File Nos. 333-35821
811-08359
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 2000
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. 3 |X|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 5 |X|
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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):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 2000 pursuant to paragraph (b) of Rule 485
[ ] 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
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THE WESTPORT FUNDS
WESTPORT FUND
WESTPORT SMALL CAP FUND
Prospectus
May 1, 2000
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.
WESTPORT
Investments
<PAGE>
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.
o Each Fund's investment goal -- what the Fund is trying to achieve.
o 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.
o The investment selection process used -- this section discusses how the
Adviser chooses investments for each Fund.
o 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").
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Table of Contents
Page
The Funds............................................................... 3
Investment Goals of the Funds........................................... 3
Principal Investment Strategies of the Funds............................ 3
How Investments are Selected............................................ 3
Principal Risks of Investing in the Funds............................... 4
Performance History of the Funds........................................ 5
Fees and Expenses....................................................... 7
Management of the Funds................................................. 8
The Adviser............................................................. 8
The Portfolio Managers.................................................. 8
How to Buy and Sell Shares.............................................. 10
Pricing of Fund Shares.................................................. 10
Investment Minimums..................................................... 11
Instructions for Opening or Adding to an Account........................ 11
Instructions for Selling or Redeeming Shares............................ 12
Retirement Plans........................................................ 14
Shareholder Services.................................................... 14
Dividends and Distributions............................................. 15
Taxes................................................................... 15
Financial Highlights.................................................... 16
Where to Get Additional Information..................................... 19
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The Funds
INVESTMENT GOALS OF THE FUNDS
o Westport Fund seeks a return composed of primarily capital appreciation and
secondarily current income.
o Westport Small Cap Fund seeks long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES OF THE FUNDS
o 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 $1.75 billion and $7.5 billion. The Fund will 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 median market capitalization of the companies in the Fund will be
in the mid capitalization range.
o 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 $1.75 billion or less at the time of the Fund's
investment. Companies whose capitalization exceeds $1.75 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.
o 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.
o 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
o 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.
o 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 the prospect of a significant
increase in earnings or cash flow within the investment horizon. The
estimated improvement in earnings or cash flow 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
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.
o Second generation value investing provides investors with a risk averse
approach for investing in growth opportunities among smaller companies.
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.
o 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.,
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an affiliate of the Adviser, for over 16 years. The Adviser relies on stock
selection and the strategy previously outlined to achieve its results,
rather than trying to time market fluctuations.
o 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.
o 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.
o 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.
o 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 $1.75 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.
o 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.
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
WHO SHOULD INVEST
o 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.
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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.
Investing in small companies can be riskier than other investments. 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. 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.
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 returns of the
Class R shares of each Fund for 1998 and 1999, 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 table shows each Fund's
average annual total returns for the Class R shares and the Westport Small Cap
Fund's average annual returns for the Class I shares for the last year and 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.
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ANNUAL TOTAL RETURNS THROUGH DECEMBER 31, 1999
Westport Fund
[ADD BAR CHART HERE]
12.20% 46.13% HIGHEST QUARTERLY RETURN DURING THIS PERIOD 25.07%
1998 1999 (4TH QUARTER 1999)
LOWEST QUARTERLY RETURN DURING THIS PERIOD -17.10%
(3RD QUARTER 1998)
Westport Small Cap Fund
[ADD BAR CHART HERE]
15.40% 42.72% HIGHEST QUARTERLY RETURN DURING THIS PERIOD 27.65%
1998 1999 (4TH QUARTER 1998)
LOWEST QUARTERLY RETURN DURING THIS PERIOD -19.14%
(3RD QUARTER 1998)
- --------------------------------------------------------------------------------
* The bar charts show the annual returns of the Class R shares of each Fund.
The annual returns for the Class I shares of Westport Small Cap Fund are
substantially similar to the annual returns for the Class R shares of the
Fund because shares are invested in the same portfolio of securities and
the annual returns differ only to the extent that the classes do not have
the same expenses. There are no Westport Fund Class I shares currently
outstanding.
AVERAGE ANNUAL TOTAL RETURNS
(for periods ended December 31, 1999)
1 YEAR SINCE INCEPTION*
Westport Fund (Class R shares)** 46.13% 28.09%
S&P Mid Cap 400 Index*** 14.70% 16.90%
Westport Small Cap Fund (Class R shares) 42.72% 28.38%
Westport Small Cap Fund (Class I shares) 42.86% 24.64%
Russell 2000 Index*** 21.30% 8.70%
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* The Class R shares of the Westport Fund and the Westport Small Cap Fund
commenced operations on January 2, 1998. The Class I shares of the Westport
Small Cap Fund commenced operations on February 16, 1998.
** There are no Westport Fund Class I shares currently outstanding.
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*** 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 index comprised of the 2,000 smallest U.S.
domiciled publicly-traded common stocks in the Russell 3000 Index (an 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 which are subject to advisory fees and other expenses,
while the indices are unmanaged and do not incur expenses.
FEES AND EXPENSES
THIS TABLE DESCRIBES THE FEES AND EXPENSES THAT YOU MAY PAY IF YOU BUY AND
HOLD SHARES OF THE WESTPORT FUNDS.
WESTPORT
WESTPORT FUND SMALL CAP FUND
CLASS R CLASS I CLASS R CLASS I
---------------------------------------
SHAREHOLDER FEES (fees paid directly
from your investment): NONE NONE NONE NONE
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from Fund assets):
WESTPORT
WESTPORT FUND SMALL CAP FUND
CLASS R CLASS I CLASS R CLASS I
---------------------------------------
Advisory Fee: 0.90% 0.90% 1.00% 1.00%
Other Expenses:
Service Fee:(1) 0.25% None 0.25% None
Other Operating Expenses:(2, 3) 1.77% 1.77%(4) 0.33% 0.24%
----- ----- ----- -----
Total Annual Fund Operating Expenses: 2.92% 2.67% 1.58% 1.24%
===== ===== ===== =====
Fee Waiver and Expense Reimbursement:(3) 1.42% 1.17% 0.08% 0.00%
----- ----- ----- -----
Net Expenses:(3) 1.50% 1.50% 1.50% 1.24%
===== ===== ===== =====
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(1) During the fiscal year ended December 31, 1999, the Class R shares of the
Westport Fund did not pay or accrue any service fees, and the Class R
shares of the Westport Small Cap Fund paid service fees equal to 0.10% of
the Fund's average net assets attributable to the Class R shares. As a
result, during the fiscal year ended December 31, 1999, the Class R shares
of the Westport Small Cap Fund had actual Total Annual Fund Operating
Expenses of 1.43% and there were no waivers or reimbursements with respect
to those shares. After January 1, 2000, 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, but "Net Expenses" may not exceed the amounts discussed in
footnote 3 below.
(2) With the exception of Westport Fund Class I shares, "Other Operating
Expenses" reflect actual 1999 expense amounts.
(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 "Expense
Limitation Agreement"). The Adviser has agreed to maintain these expense
limitations with regard to each class of each Fund through December 31,
2000.
(4) There are no Westport Fund Class I shares currently outstanding. The amount
of the "Other Operating Expenses" is an estimate.
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. The Examples are based on
the "Net Expenses" described in the table, which reflect the expense limits that
apply under the Expense Limitation Agreement described in
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footnote 3 to the table, for Year 1 and on the "Total Annual Fund Operating
Expenses" described in the table, which do not reflect fee waivers and
reimbursements for the Funds during the fiscal year ended December 31, 1999, for
Years 2 through 10.
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
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Westport Fund
Class R $153 $770 $1,413 $3,141
Class I 153 718 1,311 2,916
Westport Small Cap Fund
Class R 153 491 853 1,872
Class I 126 393 681 1,500
OTHER INVESTMENT STRATEGIES OF THE FUNDS
Although not a principal investment strategy of either Fund, each Fund is
authorized to purchase and sell financial futures contracts and options on such
contracts exclusively for hedging and other non-speculative purposes. A full
description of the instruments the Funds may use to hedge, the extent to which a
Fund may hedge and the risks involved with hedging appears in the Statement of
Additional Information.
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 Investment 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) had more than 10
years experience managing an investment company as the portfolio manager for the
Evergreen Growth and Income Fund prior to joining the Adviser in 1997. Together,
the principals of Westport Asset Management, Inc. and the Adviser have more than
30 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 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.
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,
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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 is also 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 and Income Fund. As portfolio
manager of the fund from its inception to August 22, 1997, and as president of
the 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 and Income Fund, had a
numerically larger in-house analytical staff than Westport Asset Management,
Inc. and the Adviser combined, Mr. Nicklin is now able to draw on the special
research and analysis resources of Andrew 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.
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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 and 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, substantially similar
investment policies and a substantially similar investment strategy executed by
the same portfolio manager and is subject to similar investment risks, it is
likely that the Westport Fund would 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.
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
NAV 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.
10
<PAGE>
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 applicable Fund and a completed account application to:
The Westport Funds
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 the Funds' transfer agent, Integrated
Fund Services, Inc. (the "Transfer Agent"), at (888) 593-7878 for instructions.
You should then promptly complete, sign and mail the account application.
PURCHASING ADDITIONAL SHARES
You may purchase additional shares
o by bank wire, as indicated above;
o by mailing a check to The Westport Funds at the address listed above;
or
o 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 or financial
intermediaries. These broker-dealers or financial intermediaries may make
arrangements for their customers to purchase and redeem shares of the Funds by
telephone and some broker-dealers and financial intermediaries may impose a
charge for their services. Alternatively, if you did not make your initial
purchase through a broker-dealer or financial intermediaries, 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
11
<PAGE>
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 your 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 the Transfer Agent 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 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 the Transfer Agent of a redemption request in proper form,
shares of a Fund will be redeemed at their next determined NAV.
BY WRITTEN REQUEST
Redemption requests may be made in writing to:
The Westport Funds
P.O. Box 5354
Cincinnati, Ohio 45201-5354
The request must specify
o the name of the Fund;
o the dollar amount or number of shares to be redeemed; and
o 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 or
financial intermediary.
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 the Transfer Agent 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. We will wire or electronically transfer your proceeds only to accounts
with domestic banks or depository
12
<PAGE>
institutions. 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. 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, the Transfer Agent will follow reasonable procedures to confirm that
such instructions are genuine. If such procedures are followed, neither the
Transfer Agent, 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 the Transfer Agent by telephone,
you may mail redemption requests to the Transfer Agent at P.O. Box 5354,
Cincinnati, Ohio 45201-5354.
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
o record name or address;
o Automated Clearing House bank or bank account information;
o Systematic Withdrawal Plan information;
o dividend election; or
o telephone redemption or exchange options.
Signature guarantees may be provided by any bank, broker-dealer, national
securities exchange, credit union, or savings association that is authorized to
guarantee signatures and which is acceptable to the Transfer Agent. Whenever a
signature guarantee is required, each person required to sign for the account
must have his signature guaranteed. Signature guarantees by notaries public are
not acceptable.
SYSTEMATIC WITHDRAWAL PLAN
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 own tax advisor.
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 to the Funds at the address
listed above or calling the Transfer Agent 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 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 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.
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<PAGE>
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 IRA documentation on IRA
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, under current law, 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 1999 is
affected, $31,000, will increase annually to reach $50,000 in 2005. The adjusted
gross income level at which the deduction for 1999 for a married taxpayer (other
than a married individual filing a separate return) is affected, $51,000, will
increase annually to reach $80,000 in 2007.
The master IRA plan also permits an IRA rollover of a lump sum distribution
from a qualified pension or profit-sharing plan. The participant may roll over
all or part of such a distribution into an IRA plan and thereby postpone federal
income tax on that part of the distribution. The rollover must be made within 60
days after receipt of the distribution. Rollovers must be made directly from the
plan to avoid certain withholding taxes.
Withdrawals from a traditional IRA, other than that portion, if any, of the
withdrawal considered to be a return of 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;
14
<PAGE>
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.
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 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
o fail to provide us with your correct taxpayer identification number;
o fail to make required certifications; or
o 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.
15
<PAGE>
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.
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.
WESTPORT FUND
Per Share Data for a Share Outstanding Throughout Each Year
- --------------------------------------------------------------------------------
Class R
For the Year For the Year
Ended Ended
December 31, 1999 December 31, 1998
- --------------------------------------------------------------------------------
Net asset value at beginning of year ...... $ 11.22 $ 10.00
---------- ----------
Income from investment operations
Net investment loss .................. (0.08) (0.05)
Net realized and unrealized
gains on investments ............ 5.21 1.27
---------- ----------
Total from investment operations .......... 5.13 1.22
---------- ----------
Less distributions:
From net realized gains .............. (1.60) --
---------- ----------
Total distributions ....................... (1.60) --
---------- ----------
Net asset value at end of year ............ $ 14.75 $ 11.22
========== ==========
Total return .............................. 46.13% 12.20%
========== ==========
Net assets at end of year (000's) ......... $ 10,219 $ 6,099
========== ==========
Ratio of net expenses to
average net assets ................... 1.50% 1.50%
Ratio of gross expenses to
average net assets(A) ................ 2.67% 3.60%
Ratio of net investment loss
to average net assets ................ (0.81)% (0.71)%
Portfolio turnover rate ................... 68% 63%
- --------------------------------------------------------------------------------
(A) Represents the ratio of expenses to average net assets absent fee waivers
and/or expense reimbursements by the Adviser.
16
<PAGE>
WESTPORT SMALL CAP FUND
<TABLE>
<CAPTION>
Per Share Data for a Share Outstanding Throughout Each Year
- ------------------------------------------------------------------------------------------------------------
Class R Class I
For the Year For the Year For the Year For the Period
Ended Ended Ended Ended
December 31, December 31, December 31, December 31,
1999 1998 1999 1998(A)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period .... $ 11.54 $ 10.00 $ 11.55 $ 10.92
---------- ---------- ---------- ----------
Income from investment operations
Net investment loss .................... (0.03) (0.02) (0.01) (0.02)
Net realized and unrealized
gains on investments ................ 4.96 1.56 4.96 0.65
---------- ---------- ---------- ----------
Total from investment operations .......... 4.93 1.54 4.95 0.63
---------- ---------- ---------- ----------
Net asset value at end of period .......... $ 16.47 $ 11.54 $ 16.50 $ 11.55
========== ========== ========== ==========
Total return .............................. 42.72% 15.40% 42.86% 5.77%
========== ========== ========== ==========
Net assets at end of period (000's) ....... $ 79,851 $ 20,637 $ 205,507 $ 33,230
========== ========== ========== ==========
Ratio of net expenses to
average net assets ..................... 1.43% 1.50% 1.24% 1.50%(C)
Ratio of gross expense to
average net assets(B) .................. 1.43% 1.79% 1.24% 1.64%(C)
Ratio of net investment loss
to average net assets .................. (0.33)% (0.39)% (0.13)% (0.36)%(C)
Portfolio turnover rate ................... 10% 19% 10% 19%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(A) Represents period from the 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.
17
<PAGE>
The Westport Funds
WESTPORT FUND
WESTPORT SMALL CAP FUND
INVESTMENT ADVISER
Westport Advisers, LLC
ADMINISTRATOR
Integrated Fund Services, Inc.
DISTRIBUTOR
IFS Fund Distributors, Inc.
COUNSEL
Dechert Price & Rhoads
INDEPENDENT ACCOUNTANTS
Tait, Weller & Baker
TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT
Integrated Fund Services, Inc.
CUSTODIAN
Firstar Bank, N.A.
18
<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:
o ANNUAL/SEMI-ANNUAL REPORTS -- Additional information about the Funds'
investments is available in the Funds' annual and semi-annual reports to
shareholders. In the Funds' annual report, you will find a discussion of
the market conditions and investment strategies that significantly affected
the Funds' performance during their last fiscal year.
o 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 The Westport Funds
P.O. Box 5354
Cincinnati, Ohio 54201-5354
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:
o 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
1-202-942-8090.
o By accessing the EDGAR Database on the Commission's Internet site at
http://www.sec.gov where you can view, download and print the information.
o By electronic request at the following E-mail address: [email protected],
or by writing to the Public Reference Section of the Securities and
Exchange Commission, Washington, D.C. 20549-0102 where, upon payment of a
duplicating fee, copies of the information will be sent to you.
Investment Company Act File No. 811-08359.
19
<PAGE>
W E S T P O R T
INVESTMENTS
Statement of Additional Information
THE WESTPORT FUNDS
Westport Fund
Westport Small Cap Fund
May 1, 2000
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, 2000 (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 and
annual and semi-annual reports may be obtained without charge by writing the
address or calling the phone number shown above.
<PAGE>
TABLE OF CONTENTS
SECURITIES, INVESTMENT STRATEGIES AND RELATED RISKS............................1
Equity Securities...........................................................1
U.S. Government Securities..................................................1
American Depositary Receipts ("ADRs").......................................1
Foreign Securities..........................................................2
Securities of Other Investment Companies....................................2
Convertible Securities......................................................2
Lower-Grade Securities......................................................3
Rights and Warrants.........................................................3
When-Issued Securities......................................................3
Repurchase Agreements.......................................................3
Illiquid and Restricted Securities..........................................4
Loans of Portfolio Securities...............................................4
HEDGING........................................................................4
Stock Index Futures.........................................................5
Writing Call Options........................................................5
Writing Put Options.........................................................5
Purchasing Puts and Calls...................................................6
Regulatory Aspects of Hedging Instruments...................................7
Additional Information About Hedging........................................8
Special Risk Factors in Hedging.............................................8
FUND POLICIES..................................................................9
Fundamental Policies........................................................9
Fundamental Restrictions...................................................10
Temporary Defensive Positions .............................................11
MANAGEMENT OF THE FUND........................................................11
Compensation of Trustees and Certain Officers..............................12
Personal Trading...........................................................13
INVESTMENT ADVISORY AND OTHER SERVICES........................................13
The Investment Adviser.....................................................13
The Administrator..........................................................14
The Accounting Services Agent..............................................14
The Distributor............................................................15
Custodian..................................................................15
Transfer and Dividend Disbursing Agent.....................................15
DETERMINATION OF NET ASSET VALUE..............................................15
ADDITIONAL INFORMATION ABOUT REDEMPTION OF SHARES.............................16
PORTFOLIO TURNOVER............................................................16
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................16
ORGANIZATION OF THE TRUST AND A DESCRIPTION OF THE SHARES.....................17
TAXATION......................................................................18
Taxation of the Funds......................................................18
Distributions..............................................................19
Sale of Shares.............................................................19
i
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Original Issue Discount Securities.........................................20
Market Discount Bonds......................................................20
Options and Hedging Transactions...........................................20
Currency Fluctuations - "Section 988" Gains or Losses......................21
Foreign Withholding Taxes..................................................22
Backup Withholding.........................................................22
Foreign Shareholders.......................................................22
Other Taxation.............................................................23
PERFORMANCE...................................................................23
COUNSEL AND INDEPENDENT ACCOUNTANTS...........................................24
FINANCIAL STATEMENTS..........................................................24
APPENDIX A....................................................................25
ii
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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.
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.
1
<PAGE>
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
("SEC").
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 Investment Company Act of 1940, as amended (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).
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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 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 days of the
purchase. Repurchase agreements are considered "loans" under 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
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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, as amended, and must permit a Fund to reacquire
loaned securities on five days' 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
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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 the 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.
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 the Fund. Any gain or loss is then realized by the 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 the 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, the 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 a security 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
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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, the 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, the Fund (as
the writer of the put) realizes a gain in the amount of the premium less
transaction costs. If the put is exercised, the Fund must fulfill its obligation
to purchase the underlying investment at the exercise price, which will usually
exceed the market value of the investment at that time. In that case, the 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.
The Fund therefore forgoes the opportunity of investing the segregated assets or
writing calls against those assets. As long as the obligation of the 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 the Fund to exchange
currency at the specified rate of exchange or to take delivery of the underlying
security against payment of the exercise price. The 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 the Fund effects a closing purchase
transaction by purchasing a put of the same series as that previously sold. Once
the 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 the 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 The 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 the
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 the Fund will lose
its premium payment and the right to purchase the underlying investment. When a
Fund purchases a call on a stock index, it pays a premium, but settlement is in
cash rather than by delivery of the underlying investment to the 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,
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the put will become worthless at its expiration and the 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 the 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 the Fund's exercise of
its put, to deliver cash to the 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 the Fund to the extent that the index moves in
a similar pattern to the securities the Fund holds. The 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, the Fund could
exercise or sell the put at a profit to attempt to offset some or all of its
loss on its portfolio securities.
Each Fund's options activities may affect its portfolio turnover rate and
brokerage commissions. The exercise of calls written by a Fund may cause that
Fund to sell related portfolio securities, thus increasing its turnover rate.
The exercise by a Fund of puts on securities will cause the sale of underlying
investments, increasing portfolio turnover. Although the decision whether to
exercise a put it holds is within each Fund's control, holding a put might cause
a Fund to sell the related investments for reasons that would not exist in the
absence of the put. A Fund will pay a brokerage commission each time it buys or
sells a call, put or an underlying investment in connection with the exercise of
a put or call. Those commissions may be higher than the commissions for direct
purchases or sales of the underlying investments.
Premiums paid for options are small in relation to the market value of the
underlying investments and, consequently, put and call options offer large
amounts of leverage. The leverage 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
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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, the 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 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 SEC 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 may reduce the gain that would otherwise
result from a change in the relationship between the U.S. dollar and a foreign
currency.
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
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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 the 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, the 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 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.
9
<PAGE>
Borrowing
As a fundamental investment policy, each Fund may borrow money for
temporary or emergency purposes, including the meeting of redemption requests,
in amounts up to 10% 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 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;
3. 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);
4. 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);
5. 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;
6. 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;
10
<PAGE>
7. 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;
8. 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;
9. 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;
10. 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;
11. 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;
12. 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;
13. invest for the purpose of exercising control or management of another
company;
14. 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 3, 2000,
the Trustees and officers as a group beneficially or of record owned 11.86% of
the outstanding Class R shares of the Westport Fund, 1.16% of the outstanding
Class R shares of the Westport Small Cap Fund, and less than 1% of the
outstanding Class I shares of the Westport Small Cap Fund.
11
<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>
Principal Occupations
Name, Address and Age Position with the Trust During the Past Five Year
- --------------------- ----------------------- -------------------------
<S> <C> <C>
Raymond J. Armstrong, 74 Trustee Chairman of money manager, Armstrong Shaw
2 Bluewater Hill Associates, Inc. (registered investment
Westport, CT 06880 adviser) (1984-1996).
Stephen E. Milman, 62 Trustee Principal, Neuberger Berman LLC (1987-1996).
5 Pratt Island
Darien, CT 06820
Edmund H. Nicklin, Jr.*, 53 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*, 71 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, 61 Trustee Independent consultant. Independent
19 Beaver Brook Road Consultant, Gunn Partners, Inc. (March
Ridgefield, CT 06877 1994-1998); Controller, Solvents and Coatings
Materials Division, Union Carbide Corp.
(manufacturer, sale of chemicals)(until
December 1993).
Andrew J. Knuth, 61 Executive Vice President Chairman, Chief Investment Officer and
253 Riverside Avenue portfolio manager, Westport Asset Management,
Westport, CT 06880 Inc.; General Partner, Riverside Associates
Limited Partnership I.
</TABLE>
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, 1999. 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.
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<PAGE>
COMPENSATION TABLE
FISCAL YEAR ENDED DECEMBER 31, 1999
Aggregate Compensation
Name of Person, Position from Registrant and Fund Complex
Raymond J. Armstrong*, Trustee $8,000
Stephen E. Milman*+, Trustee $0
Edmund H. Nicklin, Jr.**, Trustee and President $0
Ronald H. Oliver**, Trustee, Executive Vice President,
Secretary and Treasurer $0
D. Bruce Smith, II*, Trustee $8,000
- ---------------------
* 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.
PERSONAL TRADING
The Trust and the Adviser have both adopted a code of ethics which put
restrictions on the timing of personal trading in relation to trades by the
Funds and other advisory clients of the Adviser and its affiliates. The code of
ethics, which was adopted in accordance with Rule 17j-1 under the 1940 Act,
describes the fiduciary duties owed to shareholders of the Funds and to other
Westport advisory accounts by all trustees, directors, officers, members and
employees of the Trust, the Adviser and Westport Asset Management, Inc.,
establishes procedures for personal investing and restricts certain
transactions. For example, personal investment transactions in most securities,
including initial public offerings and limited offerings, must receive prior
written approval and, in most cases, may not be effected on the same day that
one of the Funds or another Westport advisory client is trading that security.
The Distributor has also adopted a code of ethics governing the personal trading
activities of its directors, officers and employees which contains comparable
restrictions.
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
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 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)
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<PAGE>
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 SEC 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. 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, 2000. The same
contractual expense limitations were in effect during the fiscal year ended
December 31, 1999. The same expense limits also applied during the fiscal year
ended December 31, 1998, although the limits were not reduced to writing at that
time.
During the fiscal years ended December 31, 1999 and 1998, the Westport Fund
paid the Adviser $65,665 and $34,289, respectively, and the Westport Small Cap
Fund paid the Adviser $1,516,620 and $247,031, respectively. In order to
voluntarily reduce operating expenses during the fiscal years ended December 31,
1999 and 1998, and pursuant to the arrangements noted above, the Adviser waived
investment advisory fees and reimbursed expenses of the Funds in the aggregate
amounts of $93,501 and $92,271, respectively, for the Westport Fund and $0 and
$46,948, respectively, for the Westport Small Cap Fund.
THE ADMINISTRATOR
On behalf of the Funds, the Trust has entered into an Administration
Agreement with Integrated Fund Services, Inc., 312 Walnut Street, Cincinnati,
Ohio 45202 (the "Administrator"). As provided in this agreement, the
Administrator is responsible for the supervision of the overall management of
the Trust (including the Trust's receipt of services for which it must pay),
providing the Trust with general office facilities and for certain special
functions, and providing persons satisfactory to the Board of Trustees to serve
as officers of the Trust. For these services, the Administrator receives from
each Fund a monthly fee at the annual rate of 0.125% of such Funds' average
daily net assets up to $50 million; 0.10% of such assets from $50 to $100
million; 0.075% of such assets from $100 to $150 million; provided, however,
that the minimum fee is $1,000 per month for each Fund. For the fiscal years
ending December 31, 1999 and 1998, the Westport Fund paid the Administrator
$12,000 and $11,000, respectively, and the Westport Small Cap Fund paid the
Administrator $142,144 and $31,382, respectively.
THE ACCOUNTING SERVICES AGENT
On behalf of the Funds, the Trust has entered into an Accounting Services
Agreement with Integrated 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
14
<PAGE>
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
years ending December 31, 1999 and 1998, the Westport Fund paid the Accounting
Services Agent $24,000 and $22,000, respectively, and the Westport Small Cap
Fund paid the Accounting Services Agent $42,500 and $27,500, respectively.
THE DISTRIBUTOR
The Trust has entered into a Distribution Agreement, on behalf of the
Funds, with IFS Fund Distributors, Inc., 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.
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
Integrated 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.
15
<PAGE>
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. Moreover, the
Trust has elected to be governed by Rule 18f-1 under the 1940 Act, under which
the Funds are obligated to redeem their shares solely in cash up to the lesser
of $250,000 or 1% of their net asset value during any 90-day period for one
shareholder. This election is irrevocable unless the SEC permits its withdrawal.
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. The Funds may redeem shares held by affiliates in kind as long as neither
the affiliated shareholder nor any other party with the ability and pecuniary
incentive to influence the redemption in kind selects, or influences the
selection of the distributed securities and as along as the redemption in kind
is approved by the Board of Trustees, including a majority of the Trustees who
are not interested persons of the Trust, in a manner consistent with SEC rules,
regulations and interpretive positions.
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 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
16
<PAGE>
light of generally prevailing rates. The Adviser's policy is to pay higher
commissions to brokers for particular transactions than might be charged if a
different broker had been selected on occasions when, in the Adviser's opinion,
this policy furthers the objective of obtaining the most favorable price and
execution. In addition, the Adviser is authorized to pay higher commissions on
brokerage transactions for the Funds to brokers in order to secure research and
investment services described above, subject to review by the Board of Trustees
from time to time as to the extent and continuation of the practice. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Board. For the fiscal years ended December 31, 1999 and
1998, the Westport Fund paid brokerage commissions of $8,667 and $15,559,
respectively, and the Westport Small Cap Fund paid brokerage commissions of
$268,124 and $113,865, respectively.
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
3, 2000.
PERCENTAGE TYPE OF
NAME AND ADDRESS OWNERSHIP OWNERSHIP
WESTPORT FUND CLASS R SHARES
Ledyard & Co. 31.98% Record
P.O. Box 799
Hanover, NH 03755-0799
Charles Schwab & Co. Inc. 19.82% Record
Special Custody Acct FBO Customers
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
17
<PAGE>
WESTPORT SMALL CAP FUND CLASS R SHARES
Charles Schwab & Co. Inc. 59.18% Record
Special Custody Acct FBO Customers
Attn Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
NFSC for Exclusive Benefit of Our Customers 14.50% Record
Sal Vella
200 Liberty Street
New York, NY 10281
National Investor Services Corp. 7.41% Record
For the Exclusive Benefit of Customers
55 Water Street, 32nd Floor
New York, NY 10041-3299
WESTPORT SMALL CAP FUND CLASS I SHARES
Northern Trust Co-Trustee 19.08% Beneficial
FBO Allianz A/C #22-45894
P.O. Box 92956
Chicago, IL 60675
Mitra & Co. 17.80% Beneficial
1000 N. Water St.
Milwaukee, WI 53202
First Union National Bank* 14.84% Beneficial
FBO Customers
1525 W. WT. Harris Blvd. NC 1151
Charlotte, NC 28262
Charles Schwab & Co., Inc. 9.76% Record
Special Custody Acct. FBO Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
- ------------------
* Aggregate of multiple accounts.
TAXATION
TAXATION OF THE FUNDS
Each Fund intends to qualify annually and to elect to be treated as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(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
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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 currently intends to make its
distributions in accordance with the calendar year distribution requirement.
As of December 31, 1999, the Westport Small Cap Fund had a capital loss
carryforward for federal income tax purposes of $309,752, which will expire on
December 31, 2007. This capital loss carryforward may be utilized in future
years to offset net realized capital gains prior to distributing such gains to
shareholders.
DISTRIBUTIONS
Dividends paid out of a Fund's investment company taxable income will be
taxable to a U.S. shareholder as ordinary income. Because a portion of a Fund's
income may consist of dividends paid by U.S. corporations, a portion of the
dividends paid by such Fund may be eligible for the corporate dividends-received
deduction. Distributions of net capital gains, if any, designated as capital
gain dividends are taxable 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
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disposition of shares of a Fund held by the shareholder for six months or less
will be treated as a long-term capital loss to the extent of any distributions
of net capital gains received by the shareholder with respect to such shares.
ORIGINAL ISSUE DISCOUNT SECURITIES
Investments by a Fund in zero coupon or other discount securities will
result in income to such Fund equal to a portion of the excess of the face value
of the securities over their issue price (the "original issue discount") each
year that the securities are held, even though such Fund receives no cash
interest payments. This income is included in determining the amount of income
which that Fund must distribute to maintain its status as a regulated investment
company and to avoid the payment of federal income tax and the 4% excise tax. In
addition, if a Fund invests in certain high yield original issue discount
securities issued by corporations, a portion of the original issue discount
accruing on any such obligation may be eligible for the deduction for dividends
received by corporations. In such event, dividends of investment company taxable
income received from such Fund by its corporate shareholders, to the extent
attributable to such portion of accrued original issue discount, may be eligible
for this deduction for dividends received by corporations if so designated by
that Fund in a written notice to shareholders.
MARKET DISCOUNT BONDS
Gains derived by a Fund from the disposition of any market discount bonds
(i.e., bonds purchased other than at original issue, where the face value of the
bonds exceeds their purchase price) held by such Fund will be taxed as ordinary
income to the extent of the accrued market discount of the bonds, unless such
Fund elects to include the market discount in income as it accrues.
OPTIONS AND HEDGING TRANSACTIONS
The taxation of equity options and over-the-counter options on debt
securities is governed by Code section 1234. Pursuant to Code section 1234, the
premium received by a Fund for selling a put or call option is not included in
income at the time of receipt. If the option expires, the premium is short-term
capital gain to a Fund. If a Fund enters into a closing transaction, the
difference between the amount paid to close out its position and the premium is
received is short-term capital gain or loss. If a call option written by a Fund
is exercised, thereby requiring such Fund to sell the underlying security, the
premium will increase the amount realized upon the sale of such security and any
resulting gain or loss will be capital gain or loss, and will be long-term or
short-term depending upon the holding period of the security. With respect to a
put or call option that is purchased by a Fund, if the option is sold, any
resulting gain or loss will be a capital gain or loss, and will be long-term or
short-term, depending upon the holding period of the option. If the option
expires, the resulting loss is a capital loss and is long-term or short-term
depending upon the holding period of the option. If the option is exercised, the
cost of the option, in the case of a 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.
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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 the 90-day
period ending with the 30th day after the close of the taxable year, if certain
conditions are met.
CURRENCY FLUCTUATIONS - "SECTION 988" GAINS OR LOSSES
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time a Fund accrues receivables or liabilities
denominated in foreign currency and the time such Fund actually collects such
receivables, or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency, and on disposition of certain options, futures and foreign
currency contracts, gains or losses attributable to fluctuations in the value of
foreign currency between the date of acquisition of the security or contract and
the date of disposition also are treated as ordinary gain or loss. These gains
or losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of a Fund's investment company taxable income to
be distributed to its shareholders as ordinary income.
Unless certain constructive sale rules (discussed more fully above) apply,
a Fund will not realize gain or loss on a short sale of a security until it
closes the transaction by delivering the borrowed security to the lender. All or
a portion of any gain arising from a short sale may be treated as short-term
capital gain, regardless of the period for which a Fund held the security used
to close the short sale. In addition, a Fund's holding period for any security
which is substantially identical to that which is sold short may be reduced or
eliminated as a result of the short sale. In many cases, as described more fully
under "Options and Hedging Transactions" above, a Fund is required to recognize
gain (but not loss) upon entering into a short sale with respect to an
appreciated security that such Fund owns, as though such Fund constructively
sold the security at the time of entering into the short sale. Similarly, if a
Fund enters into a short sale of property that becomes substantially worthless,
the Fund will recognize gain at that time as though it had closed the short
sale. Future Treasury regulations may apply similar treatment to other
transactions with respect to property that becomes substantially worthless.
If a Fund invests in stock of certain foreign investment companies, such
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
of such Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of a Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to such Fund at the highest
ordinary income tax rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in such Fund's investment company taxable income
and, accordingly, would not be taxable to that Fund to the extent distributed by
such Fund as a dividend to its shareholders.
A Fund may be able to make an election, in lieu of being taxable in the
manner described above, to include annually in income its pro rata share of the
ordinary earnings and net capital gain of the foreign investment company,
regardless of whether it actually received any distributions from the foreign
company. These amounts
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would be included in a Fund's investment company taxable income and net capital
gain which, to the extent distributed by such Fund as ordinary or capital gain
dividends, as the case may be, would not be taxable to that Fund. In order to
make this election, such Fund would be required to obtain certain annual
information from the foreign investment companies in which it invests, which in
many cases may be difficult to obtain. Alternatively, a Fund may elect to mark
to market its foreign investment company stock, resulting in the stock being
treated as sold at fair market value on the last business day of each tax year.
Any resulting gain would be reported as ordinary income; any resulting loss and
any loss from an actual disposition of the stock would be reported as ordinary
loss to the extent of any net marked-to-market gains reported in prior years.
FOREIGN WITHHOLDING TAXES
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
BACKUP WITHHOLDING
A Fund may be required to withhold U.S. federal income tax at the rate of
31% of all taxable distributions payable to shareholders who fail to provide
such Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the Internal Revenue Service that
they are subject to backup withholding. Corporate shareholders and certain other
shareholders specified in the Code generally are exempt from such backup
withholding. Backup withholding is not an additional tax. Any amounts withheld
may be credited against the shareholder's U.S. federal income tax liability.
FOREIGN SHAREHOLDERS
U.S. taxation of a shareholder who, as to the United States, is a
nonresident alien individual, a foreign trust or estate, a foreign corporation
or foreign partnership ("foreign shareholder") depends on whether the income of
a Fund is "effectively connected" with a U.S. trade or business carried on by
the shareholder.
Income Not Effectively Connected. If the income from the Fund is not
"effectively connected" with a U.S. trade or business carried on by the foreign
shareholder, distributions of investment company taxable income and short-term
capital gains 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 long-term capital gains and any amounts retained by a Fund
which are designated as undistributed long-term 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
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fair market value of such interests plus its interests in real property located
outside the United States plus any other assets used or held for use in a
business. In the case of a Fund, U.S. real property interests include interests
in stock in U.S. real property holding corporations and certain participating
debt securities.
Income Effectively Connected. If the income from a Fund is "effectively
connected" with a U.S. trade or business carried on by a foreign shareholder,
then distributions of investment company taxable income and capital gain
dividends, any amounts retained by a Fund which are designated as undistributed
capital gains and any gains realized upon the sale or exchange of shares of a
Fund will be subject to U.S. income tax at the graduated rates applicable to
U.S. citizens, residents and domestic corporations. Foreign corporate
shareholders may also be subject to the branch profits tax imposed by the Code.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may differ from those described herein.
Foreign shareholders are advised to consult their own tax advisers with respect
to the particular tax consequences to them of an investment in a Fund.
OTHER TAXATION
Fund shareholders may be subject to state, local and foreign taxes on their
Fund distributions. Shareholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of an investment in a
Fund.
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:
6
YIELD = 2 [((a - b)/cd) + 1) - 1]
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares of a Fund outstanding during
the period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the period.
Quotations of average annual total return will be expressed in terms of the
average annual compounded rate of return of a hypothetical investment in a Fund
over periods of one, five and ten years (up to the life of such Fund),
calculated pursuant to the following formula which is prescribed by the
Securities and Exchange Commission:
n
P(1+T) = ERV
Where: P = a hypothetical initial investment of $1,000;
T = average annual total return
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
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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 one year period ended
December 31, 1999 and since inception were:
One Year Since Inception
-------- ---------------
Westport Fund (Class R shares) 46.13% 28.09%
Westport Small Cap Fund (Class R shares) 42.72% 28.38%
Westport Small Cap Fund (Class I shares) 42.86% 24.64%
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, 1999 are incorporated herein by
reference. Copies of the Funds' most 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.
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APPENDIX A
DESCRIPTION OF BOND RATINGS
MOODY'S RATINGS
Long-term ratings
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- 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.
C -- Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
Short-term ratings
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted.
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Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Prime-1 -- Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
o Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
o Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Prime-2 -- Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3 -- Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Not Prime -- Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS
Long-term issue credit ratings
Issue credit ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of payment - capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issuer rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above. (Such differentiation applies when an entity has
both senior and subordinated obligations, secured and unsecured obligations, or
operating company and holding company obligations.) Accordingly, in the case of
junior debt, the rating may not conform exactly with the category definition.
AAA -- An obligation rated 'AAA' has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA -- An obligation rated 'AA' differs from the highest rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A -- An obligation rated 'A' is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
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BBB -- An obligation rated 'BBB' exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
BB -- An obligation rated 'BB' s less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B -- An obligation rated 'B' is more vulnerable to nonpayment than obligations
rated 'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC -- An obligation rated 'CCC' is currently vulnerable to nonpayment, and is
independent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC -- An obligation rated 'CC' is currently highly vulnerable to nonpayment.
C -- A subordinated debt or preferred stock obligation rated 'C' is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The 'C' rating may be used to cover a situation
where a bankruptcy petition has been filed or similar action taken, but payments
on this obligation are being continued. A 'C' also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
D -- An obligation rated 'D' is in payment default. The 'D' rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
Plus (+) or minus(-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R.: This indicate that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poor's does not rate a particular obligation as a matter of policy.
Short-term issue credit ratings
A-1 -- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2 -- A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
27
<PAGE>
A-3 -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C -- A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D -- A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
28
<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. Form of Investment Advisory Agreement**
5. Distribution Agreement between the Trust and CW Fund Distributors,
Inc. (now doing business as IFS Fund Distributors, Inc.)
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. Consent of Dechert Price & Rhoads
10. Consent of Independent Certified Public Accountants
11. Not Applicable
12. Investment Representation Letters**
13. Not Applicable
14. Multi-class Plan**
15. Powers of Attorney**
16. Codes of Ethics
(a) The Westport Funds and Westport Advisers, LLC
(b) IFS Fund Distributors, Inc.
- ---------
* 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.
<PAGE>
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
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.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) IFS Fund Distributors, Inc. also acts as underwriter for the following
open-end investment companies: The Bjurman Funds; Brundage, Story and Rose
Investment Trust; The Caldwell & Orkin Funds, Inc.; Flippin Bruce & Porter
Funds; The James Advantage Funds; The Jamestown Funds; the Lake Shore Family of
Funds, Profit Funds Investment Trust; StockJungle.com Investment Trust; UC
Investment Trust; and The Winter Harbor Fund.
(b) The following list sets forth the directors and executive officers of the
Distributor. The address of the persons named below is 312 Walnut Street,
Cincinnati, Ohio 45202.
<TABLE>
<CAPTION>
NAME POSITION WITH DISTRIBUTOR POSITION WITH REGISTRANT
- ---- ------------------------- ------------------------
<S> <C> <C>
William F. Ledwin Director None
Jill T. McGruder Director None
Maryellen Peretzky Senior Vice President-Administration Assistant Secretary
and Secretary
Tina D. Hosking Vice President and Associate General Assistant Secretary
Counsel
Theresa M. Samocki Vice President-Fund Accounting None
Manager
Terrie A. Wiedenheft First Vice President, Chief None
Financial Officer and 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
Integrated 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 certifies that it
meets all of the requirements for effectiveness of this Registration Statement
under Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment No. 3 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 28th day of April, 2000.
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. 3 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 28, 2000
----------------------------
(Edmund H. Nicklin, Jr.)
By: /s/ Ronald H. Oliver Executive Vice President, April 28, 2000
---------------------------- Secretary, Treasurer and
(Ronald H. Oliver) Trustee
By: * Trustee April 28, 2000
----------------------------
(Raymond J. Armstrong)
By: * Trustee April 28, 2000
----------------------------
By: * Trustee April 28, 2000
----------------------------
(D. Bruce Smith, II)
By: * Trustee April 28, 2000
----------------------------
(Stephen E. Milman)
By: /s/ Edmund H. Nicklin, Jr. Trustee April 28, 2000
----------------------------
* Edmund H. Nicklin, Jr.
as Attorney-in-Fact
DISTRIBUTION AGREEMENT
----------------------
This Agreement made as of October 29, 1999 by and between The Westport
Funds, a Delaware business trust (the "Trust"), and CW Fund Distributors, Inc.,
an Ohio corporation ("Distributor").
WHEREAS, the Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "Act"); and
WHEREAS, Distributor is a broker-dealer registered with the Securities and
Exchange Commission and a member of the National Association of Securities
Dealers, Inc. (the "NASD"); and
WHEREAS, the Trust and Distributor are desirous of entering into an
agreement providing for the distribution by Distributor of shares of beneficial
interest ("Shares") of each series of shares of the Trust (the "Series");
NOW, THEREFORE, in consideration of the promises and agreements of the
parties contained herein, the parties agree as follows:
1. Appointment.
-----------
The Trust hereby appoints Distributor as its agent for the distribution of
Shares, and Distributor hereby accepts such appointment under the terms of this
Agreement. While this Agreement is in force, the Trust shall not sell any Shares
except on the terms set forth in this Agreement. Notwithstanding any other
provision hereof, the Trust may terminate, suspend or withdraw the offering of
Shares whenever, in its sole discretion, it deems such action to be desirable.
Upon notice of such termination, suspension or withdrawal, the Distributor shall
cease to offer Shares.
<PAGE>
2. Sale of Shares.
--------------
(a) Distributor will have the right, as agent for the Trust, to offer, and
to solicit offers to subscribe to, the unsold balance of Shares of the Trust as
shall then be effectively registered under the Securities Act of 1933 at the
then current public offering price for the Shares.
(b) All subscriptions for Shares obtained by the Distributor shall be
directed to the Trust for acceptance and shall not be binding on the Trust until
accepted by the Trust. The Distributor shall have no authority to make binding
subscriptions on the Trust's behalf. The Distributor will send to the Trust
promptly all subscriptions placed with the Distributor.
(c) The public offering price for Shares of each Series shall be the
respective net asset value of Shares of that Series then in effect.
(d) The net asset value of Shares of each Series shall be determined in the
manner provided in the then current prospectus and statement of additional
information (the "Registration Statement"), and when determined shall be
applicable to transactions as provided for in the Registration Statement. The
net asset value of Shares of each Series shall be calculated by the Trust or by
another entity on behalf of the Trust. Distributor shall have no duty to inquire
into or liability for the accuracy of the net asset value per Share as
calculated.
(e) On every sale, the Trust shall receive the applicable net asset value
of Shares promptly, but in no event later than the third business day following
the date on which Distributor shall have received an order for the purchase of
Shares.
- 2 -
<PAGE>
(f) Upon receipt of purchase instructions, Distributor will transmit such
instructions to the Trust or its transfer agent for registration of Shares
purchased.
(g) Nothing in this Agreement shall prevent Distributor or any affiliated
person (as defined in the Act) of Distributor from acting as underwriter or
distributor for any other person, firm or corporation (including other
investment companies) or in any way limit or restrict Distributor or any such
affiliated person from buying, selling or trading any securities for its or
their own account or for the accounts of others for whom it or they may be
acting; provided, however, that Distributor expressly represents that it will
undertake no activities which, in its judgment, will adversely affect the
performance of its obligations to the Trust under this Agreement.
3. Sale of Shares by the Trust.
---------------------------
The Trust reserves the right to sell Shares through other distributors or
directly to investors through subscriptions received by the Trust or the Trust's
transfer agent. The right given to the Distributor under this Agreement shall
not apply to Shares issued in connection with (a) the merger or consolidation of
any other investment company with the Trust, (b) the Trust's acquisition, by
purchase or otherwise, of all or substantially all of the assets or stock of any
other investment company, or (c) the reinvestment in Shares by shareholders of
the Trust of dividends or other distributions or any other offering by the Trust
of securities to Trust shareholders.
- 3 -
<PAGE>
4. Basis of Sale of Shares.
-----------------------
Distributor does not agree to sell any specific number of Shares.
Distributor, as agent for the Trust, undertakes to sell Shares on a best efforts
basis only against orders therefor.
5. Rules of NASD, etc.
------------------
(a) Distributor will conform to the Conduct Rules of the NASD and the
securities laws of any jurisdiction in which it sells, directly or indirectly,
any Shares.
(b) Distributor will require each dealer with whom Distributor has a dealer
agreement to conform to the applicable provisions hereof and the Registration
Statement with respect to the public offering price of Shares, and neither
Distributor nor any such dealers shall withhold the placing of purchase orders
so as to make a profit thereby.
(c) Distributor agrees to furnish to the Trust sufficient copies of any
agreements, plans or other materials it intends to use in connection with any
sales of Shares in adequate time for the Trust to file and clear them with the
proper authorities before they are put in use, and not to use them until so
filed and cleared.
(d) Distributor, at its own expense, will qualify as dealer or broker, or
otherwise, under all applicable state or federal laws required in order that
Shares may be sold in such states as may be mutually agreed upon by the parties.
(e) Distributor shall not make, or permit any representative to make, in
connection with any sale or solicitation of a sale of Shares, any
representations concerning
- 4 -
<PAGE>
Shares except those contained in the then current prospectus and statement of
additional information covering the Shares and in printed information approved
by the Trust as information supplemental to such prospectus and statement of
additional information. Copies of the then effective prospectus and statement of
additional information and any such printed supplemental information will be
supplied by the Trust to Distributor in reasonable quantities upon request.
6. Records to be Supplied by Trust.
-------------------------------
The Trust shall furnish to Distributor copies of all information, financial
statements and other papers which Distributor may reasonably request for use in
connection with the distribution of the Shares, and this shall include, but
shall not be limited to, one certified copy, upon request by Distributor, of all
financial statements prepared for the Trust by independent public accountants.
7. Expenses.
--------
In the performance of its obligations under this Agreement, Distributor
will pay only the costs incurred in qualifying as a broker or dealer under state
and federal laws and in establishing and maintaining its relationships with the
dealers selling Shares. All other costs in connection with the offering of
Shares will be paid by the Trust or the Trust's investment adviser (the
"Adviser") in accordance with agreements between them as permitted by applicable
law, including the Act and rules and regulations promulgated thereunder.
8. Indemnification of Trust.
------------------------
Distributor agrees to indemnify and hold harmless the Trust, the Adviser
and each person who has been, is, or may hereafter be a trustee, director,
officer, employee, partner,
- 5 -
<PAGE>
shareholder or control person of the Trust or the Adviser, against any loss,
damage or expense (including the reasonable costs of investigation) reasonably
incurred by any of them in connection with any claim or in connection with any
action, suit or proceeding to which any of them may be a party, which arises out
of or is alleged to arise out of or is based upon any untrue statement or
alleged untrue statement of a material fact, or the omission or alleged omission
to state a material fact necessary to make the statements not misleading, on the
part of Distributor or any agent or employee of Distributor or any other person
for whose acts Distributor is responsible, unless such statement or omission was
made in reliance upon written information furnished by the Trust or the Adviser.
Distributor likewise agrees to indemnify and hold harmless the Trust, the
Adviser and each such person in connection with any claim or in connection with
any action, suit or proceeding which arises out of or is alleged to arise out of
Distributor's failure to exercise reasonable care and diligence with respect to
its services, if any, rendered in connection with investment, reinvestment,
automatic withdrawal and other plans for Shares. The term "expenses" for
purposes of this and the next paragraph includes amounts paid in satisfaction of
judgments or in settlements which are made with Distributor's consent. The
foregoing rights of indemnification shall be in addition to any other rights to
which the Trust, the Adviser or each such person may be entitled as a matter of
law.
9. Indemnification of Distributor.
------------------------------
Distributor, its directors, officers, employees, shareholders and control
persons shall not be liable for any error of judgment or mistake of law or for
any loss suffered by the Trust in connection with the matters to which this
Agreement relates, except a loss resulting from
- 6 -
<PAGE>
willful misfeasance, bad faith or negligence on the part of any of such persons
in the performance of Distributor's duties or from the disregard by any of such
persons of Distributor's obligations and duties under this Agreement. The Trust
will advance attorneys' fees or other expenses incurred by any such person in
defending a proceeding, upon the undertaking by or on behalf of such person to
repay the advance if it is ultimately determined that such person is not
entitled to indemnification. Any person employed by Distributor who may also be
or become an officer or employee of the Trust shall be deemed, when acting
within the scope of his employment by the Trust, to be acting in such employment
solely for the Trust and not as an employee or agent of Distributor.
10. Compensation of Distributor
---------------------------
For services rendered under this Agreement, the Distributor will receive a
fee of $1.00 per year.
11. Termination and Amendment of this Agreement.
-------------------------------------------
This Agreement shall automatically terminate, without the payment of any
penalty, in the event of its assignment. This Agreement may be amended only if
such amendment is approved (i) by Distributor, (ii) either by action of the
Board of Trustees of the Trust or at a meeting of the Shareholders of the Trust
by the affirmative vote of a majority of the outstanding Shares, and (iii) by a
majority of the Trustees of the Trust who are not interested persons of the
Trust or of Distributor by vote cast in person at a meeting called for the
purpose of voting on such approval.
Either the Trust or Distributor may at any time terminate this Agreement on
sixty (60) days' written notice delivered or mailed by registered mail, postage
prepaid, to the other party.
- 7 -
<PAGE>
12. Effective Period of this Agreement.
----------------------------------
This Agreement shall take effect upon its execution and shall remain in
full force and effect for a period of two (2) years from the date of its
execution (unless terminated automatically as set forth in Section 11), and from
year to year thereafter, subject to annual approval (i) by Distributor, (ii) by
the Board of Trustees of the Trust or a vote of a majority of the outstanding
Shares, and (iii) by a majority of the Trustees of the Trust who are not
interested persons of the Trust or of Distributor by vote cast in person at a
meeting called for the purpose of voting on such approval.
13. Limitation of Liability.
-----------------------
It is expressly agreed that the obligations of the Trust hereunder shall
not be binding upon any of the Trustees, Shareholders, nominees, officers,
agents or employees of the Trust, personally, but bind only the trust property
of the Trust, as provided in the Declaration of Trust. The execution and
delivery of this Agreement have been authorized by the Trustees and Shareholders
of the Trust and signed by an officer of the Trust, acting as such, and neither
such authorization by such Trustees and Shareholders nor such execution and
delivery by such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally, but shall
bind only the trust property of the Trust as provided in its Declaration of
Trust.
- 8 -
<PAGE>
14. New Series.
----------
The terms and provisions of this Agreement shall become automatically
applicable to any additional series of the Trust established during the initial
or renewal term of this Agreement.
15. Successor Investment Company.
----------------------------
Unless this Agreement has been terminated in accordance with Paragraph 11,
the terms and provisions of this Agreement shall become automatically applicable
to any investment company which is a successor to the Trust as a result of
reorganization, recapitalization or change of domicile.
16. Severability.
------------
In the event any provision of this Agreement is determined to be void or
unenforceable, such determination shall not affect the remainder of this
Agreement, which shall continue to be in force.
17. Questions of Interpretation.
---------------------------
(a) This Agreement shall be governed by the laws of the State of Ohio.
(b) Any question of interpretation of any term or provision of this
Agreement having a counterpart in or otherwise derived from a term or provision
of the Act shall be resolved by reference to such term or provision of the Act
and to interpretation thereof, if any, by the United States courts or in the
absence of any controlling decision of any such court, by rules, regulations or
orders of the Securities and Exchange Commission issued pursuant to said Act. In
addition, where the effect of a requirement of the Act, reflected in any
provision of this
- 9 -
<PAGE>
Agreement is revised by rule, regulation or order of the Securities and Exchange
Commission, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
18. Notices.
-------
Any notices under this Agreement shall be in writing, addressed and
delivered or mailed postage paid to the other party at such address as such
other party may designate for the receipt of such notice. Until further notice
to the other party, it is agreed that the address of the Trust for this purpose
shall be 253 Riverside Avenue, Westport, Connecticut 06880 and that the address
of Distributor for this purpose shall be 312 Walnut Street, 21st Floor,
Cincinnati, Ohio 45202.
IN WITNESS WHEREOF, the Trust and Distributor have each caused this
Agreement to be signed in duplicate on their behalf, all as of the day and year
first above written.
ATTEST: THE WESTPORT FUNDS
/s/ Terry Wettergreen By: /s/ Edmund H. Nicklin, Jr.
- --------------------------------- -----------------------------
Its: President
ATTEST: CW FUND DISTRIBUTORS, INC.
/s/ Tina D. Hosking By: /s/ Robert H. Leshner
- --------------------------------- -----------------------------
Its: President
Dechert Price & Rhoads
30 Rockefeller Plaza
New York, NY 10112
April 27, 2000
The Westport Funds
253 Riverside Avenue
Westport, CT 06880
Re: The Westport Funds
Post-Effective Amendment No. 3 to the Registration Statement
on Form N-1A (Registration Nos.: 333-35821, 811-08359)
Ladies and Gentlemen:
We have acted as counsel for The Westport Funds (the "Trust"), a business
trust organized and validly existing under the laws of the State of Delaware, in
connection with the above-referenced Registration Statement relating to the
issuance and sale by the Trust of an indefinite number of its shares of
beneficial interest, $0.001 par value per share, of two separate series of the
Trust -- the Westport Fund and the Westport Small Cap Fund -- under the
Securities Act of 1933, as amended and under the Investment Company Act of 1940,
as amended. We have examined such governmental and corporate certificates and
records as we deemed necessary to render this opinion and we are familiar with
the Trust's Certificate of Trust, Trust Instrument and its Bylaws.
Based upon the foregoing, we are of the opinion that the shares proposed to
be sold pursuant to Post-Effective Amendment No. 3 to the Trust's Registration
Statement, when paid for as contemplated in the Trust's Registration Statement,
will be legally and validly issued, fully paid and non-assessable. We hereby
consent to the filing of this opinion as an exhibit to Post-Effective Amendment
No. 3 to the Trust's Registration Statement on Form N-1A, to be filed with the
Securities and Exchange Commission, and to the use of our name in the Trust's
Statement of Additional Information of the Trust's Registration Statement to be
dated as of May 1, 2000, and in any revised or amended versions thereof under
the caption "Legal Counsel." In giving such consent, however, we do not admit
that we are within the category of persons whose consent is required by Section
7 of the Securities Act of 1933, as amended, and the rules and regulations
thereunder.
Very truly yours,
\s\ Dechert Price & Rhoads
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 Westport Funds and to the use of
our report dated January 21, 2000 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 1999 Annual
Report to Shareholders which is incorporated by reference in the Registration
Statement and Prospectus.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 26, 2000
THE WESTPORT FUNDS
WESTPORT ADVISERS, LLC
WESTPORT ASSET MANAGEMENT, INC.
CODE OF ETHICS & CONDUCT
I. INTRODUCTION
This Code of Ethics and Conduct (the "Code") has been adopted by The
Westport Funds (the "Funds"), Westport Advisers, LLC ("WALLC") and Westport
Asset Management, Inc. ("WAMI") (collectively, "Westport"), in accordance with
the federal securities laws, including the Investment Company Act of 1940, as
amended, the Investment Advisers Act of 1940, as amended, and the Securities
Exchange Act of 1934, as amended (the "1934 Act"). The purpose of the Code is to
establish guidelines and procedures to identify and prevent persons who may have
knowledge of Westport's investments and investment intentions from breaching
their fiduciary duties and to deal with other situations that may pose a
conflict of interest or a potential conflict of interest.
Carefully read the guidelines and procedures of this Code. When you believe
that you sufficiently understand them, please sign, date, and return the Annual
Certificate of Compliance (attached as Appendix I) to the Compliance Director.
Please keep a copy of the Code for your reference.
Additionally, federal securities laws require money managers and others to
adopt policies and procedures to identify and prevent the misuse of material,
non-public information. Therefore, Westport has developed and adopted Policies
and Procedures Concerning the Misuse of Material Non-Public Information (the
"Insider Trading Policy") that applies to all employees, officers and trustees
(attached as Appendix VI). Read it carefully. When you believe that you
sufficiently understand its terms and conditions, please sign, date and return
the Insider Trading Policy Annual Certificate of Compliance (attached as
Appendix VII) to the Compliance Director.
II. DEFINITIONS
As used in the Code, the following terms have the following meanings:
ACCESS PERSON: means any trustee, director, officer, member or employee of
a Westport entity. It would also generally include any
entity or natural person in a control relationship to any
Westport entity.
ADVISORY CLIENT: means any person or entity to which WAMI or WALLC provides
investment advisory services. This term includes any
registered or unregistered investment company for which WAMI
or WALLC serves as an adviser or sub-adviser and any
separate account clients.
BENEFICIAL
OWNERSHIP: generally means any interest in a Covered Security for which
an Access Person or any member of his or her immediate
family sharing the same
<PAGE>
household can directly or indirectly receive a monetary
("pecuniary") benefit. Please see Appendix II for a complete
definition.
COMPLIANCE
DIRECTOR: means the person appointed by each Westport entity and
indicated in Appendix VIII, as updated from time to time.
The Compliance Director may delegate any or all of his or
her responsibilities under the Code, as specified in
Appendix VIII. In instances when the Code is applied to the
Compliance Director, any other principal of the appropriate
Westport entity may act as the Compliance Director.
CONTROL: of the Funds, WALLC or WAMI means the power to exercise a
controlling influence over the management or policies of the
entity (unless such power is solely the result of an
official position with the entity). Any person who owns
(directly or through one or more controlled companies), more
than 25% of the voting securities of one of these entities
shall be presumed to control such entity.
INDEPENDENT
TRUSTEE: means any person who serves on the Board of Trustees of the
Funds who is not an "interested person" as that term is
defined in Section 2(a)(19) of the Investment Company Act of
1940, as amended. Independent Trustees are exempted from
most of the Code's provisions. See, for example, Article V,
Sections 2 and 3, and Article IX.
COVERED SECURITY: means any and every security as defined in Section 2(a)(36)
of the Investment Company Act of 1940, as amended, but does
not include the following, so that transactions in the
following are not covered by the Code:
o direct obligations of the Government of the United
States;
o bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt
instruments, including repurchase agreements; and
o shares issued by registered open-end investment
companies (mutual funds).
III. GENERAL PRINCIPLES
This Code applies to all Access Persons. The Code acknowledges the general
principles that Access Persons:
o owe a fiduciary obligation to all Advisory Clients;
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o have the duty at all times to place the interests of all Advisory
Clients first and foremost;
o must conduct their Personal Securities Transactions in a manner that
avoids conflicts of interest or abuses of their position of trust and
responsibility; and
o should not take improper advantage of their positions in relation to
Advisory Clients.
No Access Person shall, directly or indirectly in connection with its
purchase or sale of a Security Held or to be Acquired by any Advisory Client:1
o employ any device, scheme or artifice to defraud any Advisory Client;
o make any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made to the
Advisory Client, in light of the circumstances under which they are
made, not misleading;
o engage in any act, practice, or course of business that operates or
would operate as a fraud or deceit upon any Advisory Client; or
o engage in any manipulative practice with respect to any Advisory
Client.
IV. INSIDE INFORMATION
No Access Person may use material, non-public information about a security
or issuer in breach of a duty of trust or confidence that is owed directly,
indirectly, or derivatively, to the issuer of that security, the shareholders of
that issuer, any Advisory Client, or to any other person who is the source of
the material non-public information. Any Access Person who believes he or she is
in possession of such information must contact the Compliance Director
immediately to discuss the information and the circumstances surrounding its
receipt. Please refer to the Insider Trading Policy attached as Appendix VI for
more information.
V. PROHIBITED TRANSACTIONS
1. SAME DAY TRADING
No Access Person may purchase or sell, directly or indirectly, any
Covered Security in which he or she has, or by reason of such transaction
acquires, any direct or indirect beneficial ownership if, to his or her
actual knowledge at the time of such purchase or sale, the same or an
equivalent
- ----------------------
1 "Security Held or to be Acquired" by any Advisory Client means (1) any
Covered Security which, within the most recent 15 days, is or has been
held by an Advisory Client, or is being or has been considered by an
Advisory Client or Westport for purchase by an Advisory Client, and (2)
any option to purchase or sell, and any security convertible into or
exchangeable for, a Covered Security described in clause (1) above.
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Covered Security is (1) being considered for purchase or sale by an
Advisory Client that day; or (2) being purchased or sold by an Advisory
Client that day.
Notwithstanding the above, accounts in which an Access Person has a
beneficial ownership interest in a Covered Security solely by reason of an
indirect pecuniary interest described in Rule 16a-1(a)(2)(ii)(B) or (C)
under the 1934 Act may purchase or sell, directly or indirectly, any
Covered Security even if the same or an equivalent Covered Security is (1)
being considered for purchase or sale by an Advisory Client that day; or
(2) being purchased or sold by an Advisory Client that day provided that
such accounts receive the average price for all such purchases and sales
executed for such accounts and all Advisory Clients that day, with
transaction costs shared on a pro rata basis.
2. TRANSACTIONS IN COVERED SECURITIES
Unless prior written approval is obtained as described in Article VII,
no Access Person, other than Independent Trustees, may engage in a
transaction in any Covered Security.
3. INITIAL PUBLIC OFFERINGS AND PRIVATE PLACEMENTS
Unless prior written approval is obtained as described in Article VII,
no Access Person, other than Independent Trustees, may engage in a
transaction in any security in an initial public offering or a private
placement.
An Access Person who has been approved to engage in a transaction in a
private placement must disclose that investment if he or she plays a part
in subsequent investment considerations concerning the issuer of such
security for an Advisory Client. In such circumstances, Westport's decision
to purchase or sell securities of the issuer shall be subject to an
independent review by an Access Person with no personal interest in the
issuer.
VI. EXEMPTIONS
The prohibitions of Article V of this Code shall not apply to:
o Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control or in any
account which is managed on a discretionary basis by a person other
than such Access Person and with respect to which such Access Person
does not in fact influence or control such transactions;
o Purchases or sales of securities which are not eligible for purchase
or sale by any Advisory Client;
o Purchases or sales which are non-volitional on the part of either the
Access Person or any Advisory Client;
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o Purchases which are part of an automatic dividend reinvestment plan;
o Purchases effected upon the exercise of rights or options issued by an
issuer pro rata to all holders of a class of its securities, to the
extent such rights or options were acquired from such issuer, and
sales of such rights or options so acquired; and
o Any securities transaction, or series of related transactions,
involving 500 shares or less in the aggregate, if the issuer has a
market capitalization (outstanding shares multiplied by the current
price per share) greater than $1.75 billion.
VII. PRE-APPROVAL PROCEDURES
1. APPROVAL REQUIREMENTS
An Access Person must obtain prior written approval from a principal
of Westport for all securities transactions otherwise prohibited by Article
V. Another principal of Westport must approve transactions made by a
principal of Westport.
2. TIME OF APPROVAL
Pre-approval must be obtained prior to the proposed securities
transaction and is valid for only 12 hours after approval.
3. FORM
Pre-approval must be obtained in writing by completing and signing a
Personal Trading Request and Authorization Form (including the details of
the proposed securities transaction) and submitting it to a principal of
Westport. Please use the form attached as Appendix III.
4. FILING
The Compliance Director will retain a copy of all completed Personal
Trading Request and Authorization Forms in the manner contemplated by
Article XII.
5. FACTORS CONSIDERED IN APPROVAL OF PERSONAL SECURITIES TRANSACTIONS
Generally, the factors described below will be considered by Westport
principals in determining whether or not to approve a proposed securities
transaction.
o whether the proposed purchase or sale is likely to have any economic
impact on any Advisory Client or on their ability to purchase or sell
securities of the same class or other securities of the same issuer;
o whether any Advisory Client has a pending "buy" or "sell" order in
that security or has completed a purchase or sale of that security
that day;
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o whether the amount or nature of the securities transaction or person
making it is likely to affect the price of or market for the security;
o whether the security proposed to be purchased or sold is one that
would qualify for purchase or sale by any Advisory Client;
o whether the security is currently being considered for purchase or
sale by Westport that day;
o whether the securities transaction would create the appearance of
impropriety, whether or not an actual conflict exists; and
o whether the investment opportunity should be reserved for an Advisory
Client, and whether the opportunity is being offered to the Access
Person by virtue of his or her position.
However, if warranted by the nature of the transaction, and notwithstanding the
prohibition in Section V.1., the Compliance Director has the authority, only in
exceptional circumstances, to approve a securities transaction where the
security is currently being considered for purchase or sale by Westport that
day.
VIII. REPORTING BY ACCESS PERSONS OTHER THAN INDEPENDENT TRUSTEES OF THE FUNDS2
1. INITIAL HOLDINGS REPORT
Beginning on March 1, 2000, no later than 10 days after a person
becomes an Access Person (other than Independent Trustees of the Funds),
such person must file a report with the Compliance Director which contains
the following information:
o the title, number of shares and principal amount of each Covered
Security in which such person has any direct or indirect beneficial
ownership;
o the name of the broker, dealer or bank with whom such person maintains
an account in which any securities are held for the direct or indirect
benefit of such person; and
o the date the report is submitted to the Compliance Director.
- --------------------------
2 Each Access Person required to make a report is responsible for taking the
initiative to file reports as required under the Code. Any effort by the
Compliance Director to facilitate the reporting process does not change or
alter that responsibility.
Any report required by Articles VIII and IX may contain a statement that
the report will not be construed as an admission that the person making the
report has any direct or indirect beneficial ownership in the Covered
Security to which the report relates.
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2. QUARTERLY TRANSACTION REPORTS
Beginning with the calendar quarter ending March 31, 2000, no later
than 10 days after the end of a calendar quarter, every Access Person
(other than Independent Trustees of the Funds) must file a report with the
Compliance Director with respect to any transaction during the calendar
quarter in a Covered Security in which the Access Person had any direct or
indirect beneficial ownership (the "Quarterly Report"). The Quarterly
Report, which may be in the form of the cover page in Appendix IV and
attached account statements, must contain:
o the date of each transaction, the title, the interest rate and
maturity date (if applicable), the number of shares and the principal
amount of each Covered Security involved;
o the nature of the transaction (i.e., purchase or sale or other type of
acquisition or disposition);
o the price of the Covered Security at which the transaction was
effected;
o the name of the broker, dealer or bank with or through which the
transaction was effected; and
o the date that the report is submitted to the Compliance Director.
With respect to any quarter in which an account was established by an
Access Person in which any securities were held for the direct or indirect
benefit of the Access Person, such Quarterly Report must also contain the
name of the broker, dealer or bank with whom the Access Person established
the account and the date the account was established.
3. ANNUAL HOLDINGS REPORTS
No later than January 30, 2001, and every January 30 thereafter, every
Access Person (other than Independent Trustees of the Funds) must file a
report with the Compliance Director which contains the following
information:
o the title, number of shares and principal amount of each Covered
Security in which such person has any direct or indirect beneficial
ownership as of December 31 of the prior calendar year;
o the name of the broker, dealer or bank with whom such person maintains
an account in which any securities are held for the direct or indirect
benefit of such person; and
o the date the report is submitted to the Compliance Director.
The report may be in the form of the cover page in Appendix V and attached
account statements.
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IX. REPORTING BY INDEPENDENT TRUSTEES OF THE FUNDS3
An Independent Trustee of the Funds must make a quarterly transaction
report containing the information required by Article VIII, Section 2, no later
than 10 days after the end of a calendar quarter with respect to transactions
occurring in such quarter in a Covered Security only if such trustee knew or, in
the ordinary course of fulfilling his or her official duties as a trustee of the
Funds, should have known that during the 15-day period immediately before or
after such trustee's transaction in a Covered Security, the Funds purchased or
sold the Covered Security, or the Funds or their investment adviser considered
purchasing or selling the Covered Security.3
X. DETERMINATION OF ACCESS PERSONS
Each current trustee, director, officer, member and employee of Westport
will be evaluated by the Compliance Director to determine whether he or she is
an Access Person before March 1, 2000. Those who are determined to be Access
Persons will be notified of their status as an Access Person and their
corresponding reporting obligations by March 1, 2000.
Each potential new trustee, director, officer, member or employee of
Westport will be evaluated to determine whether he or she is an Access Person
before he or she is offered a position and will be notified of his or her status
as an Access Person, if applicable, before taking his or her position.
XI. REVIEW OF REPORTS REQUIRED BY THIS CODE OF ETHICS
Each report required to be submitted under Articles VIII and IX of the Code
will be promptly reviewed by the Compliance Director when submitted.
Any violation or potential violation of the Code shall be brought to the
attention of the appropriate principal of the affected Westport entity within
five business days of its discovery. The Compliance Director will investigate
any such violation or potential violation and report to such principal with a
recommendation of appropriate action to be taken against any individual whom it
is determined has violated the Code, as is necessary to cure the violation and
prevent future violations.
The Compliance Director will keep a written record of all investigations in
connection with any Code violations including any action taken as a result of
the violation.
XII. RECORDKEEPING REQUIREMENTS
The following records must be maintained at the principal place of business
of the appropriate Westport entity in the manner and to the extent set out
below. These records must be made available to the Securities and Exchange
Commission or any representative of the Commission at any time and from time to
time for reasonable periodic, special or other examination:
- -------------------------
3 Ordinarily, reports would need to be filed only if an Independent Trustee
actually knows of a Fund transaction since, generally, Independent Trustees
would not be expected to be in a position in which they "should have known"
of a Fund transaction.
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o A copy of the Code that is in effect, or at any time within the past
five years was in effect, must be maintained in an easily accessible
place;
o A record of any violation of the Code, and of any action taken as a
result of the violation, must be maintained in an easily accessible
place for at least five years after the end of the fiscal year in
which the violation occurs;
o A copy of each report required to be submitted by Access Persons under
Articles VIII and IX of the Code, including any information provided
on broker transaction confirmations and account statements, must be
maintained for at least five years after the end of the fiscal year in
which the report is made or the information is provided, the first two
years in an easily accessible place;
o A record of all Access Persons, currently or within the past five
years, who are or were required to make reports under the Code will be
established prior to March 1, 2000 and maintained in an easily
accessible place;
o A record of all persons, currently or within the past five years, who
are or were responsible for reviewing reports of Access Persons will
be established prior to March 1, 2000 and maintained in an easily
accessible place;
o A copy of each Personal Trading Request and Authorization Form
submitted to the Compliance Director (including a record of all
approvals to acquire securities in an initial public offering or
private placement, indicating the reasons therefor) must be maintained
for at least five years after the end of the fiscal year in which the
form was submitted or the approval is granted, whichever is later; and
o A copy of each report to the Board of Trustees of the Funds required
to be submitted pursuant to Article XIII of the Code must be
maintained for at least five years after the end of the fiscal year in
which it is made, the first two years in an easily accessible place.
o A record of all accounts, currently or within the past five years, in
which an Access Person has or had a beneficial ownership interest in a
Covered Security solely by reason of an indirect pecuniary interest
described in Rule 16a-1(a)(2)(ii)(B) or (C) under the 1934 Act must be
maintained in an easily accessible place.
XIII. REPORTS TO THE BOARD OF TRUSTEES OF THE FUNDS
No later than September 1, 2000 and no less frequently than annually
thereafter, the Compliance Director will prepare a written report to be
furnished to the Board of Trustees of the Funds that:
o Describes any issues arising under the Code since the last report to
the Board of Trustees of the Funds, including, but not limited to,
information about material violations of the Code and sanctions
imposed in response to the material violations; and
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o Certifies that each Westport entity has adopted the procedures in
Articles X through XII of the Code and this Article XIII, which
Articles are reasonably necessary to prevent Access Persons from
violating the Code.
No later than September 1, 2000 and no less frequently than annually
thereafter, the distributor of the Funds must prepare a written report to be
furnished to the Board of Trustees of the Funds that:
o Describes any issues arising under its code of ethics since the last
report to the Board of Trustees, including, but not limited to,
information about material violations of its code of ethics and
sanctions imposed in response to the material violations; and
o Certifies that it has adopted procedures reasonably necessary to
prevent Access Persons from violating its code of ethics.
XIV. CONFIDENTIALITY OF ADVISER TRANSACTIONS
Specific information relating to any Advisory Client's portfolio or
activities is strictly confidential and should not be discussed with anyone
outside Westport.
XV. SANCTIONS
A violation of this Code is subject to the imposition of such sanctions by
each Westport entity as may be deemed appropriate under the circumstances to
achieve the purposes of the Code. Sanctions for violations of the Code will be
determined by the Compliance Director, in consultation with the principals of
the appropriate Westport entity and outside counsel. Such sanctions may include
a written warning, suspension or termination of employment, a letter of censure
and/or disgorgement of any profit.
XVI. AMENDMENTS AND MODIFICATIONS
This Code may be amended or modified as deemed necessary by the officers of
the appropriate Westport entity. In the case of amendments or modifications by
the Funds or WALLC, the amendments and modifications must also by approved by
the trustees of the Funds within six months of any such amendment or
modification.
XVII. ANNUAL CERTIFICATION
All Access Persons must certify annually that they understand the Code,
have had an opportunity to ask questions about the Code, and will comply with
all applicable aspects of the Code by submitting an Annual Certificate of
Compliance (attached as Appendix I) to the Compliance Director no later than
December 31 of each year.
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APPENDIX I
THE WESTPORT FUNDS
WESTPORT ADVISERS, LLC
WESTPORT ASSET MANAGEMENT, INC.
CODE OF ETHICS & CONDUCT
ANNUAL CERTIFICATE OF COMPLIANCE
- -------------------------
Name (please print)
This is to certify that the attached Code of Ethics and Conduct ("Code")
was distributed to me on ____________, 20___. I have read and understand the
Code. I certify that I have complied with the Code during the course of my
association with Westport, and that I will continue to do so in the future.
Moreover, I agree to promptly report to the Compliance Director any violation or
possible violation of the Code of which I become aware.
I understand that violation of the Code will be grounds for disciplinary
action or dismissal and may also be a violation of federal and/or state
securities laws.
- -------------------------------------
Signature
- -------------------------------------
Date
<PAGE>
APPENDIX II
The term "beneficial owner" shall mean any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares a direct or indirect pecuniary interest in securities,
subject to the following:
(1) The term "pecuniary interest" in any class of securities shall mean the
opportunity, directly or indirectly, to profit or share in any profit derived
from a transaction in the subject securities.
(2) The term "indirect pecuniary interest" in any class of securities shall
include, but not be limited to:
(A) Securities held by members of a person's immediate family sharing the
same household; provided, however that the presumption of such beneficial
ownership may be rebutted;
(B) A general partner's proportionate interest in the portfolio securities
held by a general or limited partnership. The general partner's proportionate
interest, as evidenced by the partnership agreement in effect at the time of the
transaction and the partnership's most recent financial statements, shall be the
greater of: (1) the general partner's share of the partnership's profits,
including profits attributed to any limited partnership interests held by the
general partner and any other interests in profits that arise from the purchase
and sale of the partnership's portfolio securities; or (2) the general partner's
share of the partnership capital account, including the share attributable to
any limited partnership interest held by the general partner;
(C) A performance-related fee, other than an asset-based fee, received by
any broker, dealer, bank, insurance company, investment company, investment
adviser, investment manager, trustee or person or entity performing a similar
function; provided, however, that no pecuniary interest shall be present where:
(1) the performance-related fee, regardless of when payable, is calculated based
upon net capital gains and/or net capital appreciation generated from the
portfolio or from the fiduciary's overall performance over a period of one year
or more; and (2) securities of the issuer do not account for more than 10
percent of the market value of the portfolio. A right to a
nonperformance-related fee alone shall not represent a pecuniary interest in the
securities;
(D) A person's right to dividends that is separated or separable from the
underlying securities. Otherwise, a right to dividends alone shall not represent
a pecuniary interest in the securities;
(E) A person's interest in securities held by a trust, as specified in Rule
16a-8(b); and
(F) A person's right to acquire securities through the exercise or
conversion of any derivative security, whether or not presently exercisable.
<PAGE>
(3) A shareholder shall not be deemed to have a pecuniary interest in the
portfolio securities held by a corporation or similar entity in which the person
owns securities if the shareholder is not a controlling shareholder of the
entity and does not have or share investment control over the entity's
portfolio.
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THE WESTPORT FUNDS
WESTPORT ADVISERS, LLC
WESTPORT ASSET MANAGEMENT, INC.
APPENDIX III
PERSONAL TRADING REQUEST AND AUTHORIZATION FORM
Employee Name _______________________________
Person On Whose Behalf Trade is Being Done (if different) ______________________
Broker ___________________ Brokerage Account Number _________________
Covered Security ______________________________________ Ticker Symbol _______
Company Name, Type of Covered Security
Number of Shares or Units ______ Price per Share or Unit _______
Approximate Total Price ________ Buy or Sell ________
I HEREBY CERTIFY THAT ALL OF THE FOLLOWING INFORMATION IS TRUE AND COMPLETE:
To the best of my knowledge, neither I nor anyone at Westport possess material,
non-public information about the issuer or the security.
To the best of my knowledge, the requested transaction is consistent with the
letter and spirit of the Code.
_______________________________________ ________________
Signature Date
When signed and dated by a principal of Westport, this authorization is approved
for this transaction only and is effective for 12 hours from the time written
below unless you are notified otherwise by the a principal of Westport. A record
of this transaction will be kept by the Compliance Director in confidential
files.1
a.m.
_______________________________________ ________________ ______________p.m.
Westport Principal Date Time
- ----------------------
1 Compliance Director or Westport principal please note: If approval is
granted to acquire securities in an initial public offering or in a private
placement, indicate the reasons for such approval on the reverse side of
this form. This form must be maintained for at least five years after the
end of the fiscal year in which the form was submitted or the approval is
granted, whichever is later in accordance with Article XII of the Code.
<PAGE>
THE WESTPORT FUNDS
WESTPORT ADVISERS, LLC
WESTPORT ASSET MANAGEMENT, INC.
APPENDIX IV
QUARTERLY SECURITIES TRANSACTIONS REPORT
For the quarter ending _______________, _______
I hereby certify that the transactions on the attached pages are the only
transactions in Covered Securities entered into during the quarter ending on the
date written above in which I had any direct or indirect beneficial ownership.
Please check the applicable box below:
[ ] During the quarter ending on the date written above, I have not
established any new account in which any securities were held during such
quarter for my direct or indirect benefit.
[ ] During the quarter ending on the date written above, I have
established the following new accounts in which any securities were held during
such quarter for my direct or indirect benefit:
Name of Broker, Dealer, or Bank Date Established
------------------------------------------------------------------
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
__________________________________________________________________
Signature _____________________________________________
Name: _________________________________________________
Please Print
Date: _________________
<PAGE>
THE WESTPORT FUNDS
WESTPORT ADVISERS, LLC
WESTPORT ASSET MANAGEMENT, INC.
APPENDIX V
ANNUAL HOLDINGS REPORT
For the calendar year ending December 31, _______
I hereby certify that the securities on the attached account statements are
the only Covered Securities in which I have a direct or indirect beneficial
ownership as of the date written above.
Listed below are the names of every broker, dealer and bank with whom I
maintain an account in which securities are held for my direct or indirect
benefit:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Signature _______________________________________
Name: ___________________________________________
Please Print
Date: _________________
<PAGE>
APPENDIX VI
POLICIES AND PROCEDURES
CONCERNING THE MISUSE OF MATERIAL
NON-PUBLIC INFORMATION
(THE "INSIDER TRADING POLICY")
Every trustee, director, officer, member or employee (each a "Covered
Person") of The Westport Funds, Westport Advisers, LLC and Westport Asset
Management, Inc. (collectively, "Westport") must read and retain a copy of these
Policies and Procedures Concerning the Misuse of Material Non-Public Information
(the "Insider Trading Policy"). Any questions regarding the Insider Trading
Policy described herein should be referred to Westport's Compliance Director.
SECTION I. POLICY STATEMENT ON INSIDER TRADING ("POLICY STATEMENT")
Westport's Policy Statement applies to every Covered Person and extends to
activities both within and outside the scope of their duties at Westport.
Westport forbids any Covered Person from engaging in any activities that would
be considered to be "insider trading."
The term "insider trading" is not defined in the federal securities laws,
but generally is understood to prohibit the following activities:
1. trading while in possession of material non-public information;
2. recommending the purchase or sale of securities while in possession of
material non-public information; or
3. communicating material non-public information to others (i.e.,
"tipping").
The elements of insider trading and the penalties for such unlawful conduct
are discussed below. If, after reviewing this Policy Statement, you have any
questions you should consult the Compliance Director.
A. Who is an Insider?
-----------------
The concept of "insider" is broad and it includes trustees, directors,
officers, partners, members, and employees of a company. In addition, a person
can become a "temporary insider" if that person is given material inside
information about a company or the market for the company's securities on the
reasonable expectation that the recipient would maintain the information in
confidence and would not trade on it.
B. What is Material Information?
----------------------------
Trading, tipping, or recommending securities transactions while in
possession of inside information is not an actionable activity unless the
information is "material." Generally, information is considered material if: (i)
there is a substantial likelihood that a reasonable investor would consider it
important in making his or her investment decisions or (ii) it would
significantly
<PAGE>
alter the total mix of information made available. A pragmatic test is whether
the information is reasonably certain to have a substantial effect on the price
of a company's securities. Information that should be considered material
includes, but is not limited to, the following: dividend changes, earnings
estimates, changes in previously released earnings estimates, a joint venture,
the borrowing of significant funds, a major labor dispute, merger or acquisition
proposals or agreements, major litigation, liquidation problems, and
extraordinary management developments. For information to be considered material
it need not be so important that it would have changed an investor's decision to
purchase or sell particular securities; rather it is enough that it is the type
of information on which reasonable investors rely in making purchase or sale
decisions. The materiality of information relating to the possible occurrence of
any future event may depend on the likelihood that the event will occur and its
significance if it did occur.
C. What is Non-Public Information?
------------------------------
All information is considered non-public until it has been effectively
communicated to the marketplace. One must be able to point to some fact to show
that the information is generally public. For example, information found in a
report filed with the Securities and Exchange Commission, or appearing in Dow
Jones, Reuters Economic Services, The Wall Street Journal or other publications
of general circulation would be considered public. Information in bulletins and
research reports disseminated by brokerage firms are also generally considered
to be public information.
D. Penalties for Insider Trading
-----------------------------
Penalties for trading on or communicating material non-public information
are severe, both for individuals involved in such unlawful conduct and their
employers. A person can be subject to some or all of the penalties below even if
he or she did not personally benefit from the violation. Penalties include:
1. civil injunctions;
2. criminal penalties for individuals of up to $1,000,000 and for
"non-natural persons" of up to $2.5 million dollars plus, for
individuals, a maximum jail term of ten years;
3. private rights of actions for disgorgement of profits;
4. civil penalties for the person who committed the violation of up to
three times the profit gained or loss avoided, whether or not the
person actually benefited;
5. civil penalties for the employer or other controlling person of up to
the greater of $1,000,000 per violation or three times the amount of
the profit gained or loss avoided as a result of each violation; and
6. a permanent bar, pursuant to the SEC's administrative jurisdiction,
from association with any broker, dealer, investment company,
investment adviser, or municipal securities dealer.
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In addition, any violation of this Policy Statement can be expected to
result in serious sanctions by Westport, including dismissal of the persons
involved.
SECTION II. PROCEDURES TO IMPLEMENT WESTPORT'S POLICY STATEMENT
The following procedures have been established to aid Westport's Employees
in avoiding insider trading, and to aid Westport in preventing, detecting and
imposing sanctions against insider trading. Every Covered Person must follow
these procedures or risk serious sanctions, as described above. If you have any
questions about these procedures you should consult the Compliance Director.
A. Identifying Insider Information
-------------------------------
Before trading for yourself or others, including for any client accounts
managed by Westport, in the securities of a company about which you may have
potential insider information, or revealing such information to others or making
a recommendation based on such information, you should ask yourself the
following questions:
1. Is the information material? Is this information that an investor
would consider important in making a investment decision? Is this
information that would substantially affect the market price of the
securities if generally disclosed?
2. Is the information non-public? To whom has this information been
provided? Has the information been effectively communicated to the
marketplace by being published in The Wall Street Journal or other
publications of general circulation, or has it otherwise been made
available to the public?
If, after consideration of the above, you believe that the information is
material and non-public, or if you have questions as to whether the information
may be material and non-public, you should take the following steps:
1. Report the matter immediately to the Compliance Director. In
consulting with the Compliance Director, you should disclose all
information that you believe may bear on the issue of whether the
information you have is material and non-public.
2. Refrain from purchasing or selling securities with respect to such
information on behalf of yourself or others, including for client
accounts managed by Westport.
3. Refrain from communicating the information inside or outside Westport,
other than to the Compliance Director.
After the Compliance Director has reviewed the issue, you will be
instructed to continue the prohibitions against trading, tipping, or
communication, or you will be allowed to trade and communicate the information.
In appropriate circumstances, the Compliance Director will consult with counsel
as to the appropriate course to follow.
3
<PAGE>
B. Personal Securities Trading
---------------------------
All Covered Persons must adhere to Westport's Code of Ethics and Conduct
("Code") with respect to securities transactions effected for their own account
and accounts over which they have a direct or indirect beneficial interest.
Please refer to the Code as necessary.
C. Restricting Access to Material Non-Public Information
-----------------------------------------------------
Information in your possession that you identify, or which has been
identified to you as material and non-public, must not be communicated to
anyone, except as provided in paragraph II.A., above. In addition, you should
make certain that such information is secure. For example, files containing
material non-public information should be sealed and inaccessible and access to
computer files containing material non-public information should be restricted
by means of a password or other similar restriction.
D. Resolving Issues Concerning Insider Trading
-------------------------------------------
If, after consideration of the items set forth in paragraph II.A. above,
doubt remains as to whether information is material or non-public, or if there
is any unresolved question as to the applicability or interpretation of the
foregoing procedures, or as to the propriety of any action, please discuss such
matters with the Compliance Director before trading on or communicating the
information in question to anyone.
E. Supervisory Procedures
----------------------
Westport's Compliance Director is critical to the implementation and
maintenance of these Policy and Procedures against insider trading. The
supervisory procedures set forth below are designed to prevent insider trading.
1. Prevention of Insider Trading
-----------------------------
In addition to the prior written approval and monthly reporting procedures
specified in the Code concerning personal securities transactions, the following
measures have been implemented to prevent insider trading by Covered Persons:
a. Each Covered Person will be provided with a copy of the Insider
Trading Policy;
b. The Compliance Director will answer questions regarding the
Insider Trading Policy;
c. The Compliance Director will resolve issues of whether
information received by a Covered Person is material and
non-public;
d. The Compliance Director will review on a regular basis, and
update as necessary, the Insider Trading Policy;
4
<PAGE>
e. Whenever it has been determined that a Covered Person has
material non-public information, the Compliance Director will
implement measures to prevent dissemination of such information;
and
f. Upon the request of any Covered Person, the Compliance Director
will promptly review and either approve or disapprove a request
for clearance to trade in the subject securities.
2. Special Reports to Management
-----------------------------
Promptly upon learning of a potential violation of the Insider Trading
Policy, the Compliance Director will prepare a confidential written report to
the management of the effected Westport entity providing full details and
recommendations for further action.
3. Annual Reports to Management
----------------------------
On an annual basis, the Compliance Director will prepare a written report
to the management of each Westport entity setting forth:
a. full details of any investigation, either internal or by a
regulatory agency, of any suspected insider trading and the
results of such investigation; and
b. an evaluation of the current Insider Trading Policy and any
recommendations for improvement.
In response to such reports, management of each Westport entity will
determine whether any changes to the Insider Trading Policy may be appropriate.
5
<PAGE>
THE WESTPORT FUNDS
WESTPORT ADVISERS, LLC
WESTPORT ASSET MANAGEMENT, INC.
APPENDIX VII
POLICIES AND PROCEDURES
CONCERNING THE MISUSE OF MATERIAL
NON-PUBLIC INFORMATION
(THE "INSIDER TRADING POLICY")
ANNUAL CERTIFICATE OF COMPLIANCE
- -------------------------
Name (please print)
This is to certify that the I have read and sufficiently understand the Insider
Trading Policy distributed to me on __________, 20___. I certify that I have
complied with the Insider Trading Policy during the course of my association
with Westport and that I will continue to do so in the future. Moreover, I agree
to promptly report to the Compliance Director any violation or possible
violation of the Insider Trading Policy of which I become aware.
I understand that violation of the Insider Trading Policy will be grounds for
disciplinary action or dismissal and may also be a violation of federal and/or
state securities laws.
- -------------------------------------
Signature
- -------------------------------------
Date
<PAGE>
APPENDIX VIII
COMPLIANCE DIRECTOR
As of _____________, 2000, each of the Funds, WALLC, and WAMI has designated the
following person as Westport's Compliance Director:
Ronald H. Oliver
The Compliance Director may delegate his or her functions as he or she sees fit.
The Compliance Director may consult with outside counsel as appropriate.
Securities transactions of the Compliance Director may be pre-approved pursuant
to the procedure in Article VII of the Code by any principal of the appropriate
Westport entity.
AMENDED CODE OF ETHICS
COUNTRYWIDE FINANCIAL SERVICES, INC.
Adopted May 25, 1999
I. STATEMENT OF GENERAL PRINCIPLES
This Code of Ethics has been adopted by Countrywide Financial Services,
Inc., Countrywide Investments, Inc., Countrywide Fund Services, Inc. and CW
Fund Distributors, Inc. (collectively "Countrywide") for the purpose of
instructing all employees, officers and directors of Countrywide in their
ethical obligations and to provide rules for their personal securities
transactions. All employees, officers and directors owe a fiduciary duty to
the clients of Countrywide. A fiduciary duty means a duty of loyalty,
fairness and good faith towards clients, and the obligation to adhere not
only to the specific provisions of this Code but to the general principles
that guide the Code. These general principles are:
o The duty at all times to place the interests of clients first;
o The requirement that all personal securities transactions be
conducted in a manner consistent with the Code of Ethics and in
such a manner as to avoid any actual or potential conflict of
interest or any abuse of any individual's position of trust and
responsibility; and
o The fundamental standard that employees, officers and directors
should not take inappropriate advantage of
<PAGE>
their positions, or of their relationship with clients.
It is imperative that the personal trading activities of the employees,
officers and directors of Countrywide be conducted with the highest regard
for these general principles in order to avoid any possible conflict of
interest, any appearance of a conflict, or activities that could lead to
disciplinary action. This includes executing transactions through or for
the benefit of a third party when the transaction is not in keeping with
the general principles of this Code. All personal securities transactions
must also comply with our Insider Trading Policy and Procedures of
Countrywide Investments, Inc. and the Securities and Exchange Commission's
Rule 17j-1. Under this rule, no Employee may:
o employ any device, scheme or artifice to defraud any client of
Countrywide;
o make to any client of Countrywide any untrue statement of a
material fact or omit to state to such client a material fact
necessary in order to make the statements made, in light of the
circumstances under which they are made, not misleading;
o engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon any client of
Countrywide; or
-2-
<PAGE>
o engage in any manipulative practice with respect to any client of
Countrywide.
II. DEFINITIONS
A. ADVISORY CLIENTS: all Countrywide Funds and all privately managed
advisory accounts of Countrywide.
B. ADVISORY EMPLOYEES: Employees of Countrywide Investments, Inc. who
participate in or make recommendations with respect to the purchase or sale
of securities including fund portfolio managers and assistant fund
portfolio managers. The Compliance Officer will maintain a current list of
all Advisory Employees.
C. BENEFICIAL INTEREST: ownership or any benefits of ownership, including
the opportunity to directly or indirectly profit or otherwise obtain
financial benefits from any interest in a security.
D. COMPLIANCE OFFICER: Michele Hawkins or, in her absence, an alternate
Compliance Officer (Maryellen Peretzky, Robert Leshner or Susan Flischel),
or their respective successors in such positions.
E. EMPLOYEE ACCOUNT: each account in which an Employee or a member of his
or her family has any direct or indirect Beneficial Interest or over which
such person exercises control or influence, including, but not limited to,
any joint account, partnership, corporation, trust or estate. An Employee's
family members include the Employee's spouse, minor children, any
-3-
<PAGE>
person living in the home of the Employee, and any relative of the Employee
(including in-laws) to whose support an Employee directly or indirectly
contributes.
F. EMPLOYEES: the employees, officers, and directors of Countrywide,
including Advisory Employees. The Compliance Officer will maintain a
current list of all Employees.
G. EXEMPT TRANSACTIONS: transactions which are 1) effected in an amount or
in a manner over which the Employee has no direct or indirect influence or
control, 2) pursuant to a systematic dividend reinvestment plan, systematic
cash purchase plan or systematic withdrawal plan, 3) in connection with the
exercise or sale of rights to purchase additional securities from an issuer
and granted by such issuer pro-rata to all holders of a class of its
securities, 4) in connection with the call by the issuer of a preferred
stock or bond, 5) pursuant to the exercise by a second party of a put or
call option, 6) closing transactions no more than five business days prior
to the expiration of a related put or call option, or 7) with respect to
any affiliated or unaffiliated registered open-end investment company.
H. COUNTRYWIDE FUNDS: any series of Countrywide Investment Trust,
Countrywide Strategic Trust or Countrywide Tax-Free Trust.
I. RECOMMENDED LIST: the list of those Securities which
-4-
<PAGE>
Countrywide currently is recommending to Advisory Clients for purchase or
sale.
J. RELATED SECURITIES: securities issued by the same issuer or issuer under
common control, or when either security gives the holder any contractual
rights with respect to the other security, including options, warrants or
other convertible securities.
K. SECURITIES: any note, stock, treasury stock, bond, debenture, evidence
of indebtedness, certificate of interest or participation in any
profit-sharing agreement, collateral-trust certificate, pre-organization
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas or other mineral rights, or, in general, any
interest or instrument commonly known as a "security," or any certificate
or interest or participation in temporary or interim certificate for,
receipt for, guarantee of, or warrant or right to subscribe to or purchase
(including options) any of the foregoing; except for the following: 1)
securities issued by the government of the United States, 2) bankers'
acceptances, 3) bank certificates of deposit, 4) commercial paper, 5) debt
securities, provided that (a) the security has a credit rating of Aa or Aaa
from Moody's Investor Services, AA or AAA from Standard & Poor's Ratings
Group, or an
-5-
<PAGE>
equivalent rating from another rating service, or is unrated but comparably
creditworthy, (b) the security matures within twelve months of purchase,
(c) the market is very broad so that a large volume of transactions on a
given day will have relatively little effect on yields, and (d) the market
for the instrument features highly efficient machinery permitting quick and
convenient trading in virtually any volume, and 6) shares of registered
open-end investment companies.
L. SECURITIES TRANSACTION: the purchase or sale, or any action to
accomplish the purchase or sale, of a Security for an Employee Account.
III. PERSONAL INVESTMENT GUIDELINES
A. Personal Accounts and Pre-Clearance
1. Employees must conduct all securities transactions for Employee
Accounts through a Countrywide account, unless the Employee gives
prior written notice to the Compliance Officer of an account with
another brokerage firm for transactions in registered, open-end
investment company shares only. If such notice is given, the
Employee may, subject to this Code, conduct registered, open-end
investment company transactions through that brokerage firm.
2. Employees must obtain prior written permission from the
Compliance Officer to open or maintain a margin
-6-
<PAGE>
account, or a joint or partnership account with persons other
than the Employee's spouse, parent, or child (including custodial
accounts).
3. No Employee may execute a Securities Transaction without first
obtaining Pre-Clearance from the Compliance Officer. Prior to
execution the Employee must submit the Pre-Clearance form to the
Compliance Officer, or in the case of a Pre-Clearance request by
the Compliance Officer, to the alternate Compliance Officer. An
Employee may not submit a Pre-Clearance request if, to the
Employee's knowledge at the time of the request, the same
Security or a Related Security is being actively considered for
purchase or sale, or is being purchased or sold, by an Advisory
Client.
4. Advisory Employees may not execute a Securities Transaction while
at the same time recommending contrary action to clients.
5. Settlement of Securities Transactions must be made on or before
settlement date. Extensions and pre-payments are not permitted.
6. The Personal Investment Guidelines in this section III do not
apply to Exempt Transactions. Employees must remember that
regardless of the transaction's status as exempt or not exempt,
the Employee's fiduciary
-7-
<PAGE>
obligations remain unchanged.
7. Directors of Countrywide who (i) are not directly employed by
Countrywide and (ii) do not in the ordinary course of fulfilling
the duties of that position participate in or make
recommendations with respect to the purchase or sale of
Securities by Advisory Clients, are subject at all times to the
fiduciary obligations described in this Code; provided, however,
that the Personal Investment Guidelines and Compliance Procedures
in Section III and IV of this Code apply to such directors only
if the director knew or, in the ordinary course of fulfilling the
duties of that position, should have known, that during the
fifteen days immediately preceding or after the date of the
director's transaction that the same Security or a Related
Security was or was to be purchased or sold by an Advisory Client
or that such purchase or sale for an Advisory Client was being
considered, in which case such Sections apply only to such
transaction.
B. Limitations on Pre-Clearance
1. After receiving a Pre-Clearance request, the Compliance Officer
will promptly review the request and will deny the request if the
Securities
-8-
<PAGE>
Transaction will violate this Code.
2. Employees may not execute a Securities Transaction on a day
during which a purchase or sell order in that same Security or a
Related Security is pending for, or is being actively considered
on behalf of, an Advisory Client. In order to determine whether a
Security is being actively considered on behalf of an Advisory
Client, the Compliance Officer will consult the current
Recommended List and, in the case of non-equity Securities,
consult each Advisory Employee responsible for investing in
non-equity Securities for any Advisory Client. Securities
Transactions executed in violation of this prohibition shall be
unwound or, if not possible or practical, the Employee must
disgorge to the appropriate Countrywide Fund, as determined by
the Compliance Officer (or, if disgorgement to a Countrywide Fund
is inappropriate, to a charity chosen by the Compliance Officer),
the value received by the Employee due to any favorable price
differential received by the Employee. For example, if the
Employee buys 100 shares at $10 per share, and a Countrywide Fund
buys 1000 shares at $11 per share, the Employee would pay $100
(100 shares x $1 differential) to the Countrywide Fund.
-9-
<PAGE>
3. An Advisory Employee may not execute a Securities Transaction
within seven (7) calendar days after a transaction in the same
Security or a Related Security has been executed on behalf of a
Countrywide Fund unless the Countrywide Fund's entire position in
the Security has been sold prior to the Advisory Employee's
Securities Transaction and the Advisory Employee is also selling
the Security. If the Compliance Officer determines that a
transaction has violated this prohibition, the transaction shall
be unwound or, if not possible or practical, the Advisory
Employee must disgorge to the appropriate Countrywide Fund or
Funds the value received by the Advisory Employee due to any
favorable price differential received by the Advisory Employee.
4. Pre-Clearance requests involving a Securities Transaction by an
Employee within fifteen calendar days after any Advisory Client
has traded in the same Security or a Related Security will be
evaluated by the Compliance Officer to ensure that the proposed
transaction by the Employee is consistent with this Code and that
all contemplated Advisory Client activity in the Security has
been completed. It is wholly within the Compliance Officer's
discretion to
-10-
<PAGE>
determine when Pre-Clearance will or will not be given to an
Employee if the proposed transaction falls within the fifteen day
period.
5. Pre-Clearance procedures apply to any Securities Transactions in
a private placement. In connection with a private placement
acquisition, the Compliance Officer will take into account, among
other factors, whether the investment opportunity should be
reserved for Advisory Clients, and whether the opportunity is
being offered to the Employee by virtue of the Employee's
position with Countrywide. Employees who have been authorized to
acquire securities in a private placement will, in connection
therewith, be required to disclose that investment if and when
the Employee takes part in any subsequent investment in the same
issuer. In such circumstances, the determination by an Advisory
Client to purchase Securities of that issuer will be subject to
an independent review by personnel of the Countrywide with no
personal interest in the issuer.
6. Employees are prohibited from acquiring any Securities in an
initial public offering. This restriction is imposed in order to
preclude any possibility of an Employee profiting improperly from
the Employee's
-11-
<PAGE>
position with Countrywide, and applies only to the Securities
offered for sale by the issuer, either directly or through an
underwriter, and not to Securities purchased on a securities
exchange or in connection with a secondary distribution.
7. Employees are prohibited from acquiring low priced equity
securities (or "penny stock"), defined as those equity securities
trading below $5 per share.
C. Other Restrictions
1. If a Securities Transaction is executed on behalf of a
Countrywide Fund within seven (7) calendar days after an Advisory
Employee executed a transaction in the same Security or a Related
Security, the Compliance Officer will review the Advisory
Employee's and the Countrywide Fund's transactions to determine
whether the Advisory Employee did not meet his or her fiduciary
duties to Advisory Clients in violation of this Code. If the
Compliance Officer determines that the Advisory Employee's
transaction violated this Code, the transaction shall be unwound
or, if not possible or practical, the Advisory Employee must
disgorge to the appropriate Countrywide Fund or Funds the value
received by the Advisory Employee due to any favorable price
differential received by the Advisory Employee.
-12-
<PAGE>
2. Employees are prohibited from serving on the boards of directors
of publicly traded companies, absent prior authorization in
accord with the general procedures of this Code. The
consideration of prior authorization will be based upon a
determination that the board service will be consistent with the
interests of Advisory Clients. In the event that board service is
authorized, Employees serving as directors will be isolated from
other Employees making investment decisions with respect to the
securities of the company in question.
3. No Employee may accept from a customer or vendor an amount in
excess of $100 per year in the form of gifts or gratuities, or as
compensation for services. If there is a question regarding
receipt of a gift, gratuity or compensation, it is to be reviewed
by the Compliance Officer.
IV. COMPLIANCE PROCEDURES
A. Employee Disclosure and Certification
1. At the commencement of employment with Countrywide, each Employee
must certify that he or she has read and understands this Code
and recognizes that he or she is subject to it, and must disclose
all personal Securities holdings.
-13-
<PAGE>
2. The above disclosure and certification is also required annually,
along with an additional certification that the Employee has
complied with the requirements of this Code and has disclosed or
reported all personal Securities Transactions required to be
disclosed or reported pursuant to the requirements of this Code.
B. Pre-Clearance
1. Advisory Employees will maintain an accurate and current
Recommended List at all times, updating the list as necessary.
The Advisory Employees will submit all Recommended Lists to the
Compliance Officer as they are generated, and the Compliance
Officer will retain the Recommended Lists for use when reviewing
Employee compliance with this Code. Upon receiving a
Pre-Clearance request, the Compliance Officer will contact the
trading desk and all Advisory Employees to determine whether the
Security the Employee intends to purchase or sell is or was owned
within the past fifteen (15) days by an Advisory Client, and
whether there are any pending purchase or sell orders for the
Security. The Compliance Officer will determine whether the
Employee's request violates any
-14-
<PAGE>
prohibitions or restrictions set out in this Code.
2. If authorized, the Pre-Clearance is valid for orders placed by
the close of business on the second trading day after the
authorization is granted. If during the two day period the
Employee becomes aware that the trade does not comply with this
Code or that the statements made on the request form are no
longer true, the Employee must immediately notify the Compliance
Officer of that information and the Pre-Clearance may be
terminated. If during the two day period the trading desk is
notified that a purchase or sell order for the same Security or
Related Security is pending, or is being considered on behalf of
an Advisory Client, the trading desk will not execute the
Employee Transaction and will notify the Employee and the
Compliance Officer that the Pre-Clearance is terminated.
C. Compliance
1. All Employees must direct their broker, dealer or bank to send
duplicate copies of all confirmations and periodic account
statements directly to the Compliance Officer. Each Employee must
report, no later than ten (10) days after the close of each
calendar quarter, on the Securities Transaction Report form
provided by
-15-
<PAGE>
Countrywide, all transactions in which the Employee acquired any
direct or indirect Beneficial Interest in a Security and certify
that he or she has reported all transactions required to be
disclosed pursuant to the requirements of this Code.
2. The Compliance Officer will spot check the trading confirmations
provided by brokers to verify that the Employee obtained any
necessary Pre-Clearance for the transaction. On a quarterly basis
the Compliance Officer will compare all confirmations with the
Pre-Clearance records, to determine, among other things, whether
any Advisory Client owned the Securities at the time of the
transaction or purchased or sold the security within fifteen (15)
days of the transaction. The Employee's annual disclosure of
Securities holdings will be reviewed by the Compliance Officer
for compliance with this Code, including transactions that reveal
a pattern of trading inconsistent with this Code.
3. If an Employee violates this Code, the Compliance Officer will
report the violation to the management personnel of Countrywide
for appropriate remedial action which, in addition to the actions
specifically delineated in other sections of this Code, may
include a reprimand of the Employee, or suspension or
-16-
<PAGE>
termination of the Employee's relationship with Countrywide.
4. The management personnel of Countrywide will prepare an annual
report to the board of directors of Countrywide that summarizes
existing procedures and any changes in the procedures made during
the past year. The report will identify any violations of this
Code, any significant remedial action during the past year and
any instances when a Securities Transaction was executed on
behalf of a Countrywide Fund within seven (7) calendar days after
an Advisory Employee executed a transaction but no remedial
action was taken. The report will also identify any recommended
procedural or substantive changes to this Code based on
management's experience under this Code, evolving industry
practices, or legal developments.
-17-
<PAGE>
EMPLOYEE ACKNOWLEDGMENT FORM
I hereby acknowledge that I have received, read and understand the Code of
Ethics of Countrywide Investments, Inc. and confirm that I agree to abide by it.
Employee Name (please print):
Signature: Date:
-------------------------------------
Comments:
-18-
<PAGE>
PRE-CLEARANCE OF SECURITY TRANSACTION
To: Michele Hawkins, Compliance Officer
From: __________________________________________
(Name of Employee)
Date: __________________________________
1. I hereby seek approval for the |_| purchase/|_| sale of _________
shares or $__________ par value of for the cash or margin account of
_____________________.
2. The price per share or contract is approximately
$_________________.
3. The transaction |_| is/|_| is not in connection with a private
placement.
4. Said transaction was recommended to me by
__________________________________.
I have no knowledge of any Fund of Countrywide Investments or other account
managed by Countrywide Investments actively considering the purchase or sale of
this Security.
I have read the Countrywide Code of Ethics within the past year and
recognize that I am subject to it.
After inquiry, I am satisfied that this transaction is consistent with the
Code of Ethics and the Countrywide Investments, Inc.'s Insider Trading Policy.
If I become aware that the trade does not comply with this Code or that the
statements made on the request are no longer true, I will immediately notify the
Compliance Officer.
--------------------------------------
Signature of Employee
APPROVED: ______________________________ DATE: ______________________
TRANSACTION COMPLETED: Date ______ No. of Shares _________ Price
TRANSACTION UNFILLED: ____________________
-19-
<PAGE>
COMMENTS/FOLLOW UP:
- ------------------
(This authorization is valid until close of business on the second trading
day following authorization.
-20-
<PAGE>
------- Quarter 1999
Countrywide Funds
*Includes: Countrywide Investments, Inc., Countrywide Fund Services, Inc. and
Countrywide Financial Services, Inc.
QUARTERLY SECURITIES TRANSACTIONS REPORT FOR EMPLOYEES,
OFFICERS AND INTERESTED TRUSTEES
All employees, officers, and interested Trustees are required to report ALL
securities transactions in accounts over which they have direct or indirect
control or influence. Transactions in direct obligations of the United States
Treasury and transactions in shares of any mutual funds are exempt and need not
be reported. Each non-exempt transaction MUST be listed. DO NOT ATTACH BROKERAGE
REPORTS. If no transactions occurred during the reporting period, please check
NONE, sign and date the report. The report must be returned to the Legal
Department before the 10th day of the month following the end of the quarter.
|_| I have executed no Securities Transactions (other than those specifically
exempted by the Code) during the quarter.
|_| The following is a complete list of my Securities Transactions:
<TABLE>
<CAPTION>
===================================================================================================
# of Shares
or
Purchase, Principal
Transaction Sale, Amount Executing
Security Date or Other of Security Price Broker
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
===================================================================================================
</TABLE>
I certify that I have read and understand the Code of Ethics and that I
have complied with the requirements of the Code of Ethics, including disclosure
of all Securities Transactions that require disclosure.
Printed Name: ____________________________ Signature:_________________
Date: ____________________
THIS REPORT SHALL NOT BE CONSTRUED AS AN ADMISSION THAT THE REPORTING PERSON HAS
ANY DIRECT OR INDIRECT BENEFICIAL OWNERSHIP IN ANY SECURITY TO WHICH THIS REPORT
RELATES.
8686 5/28/99
