File Nos. 333-35821
811-8359
As filed with the Securities and Exchange Commission on April 27, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 2 |X|
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 4 |X|
---------------------
THE WESTPORT FUNDS
(Exact Name of Registrant as Specified in Charter)
253 Riverside Avenue
Westport, CT 06880
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (203) 227-3601
Edmund H. Nicklin, Jr. Copy To: Margaret A. Bancroft, Esq.
The Westport Funds Dechert Price & Rhoads
253 Riverside Avenue 30 Rockefeller Plaza
Westport, CT 06880 New York, New York 10112
(Name and Address of Agent of Service of Process)
Approximate Date of Proposed Public Offering: As soon as
practicable after the effective date of this registration
statement
It is proposed that this filing will become effective (check appropriate box):
_X__ immediately upon filing pursuant to paragraph (b)
____ on [date] pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
____ on [date] pursuant to paragraph (a)(1)
____ 75 days after filing pursuant to paragraph (a)(2)
____ on [date] pursuant to paragraph (a)(2) of Rule 485
<PAGE>
THE WESTPORT FUNDS
[graphic]
Westport Fund
Westport Small Cap Fund
Prospectus
May 1, 1999
<PAGE>
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved of these securities or passed upon the adequacy of this
prospectus. Anyone who tells you otherwise is committing a crime.
[graphic]
About This Prospectus
This Prospectus has been designed to give the information you need to decide
whether Westport Fund or Westport Small Cap Fund is appropriate for you.
Each Fund has a distinct investment objective, but both Funds are managed with
the same value-oriented strategy.
You can purchase shares of both Funds without any sales charge. Each Fund offers
two classes of shares. Each class has different expenses and minimum investment
amounts.
To help you find information in this Prospectus, we have divided this Prospectus
into five sections.
The first section, "The Funds," contains a discussion of the objective,
principal risks, performance history and fees of each Fund. In particular, this
section tells you four important things about each Fund.
- -- Each Fund's investment goal -- what the Fund is trying to achieve.
- -- The principal investment policies of each Fund -- how each fund tries to
reach its investment goal. This section specifies the principal types of
investments and strategies each Fund will use to try to achieve its
investment goal.
- -- The investment selection process used -- this section discusses how the
Adviser chooses investments for each Fund.
- -- Risks you should be aware of -- the principal risks associated with each
Fund.
The other four sections of the Prospectus -- "Management of the Funds," "How to
Buy and Sell Shares," "Financial Highlights" and "Where to Get Additional
Information" -- provide detailed information about how the Funds are managed,
the services and privileges available to the Funds' shareholders, how shares are
priced, how to buy and sell shares, financial information and how to obtain
additional information.
The investment adviser for both Funds is Westport Advisers, LLC (the "Adviser").
<PAGE>
TABLE OF CONTENTS
Page
----
The Funds...................................................................3
Investment Goals of the Funds...............................................3
Who Should Invest...........................................................3
Principal Investment Strategies of the Funds................................3
How Investments are Selected................................................3
Principal Risks of Investing in the Funds...................................5
Performance History of the Funds............................................7
Fees and Expenses...........................................................9
Management of the Funds....................................................10
The Adviser................................................................10
The Portfolio Managers.....................................................11
How to Buy and Sell Shares.................................................14
Pricing of Fund Shares.....................................................14
Investment Minimums........................................................14
Instructions for Opening or Adding to an Account...........................15
Instructions for Selling or Redeeming Shares...............................16
Retirement Plans...........................................................18
Shareholder Services.......................................................19
Dividends and Distributions................................................20
Taxes......................................................................20
Financial Highlights.......................................................22
Where to Get Additional Information........................................24
<PAGE>
The Funds
Investment Goals of the Funds
- -- Westport Fund seeks a return composed of primarily capital appreciation and
secondarily current income.
- -- Westport Small Cap Fund seeks long-term capital appreciation.
Principal Investment Strategies of the Funds
- -- The Westport Fund seeks to achieve its investment objective by investing
the majority of its assets in undervalued equity securities of attractive
mid capitalization companies. A mid capitalization company has a market
capitalization between $1 billion and $5 billion. The Fund may also invest
on an opportunistic basis in the securities of attractive companies with
both larger and smaller 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 seeks to achieve its investment objective 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 primarily invest in 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.
- -- When the Adviser believes that market, economic or other conditions
warrant, a Fund may assume a temporary defensive position. During these
periods, a Fund may invest without limit in cash or cash equivalents,
short-term commercial paper, U.S. government securities, high quality debt
securities, including Eurodollar and Yankee Dollar obligations, and
obligations of banks. When and to the extent a Fund assumes a temporary
defensive position, it may not pursue or achieve its investment objective.
How Investments Are Selected
- -- The Adviser employs a modified "value" approach to each Fund's investments
known as second generation value investing. Historically, value investors
have used statistical criteria to select investments which were expected to
provide superior returns. Due to increased participation in financial
markets and improved information availability, the domestic financial
markets have matured and are more competitive. As a result, simple
statistical selection criteria are no longer effective.
- -- Often a catalyst or event is necessary for those superior 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. The estimated improvement in
earnings or cash flow
3
<PAGE>
relative to the current stock price is a measure of valuation. 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. This strategy is the basis for second generation value
investing.
- -- Second generation value investing provides investors with an approach for
investing in growth opportunities among smaller companies that is risk
averse. Using this approach, the Funds will seek to invest in undervalued
companies, i.e., companies selling at a discount to fundamental value based
on earnings potential or assets. This variation of value investing offers
the potential for capital appreciation as a stock gains favor among other
investors.
- -- The Funds will be managed by the Adviser in accordance with the
investment disciplines that the portfolio managers for the Adviser have
employed in managing equity portfolios for Westport Asset Management, Inc.,
an affiliate of the Adviser, for over fifteen years. The Adviser relies on
stock selection and the strategy previously outlined to achieve its
results, rather than trying to time market fluctuations.
- -- 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 to estimate
a company's fundamental value and the extent of undervaluation, if any.
- -- Mid capitalization companies identified by second generation value
investing are often out of favor due to negative operational or financial
events. The Adviser seeks to identify those situations where the
undervaluation is a result of temporary factors. 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 capitalization 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 capitalization 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 capitalization 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
capitalization 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.
4
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Principal Risks of Investing in the Funds
Who Should Invest
- -- The Funds may be an appropriate investment for investors willing to
tolerate possibly significant fluctuations in net asset value while seeking
long-term returns.
General
Investment Risk. An investment in either Fund is subject to investment
risk, including the possible loss of the entire principal amount that you
invest.
Stock Market Risk. Your investment in Fund shares represents an indirect
investment in the equity securities owned by the Fund. The market value of these
securities, like other stock market investments, may move up or down, sometimes
rapidly and unpredictably. Your Fund shares at any point in time may be worth
less than what you invested, even after taking into account the reinvestment of
Fund dividends and distributions.
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.
Your investment in a Fund is not a deposit of any bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
An investment in either or both Funds is not by itself a complete or
balanced investment program.
Risks of Investing in the Westport Fund
Investing in the Westport Fund involves the risks inherent in investing in
mid capitalization companies, including greater risk and volatility than
investing in larger, more established companies. To the extent the Westport Fund
invests in small capitalization companies, the risks associated with small
capitalization companies would apply and are presented in the next section.
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 mid
capitalization company 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.
Risks of Investing in the Westport Small Cap Fund
Investing in the Westport Small Cap Fund involves the risks of investing in
small capitalization companies, which generally involve greater risk and
volatility than investing in larger, more established companies as well as
significant price fluctuations in response to news about the company, the
markets or the economy.
5
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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.
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.
Year 2000
Computer users around the world are faced with the dilemma of the Year 2000
issue, which stems from the use of two digits in most computer systems to
designate the year. When the year advances from 1999 to 2000, many computers
will not recognize "00" as the Year 2000. This issue could potentially affect
every aspect of computer-related activity, on an individual and corporate level.
The Funds could be adversely impacted if the computer systems used by the
Adviser and other service providers have not been converted to meet the
requirements of the new century. The Funds' Adviser has evaluated its internal
systems and expects them to be fully capable to handle the change of millennium.
The Adviser is monitoring on an ongoing basis the progress of the Funds' service
providers to convert their systems to comply with the requirements of Year 2000.
The Funds currently have no reason to believe that these steps will not be
sufficient to avoid any material adverse impact on the Funds, although there can
be no assurances. The costs or consequences of incomplete or untimely resolution
of the Year 2000 issue are unknown to the Adviser and the Funds' other service
providers at this time but could have a material adverse impact on the
operations of the Funds, the Adviser and the Funds' other service providers, in
which case it would become necessary for the Funds to enter into agreements with
new service providers or to make other arrangements. In addition, although the
Adviser considers an issuer's Year 2000 compliance status in the investment
decision making process, companies in which the Funds invest may experience Year
2000 difficulties and the Funds are unable to predict to what extent the Year
2000 issue will impact the value of those securities.
6
<PAGE>
Performance History of the Funds
The bar charts and tables below provide an indication of the risk of
investing in each Fund. The bar charts show the annual total return for 1998,
the first full year the Fund's were operational, together with the best and
worst quarters since inception. The bar chart indicates risk by illustrating how
much returns can vary from year to year. The accompanying tables show each
Fund's average annual total returns for the Class R shares and the Westport
Small Cap Fund's average annual return for the Class I shares for the period
since each Fund commenced operations, and compares these returns with the
performance of two broad-based securities market indices. All of the information
in both the bar charts and the tables assumes reinvestment of dividends and
distributions. Keep in mind that a Fund's past performance does not indicate how
it will perform in the future.
Total Return as of December 31, 1998 (Inception: December 31, 1997)
The Westport Fund
[bar chart 1998 = 12.20%]
Highest quarterly return during this period 21.17% (fourth
quarter)
Lowest quarterly return during this period -17.10% (third
quarter)
The Westport Small Cap Fund
[bar chart 1998 = 15.40%]
Highest quarterly return during this period 27.65% (fourth
quarter)
Lowest quarterly return during this period -19.14% (third
quarter)
- --------------------------------------------------------------------------------
* The bar charts show the annual return of the Class R shares of each Fund.
The annual returns for the Class I shares of Westport Small Cap Fund are
substantially similar because shares are invested in the same portfolio of
securities and the annual returns would differ only to the extent that the
classes do not have the same expenses. There are no Westport Fund Class I
shares currently outstanding.
7
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Average Annual Total Returns
(for periods ended December 31, 1998)
1 Year and
Since Inception
---------------
Westport Fund (Class R shares)* 12.20%
S&P Mid Cap 400 Index** 19.09%
Westport Small Cap Fund (Class R shares)* 15.40%
Russell 2000 Index** -2.55%
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* There are no Westport Fund Class I shares currently outstanding. The
Westport Small Cap Fund Class I shares have not been in existence for a
full year. Their inception date was February 16, 1998.
** The Standard & Poor's Mid Cap 400 Index is a capitalization-weighted index
that measures performance of the mid-range of the U.S. stock market. The
Russell 2000 Composite Stock Index, representing approximately 11% of the
U.S. equity market, is an unmanaged index comprised of the 2,000 smallest
U.S. domiciled publicly-traded common stocks in the Russell 3000 Index (an
unmanaged index of the 3,000 largest U.S. domiciled publicly-traded common
stocks by market capitalization representing approximately 98% of the U.S.
publicly-traded equity markets). You should note that The Westport Funds
are professionally managed mutual funds while the indices are unmanaged, do
not incur expenses and are not available for investment.
8
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Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Westport Fund.
Westport
Westport Fund Small Cap Fund
------------- --------------
Class R Class I Class R Class I
------- ------- ------- -------
Shareholder Fees (fees paid directly NONE NONE NONE NONE
from your investment):
Annual Fund Operating Expenses (expenses that are deducted from Fund assets):
<TABLE>
<CAPTION>
Westport
Westport Fund Small Cap Fund
----------------- -----------------
Class R Class I Class R Class I
------- ------- ------- ------
<S> <C> <C> <C> <C>
Advisory Fee: 0.90% 0.90% 1.00% 1.00%
Other Expenses:(1)
Service Fee:(2) 0.25% None 0.25% None
Other Operating Expenses:(3) 2.70% 2.70%(4) 0.79% 0.64%
--------- -------- ---------- ---------
Total Annual Fund Operating Expenses: 3.85% 3.60% 2.04% 1.64%
========= ======== ========== =========
Fee Waiver and Expense Reimbursement:(3) 2.35% 2.10% 0.54% 0.14%
========= ======== ========== =========
Net Expenses:(3) 1.50% 1.50% 1.50% 1.50%
========= ======== ========== =========
</TABLE>
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(1) With the exception of Westport Fund Class I shares, this table uses actual
1998 expense amounts.
(2) During the fiscal year ended December 31, 1998, the Trust did not pay or
accrue any service fees. After January 1, 1999, service fees may be accrued
at a rate of up to 0.25% of a Fund's average net assets attributable to the
Class R shares.
(3) Pursuant to a written contract between the Adviser and the Funds, the
Adviser has agreed to waive a portion of its advisory fees and/or assume
certain expenses of each Fund other than brokerage commissions,
extraordinary items, interest and taxes to the extent "Annual Fund
Operating Expenses" for each class exceed 1.50% of each Fund's average
daily net assets attributable to that class of shares. The Adviser has
agreed to maintain these expense limitations with regard to each class of
each Fund through December 31, 1999.
(4) There are no Westport Fund Class I shares currently outstanding. The amount
of the "Other Expenses" is an estimate.
9
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Examples
These Examples are intended to help you compare the cost of investing in
the Funds with the cost of investing in other mutual funds. These Examples
should not be considered indicative of future investment returns and operating
expenses, which may be more or less than those shown. These Examples are based
on the "Net Expenses" described in the table, which reflect fee waivers for the
Funds during the fiscal year ended December 31, 1998.
The Examples assume that you invest $10,000 in the Funds for the time
periods indicated and then redeem all of your shares at the end of those
periods. The Examples also assume that your investment has a 5% return each year
and that the Funds' operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------
Westport Fund
Class R $ 153 $1,167 $1,957 $3,972
Class I 153 1,095 1,838 3,740
Westport Small Cap Fund
Class R 153 630 1,065 2,210
Class I 153 508 861 1,796
Management of the Funds
The Adviser
Westport Advisers, LLC (the "Adviser"), 253 Riverside Avenue, Westport,
Connecticut 06880, serves as the investment adviser to the Funds. The Adviser
was organized as a Connecticut limited liability company in 1997. A limited
liability company is owned by its Members. The sole Members of the Adviser are
Edmund H. Nicklin and Westport Asset Management, Inc. Both the Adviser and
Westport Asset Management, Inc. are investment advisers registered with the
Securities and Exchange Commission under the Advisers Act of 1940. As a member
of the Adviser, Westport Asset Management, Inc. is an affiliate of the Adviser.
Although, as a recently-created entity, the Adviser has limited previous
experience managing an investment company, the Members of the Adviser and the
portfolio managers of the Adviser have substantial experience in portfolio
management. Westport Asset Management, Inc. 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 (see below) has more than 10
years experience managing an investment company as the portfolio manager for the
Evergreen Growth and Income Fund. Together, the principals of Westport Asset
Management, Inc. and the adviser have more than 27 years of collective portfolio
management experience.
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 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.
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The Portfolio Managers
The Portfolio Manager for the Westport Fund is Edmund H. Nicklin, Jr. Mr.
Nicklin has served as the sole Portfolio Manager of the Westport Fund since the
Fund's inception. Mr. Nicklin is a Managing Director of Westport Advisers, LLC
and a portfolio manager for Westport Asset Management, Inc. From October 1986 to
August 1997, Mr. Nicklin was the portfolio manager of the Evergreen Growth and
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. See "Prior Performance of
Edmund H. Nicklin, Jr." for more information.
The Portfolio Managers for the Westport Small Cap Fund are Mr. Nicklin,
whose biographical information is above, and Andrew J. Knuth. Both have served
as the Portfolio Managers of the Westport Small Cap Fund since the Fund's
inception. Mr. Knuth is also Chairman, Chief Investment Officer and a portfolio
manager for Westport Asset Management, Inc.
Andrew J. Knuth founded Westport Asset Management, Inc. 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, Inc. 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.
Prior Performance of Edmund H. Nicklin, Jr.
Prior to joining Westport Asset Management, Inc., Mr. Nicklin, who serves
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. 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
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 Asset Management, Inc. and the
Adviser combined, Mr. Nicklin will be able to draw on the special research and
analysis resources of Andrew
11
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Knuth and Westport Asset Management, Inc. Mr. Knuth, in his capacity as a
securities analyst and portfolio manager for Westport Asset Management, Inc.,
employs an original research strategy similar to Mr. Nicklin's, and 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.
Calendar Years
- --------------------------------------------------------------------------------
Inception
6 1 3 5 10 through
Mos Year Years Years Years 6/30/97(4)
- --------------------------------------------------------------------------------
Evergreen Growth
and Income Fund(1)(2) 15.0% 23.8% 18.7% 16.9% 14.6% 15.1%
S&P 500(3) 20.6% 23.0% 19.7% 15.2% 15.3% 16.4%
S&P 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%
- --------------------------------------------------------------------------------
(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 second generation value 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 policies and 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 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.
12
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How to Buy and Sell Shares
Pricing of Fund Shares
The price you pay for a share of the Fund, and the price you receive upon
selling or redeeming a share of the Fund, is called the Fund's net asset value
("NAV"). Each Fund's NAV is computed as of the scheduled close of trading on the
New York Stock Exchange (normally 4:00 p.m.) on each day during which the New
York Stock Exchange is open for trading and on each other day on which there is
a sufficient degree of trading in the Fund's investments to affect the NAV. 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 that Fund outstanding at the time the computation is made. The Fund's
investments are valued based on market value, or where market quotations are not
readily available, based on fair value as determined by the Board of Trustees in
good faith. The Funds may use pricing services to determine market value.
Your order will be priced at the next NAV calculated after the transfer
agent accepts your order.
Investment Minimums
Initial Additional
- --------------------------------------------------------------------------------
Regular Class R Accounts $5,000 No minimum
Regular Class I Accounts 250,000 No minimum
Traditional IRAs 2,000 No minimum
Spousal IRAs 2,000 No minimum
Roth IRAs 2,000 No minimum
SEP-IRAs 2,000 No minimum
Gifts to Minors 1,000 No minimum
Automatic Investment Plans 1,000 $100
The Adviser reserves the right to change such minimum for subsequent
investments.
Instructions for Opening or Adding to an Account
By Mail
To purchase shares of the Funds, you should send a check made payable to
"The Westport Funds" and a completed account application to:
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
By Bank Wire
To purchase shares of a Fund using the wire system for transmittal of money
among banks, you should first telephone Countrywide Fund Services, Inc. at (888)
593-7878 to obtain an account number. You should then instruct a member
commercial bank to wire funds to:
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Firstar 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.)
You should then promptly complete and mail the account application.
Purchasing Additional Shares
You may purchase additional shares
-- by bank wire, as indicated above,
-- by mailing a check to Countrywide Fund Services, Inc. at the address
listed above; or
-- by electronic funds transfer.
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 NAV at which the shares were purchased, and the new
balance of Fund shares owned.
Through Your Broker-Dealer
You may maintain your account 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, if you did not make your initial purchase through
a broker-dealer, you may purchase and redeem shares directly through the
Transfer Agent without any such charges.
Automatic Investment Plan
You may also purchase shares by arranging systematic monthly investments
into a Fund with either Fund's Automatic Investment Plan. The minimum initial
investment is $1,000 and the minimum subsequent investment is $100. After you
give a Fund proper authorization, your bank account, which must be with a bank
that is a member of the Automated Clearing House, will be debited accordingly to
purchase shares. You will receive a confirmation for every transaction, and a
withdrawal will appear on their bank statements.
To participate in the Automatic Investment Plan, you must complete the
appropriate sections of the account application or the Automatic Investment Plan
form. These forms may be obtained by calling Countrywide Fund Services, Inc. at
(888) 593-7878. The amount you specify will automatically be invested in shares
at the relevant Fund's NAV next determined after payment is received by that
Fund.
To change the amount invested, we must receive your written instructions at
least seven Business Days in advance of the next transfer. If the bank or bank
account number is changed, we must receive your instructions at least 20
Business Days in advance. If there are insufficient
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<PAGE>
funds in your designated bank account to cover the shares purchased using the
Automatic Investment Plan, your bank may charge you a fee or may refuse to honor
the transfer instruction (in which case no Fund shares will be purchased).
You should check with your bank to determine whether it is a member of the
Automated Clearing House and whether your bank charges a fee for transferring
funds through the Automated Clearing House. Expenses incurred by a Fund related
to the Automatic Investment Plan are borne by that Fund. As a result, you pay no
direct fee to use these services.
Instructions for Selling or Redeeming Shares
Upon receipt by Countrywide Fund Services, Inc. of a redemption request in
proper form, shares of a Fund will be redeemed at their next determined net
asset value.
By Written Request
Redemption requests may be made in writing to:
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;
-- 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 below.
Through Your Broker-Dealer
You may also make redemption requests through your broker-dealer.
By Telephone
If you wish to redeem your shares by telephone, you must elect this option
on your account application. Due to the time required to set up this service
initially, this privilege may not be available until several weeks after your
account application is received.
If you elected telephone redemption privileges, you may make a telephone
redemption request by calling Countrywide Fund Services, Inc. at (888) 593-7878
and providing your account number, the exact name in which your shares are
registered and your social security or taxpayer identification number. In
response to the telephone redemption instruction, we will mail a check to your
record address, or, if you provided a bank wire or Automated Clearing House
redemption authorization, we will wire or electronically transfer the proceeds
to your designated bank account. You must complete the appropriate sections of
the account application to authorize receipt of redemption proceeds by bank wire
or by Automated Clearing House. Redemptions for amounts less than $5,000 will be
made by check or by Automated Clearing House.
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<PAGE>
Redemptions of $5,000 or more may be made by bank wire. There is a fee on all
redemptions paid by wire, currently $9.00.
In an effort to prevent unauthorized or fraudulent redemption requests by
telephone, Countrywide Fund Services, Inc. will follow reasonable procedures to
confirm that such instructions are genuine. If such procedures are followed,
neither Countrywide Fund Services, Inc., 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 you cannot reach Countrywide Fund Services, Inc. by
telephone, you may mail or hand-deliver redemption requests to Countrywide Fund
Services, Inc.
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 your
-- record name or address;
-- Automated Clearing House bank or bank account information;
-- Systematic Withdrawal Plan information;
-- dividend election; or -- 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 Countrywide Fund Services, Inc.
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
If you own shares of a Fund with an aggregate value of $10,000 or more, you
may establish a Systematic Withdrawal Plan under which you offer to sell to such
Fund at net asset value the number of full and fractional shares which will
produce the monthly or quarterly payments you specify (minimum $100 per
payment). Depending on the amounts withdrawn, systematic withdrawals may deplete
your principal. If you are thinking about participating in this plan, you should
consult your tax adviser.
If you want to use this plan, you may do so by [marking the appropriate
box] on the account application. If you already own shares and would like to use
the plan, you may obtain the necessary form by [writing or] calling Countrywide
Fund Services, Inc. at (888) 593-7878. This service is free.
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 Automated Clearing House redemption
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<PAGE>
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, generally anticipated
to occur within 15 days after investment. Unless other instructions are given, a
check for the proceeds of a redemption will be sent to the your address of
record.
We 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, we 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 has a value below $1,000. However, you 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 of Trustees 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 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 adjusted gross income for the year. The
adjusted gross income level at which a single taxpayer's deduction for 1997 is
affected, $25,000, will increase annually to reach $50,000 in 2005. The adjusted
gross income 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
17
<PAGE>
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 your non-deductible IRA contribution,
are taxed as ordinary income when received. Such withdrawals may be made without
penalty after you reach 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.
The Funds may also be used as funding vehicles for Roth IRAs, 401(k) and
other retirement plans. For more information, please call (888) 593-7878 or
write to The Westport Funds.
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 payments and providing subaccounting services for shares of
a Fund held beneficially; and providing such other services as the Trust or
shareholder may request.
Dividends and Distributions
We will make distributions at least annually from the investment company
taxable income of each Fund. Net capital gains (net long-term capital gains in
excess of net short-term capital losses), if any, are 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 gains over net short-term capital losses, reduced by
deductible expenses of that Fund. The Fund's expenses are accrued daily. Unless
you elect to have dividends and distributions paid in cash, your dividends and
distributions will be reinvested in additional shares of the relevant Fund.
Taxes
The following discussion is intended for general information only. You
should consult with your 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.
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<PAGE>
Federal Income Taxes
Each Fund intends to elect and qualify annually to be treated as a
regulated investment company under Subchapter M of 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 in a timely manner 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 you have held a Fund's shares. Dividends are
taxable to you 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 you as a return of capital which is
applied against and reduces your basis in his or her shares. To the extent that
the amount of any such distribution exceeds your basis in his or her shares, the
excess will be treated 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 paid by a Fund during January of the following calendar
year. Such distributions will be taxable to you in the calendar year in which
the distributions are declared, rather than the calendar year in which the
distributions are received.
Each year, we will notify you of the tax status of dividends and
distributions.
Upon the sale or other disposition of shares of a Fund, you may realize a
capital gain or loss which will be long-term or short-term, generally depending
upon your holding period for the shares.
We may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable if you
-- fail to provide us with your correct taxpayer identification number;
-- fail to make required certifications; or
-- you have been notified by the IRS that you are subject to backup
withholding.
Backup withholding is not an additional tax. Any amounts withheld may be
credited against your U.S. federal income tax liability.
Further information relating to tax consequences is contained in the
Statement of additional Information.
State and Local Taxes
A Fund's distributions also may be subject to state and local taxes. You
should consult your own tax advisor regarding the particular tax consequences of
an investment in a Fund.
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<PAGE>
Financial Highlights
The financial highlights table is intended to help you understand each
Fund's financial performance for the past year. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by Tait, Weller & Baker, whose report, along with
the Funds' audited financial statements, are included in the current annual
report, which is available upon request.
Per Share Data for a Share Outstanding
Throughout the Periods Ended December 31, 1998(A)
- --------------------------------------------------------------------------------
Westport
Westport Small Cap
Fund Fund
- --------------------------------------------------------------------------------
Class R Class R Class I
------- ------- -------
Net asset value at beginning of period $ 10.00 $ 10.00 $ 10.92
----------- ----------- ----------
Income from investment operations
Net investment loss.............. (0.05) (0.02) (0.02)
Net realized and unrealized
gains on investments........ 1.27 1.56 0.65
----------- ----------- ----------
Total from investment operations...... 1.22 1.54 0.63
----------- ----------- ----------
Net asset value at end of period...... $ 11.22 $ 11.54 $ 11.55
=========== =========== ==========
Total return.......................... 12.20% 15.40% 5.77%
=========== =========== ==========
Net assets at end of period (000's)... $ 6,099 $ 20,637 $ 33,230
=========== =========== ==========
Ratio of net expenses to
average net assets............... 1.50% 1.50% 1.50%(C)
Ratio of gross expenses to
average net assets (B) ........... 3.60% 1.79% 1.64%(C)
Ratio of net investment loss
to average net assets............ (0.71)% (0.39)% (0.36)%(C)
Portfolio turnover rate............... 63% 19% 19%
- --------------------------------------------------------------------------------
(A) Represents the year ended December 31, 1998, except for Class I shares of
the Westport Small Cap Fund which represents the period from its initial
public offering of shares (February 16, 1998) through December 31, 1998.
(B) Represents the ratio of expenses to average net assets absent fee waivers
and/or expense reimbursements by the Adviser.
(C) Annualized.
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The Westport Funds
Westport Fund
Westport Small Cap Fund
Investment Adviser
Westport Advisers, LLC
Administrator
Countrywide Fund Services, Inc.
Distributor
CW Fund Distributors, Inc.
Counsel
Dechert Price & Rhoads
Independent Accountants
Tait, Weller & Baker
Transfer Agent and Dividend Disbursing Agent
Countrywide Fund Services, Inc.
Custodian
Firstar Bank, N.A.
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<PAGE>
Where to Get Additional Information
If you would like additional information about The Westport Funds, the
following documents are available to you without any charge, upon request:
- -- Annual/Semi-Annual Reports -- Additional information about the Funds'
investments is available in each Fund's annual and semi-annual reports to
shareholders. In the annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Funds' performance during the most recent fiscal year.
- -- Statement of Additional Information -- Additional information about the
Funds' structure and operations can be found in the Statement of Additional
Information. The information presented in the Statement of Additional
Information is incorporated by reference into the prospectus and is legally
considered to be part of this prospectus.
To request a free copy of any of the materials described above, or to make
any other inquiries, please contact us:
By telephone 1-888-593-7878
By mail Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
By internet http://www.westportfunds.com
Reports and other information about the Funds (including the Funds'
Statement of Additional Information) may also be obtained from the Securities
and Exchange Commission:
- -- By going to the Commission's Public Reference Room in Washington, D.C.
where you can review and copy the information. Information on the operation
of the Public Reference Room may be obtained by calling the Commission at
1-800-SEC-0330.
- -- By accessing the Commission's Internet site at http://www.sec.gov where
you can view, download and print the information.
- -- By writing to the Public Reference Section of the Securities and Exchange
Commission, Washington, D.C. 20549-6009 where, upon payment of a
duplicating fee, copies of the information will be sent to you.
Investment Company Act File No. 811-08359.
22
<PAGE>
INVESTMENTS
Statement of Additional Information
The Westport Funds
Westport Fund
Westport Small Cap Fund
May 1, 1999
253 Riverside Avenue
Westport, Connecticut 06880
1-888-593-7878
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of The Westport Funds dated May 1, 1999 (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. This Statement of Additional
Information is incorporated by reference in its entirety in the Prospectus. The
financial statements and notes contained in the annual report and semi-annual
report are incorporated by reference into this Statement of Additional
Information. Copies of the Prospectus, Statement of Additional Information,
annual and semi-annual reports may be obtained without charge by writing or
calling the address or phone number shown above.
<PAGE>
TABLE OF CONTENTS
Page
SECURITIES, INVESTMENT STRATEGIES AND RELATED RISKS...........................1
Equity Securities..........................................................1
U.S. Government Securities.................................................2
American Depositary Receipts ("ADRs")......................................2
Foreign Securities.........................................................2
Securities of Other Investment Companies...................................3
Convertible Securities.....................................................3
Lower-Grade Securities.....................................................3
Rights and Warrants........................................................4
When-Issued Securities.....................................................4
Repurchase Agreements......................................................4
Illiquid and Restricted Securities.........................................5
Loans of Portfolio Securities..............................................5
HEDGING.......................................................................6
Stock Index Futures........................................................6
Writing Call Options.......................................................7
Writing Put Options........................................................7
Purchasing Puts and Calls..................................................9
Regulatory Aspects of Hedging Instruments..................................10
Additional Information About Hedging.......................................11
Special Risk Factors in Hedging............................................12
FUND POLICIES.................................................................13
Fundamental Policies.......................................................13
Fundamental Restrictions...................................................14
Temporary Defensive Positions.................................................16
MANAGEMENT OF THE FUND........................................................16
Compensation of Trustees and Certain Officers..............................17
INVESTMENT ADVISORY AND OTHER SERVICES........................................18
The Investment Adviser.....................................................18
The Administrator..........................................................19
The Accounting Services Agent..............................................20
The Distributor............................................................20
Custodian and Transfer and Dividend Disbursing Agent.......................20
DETERMINATION OF NET ASSET VALUE..............................................21
ADDITIONAL INFORMATION ABOUT REDEMPTION OF SHARES.............................21
PORTFOLIO TURNOVER............................................................21
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................22
i
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ORGANIZATION OF THE TRUST AND A...............................................23
TAXATION......................................................................25
Taxation of the Funds......................................................25
Distributions..............................................................26
Sale of Shares.............................................................26
Original Issue Discount Securities.........................................27
Market Discount Bonds......................................................27
Options and Hedging Transactions...........................................27
Currency Fluctuations - "Section 988"Gains or Losses.......................29
Foreign Withholding Taxes..................................................30
Backup Withholding.........................................................30
Foreign Shareholders.......................................................30
Other Taxation.............................................................32
PERFORMANCE...................................................................32
COUNSEL AND INDEPENDENT ACCOUNTANTS...........................................33
FINANCIAL STATEMENTS..........................................................33
APPENDIX A....................................................................35
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STATEMENT OF ADDITIONAL INFORMATION
The Westport Funds (the "Trust") is a no-load, open-end, management
investment company organized as a Delaware business trust on September 17, 1997,
and is composed of two separate series: the Westport Fund and the Westport Small
Cap Fund (each a "Fund" and, collectively, the "Funds").
Much of the information contained in this Statement of Additional
Information expands on subjects discussed in the Prospectus. No investment in
the shares of the Funds should be made without first reading the Prospectus.
SECURITIES, INVESTMENT STRATEGIES AND RELATED RISKS
The following descriptions supplement the descriptions of the investment
objectives, strategies and related risks of each Fund as set forth in the
Prospectus.
Although each Fund will primarily invest in equity securities, subject to
the investment policies and restrictions as described in the Prospectus and in
this Statement of Additional Information, each Fund may invest in any of the
following securities or pursue any of the following investment strategies.
Equity Securities
Equity securities 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.
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.
<PAGE>
U.S. Government Securities
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.
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.
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.
2
<PAGE>
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.
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.
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 Ratings Service, a division of the McGraw
Hill Companies, Inc. ("S&P"), 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
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sell at an acceptable price. There is a relatively greater possibility
that the issuer's earnings may be 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
S&P, 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.
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).
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.
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 will only make when-issued commitments on eligible
securities with the intention of actually acquiring the securities. 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. 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. 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. The majority of these transactions run from day to day, and delivery
pursuant to the resale typically will occur within one to five
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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. 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.
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.
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.
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 subject to the restrictions stated in the Prospectus and this Statement
of Additional Information. 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 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'
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notice or in time to vote on any important matter. There are some risks in
connection with securities lending. For example, a Fund might experience a delay
in receiving additional collateral to secure a loan or a delay in recovery of
the loaned securities.
HEDGING
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. 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.
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.
Additional information about the hedging instruments that a Fund may use is
provided below.
Stock Index Futures
A 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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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
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
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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.
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
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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 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
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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 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
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
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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 (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.
Special Risk Factors in Hedging
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
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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.
In addition to the risks with respect to options discussed 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.
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.
FUND POLICIES
Each Fund has an investment objective, fundamental policies and fundamental
restrictions that cannot be changed without the vote of a "majority" of a Fund's
outstanding
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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.
Fundamental Policies
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.
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
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
S&P or an A-1+ rating from Moody's, (iii) commercial paper rated P-1 by Moody's
or A-1 by S&P, (iv) repurchase
13
<PAGE>
agreements covering any of the securities in which a Fund may invest directly,
and (v) money market mutual funds.
Fundamental Restrictions
The following investment restrictions are fundamental policies that each
fund must follow. Each Fund may not:
1. 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;
2. 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);
3. 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);
4. 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;
5. 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 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;
6. 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;
7. 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;
8. 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;
14
<PAGE>
9. 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;
10. 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;
11. 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;
12. invest for the purpose of exercising control or management of another
company;
13. 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.
Temporary Defensive Positions
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. When and to the extent a Fund assumes a temporary defensive
position, it will not pursue its investment objective.
MANAGEMENT OF THE FUND
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. As of April 1, 1999,
the Trustees and officers as a group beneficially or of record owned 14.36% of
the outstanding shares of the Westport Fund and less than 1% of the outstanding
shares of the Westport Small Cap Fund.
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<PAGE>
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.
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupations
Name, Address and Age Position with the Trust During the Past Five Year
- --------------------- ----------------------- -------------------------
Raymond J. Armstrong, 73 Trustee Chairman of money manager, Armstrong Shaw
2 Bluewater Hill Associates, Inc. (registered investment
Westport, CT 06880 adviser) (1984-present).
Stephen E. Milman, 61 Trustee Limited Partner, Orchard Park Associates,
5 Pratt Island L.P., Minor League Heroes, L.P., and Minor
Darien, CT 06820 League Sports Enterprises LP; Principal,
Neuberger Berman LLC (1987-1996).
Edmund H. Nicklin, Jr.*, 52 Trustee and President Managing Director, 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*, 70 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, 60 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, 60 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>
16
<PAGE>
Compensation of Trustees and Certain Officers
The following table sets forth information regarding compensation of
Trustees and certain officers 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. 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. The Trust does not
pay any pension or retirement benefits.
COMPENSATION TABLE
Fiscal Year Ended December 31, 1998
Aggregate Compensation
Name of Person, Position Registrant and Fund Complex
Raymond J. Armstrong*, Trustee $7,000
Stephen E. Milman*+, Trustee $0
Edmund H. Nicklin, Jr.**, Trustee and President $0
Ronald H. Oliver**, Trustee, Executive Vice President, $0
Secretary and Treasurer
D. Bruce Smith, II*, Trustee $7,000
- ---------------------
* Member of Audit Committee.
** "Interested person," as defined in the 1940 Act, of the Trust because of
their affiliation with Westport Advisers, LLC, the Funds' investment
adviser.
+ Although Mr. Milman is not an "interested person," he has requested that
he not receive any fees for his service as a Trustee.
INVESTMENT ADVISORY AND OTHER SERVICES
The Investment 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 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 Conduct
Rules 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
17
<PAGE>
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 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 Adviser is controlled by its two managing members, Edmund H. Nicklin,
Jr., and Westport Asset Management, Inc. Mr. Nicklin, a portfolio manager for
both the Adviser and Westport Asset Management, Inc., is also President of the
Trust and a member of its Board of Trustees. As portfolio manager for the
Adviser, Mr. Nicklin makes investment decisions for the Funds and is the
portfolio manager of the Westport Fund and co-portfolio manager of the Westport
Small Cap Fund. Westport Asset Management, Inc. is a registered investment
adviser which provides investment services to companies, pension plans,
endowments, foundations and individuals.
Andrew J. Knuth, who is an Executive Vice President of the Trust, is also
the Chairman and a principal of Westport Asset Management, Inc. and a
co-portfolio manager of the Westport Small Cap Fund. Ronald H. Oliver serves as
Executive Vice President, Secretary and Treasurer of the Trust and is a member
of the Board of Trustees. Mr. Oliver is a principal of Westport Asset
Management, Inc. and is also active in the day to day management of the Funds.
The Westport Fund and Westport Small Cap Fund (both Class R and Class I
shares) 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. During the 1998 fiscal year, the Westport Fund paid the Adviser
$34,289 and the Westport Small Cap Fund paid the Adviser $247,031. In order to
voluntarily reduce operating expenses during the fiscal year ended December 31,
1998, the Adviser waived investment advisory fees and reimbursed expenses of the
Funds in the aggregate amounts of $92,271 for the Westport Fund and $46,948 for
the Westport Small Cap Fund.
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
18
<PAGE>
"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. For the fiscal year ending December 31, 1998,
the Westport Fund paid the Administrator $11,000 and the Westport Small Cap Fund
paid the Administrator $31,382.
The Accounting Services Agent
On behalf of the Funds, the Trust has entered into an Accounting Services
Agreement with Countrywide Fund Services, Inc., 312 Walnut Street, Cincinnati,
Ohio 45202 (the "Accounting Services Agent"). As provided in this agreement, the
Accounting Services Agent is responsible for the calculating the daily net asset
value of the Funds in accordance with the Trust's current prospectus and
statement of additional information. The Accounting Services Agent also keeps
the general ledger for each Fund and records all income, expenses, capital share
activity and security transactions. For these services, the Administrator
receives from each Fund a monthly fee at the annual rate of $2,000 if the Fund's
average monthly net assets are less than $50 million; $2,500 if such assets are
between $50 and $100 million; $3,000 if such assets are between $100 and $200
million; $4,000 if such assets are between $200 and $300 million, $5,000 if such
assets are over $300 million; provided, however, that a surcharge of $500 per
month is charged to each Fund for each additional class. The Funds also
reimburse certain out-of-pocket expenses incurred by the Accounting Services
Agent in connection with obtaining valuations of each Fund's portfolio
securities. For the fiscal year ending December 31, 1998, the Westport Fund paid
the Accounting Services Agent $22,000 and the Westport Small Cap Fund paid the
Accounting Services Agent $27,500.
The Distributor
The Trust has entered into a Distribution Agreement, on behalf of the
Funds, with CW Fund Distributors, Inc., or an affiliated company, 312 Walnut
Street, 21st Floor, Cincinnati, Ohio 45202 (the "Distributor"). The Distributor
is an affiliate of the Administrator by reason of common ownership. 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.
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<PAGE>
Custodian
Firstar Bank, NA ("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. Bank has no part in deciding the Funds'
investment policies or which securities are to be purchased or sold for the
Funds' portfolios.
Transfer and Dividend Disbursing Agent
Countrywide Fund Services, Inc., 312 Walnut Street, Cincinnati, Ohio 45202,
has been retained to serve as the Funds' transfer agent and dividend disbursing
agent.
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 (normally 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.
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.
ADDITIONAL INFORMATION ABOUT 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 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
20
<PAGE>
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 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
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
21
<PAGE>
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.
For the fiscal year ended December 31, 1998, the Westport Fund paid brokerage
commissions of $15,559 and the Westport Small Cap Fund paid brokerage
commissions of $113,865.
ORGANIZATION OF THE TRUST AND A
DESCRIPTION OF THE SHARES
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. The Trust
currently has two series: the Westport Fund and the Westport Small Cap Fund.
Each series has two classes of shares: Class R shares and Class I shares. 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.
The following is a list of shareholders of each Fund who owned
(beneficially or of record) 5% or more of a Class of a Fund's shares as of April
1, 1999.
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Percentage Ownership Type of Ownership
Westport Fund Class R Shares
Charles Schwab & Co. Inc. 28.98% Record
Special Custody Acct FBO Customers
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Ledyard & Co. 25.00% Record
P.O. Box 799
Hanover, NH 03755
22
<PAGE>
Name and Address Percentage Ownership Type of Ownership
Westport Small Cap Fund Class R Shares
Charles Schwab & Co. Inc. 48.75% Record
Special Custody Acct FBO Customers
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
NESC for Exclusive Benefit of Our Customers 18.04% Record
200 Liberty Street
1 World Financial Center, Attn Mutual Funds
New York, NY 10281
Westport Small Cap Fund Class I Shares
Mitra & Co 26.75% Record
1000 N. Water St.
Milwaukee, WI 53202
Northern Trust Co-Trustee 22.51% Beneficial
FBO Allianz A/C #22-45894
P.O. Box 92956
Chicago, IL 60675
First Union National Bank TTEE 19.20% Beneficial
FBO Circuit City A/C #5041680202
1525 W. Wt. Harris Blvd. CMG NC 1151
Charlotte, NC 28288
Diocese of the Armenian Church 5.33% Beneficial
Armenian Church Endowment Fund
630 Second Avenue
New York, NY 10016
Tufts Associated Health Maintenance Organization 5.27% Beneficial
Inc.
Roland Price TTEE
333 Wyman St. 333-3N
Waltham, MA 02254
</TABLE>
23
<PAGE>
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.
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
24
<PAGE>
eligible for the corporate dividends-received deduction. Distributions of net
capital gains, if any, designated as capital gain dividends are taxable as
long-term capital gains, 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 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.
25
<PAGE>
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 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; 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.
26
<PAGE>
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.
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 the90-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
27
<PAGE>
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 holdng 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 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.
28
<PAGE>
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 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.
29
<PAGE>
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.
PERFORMANCE
From time to time, the Funds may advertise certain information about their
performance. Each Fund may include their 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:
YIELD = 2 [( a - b + 1)6 - 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:
Average Annual Total Return = (ERV)n-1
---
P
30
<PAGE>
Where: P = a hypothetical initial investment of $1,000;
n = the number of years; and
ERV = the ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the period.
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. 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.
The Funds' average annual total returns for the year ended December 31,
1998 were:
Westport Fund (Class R shares) 12.20%
Westport Small Cap Fund (Class R shares) 15.40%
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.) It is
important to note that the total return figures are based on historical returns
and are not intended to indicate future performance.
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
The audited financial statements contained in the annual report to
shareholders for the Funds dated December 31, 1998 are incorporated herein by
reference. Copies of the Funds' most
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<PAGE>
recent annual or semi-annual report may be obtained without charge upon request
by writing to the Westport Funds, 253 Riverside Avenue, Westport, Connecticut
06880 or by calling toll free 1-888-593-7878.
The Prospectus and this Statement of Additional Information are not an
offering of the securities herein described in any state in which such offering
may not be lawfully made. No salesman, dealer, or other person is authorized to
give any information or make any representation other than those contained in
the Prospectus and this Statement of Additional Information.
32
<PAGE>
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
33
<PAGE>
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions. 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.
34
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
1. Declaration of Trust*
2. By-Laws**
3. The rights of security holders are defined in the Registrant's Declaration of
Trust (Article II, Section 9, Article IV, Sections 4 and 6, Article V, Sections
2 and 4, and Article VI) filed as Exhibit 1 to this Registration Statement and
the Registrant's By-Laws (Article V) filed as Exhibit 2 to this Registration
Statement.
4. (a) Form of Investment Advisory Agreement**
(b) Expense Reimbursement Agreement
5. Form of Distribution Agreement**
6. Not Applicable
7. Form of Custodian Agreement**
8. (A) Form of Transfer, Dividend Disbursing, Shareholder Service and Plan
Agency Agreement**
(B) Shareholders Service Plan**
(C) Form of Shareholder Service Agreement**
(D) Form of Administration Agreement**
(E) Form of Accounting Services Agreement**
9. Opinion and Consent of Dechert Price & Rhoads**
10. Consent of Independent Certified Public Accountants
11. Not Applicable
12. Investment Representation Letters**
13. Not Applicable
14. Financial Data Schedules
15. Multi-class Plan**
16. Powers of Attorney**
- --------------------------
* Filed with initial registration statement on September 17, 1997 and
incorporated herein by reference.
** Filed with Pre-Effective Amendment No. 2 on December 22, 1997 and
incorporated herein by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 25. INDEMNIFICATION
It is the Registrant's policy to indemnify its trustees, officers, employees and
other agents to the maximum extent permitted by 12 Del. C. Sec. 3817 as set
forth in Article IX, Section 2 of Registrant's Declaration of Trust, filed as
Exhibit 1. The liability of the Registrant's directors and officers is dealt
with in Article IX, Section 1 of the Registrant's Declaration of Trust. The
indemnification of the Registrant's shareholders is dealt with in Article IX,
Section 3 of the Registrant's Declaration of Trust. The liability of Westport
Advisers, LLC, the Registrant's investment adviser, for any loss suffered by the
Registrant or its shareholders is set forth in Section 1 of the Advisory
Agreement, filed as Exhibit 5 to this Registration Statement. The liability of
Countrywide Fund Services, Inc., the Registrant's administrator, for any loss
suffered by the Registrant or its shareholders is set forth in Section 9 of the
Administration Agreement, filed as Exhibit 9(d) to this Registration Statement.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISOR
The descriptions of the Adviser under the caption "Management" in the Prospectus
in Part A of this Registration Statement are incorporated by reference herein.
Mr. Edmund H. Nicklin Jr., Ronald H. Oliver and Andrew J. Knuth has had no other
business connections of a substantial nature during the past two fiscal years.
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) CW Fund Distributors, Inc. also acts as underwriter for Brundage, Story and
Rose Investment Trust, Atalanta/Sosnoff Investment Trust, The Caldwell &
Orkin Funds, Inc., Firsthand Funds, the Lake Shore Family of Funds, UC
Investment Trust, The Winter Harbor Fund, The James Advantage Funds and
Profit Funds Investment Trust.
(b) The following list sets forth the directors and executive officers of the
Distributor. Unless otherwise indicated(*), the address of the persons
named below is 312 Walnut Street, Cincinnati, Ohio 45202.
* The Address is 4500 Park Granada Road, Calabasas, California 91302.
<TABLE>
<CAPTION>
Name Position with Underwriter Position with Registrant
- ---- ------------------------- ------------------------
<S> <C> <C>
*Angelo R. Mozilo Chairman of None
the Board/Director
*Andrew S. Bielanski Director None
*Thomas M. Boone Director None
*Marshall M. Gates Director None
Robert H. Leshner President/Vice Chairman/ None
Chief Executive
Officer/Director
Maryellen Peretzky Vice President, Secretary None
Robert L. Bennett Vice President, None
Chief Operations Officer
Terrie A. Wiedenheft Vice President, None
Chief Financial
Officer, Treasurer
</TABLE>
(c) Not Applicable.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The majority of the accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder will be maintained as follows: Journals, ledgers, securities records
and other original records will be maintained principally at the offices of
Countrywide Fund Services, Inc., 312 Walnut Street, Cincinnati, Ohio 45202. All
other records so required to be maintained will be maintained at the offices of
Westport Advisers, LLC, 253 Riverside Avenue, Westport, Connecticut 06880.
ITEM 29. MANAGEMENT SERVICES
Not Applicable
ITEM 30. UNDERTAKINGS
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 2 to its Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Westport and the State of Connecticut, on the 27th day of April, 1999.
THE WESTPORT FUNDS
By: /s/ Edmund H. Nicklin, Jr.
-------------------------------
Name: Edmund H. Nicklin, Jr.
Title: President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 2 has been signed below by the following
persons in the capacities and on the date indicated.
Signature Title Date
By: /s/ Edmund H. Nicklin, Jr. President and Trustee April 27, 1999
--------------------------
(Edmund H.Nicklin, Jr.)
By: /s/ Ronald H. Oliver Executive Vice President, April 27, 1999
-------------------- Secretary, Treasurer and
Ronald H. Oliver Trustee
By: * Trustee April 27, 1999
----------------------
(Raymond J. Armstrong)
By: * Trustee April 27, 1999
----------------------
(D. Bruce Smith, II)
By: * Trustee April 27, 1999
-----------------------
(Stephen E. Milman)
By: /s/ Edmund H. Nicklin, Jr. April 27, 1999
-----------------------
* Edmund H. Nicklin, Jr.
as Attorney-in-Fact
<PAGE>
EXHIBIT LIST
4(b) Expense Reimbursement Agreement
10 Consent of Independent Certified Public Accountants
14 Financial Data Schedules
EXPENSE LIMITATION AGREEMENT
THE WESTPORT FUNDS
EXPENSE LIMITATION AGREEMENT, effective as of March 24, 1999 by and
between Westport Advisers, LLC (the "Adviser") and The Westport Funds (the
Trust"), on behalf of each series of the Trust set forth in Schedule A attached
hereto (each a "Fund," and collectively, the "Funds").
WHEREAS, the Trust is a Delaware business trust organized under a
Declaration of Trust ("Declaration of Trust"), and is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end
management company of the series type, and each Fund is a series of the Trust;
and
WHEREAS, each Fund consists of multiple classes as set forth in Schedule A
attached hereto; and
WHEREAS, the Trust and the Adviser have entered into an Investment Advisory
Agreement dated November 25, 1997 (the "Advisory Agreement"), pursuant to which
the Adviser provides investment advisory services to each Fund listed in
Schedule A, which may be amended from time to time, for compensation based on
the value of the average daily net assets of each class of each Fund; and
WHEREAS, the Trust and the Adviser have determined that it is appropriate
and in the best interests of each Fund and its shareholders to maintain the
expenses of each class of each Fund, and, therefore, have entered into this
Expense Limitation Agreement ("the Agreement"), in order to maintain the expense
ratios of each class of each Fund at the levels specified Schedule A attached
hereto; and
NOW THEREFORE, the parties hereto agree that the Agreement provides as
follows:
1. Expense Limitation.
------------------
1.1. Applicable Expense Limit. To the extent that the aggregate expenses of
every character incurred by a Fund in any fiscal year, including but not
limited to investment advisory fees of the Adviser (but excluding
interest, taxes, brokerage commissions, other expenditures which are
capitalized in accordance with generally accepted accounting principles,
other extraordinary expenses not incurred in the ordinary course of such
Fund's business, and amounts, if any, payable pursuant to a plan adopted
in accordance with Rule 12b-1 under the 1940 Act, if any) ("Fund Operating
Expenses"), exceed the Operating Expense Limit, as defined in Section 1.2
below, such excess amount (the "Excess Amount") shall be the liability of
the Adviser.
<PAGE>
1.2. Operating Expense Limit. The maximum Operating Expense Limit in any year
with respect to each class of each Fund shall be the amount specified in
Schedule A based on a percentage of the average daily net assets of each
class of each Fund.
1.3. Method of Computation. To determine the Adviser's liability with respect
to the Excess Amount, each month the Fund Operating Expenses for each Fund
shall be annualized as of the last day of the month. If the annualized
Fund Operating Expenses for any month of a Fund exceed the Operating
Expense Limit of such Fund, the Adviser shall waive or reduce its
investment advisory fee for such month by an amount, or remit an amount to
the appropriate class or classes of the Fund or Funds, sufficient to
reduce the annualized Fund Operating Expenses to an amount no higher than
the Operating Expense Limit; provided, however, that any waiver or
reduction of the advisory fee is applied equally across the classes of the
Fund.
1.4. Year-End Adjustment. If necessary, on or before the last day of the first
month of each fiscal year, an adjustment payment shall be made by the
appropriate party in order that the amount of the investment advisory fees
waived or reduced and other payments remitted by the Adviser to the Fund
or Funds with respect to the previous fiscal year shall equal the Excess
Amount.
2. Term and Termination of Agreement.
---------------------------------
This Agreement with respect to the Funds shall continue in effect
through December 31, 1999, and from year to year thereafter provided each
such continuance is specifically approved by a majority of the Trustees of
the Trust. This Agreement shall terminate automatically upon the
termination of the Advisory Agreement.
3. Miscellaneous.
-------------
3.1. Captions. The captions in this Agreement are included for convenience of
reference only and in no other way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
3.2. Interpretation. Nothing herein contained shall be deemed to require the
Trust or the Funds to take any action contrary to the Trust's Declaration
of Trust or By-Laws, or any applicable statutory or regulatory requirement
to which it is subject or by which it is bound, or to relieve or deprive
the Trust's Board of Trustees of its responsibility for and control of the
conduct of the affairs of the Trust or the Funds.
3.3. Definitions. Any question of interpretation of any term or provision of
this Agreement, including but not limited to the investment advisory fee,
the computations of net asset values, and the allocation of expenses,
having a counterpart in or otherwise derived from the terms and provisions
of the Advisory Agreement or the 1940 Act, shall have the same meaning as
and be resolved by reference to such Advisory Agreement or the 1940 Act.
2
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunto duly authorized and their respective
corporate seals to be hereunto affixed, as of the day and year first above
written.
THE WESTPORT FUNDS
ON BEHALF OF EACH OF ITS SERIES
By:
/s/Ronald H. Oliver
------------------------------------------------
Ronald H. Oliver
Executive Vice President, Secretary and Treasurer
WESTPORT ADVISERS, LLC
By:/s/Edmund H. Nicklin, Jr.
-------------------------------------------------
Edmund H. Nicklin, Jr.
Managing Director
3
<PAGE>
SCHEDULE A
OPERATING EXPENSE LIMITS
This Agreement relates to the following Funds and classes of the Trust:
Maximum Operating
Expense Limit
-----------------
Westport Fund -- Class R shares 1.50%
Westport Fund -- Class I shares 1.50%
Westport Small Cap Fund -- Class R shares 1.50%
Westport Small Cap Fund -- Class I shares 1.50%
4
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Post-Effective Amendment to
the Registration Statement on Form N-1A of the Westporrt Funds and to the use of
our report dated January 22, 1999 on the financial statements and financial
highlights of the Westport Fund and the Westport Small Cap Fund, each a series
of the Westport Funds. Such financial statements, financial highlights and
report of independent certified public accountants appear in the 1998 Annual
Report to Shareholders and are incorporated by reference in the Registration
Statement and Prospectus.
/s/Tait, Weller & Baker
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 26, 1999
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