October 5, 2000
SHEPHERD STREET EQUITY FUND
SUPPLEMENT TO PROSPECTUS
The Prospectus, dated February 1, 2000, of the Shepherd Street Equity Fund
(the "Fund") is hereby amended to reflect the following new information:
New Transfer Agent
------------------
The Fund has appointed Ultimus Fund Solutions, LLC as the new transfer agent and
shareholder servicing agent of the Fund.
Address and Phone Number of Fund
--------------------------------
Inquiries concerning the Fund, shareholder accounts, and purchases or
redemptions of shares in the Fund should now be addressed to:
The Shepherd Street Funds
c/o Ultimus Fund Solutions
P.O. Box 46707
Cincinnati, Ohio 45246-9453
1-888-575-4800
For persons desiring to invest in the Fund by bank wire, your bank should now
use the following wire instructions:
Firstar Bank
Cincinnati, Ohio
ABA # 042000013
For Shepherd Street Equity Fund
Acct. # 199456567
For further credit to [SHAREHOLDER'S NAME AND ACCT.#]
For further information concerning purchases or redemptions of Fund shares, see
"Investing in the Fund" and "How to Sell (Redeem) Your Shares" in the
Prospectus.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Dated February 1, 2000
Revised October 5, 2000
THE SHEPHERD STREET FUNDS, INC.
480 Shepherd Street
Winston-Salem, North Carolina 27103
1-888-575-4800
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of The Shepherd Street Equity Fund (the
"Fund") dated February 1, 2000. You may obtain a copy of the Prospectus, free of
charge, by writing to The Shepherd Street Funds, Inc., c/o Ultimus Fund
Solutions, LLC, 135 Merchant Street, Suite 230, Cincinnati, Ohio 45246, or by
calling 1-888-575-4800.
TABLE OF CONTENTS
Management of the Fund .................................................... 2
Investment Policies and Restrictions ...................................... 2
Investment Adviser ........................................................ 7
Directors and Officers .................................................... 8
Performance Information ................................................... 11
Purchasing and Redeeming Shares ........................................... 11
Tax Information ........................................................... 12
Portfolio Transactions .................................................... 14
Custodian ................................................................. 14
Transfer Agent ............................................................ 15
Principal Underwriter ..................................................... 15
Independent Accountants ................................................... 16
Legal Counsel ............................................................. 16
Distribution Plan ......................................................... 16
Financial Statements ...................................................... 17
<PAGE>
MANAGEMENT OF THE FUND
The Shepherd Street Funds, Inc. (the "Company"), an open-end, diversified
management investment company, was incorporated in Maryland on July 16, 1998.
The affairs of the Company are managed by a Board of Directors, which approves
all significant agreements between the Company and the persons and companies
that furnish services to the Fund, including agreements with the Fund's
custodian, transfer agent, investment adviser and administrator. All such
agreements are subject to limitations imposed by state and/or federal securities
laws, and to the extent that any such contract may contradict such statutes, the
contract would be unenforceable. The day-to-day operations of the Fund are
delegated to the Adviser.
The Company's Articles of Incorporation permit the Board of Directors to issue
500,000,000 shares of common stock. The Board of Directors has the power to
designate one or more classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to such series.
Currently, the shares of the Fund are the only class of shares being offered by
the Company. Shareholders are entitled: (i) to one vote per full share; (ii) to
such distributions as may be declared by the Company's Board of Directors out of
funds legally available; and (iii) upon liquidation, to participate ratably in
the assets available for distribution. There are no conversion or sinking fund
provisions applicable to the shares, and the holders have no preemptive rights
and may not cumulate their votes in the election of directors. The shares are
redeemable and are fully transferable. All shares issued and sold by the Fund
will be fully paid and nonassessable.
INVESTMENT POLICIES AND RESTRICTIONS
The Fund's investment objectives and the manner in which the Fund pursues its
investment objectives are generally discussed in the Prospectus. This Section
provides additional information concerning the Fund's investments and its
investment restrictions.
The Fund is a diversified Fund, meaning that as to 75% of the Fund's assets
(valued at the time of investment), the Fund will not invest more than 5% of its
assets in securities of any one issuer, except in obligations of the United
States Government and its agencies and instrumentalities, thereby reducing the
risk of loss. The Fund normally will invest at least 65% of total assets in
common stock and securities convertible into common stock. The Fund may also
invest in a variety of other securities. The complete list of securities in
which the Fund may ordinarily invest is listed in the Prospectus, along with any
restrictions on such investments, and, where necessary, a brief discussion of
any risks unique to the particular security.
COMMON STOCKS. The Fund will ordinarily invest at least 65% of its total assets
in common stock or securities convertible into common stock. The market value of
common stock can fluctuate significantly, reflecting the business performance of
the issuing company, investor perceptions and general economic or financial
market movements. Smaller companies are especially sensitive to these factors.
Despite the risk of price volatility, however, common stocks historically have
offered the greatest potential for gain on investment, compared to other classes
of financial assets.
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FOREIGN SECURITIES. The Fund may invest up to 25% of its assets in common stock
of foreign issuers which are publicly traded on U.S. exchanges, either directly
or in the form of American Depository Receipts (ADRs). The Fund will only invest
in ADRs that are issuer sponsored. Sponsored ADRs typically are issued by a U.S.
bank or trust company and evidence ownership of underlying securities issued by
a foreign corporation.
PREFERRED STOCK. The Fund may invest, without limitation, in preferred stock.
Preferred stock generally pays dividends at a specified rate and generally has
preference over common stock in the payments of dividends and the liquidation of
the issuer's assets. Dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Accordingly, Shareholders may
suffer a loss of value if dividends are not paid. The market prices of preferred
stocks are also sensitive to changes in interest rates and in the issuer's
creditworthiness. Accordingly, shareholders may experience a loss of value due
to adverse interest rate movements or a decline in the issuer's credit rating.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real estate investment
trusts (REITs). Equity REITs invest directly in real property while mortgage
REITs invest in mortgages on real property. REITs may be subject to certain
risks associated with the direct ownership of real estate, including declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, and variations in rental income. REITs pay dividends to
their shareholders based upon available funds from operations. It is quite
common for these dividends to exceed the REITs taxable earnings and profits
resulting in the excess portion of such dividends being designated as a return
of capital. The Fund intends to include the gross dividends from such REITs in
its distribution to its shareholders and, accordingly, a portion of the Fund's
distributions may also be designated as a return of capital. The Fund will not
invest more than 10% of its assets in REITS.
OPTIONS ON EQUITIES. Although the Fund will not normally do so, the Fund may
occasionally invest in options contracts to decrease its exposure to the effects
of changes in security prices, to hedge securities held, to maintain cash
reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns when an options contract
is priced more attractively than the underlying security or index.
The Fund may write (i.e., sell) covered call options, and may purchase put and
call options, on equity securities traded on a United States exchange or
properly regulated over-the-counter market. The Fund may also enter into such
transactions on Indexes. Options contracts can include long-term options with
durations of up to three years.
The Fund may enter into these transactions so long as the value of the
underlying securities on which options contracts may be written at any one time
does not exceed 100% of the net assets of the Fund, and so long as the initial
margin required to enter into such contracts does not exceed five percent (5%)
of the Fund's total net assets. When writing covered call options, to minimize
the risks of entering into these transactions, the Fund will maintain a
segregated account with its Custodian consisting of the underlying securities
upon which the option was written, cash, cash equivalents, U.S. Government
Securities or other high-grade liquid debt securities, denominated in U.S.
dollars or non-U.S. currencies, in an amount equal to the aggregate fair market
value of its
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commitments to such transactions.
RISK FACTORS. The primary risks associated with the use of options are; (1)
imperfect correlation between a change in the value of the underlying security
or index and a change in the price of the option or futures contract, and (2)
the possible lack of a liquid secondary market for an options or futures
contract and the resulting inability of the Fund to close out the position prior
to the maturity date. Investing only in those contracts whose price fluctuations
are expected to resemble those of the Fund's underlying securities will minimize
the risk of imperfect correlation. Entering into such transactions only on
national exchanges and over-the-counter markets with an active and liquid
secondary market will minimize the risk that the Fund will be unable to close
out a position.
DEBT SECURITIES. The Fund may invest in corporate or U.S. Government debt
securities including zero coupon bonds. Corporate debt securities may be
convertible into preferred or common stock. In selecting corporate debt
securities for the Fund, the Adviser reviews and monitors the creditworthiness
of each issuer and issue. U.S. Government securities include direct obligations
of the U.S. Government and obligations issued by U.S. Government agencies and
instrumentalities. The market value of such securities fluctuates in response to
interest rates and the creditworthiness of the issuer. In the case of securities
backed by the full faith and credit of the United States Government,
shareholders are only exposed to interest rate risk.
Zero coupon bonds do not provide for cash interest payments but instead are
issued at a discount from face value. Each year, a holder of such bonds must
accrue a portion of the discount as income. Because issuers of zero coupon bonds
do not make periodic interest payments, their prices tend to be more volatile
than other types of debt securities when market interest rates change.
MONEY MARKET FUNDS. The Fund may invest in securities issued by other registered
investment companies that invest in short-term debt securities (i.e., money
market fund). As a shareholder of another registered investment company, the
Fund would bear its pro rata portion of that company's advisory fees and other
expenses. Such fees and expenses will be borne indirectly by the Fund's
shareholders. The Fund may invest in such instruments to the extent that such
investments do not exceed 10% of the Fund's net assets and/or 3% of any
investment company's outstanding securities.
REPURCHASE AGREEMENTS. The Fund may invest a portion of its assets in repurchase
agreements ("Repos") with broker-dealers, banks and other financial
institutions, provided that the Fund's custodian always has possession of the
securities serving as collateral for the Repos or has proper evidence of book
entry receipt of said securities. In a Repo, the Fund purchases securities
subject to the seller's simultaneous agreement to repurchase those securities
from the Fund at a specified time (usually one day) and price. The repurchase
price reflects an agreed-upon interest rate during the time of investment. All
Repos entered into by the Fund must be collateralized by U.S. Government
Securities, the market values of which equal or exceed 102% of the principal
amount of the money invested by the Fund. If an institution with whom the Fund
has entered into a Repo enters insolvency proceedings, the resulting delay, if
any, in the Fund's ability to liquidate the securities serving as collateral
could cause the Fund some loss if the securities declined in value prior to
liquidation. To minimize the risk of such loss, the Fund will enter into Repos
only with institutions and dealers considered creditworthy.
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CASH RESERVES. The Fund may hold up to 100% of its net assets in cash to
maintain liquidity and for temporary defensive purposes.
The Fund may take a temporary defensive position when, in the Adviser's opinion,
market conditions are such that investing according to the Fund's normal
investment objectives would place the Fund in imminent risk of loss. In such an
event, the Adviser could temporarily convert some or all of the Fund's
investments to cash. Such actions are subject to the supervision of the Board of
Directors. You should be aware that any time the Fund is assuming a temporary
defensive position, the Fund will not be invested according to its investment
objectives, and its performance will vary, perhaps significantly, from its norm.
RESTRICTED AND ILLIQUID SECURITIES. The Fund will not invest more than 15% of
its net assets in securities that the Adviser determines, under the supervision
of the Board of Directors, to be illiquid and/or restricted. Illiquid securities
are securities that may be difficult to sell promptly at an acceptable price
because of lack of available market and other factors. The sale of some illiquid
and other types of securities may be subject to legal restrictions. Because
illiquid and restricted securities may present a greater risk of loss than other
types of securities, the Fund will not invest in such securities in excess of
the limits set forth above.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS. The Fund may purchase securities
on a when-issued basis, and it may purchase or sell securities for
delayed-delivery. These transactions occur when securities are purchased or sold
by the Fund with payment and delivery taking place at some future date. The Fund
may enter into such transactions when, in the Adviser's opinion, doing so may
secure an advantageous yield and/or price to the Fund that might otherwise be
unavailable. The Fund has not established any limit on the percentage of assets
it may commit to such transactions, but to minimize the risks of entering into
these transactions, the Fund will maintain a segregated account with its
Custodian consisting of cash, cash equivalents, U.S. Government Securities or
other high-grade liquid debt securities, denominated in U.S. dollars or non-U.S.
currencies, in an amount equal to the aggregate fair market value of its
commitments to such transactions.
PORTFOLIO TURNOVER. The Fund's portfolio turnover for its first fiscal year
ending on September 30, 1999 was 28.10%. Higher portfolio turnover rates may
result in higher rates of net realized capital gains to the Fund, thus the
portion of the Fund's distributions constituting taxable gains may increase. In
addition, higher portfolio turnover activity can result in higher brokerage
costs to the Fund. The Fund anticipates that its annual portfolio turnover will
be not greater than 50%.
The complete list of the Fund's investment restrictions is as follows:
The Fund will not:
1. To the extent of 75% of its assets (valued at time of investment), invest
more than 5% of its assets in securities of any one issuer, except in
obligations of the United States Government and its agencies and
instrumentalities;
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2. Acquire securities of any one issuer that at the time of investment (a)
represent more than 10% of the voting securities of the issuer or (b) have a
value greater than 10% of the value of the outstanding securities of the issuer;
3. Invest more than 25% of its assets (valued at time of investment) in
securities of companies in any one industry;
4. Borrow money, except from banks for temporary or emergency purposes in
amounts not exceeding 5% of the value of the Fund's assets at the time of
borrowing;
5. Underwrite the distribution of securities of other issuers, or acquire
"restricted" securities that, in the event of a resale, might be required to be
registered under the Securities Act of 1933;
6. Make margin purchases or short sales of securities;
7. Invest in companies for the purpose of management or the exercise of
control;
8. Lend money (but this restriction shall not prevent the Fund from investing
in debt securities or repurchase agreements, or lend its portfolio securities);
9. Acquire or retain any security issued by a company, an officer or director
of which is an officer or director of the Company or an officer, director or
other affiliated person of the Adviser;
10. Invest in oil, gas or other mineral exploration or development programs,
although it may invest in marketable securities of companies engaged in oil, gas
or mineral exploration;
11. Purchase or sell real estate or real estate loans or real estate limited
partnerships, although it may invest in marketable securities of companies that
invest in real estate or interests in real estate;
12. Purchase warrants on securities;
13. Issue senior securities;or
14. Invest in commodities, or invest in futures or options on commodities.
Restrictions 1 through 14 listed above are fundamental policies, and may be
changed only with the approval of a "majority of the outstanding voting
securities" of the Fund as defined in the Investment Company Act of 1940 (the
"1940 Act").
The Fund has also adopted the following restrictions that may be changed by the
Board of Directors without shareholder approval:
The Fund may not:
a. Invest more than 25% of its assets (valued at time of investment) in
securities of issuers with less than three years' operation (including
predecessors);
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b. Invest more than 15% of its net assets in securities that are not readily
marketable;
c. Acquire securities of other investment companies except (a) by purchase in
the open market, where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission and
(b) where acquisition results from a dividend or merger, consolidation or
other reorganization.
d. purchase more than 3% of the voting securities of any one investment
company nor invest more than 10% of the Funds assets (valued at time of
investment) in all investment company securities purchased by the Fund;
e. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 5% of its total
assets at cost; or
f. Invest more than 10% of the Fund's assets (valued at time of investment) in
initial margin deposits of options or futures contracts.
INVESTMENT ADVISER
Information on the Fund's investment adviser, Salem Investment Counselors, Inc.,
is set forth in the Prospectus. This Section contains additional information
concerning the Adviser.
Salem Investment Counselors, Inc. (the "Adviser") was organized under the laws
of the State of North Carolina in 1979. The Adviser registered as an investment
adviser with the Securities and Exchange Commission in April 1979. The Adviser
is one of the largest private financial counseling firms in North Carolina,
providing financial management services to individuals, corporations, and
professional organizations in North Carolina and throughout the United States.
The Adviser manages the investment portfolio and the general business affairs of
the Fund pursuant to an investment services agreement with the Fund dated
September 30, 1998 (the "Agreement"). Messrs. David B. Rea, Robert T. Beach, and
William R. Watson are officers of the Adviser and Directors of the Company.
Accordingly, each of those persons is considered an "affiliated person", as that
term is defined in the Investment Company Act of 1940, as amended (the 1940
Act). Mr. David B. Rea is portfolio manager for the Fund.
Investment Advisory Agreement
-----------------------------
The Company has entered into an Investment Advisory Agreement with the Adviser.
Under the terms of the Advisory Agreement, the Adviser manages the investment
operations of the Fund in accordance with the Fund's investment policies and
restrictions. The Adviser furnishes an investment program for the Fund,
determines what investments should be purchased, sold and held, and makes
changes on behalf of the Company in the investments of the Fund. At all times
the Adviser's actions on behalf of the Fund are subject to the overall
supervision and review of the Board of Directors of the Company.
The Advisory Agreement provides that the Adviser shall not be liable for any
loss suffered by the Fund or its shareholders as a consequence of any act or
omission in connection with services under the Advisory Agreement, except by
reason of the Adviser's willful misfeasance, bad faith, gross negligence, or
reckless disregard of its obligations and duties under the Advisory Agreement.
The Advisory Agreement has a term of two years, but may be continued from year
to year so long as its continuance is approved at least annually:
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(a) by the vote of a majority of the Directors of the Fund who are not
"interested persons" of the Fund or the adviser cast in person at a meeting
called for the purpose of voting on such approval, and
(b) by the Board of Directors as a whole or by the vote of a majority (as
defined in the 1940 Act) of the outstanding shares of the Fund.
The Advisory Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
Operating Services Agreement
----------------------------
The Company has also entered into an Operating Services Agreement with the
Adviser. Under the terms of the Operating Services Agreement, the Adviser
provides, OR ARRANGES TO PROVIDE, day-to-day operational services to the Fund
including, but not limited to;
1. accounting 6. custodial
2. administrative 7. fund share distribution
3. legal (except litigation) 8. shareholder reporting
4. dividend disbursing and transfer agent 9. sub-accounting, and
5. registrar 10. record keeping services
For its services to the Fund under the Operating Services Agreement, the Fund
pays to the Adviser on the last day of each month, a fee equal to 0.60% of
average daily net assets of the Fund.
Under the Operating Services Agreement, the Adviser may, with the Company's
permission, employ third parties to assist it in performing the various services
required of the Fund. The Adviser is responsible for compensating such parties.
The Adviser has entered into agreements with Ultimus Fund Solutions, LLC to
provide transfer agent and essentially all administrative services for the Fund.
The Adviser has also entered into a Distribution Agreement with the Fund and
Ultimus Fund Distributors, LLC wherein Ultimus Fund Distributors acts as
principal underwriter for the Fund's shares.
The effect of the Investment Advisory Agreement and the Operating Services
Agreement is to place a "cap" on the Fund's normal operating expenses at 1.00%.
The only other expenses incurred by the Fund are distribution (12b-1) fees,
brokerage fees, taxes, if any, legal fees relating to Fund litigation, and other
extraordinary expenses.
DIRECTORS AND OFFICERS
The Board of Directors has overall responsibility for conduct of the Company's
affairs. The day-to-day operations of the Fund are managed by the Adviser,
subject to the bylaws of the Company and review by the Board of Directors. The
directors of the Company, including those directors who are also officers, are
listed below. The business address of each director is 480 Shepherd Street,
Winston-Salem, North Carolina 27103.
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<TABLE>
<CAPTION>
Position Principal Occupation for
Name, Age with Fund the Last Five Years
-------------------------------------------------------------------------------------------
<S> <C> <C>
David B. Rea*; President and President of Salem Investment Counselors
(Age 43) Director Inc. Registered Investment Adviser,
Chartered Financial Analyst (1987). MBA
degree, Indiana University (1981). Juris
Doctorate degree, Wake Forest University
School of Law, (1979), Certified Public
Accountant (1982).
Robert T. Beach* Director Investment Counselor with Salem
(Age 52) Investment Counselors since 1985.
Undergraduate degree, Dartmouth College.
MBA degree, Stanford Graduate School of
Business. Juris Doctorate degree,
Stanford Law School. Chartered Financial
Analyst (1988).
William R. Watson*, Director Investment Counselor with Salem
(Age 58) Investment Counselors since 1982.
Undergraduate degree, North Carolina
State University, 1963. MBA Degree,
University of North Carolina, 1976.
Chartered Financial Analyst (1975).
James T. Broyhill, Director Retired. Former Secretary of North
(Age 71) Carolina Dept. of Economic & Community
Development, 1989-91. United States
Senator, July 1996-November 1996. Member
of The United States House of
Representatives, 1963-1986.
Ralph M. Stockton, Jr. Director Attorney, partner in firm of Kilpatrick
(Age 72) Stockton since 1952.Undergraduate
degree, University of North Carolina,
1948, Juris Doctorate degree, with
Honors, University of North Carolina
School of Law, Member, American Bar
Association, U.S. Supreme Court
Historical Society, North Carolina Bar
Association. Inducted into North
Carolina Bar Association General
Practice Hall of Fame, 1993.
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Helen C. Hanes Director Private Investor. Undergraduate degrees
(Age 81) from Marion College and Wittenberg
University. Doctorate of Humane Letters
from Roanoke College.
</TABLE>
* Indicates an "interested person" as defined in the 1940 Act.
The table below sets forth the compensation anticipated to be paid by the
Company to each of the directors of the Company during the fiscal year ending
September 30, 1999.
Name of Director Compensation Pension Annual Total Compensation
from Company Benefits Benefits Paid to Director
--------------------------------------------------------------------------------
David B. Rea None None None None
William R. Watson None None None None
Robert T. Beach None None None None
James T. Broyhill $2,250 None None $2,250
Ralph M. Stockton, Jr. $2,250 None None $2,250
Helen C. Hanes $2,250 None None $2,250
As of September 30, 1999, the following persons owned of record more than 5% of
the Fund's outstanding shares.
Name & Address Number of Fund Percentage of Fund's
Of Shareholder Shares Owned Outstanding Shares
--------------------------------------------------------------------------------
Wachovia Securities, Inc. 119,279 26.84%
FBO Client Accounts
301 North Main Street
Winston-Salem, NC 27150
The Company will call a meeting of shareholders for the purpose of voting upon
the question of removal of a director or directors when requested in writing to
do so by record holders of at least 10% of the Fund's outstanding common shares.
The Company's bylaws contain procedures for the removal of directors by its
stockholders. At any meeting of stockholders, duly called and at which a quorum
is present, the stockholders may by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any director or
directors from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of the removed directors.
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PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return" for a
period is the percentage change in value during the period of an investment in
Fund shares, including the value of shares acquired through reinvestment of all
dividends and capital gains distributions. "Average Annual Total Return" is the
average annual compounded rate of change in value represented by the Total
Return Percentage for the period.
n
Average Annual Total Return is computed as follows: P(1+T) = ERV
Where: P = a hypothetical initial investment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of shares at the end of the period
YIELD. The Fund may advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
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 reimbursement)
c = the average daily number of shares outstanding during the period
that they were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
The Fund's performance is a function of conditions in the securities markets,
portfolio management, and operating expenses. Although information such as that
shown above is useful in reviewing the Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
In sales literature, the Fund's performance may be compared with that of market
indices and other mutual funds. In addition to the above computations, the Fund
might use comparative performance as computed in a ranking determined by Lipper
Analytical Services, Morningstar, Inc., or that of another service.
PURCHASING AND REDEEMING SHARES
Redemptions will be made at net asset value. The Fund's net asset value is
determined on days on which the New York Stock Exchange is open for trading. For
purposes of computing the net asset value of a share of the Fund, securities
traded on security exchanges, or in the over-the-counter market in which
transaction prices are reported, are valued at the last sales price at the time
of
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valuation or, lacking any reported sales on that day, at the most recent bid
quotations. Securities for which quotations are not available and any other
assets are valued at a fair market value as determined in good faith by the
Adviser, subject to the review and supervision of the board of directors. The
price per share for a purchase order or redemption request is the net asset
value next determined after receipt of the order.
The Fund is open for business on each day that the New York Stock Exchange
("NYSE") is open. The Fund's share price or net asset value per share ("NAV") is
normally determined as of 4:00 p.m., New York time. The Fund's share price is
calculated by subtracting its liabilities from the closing fair market value of
its total assets and dividing the result by the total number of shares
outstanding on that day. Fund liabilities include accrued expenses and dividends
payable, and its total assets include the market value of the portfolio
securities as well as income accrued but not yet received. Since the Fund
generally does not charge sales or redemption fees, the NAV is the offering
price for shares of the Fund. For shares redeemed prior to being held for at
least six months, the redemption value is the NAV less a service fee equal to
0.50% of the NAV.
TAX INFORMATION
The Fund intends to qualify as a regulated investment company under SubChapter M
of the Internal Revenue Code so as to be relieved of federal income tax on its
capital gains and net investment income currently distributed to its
shareholders. To qualify as a regulated investment company, the Fund must, among
other things, derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities, or other income derived with respect to its
business of investing in such stock or securities.
If the Fund qualifies as a regulated investment company and distributes at least
90% of its net investment income, the Fund will not be subject to Federal income
tax on the income so distributed. However, the Fund would be subject to
corporate income tax on any undistributed income other than tax-exempt income
from municipal securities.
The Fund intends to distribute to shareholders, at least annually, substantially
all net investment income and any net capital gains realized from sales of the
Fund's portfolio securities. Dividends from net investment income and
distributions from any net realized capital gains are reinvested in additional
shares of the Fund unless the shareholder has requested in writing to have them
paid by check.
Dividends from investment income and net short-term capital gains are generally
taxable to the shareholder as ordinary income. Distributions of long-term
capital gains are taxable as long-term capital gains regardless of the length of
time shares in the Fund have been held. Distributions are taxable, whether
received in cash or reinvested in shares of the Fund.
Each shareholder is advised annually of the source of distributions for federal
income tax purposes. A shareholder who is not subject to federal income tax will
not be required to pay tax on distributions received.
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If shares are purchased shortly before a record date for a distribution, the
shareholder will, in effect, receive a return of a portion of his investment,
but the distribution will be taxable to him even if the net asset value of the
shares is reduced below the shareholder's cost. However, for federal income tax
purposes the original cost would continue as the tax basis.
If a shareholder fails to furnish his social security or other tax
identification number or to certify properly that it is correct, the Fund may be
required to withhold federal income tax at the rate of 31% (backup withholding)
from dividend, capital gain and redemption payments to him. Dividend and capital
gain payments may also be subject to backup withholding if the shareholder fails
to certify properly that he is not subject to backup withholding due to the
under-reporting of certain income.
TAXATION OF THE SHAREHOLDER. Taxable distributions generally are included in a
shareholder's gross income for the taxable year in which they are received.
However, dividends declared in October, November and December and made payable
to shareholders of record in such month will be deemed to have been received on
December 31st if paid by the Fund during the following January.
Distributions by the Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution would be taxable to the shareholder
as ordinary income or as a long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares of the Fund just prior to a distribution. The price of such shares
include the amount of any forthcoming distribution so that those investors may
receive a return of investment upon distribution which will, nevertheless, be
taxable to them.
A redemption of shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. Each investor should consult a tax advisor regarding the
effect of federal, state, local, and foreign taxes on an investment in the Fund.
DIVIDENDS. A portion of the Fund's income may qualify for the dividends-received
deduction available to corporate shareholders to the extent that the Fund's
income is derived from qualifying dividends. Because the Fund may earn other
types of income, such as interest, income from securities loans, non-qualifying
dividends, and short-term capital gains, the percentage of dividends from the
Fund that qualifies for the deduction generally will be less than 100%. The Fund
will notify corporate shareholders annually of the percentage of Fund dividends
that qualifies for the dividend received deductions.
A portion of the Fund's dividends derived from certain U.S. Government
obligations may be exempt from state and local taxation. Short-term capital
gains are distributed as dividend income. The Fund will send each shareholder a
notice in January describing the tax status of dividends and capital gain
distributions for the prior year.
CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains earned by the Fund from the
sale of securities and distributed to shareholders are federally taxable as
long-term capital gains, regardless
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of the length of time shareholders have held their shares. If a shareholder
receives a long-term capital gain distribution on shares of the Fund, and such
shares are held six months or less and are sold at a loss, the portion of the
loss equal to the amount of the long-term capital gain distribution will be
considered a long-term loss for tax purposes. Short-term capital gains
distributed by the Fund are taxable to shareholders as dividends, not as capital
gains.
PORTFOLIO TRANSACTIONS
The Fund will generally purchase and sell securities without regard to the
length of time the security has been held. Accordingly, it can be expected that
the rate of portfolio turnover may be substantial. The Fund expects that its
annual portfolio turnover rate will not exceed 50% under normal conditions.
However, there can be no assurance that the Fund will not exceed this rate, and
the portfolio turnover rate may vary from year to year.
High portfolio turnover in any year will result in the payment by the Fund of
above-average transaction costs and could result in the payment by shareholders
of above-average amounts of taxes on realized investment gains. Distributions to
shareholders of such investment gains, to the extent they consist of short-term
capital gains, will be considered ordinary income for federal income tax
purposes.
Decisions to buy and sell securities for the Fund are made by the Adviser
subject to review by the Company's Board of Directors. In placing purchase and
sale orders for portfolio securities for the Fund, it is the policy of the
Adviser to seek the best execution of orders at the most favorable price. In
selecting brokers to effect portfolio transactions, the determination of what is
expected to result in the best execution at the most favorable price involves a
number of largely judgmental considerations. Among these are the Adviser's
evaluation of the broker's efficiency in executing and clearing transactions.
Over-the-counter securities are generally purchased and sold directly with
principal market makers who retain the difference in their cost in the security
and its selling price. In some instances, the Adviser feels that better prices
are available from non-principal market makers who are paid commissions
directly.
CUSTODIAN
First Union National Bank, 1345 Chestnut Street, Philadelphia, Pennsylvania
19101, acts as custodian for the Fund. As such, First Union holds all securities
and cash of the Fund, delivers and receives payment for securities sold,
receives and pays for securities purchased, collects income from investments and
performs other duties, all as directed by officers of the Company. First Union
does not exercise any supervisory function over management of the Fund, the
purchase and sale of securities or the payment of distributions to shareholders.
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TRANSFER AGENT
Effective October 5, 2000, the Adviser has retained Ultimus Fund Solutions, LLC
(the "Transfer Agent"), 135 Merchant Street, Suite 230, Cincinnati, Ohio 45246,
to act as the Fund's transfer agent. The Transfer Agent maintains the records of
eacg shareholder's account, answers shareholders' inquiries concerning their
accounts, processes purchases and redemptions of the Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions. The Transfer Agent receives from the Adviser for its services
as transfer agent a fee payable monthly at an annual rate of $17 per account,
provided, however, that the minimum fee is $1,500 per month. In addition, the
Adviser pays out-of-pocket expenses, including but not limited to, postage,
envelopes, checks, drafts, forms, reports, record storage and communication
lines.
The Transfer Agent also provides accounting and pricing services to the Fund.
For calculating daily net asset value per share and maintaining such books and
records as are necessary to enable the Transfer Agent to perform its duties, the
Adviser pays the Transfer Agent a base fee of $2,500 per month plus an
asset-based fee computed as a percentage of the Fund's average net assets in
excess of $25 million. In addition, the Adviser pays all costs of external
pricing services.
The Transfer Agent also provides administrative services to the Fund. In this
capacity, the Transfer Agent supplies non-investment related statistical and
research data, internal regulatory compliance services, and executive and
administrative services. The Transfer Agent supervises the preparation of tax
returns, reports to shareholders of the Fund, reports to and filings with the
Securities and Exchange Commission and state securities commissions, and
materials for meetings of the Board of Directors. For performance of these
administrative services, the Adviser pays the Transfer Agent a fee at the annual
rate of .15% of the average value of the Fund's daily net assets up to $50
million, .125% of such assets from $50 million to $100 million, .1% of such
assets from $100 million to $250 million, .075% of such assets from $250 Million
to $500 million, and .05% of such assets in excess of $500 million, provided,
however, that the minimum fee is $2,000 per month.
Prior to October 5, 2000, Declaration Services Company, 555 North Lane, Suite
6160, Conshohocken, Pennsylvania 19428, provided the transfer agency, accounting
and administrative services described above with respect to the Transfer Agent.
PRINCIPAL UNDERWRITER
Ultimus Fund Distributors, LLC (the "Underwriter"), 135 Merchant Street, Suite
230, Cincinnati, Ohio 45246, acts as principal underwriter for the Company. The
purpose of acting as an underwriter is to facilitate the registration of the
Fund's shares under state securities laws and to assist in the sale of shares.
The Underwriter is an affiliated company of the Fund's transfer agent, Ultimus
Fund Solutions, LLC. The Underwriter is compensated by the Adviser for its
services to the Company under a written agreement for such services.
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INDEPENDENT ACCOUNTANTS
Tait, Weller & Baker, 8 Penn Center, Suite 800, Philadelphia, Pennsylvania
19103, will serve as the Company's independent auditors for the fiscal year
ended September 30, 2000.
LEGAL COUNSEL
David Jones & Assoc., P.C., 4747 Research Forest Drive, Suite 180, # 303, The
Woodlands, Texas 77381, has passed on certain matters relating to this
Registration Statement and acts as counsel to the Company.
DISTRIBUTION PLAN
As noted in the Fund's Prospectus, the Fund has adopted a plan pursuant to Rule
12b-1 under the 1940 Act (the "Plan") whereby the Fund may pay up to a maximum
of 0.25% per annum of the Fund's average daily net assets to the Adviser, the
Underwriter, dealers and others, for providing personal service and/or
maintaining shareholder accounts relating to the distribution of the Fund's
shares. The fees are paid on a monthly basis, based on the Fund's average daily
net assets.
Pursuant to the Plan, the Adviser is entitled to a fee each month (up to the
maximum of 0.25% per annum of the Fund's average net assets) for expenses
incurred in the distribution and promotion of the Fund's shares, including but
not limited to, printing of prospectuses and reports used for sales purposes,
preparation and printing of sales literature and related expenses,
advertisements, and other distribution-related expenses as well as any
distribution or service fees paid to securities dealers or others who have
executed a dealer agreement with the Underwriter. Any expense of distribution in
excess of 0.25% per annum will be borne by the Adviser without any additional
payments by the Fund. You should be aware that it is possible that Plan accruals
will exceed the actual expenditures by the Adviser for eligible services.
Accordingly, such fees are not strictly tied to the provision of such services.
The Plan also provides that to the extent that the Fund, the Adviser, or other
parties on behalf of the Fund or the Adviser, make payments that are deemed to
be payments for the financing of any activity primarily intended to result in
the sale of shares issued by the Fund within the context of Rule 12b-1, such
payments shall be deemed to be made pursuant to the Plan. In no event shall the
payments made under the Plan, plus any other payments deemed to be made pursuant
to the Plan, exceed the amount permitted to be paid pursuant to the Conduct
Rules of the National Association of Securities Dealers, Inc.
The Board of Directors has determined that a consistent cash flow resulting from
the sale of new shares is necessary and appropriate to meet redemptions and to
take advantage of buying opportunities without having to make unwarranted
liquidations of portfolio securities. The Board therefore believes that it will
likely benefit the Fund to have monies available for the direct distribution
activities of the Adviser in promoting the sale of the Fund's shares, and to
avoid any uncertainties as to whether other payments constitute distribution
expenses on behalf of the Fund. The Board of Directors, including the non-
interested Directors, has concluded that in the exercise
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of their reasonable business judgment and in light of their fiduciary duties,
there is a reasonable likelihood that the Plan will benefit the Fund and its
shareholders.
The Plan has been approved by the Board of Directors, including all of the
Directors who are non-interested persons as defined in the 1940 Act. The Plan
must be renewed annually by the Board of Directors, including a majority of the
Directors who are non-interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Plan. The votes must be cast
in person at a meeting called for that purpose. It is also required that the
selection and nomination of such Directors be done by the non-interested
Directors. The Plan and any related agreements may be terminated at any time,
without any penalty: 1) by vote of a majority of the non-interested Directors on
not more than 60 days' written notice, 2) by the Adviser on not more than 60
days' written notice, 3) by vote of a majority of the Fund's outstanding shares,
on 60 days' written notice, and 4) automatically by any act that terminates the
Advisory Agreement with the Adviser. The Adviser or any dealer or other firm may
also terminate their respective agreements at any time upon written notice.
The Plan and any related agreement may not be amended to increase materially the
amounts to be spent for distribution expenses without approval by a majority of
the Fund's outstanding shares, and all material amendments to the Plan or any
related agreements shall be approved by a vote of the non-interested Directors,
cast in person at a meeting called for the purpose of voting on any such
amendment.
The Adviser is required to report in writing to the Board of Directors of the
Company, at least quarterly, on the amounts and purpose of any payment made
under the Plan, as well as to furnish the Board with such other information as
may reasonably be requested in order to enable the Board to make an informed
determination of whether the Plan should be continued.
FINANCIAL STATEMENTS
The financial statements of the Fund are incorporated herein by reference to the
annual report of the Fund dated September 30, 1999
