
Corporation ("OCC"), as to the investments on which the Funds have written
options traded on exchanges or as to other acceptable escrow securities, so that
no margin will be required for such transactions. OCC will release the
securities on the expiration of the option or upon the Funds' entering into a
closing transaction. An option position may be closed out only on a market which
provides secondary trading for options of the same series, and there is no
assurance that a liquid secondary market will exist for any particular option.
When a Fund writes an over-the-counter ("OTC") option, it will enter
into an arrangement with a primary U.S. Government securities dealer, which
would establish a formula price at which such Fund would have the absolute right
to purchase that OTC option. That formula price would generally be based on a
multiple of the premium received for the option, plus the amount by which the
option is exercisable below the market price of the underlying security (that
is, the extent to which the option is "in-the-money"). When a Fund writes an OTC
option, it will treat as illiquid
8
<PAGE>
(for purposes of the limit on its assets that may be invested in the illiquid
securities as stated in the Prospectus) the marked to market value of any OTC
option held by it. The Securities and Exchange Commission is evaluating whether
OTC options should be considered liquid securities. The procedure described
above could be affected by the outcome of that evaluation. A Fund's option
activities may affect its turnover rate and brokerage commissions. The exercise
by a Fund of puts on securities will cause the sale of related investments,
increasing portfolio turnover. Although such exercise is within a Fund's
control, holding a put might cause a Fund to sell the related investments for
reasons which would not exist in the absence of the put. Each Fund will pay a
brokerage commission each time it buys a put or call, sells a call, or buys or
sells an underlying investment in connection with the exercise of a put or call.
Such commissions may be higher than those which would apply to direct purchases
or sales of such underlying investments. Premiums paid for options are small in
relation to the market value of the related investments, and consequently, put
and call options offer large amounts of leverage. The leverage offered by
trading options could result in a Fund's net asset value being more sensitive to
changes in the value of the underlying investments.
Additional Risk Factors in Hedging. In addition to the risks with
respect to options discussed in the Prospectus and above, there is a risk in
using short hedging by (i) selling Stock Index Futures or (ii) purchasing puts
on stock indices or Stock Index Futures to attempt to protect against declines
in the value of a Fund's equity securities. The risk is that the prices of Stock
Index Futures will correlate imperfectly with the behavior of the cash (i.e.,
market value) prices of a Fund's equity securities. The ordinary spreads between
prices in the cash and futures markets are subject to distortions due to
differences in the natures of those markets. First, all participants in the
futures markets are subject to margin deposit and maintenance requirements.
Rather than meeting additional margin deposit requirements, investors may close
out futures contracts through offsetting transactions which could distort the
normal relationship between the cash and futures markets. Second, the liquidity
of the futures markets depends on participants entering into offsetting
transactions rather than making or taking delivery. To the extent participants
decide to make or take delivery, liquidity in the futures markets could be
reduced, thus producing distortion. Third, from the point of view of
speculators, the deposit requirements in the futures markets are less onerous
than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions.
The risk of imperfect correlation increases as the composition of a
Fund's portfolio diverges from the securities included in the applicable index.
To compensate for the imperfect correlation of movements in the price of the
equity securities being hedged and movements in the price of the hedging
instruments, a Fund may use hedging instruments in a greater dollar amount than
the dollar amount of equity securities being hedged if the historic volatility
of the prices of the equity securities being hedged is more than the historic
volatility of the applicable index. It is also possible that if a Fund has used
hedging instruments in a short hedge, the market may advance and the value of
equity securities held in such Fund's portfolio may decline. If that occurred,
such Fund would lose money on the hedging instruments and also experience a
decline in value in its portfolio securities. However, while this could occur
for a very brief period or to a very small degree, over time the value of a
diversified portfolio of equity securities will tend to move in the same
direction as the indices upon which the hedging instruments are based.
9
<PAGE>
If a Fund uses hedging instruments to establish a position in the
equities markets as a temporary substitute for the purchase of individual equity
securities (long hedging) by buying Stock Index Futures and/or calls on such
futures, on securities or on stock indices, it is possible that the market may
decline. If such Fund then concludes not to invest in equity securities at that
time because of concerns as to a possible further market decline or for other
reasons, such Fund will realize a loss on the hedging instruments that is not
offset by a reduction in the price of the equity securities purchased.
Other Investment Restrictions
Each Fund's most significant investment restrictions are set forth in
the Prospectus. There are additional investment restrictions that each Fund must
follow that are also fundamental policies. Fundamental polices and each Fund's
investment objective cannot be changed without the vote of a "majority" of a
Fund's outstanding voting securities. Under the 1940 Act, such a majority vote
is defined as the vote of the holders of the lesser of: (i) 67% or more of the
shares present or represented by proxy at a shareholder meeting, if the holders
of more than 50% of the outstanding shares are present or represented by proxy,
or (ii) more than 50% of the outstanding shares.
Under these fundamental restrictions, neither Fund can:
- -- invest in physical commodities or physical commodity contracts or
speculate in financial commodity contracts, but each Fund is authorized
to purchase and sell financial futures contracts and options on such
futures contracts exclusively for hedging and other non-speculative
purposes to the extent specified in the Prospectus;
- -- invest 25% or more of its net assets in one or more issuers conducting
their principal business in the same industry; -- with respect to 75%
of its assets, invest more than 5% of the market value of its total
assets in the securities of any single issuer (other than obligations
issued or guaranteed as to principal and interest by the U.S.
Government or any agency or instrumentality thereof);
- -- with respect to 75% of its assets, purchase more than 10% of the
outstanding voting securities of any issuer (other than obligations of
the U.S. Government);
- -- invest in real estate or real estate limited partnerships (direct
participation programs); however, each Fund may purchase securities of
issuers which engage in real estate operations and securities which are
secured by real estate or interests therein;
- -- make short sales whereby the dollar amount of short sales at any one
time would exceed 5% of the net assets of the Fund; provided that the
Fund maintains collateral in a segregated account consisting of cash or
liquid portfolio securities with a value equal to the current market
value of shorted securities, which is marked to market daily. If the
Fund owns an equal amount of such securities or securities convertible
into or exchangeable for, without payment of any further consideration,
securities of the same
10
<PAGE>
issuer as, and equal in amount to, the securities sold short (which
sales are commonly referred to as "short sales against the box"), such
restrictions shall not apply;
- -- purchase securities on margin, except short-term credits as are
necessary for the purchase and sale of securities, provided that the
deposit or payment of initial or variation margin in connection with
futures contracts or related options will not be deemed to be a
purchase on margin;
- -- underwrite securities of other companies except in so far as either
Fund may be deemed to be an underwriter under the Securities Act of
1933 in disposing of a security;
- -- invest in interests in oil, gas or other mineral exploration or
development programs or leases, except that the Fund may purchase
securities of companies engaging in whole or in part in such
activities;
- -- borrow money, or pledge, mortgage or hypothecate its assets, except
that the Funds may borrow money from banks for temporary or emergency
purposes, including the meeting of redemption requests which might
require the untimely disposition of securities. Borrowing in the
aggregate may not exceed 10%, and, borrowing for purposes other than
meeting redemptions may not exceed 5%, of the value of a Fund's total
assets (including the amount borrowed) less liabilities (not including
the amount borrowed) at the time of the borrowing. Outstanding
borrowings in excess of 5% of the value of the Fund's total assets will
be repaid before any subsequent investments are made;
- -- issue any senior securities, except that collateral arrangements with
respect to transactions such as forward contracts, future contracts,
short sales or options, including deposits of initial and variation
margin, shall not be considered to be the issuance of a senior security
for purposes of this restriction;
- -- make loans to other persons except through the lending of securities
held by it (but not to exceed a value of one-third of total assets),
through the use of repurchase agreements, and by the purchase of debt
securities, all in accordance with the Funds' investment policies;
- -- invest for the purpose of exercising control or management of another
company;
- -- acquire or retain securities of any investment company, except that the
Fund may (a) acquire securities of investment companies up to the
limits permitted by Sec. 12(d)(1) of the 1940 Act, and (b) acquire
securities of any investment company as part of a merger, consolidation
or similar transaction.
MANAGEMENT OF THE FUND
The Trustees and officers of the Trust and their principal occupations
during the past five years are set forth below. An asterisk (*) has been placed
next to the name of each Trustee who is an "interested person" of the Trust, as
such term is defined in the 1940 Act, by virtue of such person's affiliation
with the Trust, a Fund or the Adviser.
11
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Position with the Trust During the Past Five Years
- --------------------- ----------------------- ---------------------------
<S> <C> <C>
Raymond J. Armstrong, 72 Trustee Chairman and money manager, Armstrong Shaw
2 Bluewater Hill Associates, Inc. (registered investment
Westport, CT 06880 adviser) (1984-present).
Stephen E. Milman, 60 Trustee Limited Partner, Orchard Park Associates L.P.,
5 Pratt Island Minor League Heroes, L.P., and Minor League
Darien, CT 06820 Sports Enterprises LP; Principal, Neuberger &
Berman LLC (1987-1996).
Edmund H. Nicklin, Jr.*, 50 Trustee and President Managing Member, Westport Advisers, LLC;
253 Riverside Avenue Portfolio Manager, Westport Asset Management,
Westport, CT 06880 Inc.; Portfolio Manager, Evergreen Funds
(1982-1997); President and Director, Lake Huron
Cellular Corp.
Ronald H. Oliver*, 68 Trustee, Executive Vice President, Westport Asset Management, Inc.;
253 Riverside Avenue President, Secretary and Director, Automated Security (Holdings)
Westport, CT 06880 Treasurer (1995-1996).
D. Bruce Smith, II, 59 Trustee Independent Consultant, Gunn Partners, Inc.
19 Beaver Brook Road (March 1994-present), Controller, Solvents and
Ridgefield, CT 06877 Coatings Materials Division, Union Carbide
Corp. (manufacturer, sale of chemicals) (until
December 1993).
Andrew J. Knuth, 59 Executive Vice President Chairman, Chief Investment Officer and
253 Riverside Avenue portfolio manager, Westport Asset Management,
Westport, CT 06880 Inc.; General manager, Riverside Associates
Limited Partnership I.
</TABLE>
The Trustees of the Trust who are employees of the Adviser or officers
or employees of any of its affiliates receive no remuneration from the Trust.
Each of the other Trustees is paid an annual retainer of $5,000, and a fee of
$1,000 for each meeting attended and is reimbursed for the expenses of
attendance of such meetings.
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<PAGE>
Compensation of Trustees and Certain Officers
The following table sets forth information regarding compensation of
Trustees by the Trust, and by the fund complex of which the Trust is a part, for
the fiscal year ended December 31, 1998. Officers of the Trust and Trustees who
are interested persons of the Trust do not receive any compensation from the
Trust. In the column head "Total Compensation From Registrant and Fund Complex
Paid to Trustees," the number in parentheses indicates the total number of
boards in the fund complex on which the Trustee serves. The Trust does not pay
any pension or retirement benefits.
ESTIMATED COMPENSATION TABLE
Fiscal Year Ended December 31, 1998
<TABLE>
<CAPTION>
Total Compensation from
Aggregate Compensation Registrant and Fund
Name of Person, Position from Registrant Complex Paid to Trustee
<S> <C> <C>
Raymond J. Armstrong*; Trustee $ 9,000 $ 9,000(1)
Stephen E. Milman*, Trustee $ 9,000 $ 9,000(1)
Edmund H. Nicklin, Jr.**, Trustee $ 0 $ 0(1)
and President
Ronald H. Oliver**, Trustee, $ 0 $ 0(1)
Executive Vice President,
Secretary and Treasurer
D. Bruce Smith, II*, Trustee $ 9,000 $ 9,000(1)
</TABLE>
- ------------------
* Member of Audit Committee.
** "Interested person," as defined in the 1940 Act, of the Trust because
of the affiliation with Westport Advisers, LLC, the Funds' investment
adviser.
DETERMINATION OF NET ASSET VALUE
Each Fund's net asset value per share is computed as of the scheduled
close of trading on the New York Stock Exchange (currently 4:00 p.m.) on each
day during which the New York Stock Exchange is open for trading. The net asset
value per share of each Fund is computed by dividing the total current value of
the assets of each Fund, less its liabilities, by the total number of shares of
such Fund outstanding at the time of such computation.
13
<PAGE>
Securities listed on a securities exchange and over-the-counter
securities traded on the NASDAQ national market are valued at the closing sales
price on the date as of which the net asset value is being determined. In the
absence of closing sales prices for such securities and for securities traded in
the over-the-counter market, the security is valued at the last sales price on
that day, or if such price is not available, the closing bid price.
Securities for which market quotations are not readily available or
which are not readily marketable and all other assets of the Funds are valued at
fair value as the Board of Trustees may determine in good faith.
REDEMPTION OF SHARES
Payment of the redemption price for shares redeemed may be made either
in cash or in portfolio securities (selected in the discretion of the Board of
Trustees and taken at their value used in determining a Fund's net asset value
per share as described under "Determination of Net Asset Value"), or partly in
cash and partly in portfolio securities. However, payments will be made wholly
in cash unless the Board believes that economic conditions exist which would
make such a practice detrimental to the best interests of a Fund. If payment for
shares redeemed is made wholly or partly in portfolio securities, brokerage
costs may be incurred by the investor in converting the securities to cash.
Neither Fund will distribute in kind portfolio securities that are not readily
marketable.
PORTFOLIO TURNOVER
The Funds may engage in portfolio trading when considered appropriate,
but short-term trading will not be used as the primary means of achieving their
investment objectives. Although the Funds cannot accurately predict their
portfolio turnover rate, it is not expected to exceed 75% in normal
circumstances. However, there are no limits on the rate of portfolio turnover,
and investments may be sold without regard to length of time held when, in the
opinion of the Adviser, investment considerations warrant such actions. Higher
portfolio turnover rates, such as rates in excess of 100%, and short-term
trading involve correspondingly greater commission expenses and transaction
costs.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities
for the Funds, the selection of brokers and dealers to effect the transactions
and the negotiation of brokerage commissions. Purchases and sales of securities
on a securities exchange are effected through brokers who charge a commission
for their services. Brokerage commissions on U.S. securities exchanges are
subject to negotiation between the Adviser and the broker.
In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money
14
<PAGE>
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities of the Funds, the Adviser
is required to give primary consideration to obtaining the most favorable price
and efficient execution. Within the framework of this policy, the Adviser will
consider the research and investment services provided by brokers or dealers who
effect, or are parties to, portfolio transactions of the Funds or the Adviser's
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Adviser in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Funds may be used in managing other investment accounts.
Conversely, brokers furnishing such services may be selected for the execution
of transactions of such other accounts, and the services furnished by such
brokers may be used by the Adviser in providing investment management for the
Funds. Commission rates are established pursuant to negotiations with the broker
based on the quality and quantity of execution services provided by the broker
in light of generally prevailing rates. The Adviser's policy is to pay higher
commissions to brokers for particular transactions than might be charged if a
different broker had been selected on occasions when, in the Adviser's opinion,
this policy furthers the objective of obtaining the most favorable price and
execution. In addition, the Adviser is authorized to pay higher commissions on
brokerage transactions for the Funds to brokers in order to secure research and
investment services described above, subject to review by the Board of Trustees
from time to time as to the extent and continuation of the practice. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Board.
TAXATION
Taxation of the Funds
Each Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Code. To qualify as a regulated
investment company, each Fund must, among other things, (a) derive in each
taxable year at least 90% of its gross income from dividends, interest, payments
with respect to securities loans and gains from the sale or other disposition of
stock, securities or foreign currencies or other income derived with respect to
its business of investing in such stock, securities or currencies; (b) diversify
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of that Fund's assets is represented by cash and
cash items (including receivables), U.S. Government securities, the securities
of other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of that Fund's total assets and not
greater than 10% of the outstanding voting securities of such issuer, and (ii)
not more than 25% of the value of its total assets is invested in the securities
of any one issuer (other than U.S. Government securities or the securities of
other regulated investment companies); and (c) distribute at least 90% of its
investment company taxable income (which includes, among other items, dividends,
interest and net short-term capital gains in excess of net long-term capital
losses) each taxable year.
16
<PAGE>
As regulated investment companies, the Funds generally will not be
subject to U.S. federal income tax on their investment company taxable income
and net capital gains (the excess of net long-term capital gains over net
short-term capital losses), if any, that they distribute to shareholders. The
Funds intend to distribute to their shareholders, at least annually,
substantially all of their investment company taxable income and net capital
gains. Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, each Fund must distribute during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses) for the one-year period ending on October
31 of the calendar year, and (3) any ordinary income and capital gains for
previous years that was not distributed during those years. A distribution will
be treated as paid December 31 of the current calendar year if it is declared by
a Fund in October, November or December with a record date in such a month and
paid by such Fund during January of the following calendar year. Such
distributions will be taxable to shareholders in the calendar year in which the
distributions are declared, rather than the calendar year in which the
distributions are received. To prevent application of the excise tax, each Fund
intends to make its distributions in accordance with the calendar year
distribution requirement.
Distributions
Dividends paid out of a Fund's investment company taxable income will
be taxable to a U.S. shareholder as ordinary income. Because a portion of a
Fund's income may consist of dividends paid by U.S. corporations, a portion of
the dividends paid by such Fund may be eligible for the corporate
dividends-received deduction. Distributions of net capital gains, if any,
designated as capital gain dividends are taxable at the applicable mid-term or
long-term capital gains rate, regardless of how long the shareholder has held
the relevant Fund's shares, and are not eligible for the dividends-received
deduction. Shareholders receiving distributions in the form of additional
shares, rather than cash, generally will have a cost basis in each such share
equal to the net value of a share of the relevant Fund on the reinvestment date.
Shareholders will be notified annually as to the U.S. federal tax
status of distributions, and shareholders receiving distributions in the form of
additional shares will receive a report as to the net asset value of those
shares.
A distribution of an amount in excess of a Fund's current and
accumulated earnings and profits will be treated by a shareholder as a return of
capital which is applied against and reduces the shareholder's basis in his or
her shares. To the extent that the amount of any such distribution exceeds the
shareholder's basis in his or her shares, the excess will be treated by the
shareholder as gain from a sale or exchange of the shares.
Sale of Shares
Upon the sale or other disposition of shares of a Fund, a shareholder
may realize a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the shares. Any
loss realized on a sale or exchange will be disallowed to the
16
<PAGE>
extent the shares disposed of are replaced within a period of 61 days beginning
30 days before and ending 30 days after disposition of the shares. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Any loss realized by a shareholder on a disposition of shares
of a Fund held by the shareholder for six months or less will be treated as a
long-term capital loss to the extent of any distributions of net capital gains
received by the shareholder with respect to such shares.
Original Issue Discount Securities
Investments by a Fund in zero coupon or other discount securities will
result in income to such Fund equal to a portion of the excess of the face value
of the securities over their issue price (the "original issue discount") each
year that the securities are held, even though such Fund receives no cash
interest payments. This income is included in determining the amount of income
which that Fund must distribute to maintain its status as a regulated investment
company and to avoid the payment of federal income tax and the 4% excise tax. In
addition, if a Fund invests in certain high yield original issue discount
securities issued by corporations, a portion of the original issue discount
accruing on any such obligation may be eligible for the deduction for dividends
received by corporations. In such event, dividends of investment company taxable
income received from such Fund by its corporate shareholders, to the extent
attributable to such portion of accrued original issue discount, may be eligible
for this deduction for dividends received by corporations if so designated by
that Fund in a written notice to shareholders.
Market Discount Bonds
Gains derived by a Fund from the disposition of any market discount
bonds (i.e., bonds purchased other than at original issue, where the face value
of the bonds exceeds their purchase price) held by such Fund will be taxed as
ordinary income to the extent of the accrued market discount of the bonds,
unless such Fund elects to include the market discount in income as it accrues.
Options and Hedging Transactions
The taxation of equity options and over-the-counter options on debt
securities is governed by Code section 1234. Pursuant to Code section 1234, the
premium received by a Fund for selling a put or call option is not included in
income at the time of receipt. If the option expires, the premium is short-term
capital gain to a Fund. If a Fund enters into a closing transaction, the
difference between the amount paid to close out its position and the premium is
received is short-term capital gain or loss. If a call option written by a Fund
is exercised, thereby requiring such Fund to sell the underlying security, the
premium will increase the amount realized upon the sale of such security and any
resulting gain or loss will be capital gain or loss, and will be long-term or
short-term depending upon the holding period of the security. With respect to a
put or call option that is purchased by a Fund, if the option is sold, any
resulting gain or loss will be a capital gain or loss, and will be long-term or
short-term, depending upon the holding period of the option. If the option
expires, the resulting loss is a capital loss and is long-term or short-term
depending upon the holding period of the option. If the option is exercised, the
cost of the option, in the case of a
17
<PAGE>
call option, is added to the basis of the purchased security and, in the case of
a put option, reduces the amount realized on the underlying security in
determining gain or loss.
Certain options, futures contracts and forward contracts in which the
Funds may invest are "section 1256 contracts." Gains or losses on section 1256
contracts generally are considered 60% long-term and 40% short-term capital
gains or losses ("60-40"); however, foreign currency gains or losses (as
discussed below) arising from certain section 1256 contracts may be treated as
ordinary income or loss. Also, section 1256 contracts held by a Fund at the end
of each taxable year (and, generally, for purposes of the 4% excise tax, on
October 31 of each year) are "marked-to-market" (that is, treated as sold at
fair market value), resulting in unrealized gains or losses being treated as
though they were realized.
Generally, the hedging transactions undertaken by the Funds may result
in "straddles" for U.S. federal income tax purposes. The straddle rules may
affect the character of gains (or losses) realized by a Fund. In addition,
losses realized by a Fund on positions that are part of a straddle may be
deferred under the straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which the losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences to a Fund of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by a Fund which is taxed as ordinary
income when distributed to shareholders.
The Funds may make one or more of the elections available under the
Code which are applicable to straddles. If a Fund makes any of the elections,
the amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because the straddle rules may affect the character of gains or
losses, defer losses and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount which may be distributed to
shareholders, and which will be taxed to them as ordinary income or long-term
capital gain, may be increased or decreased as compared to a fund that did not
engage in such hedging transactions.
The diversification requirements applicable to a Fund's assets may
limit the extent to which a Fund will be able to engage in transactions in
options, future contracts and forward contracts.
Notwithstanding any of the foregoing, a Fund may recognize gain (but
not loss) from a constructive sale of certain "appreciated financial positions"
if the Fund enters into a short sale, offsetting notional principal contract,
futures or forward contract transaction with respect to the appreciated position
or substantially identical property. Appreciated financial positions subject to
this constructive sale treatment are interests (including options, futures and
forward contracts and short sales) in stock, partnership interests, certain
actively traded trust instruments and certain debt instruments. Constructive
sale treatment does not apply to certain transactions closed in the
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90-day period ending with the 30th day after the close of the taxable year, if
certain conditions are met.
Currency Fluctuations - "Section 988" Gains or Losses
Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues receivables or
liabilities denominated in foreign currency and the time such Fund actually
collects such receivables, or pays such liabilities, generally are treated as
ordinary income or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency, and on disposition of certain options,
futures and foreign currency contracts, gains or losses attributable to
fluctuations in the value of foreign currency between the date of acquisition of
the security or contract and the date of disposition also are treated as
ordinary gain or loss. These gains or losses, referred to under the Code as
"Section 988" gains or losses, may increase or decrease the amount of a Fund's
investment company taxable income to be distributed to its shareholders as
ordinary income.
Unless certain constructive sale rules (discussed more fully above)
apply, a Fund will not realize gain or loss on a short sale of a security until
it closes the transaction by delivering the borrowed security to the lender. All
or a portion of any gain arising from a short sale may be treated as short-term
capital gain, regardless of the period for which a Fund held the security used
to close the short sale. In addition, a Fund's holding period for any security
which is substantially identical to that which is sold short may be reduced or
eliminated as a result of the short sale. In many cases, as described more fully
under "Options and Hedging Transactions" above, a Fund is required to recognize
gain (but not loss) upon entering into a short sale with respect to an
appreciated security that such Fund owns, as though such Fund constructively
sold the security at the time of entering into the short sale. Similarly, if a
Fund enters into a short sale of property that becomes substantially worthless,
the Fund will recognize gain at that time as though it had closed the short
sale. Future Treasury regulations may apply similar treatment to other
transactions with respect to property that becomes substantially worthless.
If a Fund invests in stock of certain foreign investment companies,
such Fund may be subject to U.S. federal income taxation on a portion of any
"excess distribution" with respect to, or gain from the disposition of, such
stock. The tax would be determined by allocating such distribution or gain
ratably to each of such Fund's holding period for the stock. The distribution or
gain so allocated to any taxable year of a Fund, other than the taxable year of
the excess distribution or disposition, would be taxed to such Fund at the
highest ordinary income tax rate in effect for such year, and the tax would be
further increased by an interest charge to reflect the value of the tax deferral
deemed to have resulted from the ownership of the foreign company's stock. Any
amount of distribution or gain allocated to the taxable year of the distribution
or disposition would be included in such Fund's investment company taxable
income and, accordingly, would not be taxable to that Fund to the extent
distributed by such Fund as a dividend to its shareholders.
A Fund may be able to make an election, in lieu of being taxable in
the manner described above, to include annually in income its pro rata share of
the ordinary earnings and net capital gain of the foreign investment company,
regardless of whether it actually received any distributions
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from the foreign company. These amounts would be included in a Fund's investment
company taxable income and net capital gain which, to the extent distributed by
such Fund as ordinary or capital gain dividends, as the case may be, would not
be taxable to that Fund. In order to make this election, such Fund would be
required to obtain certain annual information from the foreign investment
companies in which it invests, which in many cases may be difficult to obtain.
Alternatively, a Fund may elect to mark to market its foreign investment company
stock, resulting in the stock being treated as sold at fair market value on the
last business day of each tax year. Any resulting gain would be reported as
ordinary income; any resulting loss and any loss from an actual disposition of
the stock would be reported as ordinary loss to the extent of any net
marked-to-market gains reported in prior years.
Foreign Withholding Taxes
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
Backup Withholding
A Fund may be required to withhold U.S. federal income tax at the rate
of 31% of all taxable distributions payable to shareholders who fail to provide
such Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
Foreign Shareholders
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("foreign shareholder") depends on whether the income of
a Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income will be subject
to a U.S. tax of 30% (or lower treaty rate, except in the case of any excess
inclusion income allocated to the shareholder), which tax is generally withheld
from such distributions.
Distributions of capital gain dividends and any amounts retained by a
Fund which are designated as undistributed capital gains will not be subject to
U.S. tax at the rate of 30% (or lower treaty rate) unless the foreign
shareholder is a nonresident alien individual and is physically present in the
United States for more than 182 days during the taxable year and meets certain
other requirements. However, this 30% tax on capital gains of nonresident alien
individuals who are physically present in the United States for more than the
182 day period only applies in exceptional cases because any individual present
in the United States for more than 182 days
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during the taxable year is generally treated as a resident for U.S. income tax
purposes; in that case, he or she would be subject to U.S. income tax on his or
her worldwide income at the graduated rates applicable to U.S. citizens, rather
than the 30% U.S. tax. In the case of a foreign shareholder who is a nonresident
alien individual, a Fund may be required to withhold U.S. income tax at a rate
of 31% of distributions of net capital gains unless the foreign shareholder
certifies his or her non-U.S. status under penalties of perjury or otherwise
establishes an exemption. See "Taxation -- Backup Withholding," above. If a
foreign shareholder is a nonresident alien individual, any gain such shareholder
realizes upon the sale or exchange of such shareholder's shares of a Fund in the
United States will ordinarily be exempt from U.S. tax unless (i) the gain is
U.S. source income and such shareholder is physically present in the United
States for more than 182 days during the taxable year and meets certain other
requirements, or is otherwise considered to be a resident alien of the United
States, or (ii) at any time during the shorter of the period during which the
foreign shareholder held shares of a Fund and the five year period ending on the
date of the disposition of those shares, such Fund was a "U.S. real property
holding corporation" and the foreign shareholder held more than 5% of the shares
of that Fund, in which event the gain would be taxed in the same manner as for a
U.S. shareholder, as discussed above, and a 10% U.S. withholding tax would be
imposed on the amount realized on the disposition of such shares to be credited
against the foreign shareholder's U.S. income tax liability on such disposition.
A corporation is a "U.S. real property holding corporation" if the fair market
value of its U.S. real property interests equals or exceeds 50% of the fair
market value of such interests plus its interests in real property located
outside the United States plus any other assets used or held for use in a
business. In the case of a Fund, U.S. real property interests include interests
in stock in U.S. real property holding corporations and certain participating
debt securities.
Income Effectively Connected. If the income from a Fund is "effectively
connected" with a U.S. trade or business carried on by a foreign shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by a Fund which are designated as undistributed
capital gains and any gains realized upon the sale or exchange of shares of a
Fund will be subject to U.S. income tax at the graduated rates applicable to
U.S. citizens, residents and domestic corporations. Foreign corporate
shareholders may also be subject to the branch profits tax imposed by the Code.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in a Fund.
Other Taxation
Fund shareholders may be subject to state, local and foreign taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in a Fund.
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CALCULATION OF PERFORMANCE DATA
The Funds may, from time to time, include the yield and total return in
reports to shareholders or prospective investors. Quotations of yield for a Fund
will be based on all investment income per share during a particular 30-day (or
one month) period (including dividends and interest), less expenses accrued
during the period ("net investment income"), and are computed by dividing net
investment income by the maximum offering price per share on the last day of the
period, according to the following formula which is prescribed by the Securities
and Exchange Commission:
6
YIELD = 2[(a - b + 1) - 1]
-----
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares of a Fund outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the period.
Quotations of average annual total return will be expressed in terms
of the average annual compounded rate of return of a hypothetical investment in
a Fund over periods of one, five and ten years (up to the life of such Fund),
calculated pursuant to the following formula which is prescribed by the
Securities and Exchange Commission:
n
P(1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = the average annual total return;
n = the number of years; and
ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period.
All total return figures assume that all dividends are reinvested when paid.
In reports or other communications to shareholders of the Funds or in
advertising materials, the Funds may compare their performance with that of (i)
other mutual funds listed in the rankings prepared by Lipper Analytical
Services, Inc., publications such as Barrons, Business Week, Forbes, Fortune,
Institutional Investor, Kiplinger's Personal Finance, Money, Morningstar Mutual
Fund Values, The New York Times, The Wall Street Journal and USA Today or other
industry or financial publications or (ii) the Standard and Poor's Index of 500
Stocks, the Dow Jones Industrial Average and other relevant indices and industry
publications. The Funds may also compare the historical volatility of their
portfolios to the volatility of such indices during the same time periods.
(Volatility is a generally accepted barometer of the market risk associated with
a portfolio of securities and is generally measured in comparison to the stock
market as a whole- beta-or in absolute terms- standard deviation.)
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COUNSEL AND INDEPENDENT ACCOUNTANTS
Legal matters in connection with the issuance of the shares of each
Fund offered hereby will be passed on by Dechert Price & Rhoads, 30 Rockefeller
Plaza, New York, New York 10112.
Tait, Weller & Baker, Two Penn Center Plaza, Suite 700, Philadelphia,
Pennsylvania 19102, have been appointed as independent accountants for the
Funds.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
WESTPORT
WESTPORT SMALLCAP
FUND FUND
---------- ----------
ASSETS
Cash $ 50,000 $ 50,000
Deferred organization expenses 35,000 35,000
---------- ----------
Total assets 85,000 85,000
LIABILITIES
Due to Investment Adviser 35,000 35,000
---------- ----------
NET ASSETS
(Unlimited shares of $.001 par
beneficial interest authorized;
5,000 Class R shares outstanding
each Fund) $ 50,000 $ 50,000
---------- ----------
Net asset value and redemption
price per share
$50,000/5,000 shares $ 10.00 $ 10.00
---------- ----------
Notes to Financial Statements
(1) ORGANIZATION
The Westport Funds (the "Trust"), a diversified, open-end investment
company, was organized on September 17, 1997 as a Delaware Business
Trust. The Westport Fund and the Westport Small Cap Fund (the "Funds")
are series of the Trust. The Funds have had no operations through
December 19, 1997 other than those relating to organizational matters
and the sale and issuance of 5,000 Class R shares of each series at
$10.00 per share to the initial shareholders.
(2) DEFERRED ORGANIZATION EXPENSES
All expenses of the Funds incurred in connection with their
organization and the registration of their shares have been assumed by
the Funds.
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Westport Advisers, LLC (the "Adviser") has agreed to advance the
organization expenses incurred by the Funds and will be reimbursed for
such expenses after commencement of the Funds operations. The
organization expenses will be amortized over a period of five years
commencing after the effective date of the Funds' Registration
Statement. If any of the initial shares are redeemed before
amortization of the deferred organization expenses is completed, the
redemption proceeds will be reduced by the pro rata share (represented
by the percentage of shares redeemed in relation to the total initial
shares) of unamortized deferred organization expenses existing at the
time of the redemption.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Trustees
The Westport Funds
Westport, Connecticut
We have audited the accompanying statement of assets and liabilities
of the Westport Fund and the Westport Small Cap Fund, each a series of shares of
the Westport Funds, as of December 19, 1997. This financial statement is the
responsibility of the Funds' management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of assets and liabilities is
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit of the statement of
assets and liabilities provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to
above presents fairly, in all material respects, the financial position of the
Westport Fund and the Westport Small Cap Fund as of December 19, 1997, in
conformity with generally accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
December 19, 1997
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APPENDIX A
DESCRIPTION OF BOND RATINGS
Moody's Ratings
Bonds rated Aa by Moody's are judged by Moody's to be of high quality
by all standards. Together with bonds rated Aaa (Moody's highest rating), they
compromise what are generally known as high-grade bonds. Aa bonds are rated
lower than Aaa bonds because margins of protection may not be as large as those
of Aaa bonds, or fluctuations of protective elements may be of greater
amplitude, or there may be other elements present which make the long-term risks
appear somewhat larger than those applicable to Aaa securities. Bonds which are
rated A by Moody's possess many favorable investment attributes and are to be
considered upper medium-grade obligations. Factors giving security to payment of
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Moody's Baa rated bonds are considered medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements
because their future cannot be considered as well assured. Uncertainty of
position characterizes bonds in this class, because the protection of interest
and principal payments may be very moderate and not well safeguarded.
Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the security over any long period of time may be small. Bonds
which are rated Caa are of poor standing. Such securities may be in default or
there may be present elements of danger with respect to principal or interest.
Bonds which are rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
Bonds which are rated C are the lowest rated class of bonds and issues so rated
can be regarded having extremely poor prospects of attaining any real investment
standing.
S&P's Ratings
Bonds rated AA by S&P have a very strong capacity to pay interest and
differ only in a small degree from issues rated AAA (S&P's highest rating).
Bonds rated AAA are considered by S&P to be the highest grade obligations and
have an extremely strong capacity to pay interest and principal. Bonds rated A
by S&P have a strong capacity to pay principal and interest, although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions.
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S&P's BBB rated bonds are regarded as having adequate capacity to pay
interest and principal.
Although these bonds normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay interest and principal.
Bonds rated BB, B, CCC, CC and C are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and principal in accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and C the highest degree of speculation. While such
bonds may have some quality and protective characteristics, these are outweighed
by large uncertainties or major risk exposures to adverse conditions.
