STATEMENT OF ADDITIONAL INFORMATION
January 28, 2000
CENTURION FUNDS, INC.
__________________________
Centurion U.S. Equity Fund
Centurion International Equity Fund
Centurion U.S. Contra Fund
Centurion International Contra Fund
__________________________
Contents
Page
Organization of the Company 2
Investment Goals and Policies 2
Management of the Funds 27
Additional Purchase and Redemption Information 33
Exchange Privilege 33
Additional Information Concerning Taxes 34
Performance 39
Other Information 42
Financial Statements 43
Appendix Description of Ratings A
This Statement of Additional Information is meant to
be read in conjunction with the Prospectus for Centurion
Funds, Inc. (the "Company") dated January 28, 2000, as
amended or supplemented from time to time (the
"Prospectus"), and is incorporated by reference in its
entirety into the Prospectus. The Company currently
consists of four separately managed portfolios: Centurion
U.S. Equity Fund (the "U.S. Equity Fund"), Centurion
International Equity Fund (the "International Equity Fund"),
Centurion U.S. Contra Fund (the "U.S. Contra Fund") and
Centurion International Contra Fund (the "International
Contra Fund") (together, the "Funds," and each, a "Fund").
Because this Statement of Additional Information is not
itself a prospectus, no investment in shares of a Fund
should be made solely upon the information contained herein.
Copies of the Prospectus and information regarding the
Funds' current performance and the status of shareholder
accounts may be obtained by calling the Company at
(800) 451-2010 or by writing to the Company at 2425 East
Camelback Road, Phoenix, Arizona 85016-4200.
ORGANIZATION OF THE COMPANY
The Company is a diversified open-end management
investment company that was organized as a corporation on
August 20, 1998 under the laws of the State of Maryland.
The Company's Charter authorizes the Board of Directors (the
"Board") to issue 500,000,000 full and fractional shares of
capital stock, $.001 par value, of which 100,000,000 shares
are designated a series called the "Centurion U.S. Equity
Fund," 100,000,000 shares are designated a series called the
"Centurion International Equity Fund," 150,000,000 shares
are designated a series called the "Centurion U.S. Contra
Fund," and 150,000,000 shares are designated a series called
the "Centurion International Contra Fund."
INVESTMENT GOALS AND POLICIES
As stated in the Prospectus, the investment goal of
the U.S. Equity Fund is to provide long-term after-tax
growth consistent with reasonable efforts to preserve
capital. The investment goal of the International Equity
Fund (together with the U.S. Equity Fund, the "Equity
Funds") is to provide long-term growth consistent with
reasonable efforts to preserve capital. The investment goal
of the U.S. Contra Fund is to provide protection against
declines in the value of the U.S. equity allocation of
certain assets custodied with Centurion Trust Company
("Centurion"). The investment goal of the International
Contra Fund is to provide protection against declines in the
value of the non-U.S. equity allocation of certain assets
custodied with Centurion. The following information
supplements the discussion of each Fund's investment goal
and policies in the Prospectus. There are no assurances
that a Fund will achieve its investment goal.
Centurion serves as investment manager to each Fund.
Centurion has engaged Parametric Portfolio Associates
("Parametric") and Credit Suisse Asset Management LLC
("CSAM") as sub-advisers to the U.S. Equity Fund, Friends
Ivory & Sime, Inc. ("FISI") and CSAM as sub-advisers to the
International Equity Fund, and CSAM as sub-adviser to both
the U.S. Contra Fund and the International Contra Fund
(together, the "Contra Funds"). The term "Adviser," as used
in this Statement of Additional Information, shall refer to
Centurion, Parametric, FISI and/or CSAM, as applicable.
Options, Futures and Currency Exchange Transactions
Securities Options. Each Fund may write covered call
options on stock and debt securities and may purchase U.S.
exchanged-traded and over-the counter ("OTC") put and call
options.
A Fund realizes fees (referred to as "premiums") for
granting the rights evidenced by the options it has written.
A put option embodies the right of its purchaser to compel
the writer of the option to purchase from the option holder
an underlying security at a specified price for a specified
time period or at a specified time. In contrast, a call
option embodies the right of its purchaser to compel the
writer of the option to sell to the option holder an
underlying security at a specified price for a specified
time period or at a specified time.
The principal reason for writing covered options on a
security is to attempt to realize, through the receipt of
premiums, a greater return than would be realized on the
securities alone. In return for a premium, a Fund as the
writer of a covered call option forfeits the right to any
appreciation in the value of the underlying security above
the strike price for the life of the option (or until a
closing purchase transaction can be effected).
Nevertheless, a Fund as a call writer retains the risk of a
decline in the price of the underlying security. The size
of the premiums that a Fund may receive may be adversely
affected as new or existing institutions, including other
investment companies, engage in or increase their
option-writing activities.
In the case of options written by a Fund that are
deemed covered by virtue of the Fund's holding convertible
or exchangeable preferred stock or debt securities, the time
required to convert or exchange and obtain physical delivery
of the underlying common stock with respect to which the
Fund has written options may exceed the time within which
the Fund must make delivery in accordance with an exercise
notice. In these instances, a Fund may purchase or
temporarily borrow the underlying securities for purposes of
physical delivery. By so doing, a Fund will not bear any
market risk, since the Fund will have the absolute right to
receive from the issuer of the underlying security an equal
number of shares to replace the borrowed securities, but the
Fund may incur additional transaction costs or interest
expenses in connection with any such purchase or borrowing.
Additional risks exist with respect to certain of the
securities for which a Fund may write covered call options.
For example, if a Fund writes covered call options on
mortgage-backed securities, the mortgage-backed securities
that it holds as cover may, because of scheduled
amortization or unscheduled prepayments, cease to be
sufficient cover. If this occurs, a Fund will compensate
for the decline in the value of the cover by purchasing an
appropriate additional amount of mortgage-backed securities.
Options written by a Fund will normally have
expiration dates between one and twelve months from the date
written. The exercise price of the options may be below,
equal to or above the market values of the underlying
securities at the times the options are written. In the
case of call options, these exercise prices are referred to
as "in-the-money," "at-the-money" and "out-of-the-money,"
respectively. A Fund may write (i) in-the-money call
options when the Adviser expects that the price of the
underlying security will remain flat or decline moderately
during the option period, (ii) at-the-money call options
when the Adviser expects that the price of the underlying
security will remain flat or advance moderately during the
option period and (iii) out-of-the-money call options when
the Adviser expects that the premiums received from writing
the call option plus the appreciation in market price of the
underlying security up to the exercise price will be greater
than the appreciation in the price of the underlying
security alone. In any of the preceding situations, if the
market price of the underlying security declines and the
security is sold at this lower price, the amount of any
realized loss will be offset wholly or in part by the
premium received. To secure its obligation to deliver the
underlying security when it writes a call option, a Fund
will be required to deposit in escrow the underlying
security or other assets in accordance with the rules of the
Options Clearing Corporation (the "Clearing Corporation")
and of the securities exchange on which the option is
written.
Prior to their expirations, put and call options may
be sold in closing sale or purchase transactions (sales or
purchases by a Fund prior to the exercise of options that it
has purchased or written, respectively, of options of the
same series) in which a Fund may realize a profit or loss
from the sale. An option position may be closed out only
where there exists a secondary market for an option of the
same series on a recognized securities exchange or in the
over-the-counter market. When a Fund has purchased an
option and engages in a closing sale transaction, whether
the Fund realizes a profit or loss will depend upon whether
the amount received in the closing sale transaction is more
or less than the premium the Fund initially paid for the
original option plus the related transaction costs.
Similarly, in cases where a Fund has written an option, it
will realize a profit if the cost of the closing purchase
transaction is less than the premium received upon writing
the original option and will incur a loss if the cost of the
closing purchase transaction exceeds the premium received
upon writing the original option. A Fund may engage in a
closing purchase transaction to realize a profit, to prevent
an underlying security with respect to which it has written
an option from being called or put or, in the case of a call
option, to unfreeze an underlying security (thereby
permitting its sale or the writing of a new option on the
security prior to the outstanding option's expiration). The
obligation of a Fund under an option it has written would be
terminated by a closing purchase transaction, but the Fund
would not be deemed to own an option as a result of the
transaction. So long as the obligation of a Fund as the
writer of an option continues, the Fund may be assigned an
exercise notice by the broker-dealer through which the
option was sold, requiring the Fund to deliver the
underlying security against payment of the exercise price.
This obligation terminates when the option expires or a Fund
effects a closing purchase transaction. A Fund can no
longer effect a closing purchase transaction with respect to
an option once it has been assigned an exercise notice.
There is no assurance that sufficient trading interest
will exist to create a liquid secondary market on a
securities exchange for any particular option or at any
particular time, and for some options no such secondary
market may exist. A liquid secondary market in an option
may cease to exist for a variety of reasons. In the past,
for example, higher than anticipated trading activity or
order flow or other unforeseen events have at times rendered
certain of the facilities of the Clearing Corporation and
various securities exchanges inadequate and resulted in the
institution of special procedures, such as trading
rotations, restrictions on certain types of orders or
trading halts or suspensions in one or more options. There
can be no assurance that similar events, or events that may
otherwise interfere with the timely execution of customers'
orders, will not recur. In such event, it might not be
possible to effect closing transactions in particular
options. Moreover, a Fund's ability to terminate options
positions established in the over-the-counter market may be
more limited than for exchange-traded options and may also
involve the risk that securities dealers participating in
over-the-counter transactions would fail to meet their
obligations to the Fund. Each Fund, however, intends to
purchase over-the-counter options only from dealers whose
debt securities, as determined by the Adviser, are
considered to be investment grade. If, as a covered call
option writer, a Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to
sell the underlying security until the option expires or it
delivers the underlying security upon exercise. In either
case, a Fund would continue to be at market risk on the
security and could face higher transaction costs, including
brokerage commissions.
Securities exchanges generally have established
limitations governing the maximum number of calls and puts
of each class which may be held or written, or exercised
within certain time periods by an investor or group of
investors acting in concert (regardless of whether the
options are written on the same or different securities
exchanges or are held, written or exercised in one or more
accounts or through one or more brokers). It is possible
that a Fund and other clients of the Adviser and certain of
its affiliates may be considered to be such a group. A
securities exchange may order the liquidation of positions
found to be in violation of these limits and it may impose
certain other sanctions. These limits may restrict the
number of options a Fund will be able to purchase on a
particular security.
Stock Index Options. Each Fund may purchase and write
exchange-listed and OTC put and call options on stock
indexes. A stock index measures the movement of a certain
group of stocks by assigning relative values to the common
stocks included in the index, fluctuating with changes in
the market values of the stocks included in the index. Some
stock index options are based on a broad market index, such
as the NYSE Composite Index, or a narrower market index such
as the Standard & Poor's 100. Indexes may also be based on
a particular industry or market segment.
Options on stock indexes are similar to options on
stock except that (i) the expiration cycles of stock index
options are monthly, while those of stock options are
currently quarterly, and (ii) the delivery requirements are
different. Instead of giving the right to take or make
delivery of stock at a specified price, an option on a stock
index gives the holder the right to receive a cash "exercise
settlement amount" equal to (a) the amount, if any, by which
the fixed exercise price of the option exceeds (in the case
of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of
exercise, multiplied by (b) a fixed "index multiplier."
Receipt of this cash amount will depend upon the closing
level of the stock index upon which the option is based
being greater than, in the case of a call, or less than, in
the case of a put, the exercise price of the index and the
exercise price of the option times a specified multiple.
The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Stock
index options may be offset by entering into closing
transactions as described above for securities options.
OTC Options. Each Fund may purchase OTC or dealer
options or sell OTC options. Unlike exchange-listed options
where an intermediary or clearing corporation, such as the
Clearing Corporation, assures that all transactions in such
options are properly executed, the responsibility for
performing all transactions with respect to OTC options
rests solely with the writer and the holder of those
options. A listed call option writer, for example, is
obligated to deliver the underlying stock to the clearing
organization if the option is exercised, and the clearing
organization is then obligated to pay the writer the
exercise price of the option. If a Fund were to purchase a
dealer option, however, it would rely on the dealer from
whom it purchased the option to perform if the option were
exercised. If the dealer fails to honor the exercise of the
option by a Fund, the Fund would lose the premium it paid
for the option and the expected benefit of the transaction.
Listed options generally have a continuous liquid
market while dealer options have none. Consequently, a Fund
will generally be able to realize the value of a dealer
option it has purchased only by exercising it or reselling
it to the dealer who issued it. Similarly, when a Fund
writes a dealer option, it generally will be able to close
out the option prior to its expiration only by entering into
a closing purchase transaction with the dealer to which the
Fund originally wrote the option. Although a Fund will seek
to enter into dealer options only with dealers who will
agree to and that are expected to be capable of entering
into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate a dealer
option at a favorable price at any time prior to expiration.
The inability to enter into a closing transaction may result
in material losses to a Fund. Until a Fund, as a covered
OTC call option writer, is able to effect a closing purchase
transaction, it will not be able to liquidate securities (or
other assets) used to cover the written option until the
option expires or is exercised. This requirement may impair
a Fund's ability to sell portfolio securities or, with
respect to currency options, currencies at a time when such
sale might be advantageous. In the event of insolvency of
the other party, a Fund may be unable to liquidate a dealer
option.
Futures Activities. Each Fund may enter into foreign
currency, interest rate and stock index futures contracts
and purchase and write (sell) related options traded on
exchanges designated by the Commodity Futures Trading
Commission (the "CFTC") or consistent with CFTC regulations
on foreign exchanges. These transactions may be entered
into for "bona fide hedging" purposes as defined in CFTC
regulations and other permissible purposes including hedging
against changes in the value of portfolio securities due to
anticipated changes in currency values, interest rates
and/or market conditions and increasing return.
A Fund will not enter into futures contracts and
related options for which the aggregate initial margin and
premiums (discussed below) required to establish positions
other than those considered to be "bona fide hedging" by the
CFTC exceed 5% of the Fund's net asset value after taking
into account unrealized profits and unrealized losses on any
such contracts it has entered into. Each Fund reserves the
right to engage in transactions involving futures contracts
and options on futures contracts to the extent allowed by
CFTC regulations in effect from time to time and in
accordance with the Fund's policies. There is no overall
limit on the percentage of Fund assets that may be at risk
with respect to futures activities.
The over the counter market in forward foreign
currency exchange contracts offers less protection against
defaults by the other party to such instruments than is
available for currency instruments traded on an exchange.
Such contracts are subject to the risk that the counterparty
to the contract will default on its obligations. Since
these contracts are not guaranteed by an exchange or
clearinghouse, a default on the contract would deprive a
Fund of unrealized profits, transaction costs or the
benefits of a currency hedge or force the Fund to cover its
purchase or sale commitments, if any, at the current market
price. Currency exchange rates may fluctuate significantly
over short periods of time. They generally are determined
by the forces of supply and demand in the foreign exchange
markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and
other complex factors as seen from an international
perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments
or central banks, or the failure to intervene, or by
currency controls or political developments in the U.S. or
abroad.
Futures Contracts. A foreign currency futures
contract provides for the future sale by one party and the
purchase by the other party of a certain amount of a
specified non-U.S. currency at a specified price, date, time
and place. An interest rate futures contract provides for
the future sale by one party and the purchase by the other
party of a certain amount of a specific interest rate
sensitive financial instrument (debt security) at a
specified price, date, time and place. Stock indexes are
capitalization weighted indexes which reflect the market
value of the stock listed on the indexes. A stock index
futures contract is an agreement to be settled by delivery
of an amount of cash equal to a specified multiplier times
the difference between the value of the index at the close
of the last trading day on the contract and the price at
which the agreement is made.
No consideration is paid or received by a Fund upon
entering into a futures contract. Instead, a Fund is
required to deposit in a segregated account with its
custodian an amount of cash or liquid securities acceptable
to the broker, equal to approximately 1% to 10% of the
contract amount (this amount is subject to change by the
exchange on which the contract is traded, and brokers may
charge a higher amount). This amount is known as "initial
margin" and is in the nature of a performance bond or good
faith deposit on the contract which is returned to a Fund
upon termination of the futures contract, assuming all
contractual obligations have been satisfied. The broker
will have access to amounts in the margin account if a Fund
fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the
broker, will be made daily as the currency, financial
instrument or stock index underlying the futures contract
fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as
"marking-to-market." A Fund will also incur brokerage costs
in connection with entering into futures transactions.
At any time prior to the expiration of a futures
contract, a Fund may elect to close the position by taking
an opposite position, which will operate to terminate the
Fund's existing position in the contract. Positions in
futures contracts and options on futures contracts
(described below) may be closed out only on the exchange on
which they were entered into (or through a linked exchange).
No secondary market for such contracts exists. Although
each Fund intends to enter into futures contracts only if
there is an active market for such contracts, there is no
assurance that an active market will exist at any particular
time. Most futures exchanges limit the amount of
fluctuation permitted in futures contract prices during a
single trading day. Once the daily limit has been reached
in a particular contract, no trades may be made that day at
a price beyond that limit or trading may be suspended for
specified periods during the day. It is possible that
futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions
at an advantageous price and subjecting a Fund to
substantial losses. In such event, and in the event of
adverse price movements, a Fund would be required to make
daily cash payments of variation margin. In such
situations, if a Fund had insufficient cash, it might have
to sell securities to meet daily variation margin
requirements at a time when it would be disadvantageous to
do so. In addition, if the transaction is entered into for
hedging purposes, in such circumstances a Fund may realize a
loss on a futures contract or option that is not offset by
an increase in the value of the hedged position. Losses
incurred in futures transactions and the costs of these
transactions will affect a Fund's performance.
Options on Futures Contracts. Each Fund may purchase
and write put and call options on foreign currency, interest
rate and stock index futures contracts and may enter into
closing transactions with respect to such options to
terminate existing positions. There is no guarantee that
such closing transactions can be effected; the ability to
establish and close out positions on such options will be
subject to the existence of a liquid market.
An option on a currency, interest rate or stock index
futures contract, as contrasted with the direct investment
in such a contract, gives the purchaser the right, in return
for the premium paid, to assume a position in a futures
contract at a specified exercise price at any time prior to
the expiration date of the option. The writer of the option
is required upon exercise to assume an offsetting futures
position (a short position if the option is a call and a
long position if the option is a put). Upon exercise of an
option, the delivery of the futures position by the writer
of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount
by which the market price of the futures contract exceeds,
in the case of a call, or is less than, in the case of a
put, the exercise price of the option on the futures
contract. The potential loss related to the purchase of an
option on futures contracts is limited to the premium paid
for the option (plus transaction costs). Because the value
of the option is fixed at the point of sale, there are no
daily cash payments by the purchaser to reflect changes in
the value of the underlying contract; however, the value of
the option does change daily and that change would be
reflected in the net asset value of the Fund.
Currency Exchange Transactions. The value in U.S.
dollars of the assets of a Fund that are invested in foreign
securities may be affected favorably or unfavorably by
changes in exchange control regulations, and the Fund may
incur costs in connection with conversion between various
currencies. Currency exchange transactions may be from any
non-U.S. currency into U.S. dollars or into other
appropriate currencies. A Fund will conduct its currency
exchange transactions (i) on a spot (i.e., cash) basis at
the rate prevailing in the currency exchange market,
(ii) through entering into futures contracts or options on
such contracts (as described above), (iii) through entering
into forward contracts to purchase or sell currency or (iv)
by purchasing exchange-traded currency options.
Forward Currency Contracts. A forward currency
contract involves an obligation to purchase or sell a
specific currency at a future date, which may be any fixed
number of days from the date of the contract as agreed upon
by the parties, at a price set at the time of the contract.
These contracts are entered into in the interbank market
conducted directly between currency traders (usually large
commercial banks and brokers) and their customers. Forward
currency contracts are similar to currency futures
contracts, except that futures contracts are traded on
commodities exchanges and are standardized as to contract
size and delivery date.
At or before the maturity of a forward contract, a
Fund may either sell a portfolio security and make delivery
of the currency, or retain the security and fully or
partially offset its contractual obligation to deliver the
currency by negotiating with its trading partner to purchase
a second, offsetting contract. If a Fund retains the
portfolio security and engages in an offsetting transaction,
the Fund, at the time of execution of the offsetting
transaction, will incur a gain or a loss to the extent that
movement has occurred in forward contract prices.
Currency Options. Each Fund may purchase exchange-
traded put and call options on foreign currencies. Put
options convey the right to sell the underlying currency at
a price which is anticipated to be higher than the spot
price of the currency at the time the option is exercised.
Call options convey the right to buy the underlying currency
at a price which is expected to be lower than the spot price
of the currency at the time the option is exercised.
Currency Hedging. A Fund's currency hedging will be
limited to hedging involving either specific transactions or
portfolio positions in the aggregate. Transaction hedging
is the purchase or sale of forward currency with respect to
specific receivables or payables of a Fund generally
accruing in connection with the purchase or sale of its
portfolio securities. Position hedging is the sale of
forward currency with respect to portfolio security
positions. A Fund may not position hedge to an extent
greater than the aggregate market value (at the time of
entering into the hedge) of the hedged securities.
A decline in the U.S. dollar value of a foreign
currency in which a Fund's securities are denominated will
reduce the U.S. dollar value of the securities, even if
their value in the foreign currency remains constant. The
use of currency hedges does not eliminate fluctuations in
the underlying prices of the securities, but it does
establish a rate of exchange that can be achieved in the
future. For example, in order to protect against
diminutions in the U.S. dollar value of securities it holds,
a Fund may purchase currency put options. If the value of
the currency does decline, a Fund will have the right to
sell the currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on
the U.S. dollar value of its securities that otherwise would
have resulted. Conversely, if a rise in the U.S. dollar
value of a currency in which securities to be acquired are
denominated is projected, thereby potentially increasing the
cost of the securities, a Fund may purchase call options on
the particular currency. The purchase of these options
could offset, at least partially, the effects of the adverse
movements in exchange rates. The benefit to a Fund derived
from purchases of currency options, like the benefit derived
from other types of options, will be reduced by premiums and
other transaction costs. Because transactions in currency
exchange are generally conducted on a principal basis, no
fees or commissions are generally involved. Currency
hedging involves some of the same risks and considerations
as other transactions with similar instruments. Although
currency hedges limit the risk of loss due to a decline in
the value of a hedged currency, at the same time, they also
limit any potential gain that might result should the value
of the currency increase. If a devaluation is generally
anticipated, a Fund may not be able to contract to sell a
currency at a price above the devaluation level it
anticipates.
While the values of currency futures and options on
futures, forward currency contracts and currency options may
be expected to correlate with exchange rates, they will not
reflect other factors that may affect the value of a Fund's
investments and a currency hedge may not be entirely
successful in mitigating changes in the value of the Fund's
investments denominated in that currency. A currency hedge,
for example, should protect a Yen-denominated bond against a
decline in the Yen, but will not protect a Fund against a
price decline if the issuer's creditworthiness deteriorates.
Swaps. Each Fund may enter into swaps relating to
indexes, currencies and equity interests of foreign issuers.
A swap transaction is an agreement between a Fund and a
counterparty to act in accordance with the terms of the swap
contract. Index swaps involve the exchange by a Fund with
another party of the respective amounts payable with respect
to a notional principal amount related to one or more
indexes. Currency swaps involve the exchange of cash flows
on a notional amount of two or more currencies based on
their relative future values. An equity swap is an
agreement to exchange streams of payments computed by
reference to a notional amount based on the performance of a
basket of stocks or a single stock. A Fund may enter into
these transactions to preserve a return or spread on a
particular investment or portion of its assets, to protect
against currency fluctuations, as a duration management
technique or to protect against any increase in the price of
securities the Fund anticipates purchasing at a later date.
A Fund may also use these transactions for speculative
purposes, such as to obtain the price performance of a
security without actually purchasing the security in
circumstances, for example, the subject security is
illiquid, is unavailable for direct investment or available
only on less attractive terms. Swaps have risks associated
with them including possible default by the counterparty to
the transaction, illiquidity and, where swaps are used as
hedges, the risk that the use of a swap could result in
losses greater than if the swap had not been employed
A Fund will usually enter into swaps on a net basis
(i.e., the two payment streams are netted out in a cash
settlement on the payment date or dates specified in the
agreement, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments). Swaps do
not involve the delivery of securities, other underlying
assets or principal. Accordingly, the risk of loss with
respect to swaps is limited to the net amount of payments
that a Fund is contractually obligated to make. If the
counterparty to a swap defaults, a Fund's risk of loss
consists of the net amount of payments that the Fund is
contractually entitled to receive. Where swaps are entered
into for good faith hedging purposes, the Adviser believes
such obligations do not constitute senior securities under
the Investment Company Act of 1940, as amended (the "1940
Act"), and, accordingly, will not treat them as being
subject to a Fund's borrowing restrictions. Where swaps are
entered into for other than hedging purposes, a Fund will
segregate an amount of cash or liquid securities having a
value equal to the accrued excess of its obligations over
entitlements with respect to each swap on a daily basis.
Hedging. In addition to entering into options,
futures and currency exchange transactions for other
purposes, including generating current income to offset
expenses or increase return, a Fund may enter into these
transactions as hedges to reduce investment risk, generally
by making an investment expected to move in the opposite
direction of a portfolio position. A hedge is designed to
offset a loss in a portfolio position with a gain in the
hedged position; at the same time, however, a properly
correlated hedge will result in a gain in the portfolio
position being offset by a loss in the hedged position. As
a result, the use of options, futures, contracts and
currency exchange transactions for hedging purposes could
limit any potential gain from an increase in the value of
the position hedged. In addition, the movement in the
portfolio position hedged may not be of the same magnitude
as movement in the hedge. With respect to futures
contracts, since the value of portfolio securities will far
exceed the value of the futures contracts sold by a Fund, an
increase in the value of the futures contracts could only
mitigate, but not totally offset, the decline in the value
of the Fund's assets.
In hedging transactions based on an index, whether a
Fund will realize a gain or loss from the purchase or
writing of options on an index depends upon movements in the
level of stock prices in the stock market generally or, in
the case of certain indexes, in an industry or market
segment, rather than movements in the price of a particular
stock. The risk of imperfect correlation increases as the
composition of a Fund's portfolio varies from the
composition of the index. In an effort to compensate for
imperfect correlation of relative movements in the hedged
position and the hedge, a Fund's hedge positions may be in a
greater or lesser dollar amount than the dollar amount of
the hedged position. Such "over hedging" or "under hedging"
may adversely affect a Fund's net investment results if
market movements are not as anticipated when the hedge is
established. Stock index futures transactions may be
subject to additional correlation risks. First, all
participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close
futures contracts through offsetting transactions which
would distort the normal relationship between the stock
index and futures markets. Secondly, from the point of view
of speculators, the deposit requirements in the futures
market are less onerous than margin requirements in the
securities market. Therefore, increased participation by
speculators in the futures market also may cause temporary
price distortions. Because of the possibility of price
distortions in the futures market and the imperfect
correlation between movements in the stock index and
movements in the price of stock index futures, a correct
forecast of general market trends by the Adviser still may
not result in a successful hedging transaction.
A Fund will engage in hedging transactions only when
deemed advisable by the Adviser, and successful use by a
Fund of hedging transactions will be subject to the
Adviser's ability to predict trends in currency, interest
rate or securities markets, as the case may be, and to
correctly predict movements in the directions of the hedge
and the hedged position and the correlation between them,
which predictions could prove to be inaccurate. This
requires different skills and techniques than predicting
changes in the price of individual securities, and there can
be no assurance that the use of these strategies will be
successful. Even a well-conceived hedge may be unsuccessful
to some degree because of unexpected market behavior or
trends. Losses incurred in hedging transactions and the
costs of these transactions will affect a Fund's
performance.
Asset Coverage for Forward Contracts, Options, Futures
and Options on Futures. Each Fund will comply with
guidelines established by the U.S. Securities and Exchange
Commission (the "SEC") with respect to coverage of forward
currency contracts; options written by a Fund on securities
and indexes; and currency, interest rate and index futures
contracts and options on these futures contracts. These
guidelines may, in certain instances, require segregation by
a Fund of cash or liquid securities.
For example, a call option written by a Fund on
securities may require the Fund to hold the securities
subject to the call (or securities convertible into the
securities without additional consideration) or to segregate
assets (as described above) sufficient to purchase and
deliver the securities if the call is exercised. A call
option written by a Fund on an index may require the Fund to
own portfolio securities that correlate with the index or to
segregate assets (as described above) equal to the excess of
the index value over the exercise price on a current basis.
A Fund could purchase a put option if the strike price of
that option is the same or higher than the strike price of a
put option sold by the Fund. If a Fund holds a futures or
forward contract, the Fund could purchase a put option on
the same futures or forward contract with a strike price as
high or higher than the price of the contract held. A Fund
may enter into fully or partially offsetting transactions so
that its net position, coupled with any segregated assets
(equal to any remaining obligation), equals its net
obligation. Asset coverage may be achieved by other means
when consistent with applicable regulatory policies.
Additional Information on Other Investment Practices
Foreign Investments. Investors should recognize that
investing in foreign companies involves certain risks,
including those discussed below, which are not typically
associated with investing in U.S. issuers.
Foreign Currency Exchange. Since a Fund may invest in
securities denominated in currencies other than the U.S.
dollar, and since a Fund may temporarily hold funds in bank
deposits or other money market investments denominated in
foreign currencies, a Fund may be affected favorably or
unfavorably by exchange control regulations or changes in
the exchange rate between such currencies and the dollar. A
change in the value of a foreign currency relative to the
U.S. dollar will result in a corresponding change in the
dollar value of Fund assets denominated in that foreign
currency. Changes in foreign currency exchange rates may
also affect the value of dividends and interest earned,
gains and losses realized on the sale of securities and net
investment income and gains, if any, to be distributed to
shareholders by a Fund. The rate of exchange between the
U.S. dollar and other currencies is determined by the forces
of supply and demand in the foreign exchange markets.
Changes in the exchange rate may result over time from the
interaction of many factors directly or indirectly affecting
economic and political conditions in the United States and a
particular foreign country, including economic and political
developments in other countries. Of particular importance
are rates of inflation, interest rate levels, the balance of
payments and the extent of government surpluses or deficits
in the United States and the particular foreign country, all
of which are in turn sensitive to the monetary, fiscal and
trade policies pursued by the governments of the United
States and foreign countries important to international
trade and finance. Governmental intervention may also play
a significant role. National governments rarely voluntarily
allow their currencies to float freely in response to
economic forces. Sovereign governments use a variety of
techniques, such as intervention by a country's central bank
or imposition of regulatory controls or taxes, to affect the
exchange rates of their currencies. A Fund may use hedging
techniques with the objective of protecting against loss
through the fluctuation of the value of the yen against the
U.S. dollar, particularly the forward market in foreign
exchange, currency options and currency futures. See
"Currency Exchange Transactions" and "Futures Activities"
above.
Information. There may be less publicly available
information about foreign securities and about the foreign
company or government issuing them than is available about a
domestic company or government entity. Foreign companies
are generally not subject to uniform financial reporting
standards, practices and requirements comparable to those
applicable to U.S. companies.
Political Instability. With respect to some foreign
countries, there is the possibility of expropriation or
confiscatory taxation, limitations on the removal of funds
or other assets of a Fund, political or social instability,
or domestic developments which could affect U.S. investments
in those and neighboring countries.
Delays. Securities of some foreign companies are less
liquid and their prices are more volatile than securities of
comparable U.S. companies. Certain foreign countries are
known to experience long delays between the trade and
settlement dates of securities purchased or sold.
Foreign Debt Securities. The returns on foreign debt
securities reflect interest rates and other market
conditions prevailing in those countries and the effect of
gains and losses in the denominated currencies against the
U.S. dollar, which have had a substantial impact on
investment in foreign fixed-income securities. The relative
performance of various countries' fixed-income markets
historically has reflected wide variations relating to the
unique characteristics of each country's economy. Year-to-
year fluctuations in certain markets have been significant,
and negative returns have been experienced in various
markets from time to time.
The foreign government securities in which a Fund may
invest generally consist of obligations issued or backed by
national, state or provincial governments or similar
political subdivisions or central banks in foreign
countries. Foreign government securities also include debt
obligations of supranational entities, which include
international organizations designated or backed by
governmental entities to promote economic reconstruction or
development, international banking institutions and related
government agencies. Examples include the International
Bank for Reconstruction and Development (the "World Bank"),
the European Coal and Steel Community, the Asian Development
Bank and the InterAmerican Development Bank.
Foreign government securities also include debt
securities of "quasi-governmental agencies" and debt
securities denominated in multinational currency units of an
issuer (including supranational issuers). Debt securities
of quasi-governmental agencies are issued by entities owned
by either a national, state or equivalent government or are
obligations of a political unit that is not backed by the
national government's full faith and credit and general
taxing powers.
General. Individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency,
and balance of payments positions. A Fund may invest in
securities of foreign governments (or agencies or
instrumentalities thereof), and many, if not all, of the
foregoing considerations apply to such investments as well.
Depositary Receipts. The assets of a Fund may be
invested in the securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary
Receipts ("EDRs") and International Depositary Receipts
("IDRs"). These securities may not necessarily be
denominated in the same currency as the securities into
which they may be converted. ADRs are receipts typically
issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign
corporation. EDRs, which are sometimes referred to as
Continental Depositary Receipts, are receipts issued in
Europe, and IDRs, which are sometimes referred to as Global
Depositary Receipts, are issued outside the United States.
EDRs and IDRs are typically issued by non-U.S. banks and
trust companies and evidence ownership of either foreign or
domestic securities. Generally, ADRs in registered form are
designed for use in U.S. securities markets and EDRs and
IDRs in bearer form are designed for use in European and
non-U.S. securities markets, respectively.
U.S. Government Securities. Each Fund may invest in
debt obligations of varying maturities issued or guaranteed
by the United States government, its agencies or
instrumentalities ("U.S. Government Securities"). Direct
obligations of the U.S. Treasury include a variety of
securities that differ in their interest rates, maturities
and dates of issuance. U.S. Government Securities also
include securities issued or guaranteed by the Federal
Housing Administration, Farmers Home Loan Administration,
Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association
("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Banks, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal Intermediate Credit Banks, Federal Land Banks,
Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, District of
Columbia Armory Board and Student Loan Marketing
Association. A Fund may also invest in instruments that are
supported by the right of the issuer to borrow from the U.S.
Treasury and instruments that are supported by the credit of
the instrumentality. Because the U.S. government is not
obligated by law to provide support to an instrumentality it
sponsors, a Fund will invest in obligations issued by such
an instrumentality only if the Adviser determines that the
credit risk with respect to the instrumentality does not
make its securities unsuitable for investment by the Fund.
Below Investment Grade Securities. The market values
of below investment grade securities and unrated securities
of comparable quality tend to react less to fluctuations in
interest rate levels than do those of investment grade
securities and the market values of certain of these
securities also tend to be more sensitive to individual
corporate developments and changes in economic conditions
than below investment grade securities. In addition, these
securities generally present a higher degree of credit risk.
Issuers of these securities are often highly leveraged and
may not have more traditional methods of financing available
to them so that their ability to service their obligations
during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater because
below investment grade securities generally are unsecured
and frequently are subordinated to prior payment of senior
indebtedness.
A Fund may have difficulty disposing of certain of
these securities because there may be a thin trading market.
Because there is no established retail secondary market for
many of these securities, the Funds anticipate that these
securities could be sold only to a limited number of dealers
or institutional investors. To the extent a secondary
trading market for these securities does exist, it generally
is not as liquid as the secondary market for investment
grade securities. The lack of a liquid secondary market, as
well as adverse publicity and investor perception with
respect to these securities, may have an adverse impact on
market price and a Fund's ability to dispose of particular
issues when necessary to meet liquidity needs or in response
to a specific economic event such as a deterioration in the
creditworthiness of the issuer. The lack of a liquid
secondary market for certain securities also may make it
more difficult for a Fund to obtain accurate market
quotations for purposes of valuing the Fund and calculating
net asset value.
The market value of securities rated below investment
grade is more volatile than that of investment grade
securities. Factors adversely impacting the market value of
these securities will adversely impact a Fund's net asset
value. A Fund will rely on the judgment, analysis and
experience of the Adviser in evaluating the creditworthiness
of an issuer. In this evaluation, the Adviser will take
into consideration, among other things, the issuer's
financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the
issuer's management and regulatory matters. Normally, below
investment grade securities and comparable unrated
securities are not intended for short-term investment. A
Fund may incur additional expenses to the extent it is
required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings of such
securities.
Securities of Other Investment Companies. Each Fund
may invest in securities of other investment companies to
the extent permitted under the 1940 Act. Presently, under
the 1940 Act, a Fund may hold securities of another
investment company in amounts which (i) do not exceed 3% of
the total outstanding voting stock of such company, (ii) do
not exceed 5% of the value of the Fund's total assets and
(iii) when added to all other investment company securities
held by the Fund, do not exceed 10% of the value of the
Fund's total assets.
DIAMONDS, SPDRs and WEBS ("Equity Equivalents").
DIAMONDS ("Dow Jones Industrial Average Model New Depositary
Shares") and SPDRs ("Standard & Poor's Depositary Receipts")
are exchange-traded securities that represent ownership in
long-term unit investment trusts established to accumulate
and hold a portfolio of common stocks that is intended to
track the price performance and dividend yield of the Dow
Jones Industrial Average and the Standard & Poor's Composite
Stock Price Index, respectively. WEBS ("World Equity
Benchmark Shares") are exchange-traded shares of series of
an investment company that are designed to replicate the
performance of a particular foreign equity market index.
Equity Equivalents may be used for several purposes,
including, to simulate full investment in the underlying
index while retaining a cash balance for fund management
purposes, to facilitate trading, to reduce transaction costs
or to seek higher investment returns where an Equity
Equivalent is priced more attractively than securities in
the underlying index. Because the expense associated with
an investment in Equity Equivalents may be substantially
lower than the expense of small investments directly in the
securities comprising the indices they seek to track,
investments in Equity Equivalents may provide a cost-
effective means of diversifying a Fund's assets across a
broad range of equity securities.
To the extent a Fund invests in securities of other
investment companies, Fund shareholders would indirectly pay
a portion of the operating costs of such companies in
addition to the expenses of its own operation. These costs
include management, brokerage, shareholder servicing and
other operational expenses. Indirectly, then, shareholders
of a Fund that invests in Equity Equivalents may pay higher
operational costs than if they owned the underlying
investment companies directly. Additionally, a Fund's
investments in such investment companies are subject to
limitations under the 1940 Act and market availability.
The prices of Equity Equivalents are derived and based
upon the securities held by the particular investment
company. Accordingly, the level of risk involved in the
purchase or sale of an Equity Equivalent is similar to the
risk involved in the purchase or sale of traditional common
stock, with the exception that the pricing mechanism for
such instruments is based on a basket of stocks. The market
prices of Equity Equivalents are expected to fluctuate in
accordance with both changes in the net asset values of
their underlying indices and the supply and demand for the
instruments on the exchanges on which they are traded.
Substantial market or other disruptions affecting an Equity
Equivalent could adversely affect the liquidity and value of
the shares of a Fund investing in such instruments.
Lending of Portfolio Securities. Each Fund may lend
portfolio securities to brokers, dealers and other financial
organizations that meet capital and other credit
requirements or other criteria established by the Board.
These loans, if and when made, may not exceed 33-1/3% of a
Fund's total assets taken at value. A Fund will not lend
portfolio securities to affiliates of the Adviser unless
they have applied for and received specific authority to do
so from the SEC. Loans of portfolio securities will be
collateralized by cash, letters of credit or U.S. Government
Securities, which are maintained at all times in an amount
equal to at least 102% of the current market value of the
loaned securities. Any gain or loss in the market price of
the securities loaned that might occur during the term of
the loan would be for the account of the Fund. From time to
time, a Fund may return a part of the interest earned from
the investment of collateral received for securities loaned
to the borrower and/or a third party that is unaffiliated
with the Fund and that is acting as a "finder."
By lending its securities, a Fund can increase its
income by continuing to receive interest and any dividends
on the loaned securities as well as by either investing the
collateral received for securities loaned in short-term
instruments or obtaining yield in the form of interest paid
by the borrower when U.S. Government Securities are used as
collateral. Although the generation of income is not the
primary investment goal of the Funds, income received could
be used to pay a Fund's expenses and would increase an
investor's total return. Each Fund will adhere to the
following conditions whenever its portfolio securities are
loaned: (i) the Fund must receive at least 102% cash
collateral or equivalent securities of the type discussed in
the preceding paragraph from the borrower; (ii) the borrower
must increase such collateral whenever the market value of
the securities rises above the level of such collateral;
(iii) the Fund must be able to terminate the loan at any
time; (iv) the Fund must receive reasonable interest on the
loan, as well as any dividends, interest or other
distributions on the loaned securities and any increase in
market value; (v) the Fund may pay only reasonable custodian
fees in connection with the loan; and (vi) voting rights on
the loaned securities may pass to the borrower, provided,
however, that if a material event adversely affecting the
investment occurs, the Board must terminate the loan and
regain the right to vote the securities. Loan agreements
involve certain risks in the event of default or insolvency
of the other party including possible delays or restrictions
upon a Fund's ability to recover the loaned securities or
dispose of the collateral for the loan.
When-Issued Securities, Delayed-Delivery Transactions
and Forward Commitments. Each Fund may purchase securities
on a "when-issued" basis, for delayed delivery (i.e.,
payment or delivery occur beyond the normal settlement date
at a stated price and yield) or on a forward commitment
basis. Each Fund does not intend to engage in these
transactions for speculative purposes, but only in
furtherance of its investment goal. These transactions
occur when securities are purchased or sold by a Fund with
payment and delivery taking place in the future to secure
what is considered an advantageous yield and price to a Fund
at the time of entering into the transaction. The payment
obligation and the interest rate that will be received on
when-issued securities are fixed at the time the buyer
enters into the commitment. Due to fluctuations in the
value of securities purchased or sold on a when-issued,
delayed-delivery basis or forward commitment basis, the
prices obtained on such securities may be higher or lower
than the prices available in the market on the dates when
the investments are actually delivered to the buyers.
When a Fund agrees to purchase when-issued, delayed-
delivery securities or securities on a forward commitment
basis, its custodian will set aside cash or liquid
securities equal to the amount of the commitment in a
segregated account. Normally, the custodian will set aside
portfolio securities to satisfy a purchase commitment, and
in such a case a Fund may be required subsequently to place
additional assets in the segregated account in order to
ensure that the value of the account remains equal to the
amount of the Fund's commitment. The assets contained in
the segregated account will be marked-to-market daily. It
may be expected that a Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to
cover such purchase commitments than when it sets aside
cash. When a Fund engages in when-issued, delayed-delivery
or forward commitment transactions, it relies on the other
party to consummate the trade. Failure of the seller to do
so may result in a Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
Repurchase Agreements. Each Fund may agree to
purchase securities from a bank or recognized securities
dealer and simultaneously commit to resell the securities to
the bank or dealer at an agreed-upon date and price
reflecting a market rate of interest unrelated to the coupon
rate or maturity of the purchased securities ("repurchase
agreements"). A Fund would maintain custody of the
underlying securities prior to their repurchase; thus, the
obligation of the bank or dealer to pay the repurchase price
on the date agreed to would be, in effect, secured by such
securities. If the value of such securities were less than
the repurchase price, plus interest, the other party to the
agreement would be required to provide additional collateral
so that at all times the collateral is at least 102% of the
repurchase price plus accrued interest. Default by or
bankruptcy of a seller would expose a Fund to possible loss
because of adverse market action, expenses and/or delays in
connection with the disposition of the underlying
obligations. The financial institutions with which a Fund
may enter into repurchase agreements will be banks and non-
bank dealers of U.S. Government securities that are listed
on the Federal Reserve Bank of New York's list of reporting
dealers, if such banks and non-bank dealers are deemed
creditworthy by the Fund's Adviser. The Adviser will
continue to monitor creditworthiness of the seller under a
repurchase agreement, and will require the seller to
maintain during the term of the agreement the value of the
securities subject to the agreement to equal at least 102%
of the repurchase price (including accrued interest). In
addition, the Adviser will require that the value of this
collateral, after transaction costs (including loss of
interest) reasonably expected to be incurred on a default,
be equal to 102% or greater than the repurchase price
(including accrued premium) provided in the repurchase
agreement or the daily amortization of the difference
between the purchase price and the repurchase price
specified in the repurchase agreement. The Adviser will
mark-to-market daily the value of the securities.
Repurchase agreements are considered to be loans by a Fund
under the 1940 Act.
Reverse Repurchase Agreements and Dollar Rolls. Each
Fund may enter into reverse repurchase agreements with the
same parties with whom it may enter into repurchase
agreements. Reverse repurchase agreements involve the sale
of securities held by a Fund pursuant to its agreement to
repurchase them at a mutually agreed upon date, price and
rate of interest. At the time a Fund enters into a reverse
repurchase agreement, it will establish and maintain a
segregated account with an approved custodian containing
cash or liquid securities having a value not less than the
repurchase price (including accrued interest). The assets
contained in the segregated account will be marked-to-market
daily and additional assets will be placed in such account
on any day in which the assets fall below the repurchase
price (plus accrued interest). A Fund's liquidity and
ability to manage its assets might be affected when it sets
aside cash or portfolio securities to cover such
commitments. Reverse repurchase agreements involve the risk
that the market value of the securities retained in lieu of
sale may decline below the price of the securities a Fund
has sold but is obligated to repurchase. In the event the
buyer of securities under a reverse repurchase agreement
files for bankruptcy or becomes insolvent, such buyer or its
trustee or receiver may receive an extension of time to
determine whether to enforce a Fund's obligation to
repurchase the securities, and the Fund's use of the
proceeds of the reverse repurchase agreement may effectively
be restricted pending such decision.
Each Fund also may enter into "dollar rolls," in which
a Fund sells fixed-income securities for delivery in the
current month and simultaneously contracts to repurchase
similar but not identical (same type, coupon and maturity)
securities on a specified future date. During the roll
period, the Fund would forego principal and interest paid on
such securities. The Fund would be compensated by the
difference between the current sales price and the forward
price for the future purchase, as well as by the interest
earned on the cash proceeds of the initial sale. At the
time a Fund enters into a dollar roll transaction, it will
place in a segregated account maintained with an approved
custodian cash or liquid securities having a value not less
than the repurchase price (including accrued interest) and
will subsequently monitor the account to ensure that its
value is maintained. Reverse repurchase agreements and
dollar rolls that are accounted for as financings are
considered to be borrowings under the 1940 Act.
Convertible Securities. Convertible securities in
which a Fund may invest, including both convertible debt and
convertible preferred stock, may be converted at either a
stated price or stated rate into underlying shares of common
stock. Because of this feature, convertible securities
enable an investor to benefit from increases in the market
price of the underlying common stock. Convertible
securities provide higher yields than the underlying equity
securities, but generally offer lower yields than
non-convertible securities of similar quality. Like bonds,
the value of convertible securities fluctuates in relation
to changes in interest rates and, in addition, also
fluctuates in relation to the underlying common stock.
Structured Notes. Each Fund may invest in structured
notes. The distinguishing feature of a structured note is
that the amount of interest and/or principal payable on the
notes is based on the performance of a benchmark asset or
market other than fixed-income securities or interest rates.
Examples of a benchmark include stock prices, currency
exchange rates and physical commodity prices. Investing in
a structured note allows a Fund to gain exposure to the
benchmark asset or market, such as investments in certain
emerging markets that restrict investment by foreigners.
The structured note fixes the maximum loss that a Fund may
experience in the event that the market does not perform as
expected. The performance tie can be a straight
relationship or leveraged, although the Adviser generally
will not use leverage in its structured note strategies.
Depending on the terms of the note, a Fund may forego all or
part of the interest and principal that would be payable on
a comparable conventional note; a Fund's loss cannot exceed
this foregone interest and/or principal. An investment in a
structured note involves risks similar to those associated
with a direct investment in the benchmark asset. Structured
notes will be treated as illiquid securities for investment
limitation purposes.
Non-Publicly Traded and Illiquid Securities. Each
Fund may not invest more than 15% of its net assets in non-
publicly traded and illiquid securities, including
securities that are illiquid by virtue of the absence of a
readily available market, repurchase agreements which have a
maturity of longer than seven days, certain Rule 144A
Securities (as described below) and time deposits maturing
in more than seven days. Securities that have legal or
contractual restrictions on resale but have a readily
available market are not considered illiquid for purposes of
this limitation. Repurchase agreements subject to demand
are deemed to have a maturity equal to the notice period.
Under current guidelines of the staff of the SEC,
illiquid securities are considered to include, among other
securities, purchased OTC options, certain cover for OTC
options, securities subject to contractual or legal
restrictions on resale because they have not been registered
under the Securities Act of 1933, as amended (the
"Securities Act"), securities which are otherwise not
readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have
not been registered under the Securities Act are referred to
as private placements or restricted securities and are
purchased directly from the issuer or in the secondary
market. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid
securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within
seven days without borrowing. A mutual fund might also have
to register such restricted securities in order to dispose
of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of
securities.
In recent years, however, a large institutional market
has developed for certain securities that are not registered
under the Securities Act including repurchase agreements,
commercial paper, foreign securities, municipal securities
and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the
unregistered security can be readily resold or on an
issuer's ability to honor a demand for repayment. The fact
that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be
indicative of the liquidity of such investments.
Rule 144A Securities. Rule 144A under the Securities
Act adopted by the SEC allows for a broader institutional
trading market for securities otherwise subject to
restriction on resale to the general public. Rule 144A
establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain
securities to qualified institutional buyers. The Adviser
anticipates that the market for certain restricted
securities such as institutional commercial paper will
expand further as a result of this regulation and use of
automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers,
such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc.
An investment in Rule 144A Securities will be
considered illiquid and therefore subject to the Fund's
limit on the purchase of illiquid securities unless the
Board or its delegates determines that the Rule 144A
Securities are liquid. In reaching liquidity decisions, the
Board and its delegates may consider, inter alia, the
following factors: (i) the unregistered nature of the
security; (ii) the frequency of trades and quotes for the
security; (iii) the number of dealers wishing to purchase or
sell the security and the number of other potential
purchasers; (iv) dealer undertakings to make a market in the
security and (v) the nature of the security and the nature
of the marketplace trades (e.g., the time needed to dispose
of the security, the method of soliciting offers and the
mechanics of the transfer).
Emerging Growth and Smaller Capitalization Companies;
Unseasoned Issuers. Investments in securities of small- and
medium-sized, emerging growth companies and companies with
continuous operations of less than three years ("unseasoned
issuers") involve considerations that are not applicable to
investing in securities of established, larger-
capitalization issuers, including reduced and less reliable
information about issuers and markets, less stringent
financial disclosure requirements, illiquidity of securities
and markets, higher brokerage commissions and fees and
greater market risk in general. Securities of these
companies may also involve greater risks since these
securities may have limited marketability and, thus, may be
more volatile. Because such companies normally have fewer
shares outstanding than larger, more established companies,
it may be more difficult for a Fund to buy or sell
significant amounts of such shares without an unfavorable
impact on prevailing prices. These companies may have
limited product lines, markets or financial resources and
may lack management depth. In addition, these companies are
typically subject to a greater degree of changes in earnings
and business prospects than are larger, more established
companies. Although investing in securities of these
companies offers potential for above-average returns if the
companies are successful, the risk exists that the companies
will not succeed and the prices of the companies' shares
could significantly decline in value.
Rights Offerings and Purchase Warrants. Each Fund may
invest in rights and warrants to purchase newly created
equity securities consisting of common and preferred stock.
The equity security underlying a right or warrant is
outstanding at the time the right or warrant is issued or is
issued together with the right or warrant.
Investing in rights and warrants can provide a greater
potential for profit or loss than an equivalent investment
in the underlying security, and, thus, can be a speculative
investment. The value of a right or warrant may decline
because of a decline in the value of the underlying
security, the passage of time, changes in interest rates or
in the dividend or other policies of the company whose
equity underlies the warrant or a change in the perception
as to the future price of the underlying security, or any
combination thereof. Rights and warrants generally pay no
dividends and confer no voting or other rights other than to
purchase the underlying security.
Borrowing. Each Fund may borrow up to 33-1/3% of its
total assets for temporary or emergency purposes, including
to meet portfolio redemption requests so as to permit the
orderly disposition of portfolio securities or to facilitate
settlement transactions on portfolio securities.
Investments (including roll-overs) will not be made when
borrowings exceed 5% of a Fund's net assets. Although the
principal of such borrowings will be fixed, a Fund's assets
may change in value during the time the borrowing is
outstanding. Each Fund expects that some of its borrowings
may be made on a secured basis. In such situations, either
the custodian will segregate the pledged assets for the
benefit of the lender or arrangements will be made with a
suitable subcustodian, which may include the lender.
Other Investment Limitations
The investment limitations numbered 1 through 8 may
not be changed without the affirmative vote of the holders
of a majority of the Fund's outstanding shares. Such
majority is defined as the lesser of (i) 67% or more of the
shares present at the meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the
outstanding shares. Investment limitations 9 through 14 may
be changed by a vote of the Board at any time.
Each Fund may not:
1. Borrow money except that a Fund may (a) borrow
from banks for temporary or emergency purposes and (b) enter
into reverse repurchase agreements; provided that reverse
repurchase agreements, dollar roll transactions that are
accounted for as financings and any other transactions
constituting borrowing by the Fund may not exceed 33-1/3% of
the value of the Fund's total assets at the time of such
borrowing. For purposes of this restriction, the entry into
currency transactions, options, futures contracts, options
on futures contracts, forward commitment transactions and
dollar roll transactions that are not accounted for as
financings (and the segregation of assets in connection with
any of the foregoing) shall not constitute borrowing.
2. Purchase any securities which would cause 25% or
more of the value of the Fund's total assets at the time of
purchase to be invested in the securities of issuers
conducting their principal business activities in the same
industry; provided that to the extent the benchmark of the
Equity Funds is concentrated in a particular industry, these
Funds will be concentrated in that industry. This
limitation shall not apply to the purchase of U.S.
Government Securities.
3. Purchase the securities of any issuer if as a
result more than 5% of the value of the Fund's total assets
would be invested in the securities of such issuer, except
that this 5% limitation does not apply to U.S. Government
Securities and except that up to 25% of the value of the
Fund's total assets may be invested without regard to this
5% limitation.
4. Make loans, except that a Fund may purchase or
hold fixed-income securities, including structured
securities, lend portfolio securities and enter into
repurchase agreements.
5. Underwrite any securities issued by others
except to the extent that investment in restricted
securities and the sale of securities in accordance with the
Fund's investment goal, policies and limitations may be
deemed to be underwriting.
6. Purchase or sell real estate or invest in oil,
gas or mineral exploration or development programs, except
that a Fund may invest in (a) securities secured by real
estate, mortgages or interests therein and (b) securities of
companies that invest in or sponsor oil, gas or mineral
exploration or development programs.
7. Invest in commodities, except that a Fund may
purchase and sell futures contracts, including those
relating to securities, currencies and indices, and options
on futures contracts, securities, currencies or indices, and
purchase and sell currencies on a forward commitment or
delayed-delivery basis.
8. Issue any senior security except as permitted in
the Fund's investment limitations.
9. Purchase securities on margin, except that a
Fund may obtain any short-term credits necessary for the
clearance of purchases and sales of securities. For
purposes of this restriction, the deposit or payment of
initial or variation margin in connection with transactions
in currencies, options, futures contracts or related options
will not be deemed to be a purchase of securities on margin.
10. Purchase securities of other investment
companies except in connection with a merger, consolidation,
acquisition, reorganization or offer of exchange, or as
otherwise permitted under the 1940 Act.
11. Pledge, mortgage or hypothecate its assets,
except to the extent necessary to secure permitted
borrowings and to the extent related to the deposit of
assets in escrow and in connection with the writing of
covered put and call options and purchase of securities on a
forward commitment or delayed-delivery basis and collateral
and initial or variation margin arrangements with respect to
currency transactions, options, futures contracts, and
options on futures contracts.
12. Invest more than 15% of the Fund's net assets in
securities which may be illiquid because of legal or
contractual restrictions on resale or securities for which
there are no readily available market quotations. For
purposes of this limitation, repurchase agreements with
maturities greater than seven days shall be considered
illiquid securities.
13. Invest in rights and warrants (other than rights
and warrants acquired by the Fund as part of a unit or
attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or
market) would exceed 10% of the value of the Fund's net
assets.
14. Make additional investments (including roll-
overs) if the Fund's borrowings exceed 5% of its net assets.
If a percentage restriction (other than the percentage
limitation set forth in No. 1 and No. 12) is adhered to at
the time of an investment, a later increase or decrease in
the percentage of assets resulting from a change in the
values of portfolio securities or in the amount of a Fund's
assets will not constitute a violation of such restriction.
Portfolio Valuation
The Prospectus discusses the time at which the net
asset value of each Fund is determined for purposes of sales
and redemptions. The following is a description of the
procedures used by each Fund in valuing its assets.
Securities listed on a U.S. securities exchange
(including securities traded through the NASDAQ National
Market System) or foreign securities exchange or traded in
an over-the-counter market will be valued at the most recent
sale as of the time the valuation is made or, in the absence
of sales, at the mean between the bid and asked quotations.
If there are no such quotations, the value of the securities
will be taken to be the highest bid quotation on the
exchange or market. Options or futures contracts will be
valued similarly. Stock index options will be valued at the
last price, but if that price does not fall within the bid
and ask price for the stock index option when the market
closes at 4:15 p.m. Eastern Time, then the stock index
option will be valued at the mean between the bid and asked
quotations. A security which is listed or traded on more
than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security.
Short-term obligations with maturities of 60 days or less
are valued at amortized cost, which constitutes fair value
as determined by the Board. Amortized cost involves valuing
a portfolio instrument at its initial cost and thereafter
assuming a constant amortization to maturity of any discount
or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. The amortized
cost method of valuation may also be used with respect to
other debt obligations with 60 days or less remaining to
maturity. Notwithstanding the foregoing, in determining the
market value of portfolio investments, a Fund may employ
outside organizations (a "Price Service") which may use a
matrix, formula or other objective method that takes into
consideration market indexes, matrices, yield curves and
other specific adjustments. The procedures of Pricing
Services are reviewed periodically by the officers of a Fund
under the general supervision and responsibility of the
Board, which may replace a Pricing Service at any time.
Securities, options and futures contracts for which market
quotations are not available and certain other assets of a
Fund will be valued at their fair value as determined in
good faith pursuant to consistently applied procedures
established by the Board. In addition, the Board or its
delegates may value a security at fair value if it
determines that such security's value determined by the
methodology set forth above does not reflect its fair value.
Trading in securities in certain foreign countries is
completed at various times prior to the close of business on
each business day in New York (i.e., a day on which The New
York Stock Exchange, Inc. (the "NYSE") is open for trading).
In addition, securities trading in a particular country or
countries may not take place on all business days in New
York. Furthermore, trading takes place in various foreign
markets on days which are not business days in New York and
days on which a Fund's net asset value is not calculated.
As a result, calculation of a Fund's net asset value may not
take place contemporaneously with the determination of the
prices of certain foreign portfolio securities used in such
calculation. Events affecting the values of portfolio
securities that occur between the time their prices are
determined and the close of regular trading on the NYSE will
not be reflected in a Fund's calculation of net asset value
unless the Board or its delegates deems that the particular
event would materially affect net asset value, in which case
an adjustment may be made. All assets and liabilities
initially expressed in foreign currency values will be
converted into U.S. dollar values at the prevailing rate as
quoted by a Pricing Service. If such quotations are not
available, the rate of exchange will be determined in good
faith pursuant to consistently applied procedures
established by the Board.
Portfolio Transactions
Each Fund's Adviser is responsible for establishing,
reviewing and, where necessary, modifying the Fund's
investment program to achieve its investment goal.
Purchases and sales of newly issued portfolio securities are
usually principal transactions without brokerage commissions
effected directly with the issuer or with an underwriter
acting as principal. Other purchases and sales may be
effected on a securities exchange or over-the-counter,
depending on where it appears that the best price or
execution will be obtained. The purchase price paid by a
Fund to underwriters of newly issued securities usually
includes a concession paid by the issuer to the underwriter,
and purchases of securities from dealers, acting as either
principals or agents in the after market, are normally
executed at a price between the bid and asked price, which
includes a dealer's mark-up or mark-down. Transactions on
U.S. stock exchanges and some foreign stock exchanges
involve the payment of negotiated brokerage commissions. On
exchanges on which commissions are negotiated, the cost of
transactions may vary among different brokers. On most
foreign exchanges, commissions are generally fixed. There
is generally no stated commission in the case of securities
traded in domestic or foreign over-the-counter markets, but
the price of securities traded in over-the-counter markets
includes an undisclosed commission or mark-up. U.S.
Government Securities are generally purchased from
underwriters or dealers, although certain newly issued U.S.
Government Securities may be purchased directly from the
U.S. Treasury or from the issuing agency or instrumentality.
The Adviser will select specific portfolio investments
and effect transactions for a Fund and in doing so seeks to
obtain the overall best execution of portfolio transactions.
In evaluating prices and executions, the Adviser will
consider the factors it deems relevant, which may include
the breadth of the market in the security, the price of the
security, the financial condition and execution capability
of a broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a
continuing basis. The Adviser may, in its discretion,
effect transactions in portfolio securities with dealers who
provide brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of
1934) to a Fund and/or other accounts over which the Adviser
exercises investment discretion. The Adviser may place
portfolio transactions with a broker or dealer with whom it
has negotiated a commission that is in excess of the
commission another broker or dealer would have charged for
effecting the transaction if the Adviser determines in good
faith that the amount of commission was reasonable in
relation to the value of the brokerage and research services
provided by such broker or dealer viewed in terms of either
that particular transaction or of the overall
responsibilities of the Adviser. Research and other
services received may be useful to the Adviser in serving
both a Fund and the Adviser's other clients and, conversely,
research or other services obtained by the placement of
business of other clients may be useful to the Adviser in
carrying out its obligations to a Fund. Research may
include furnishing advice, either directly or through
publications or writings, as to the value of securities, the
advisability of purchasing or selling specific securities
and the availability of securities or purchasers or sellers
of securities; furnishing seminars, information, analyses
and reports concerning issuers, industries, securities,
trading markets and methods, legislative developments,
changes in accounting practices, economic factors and trends
and portfolio strategy; access to research analysts,
corporate management personnel, industry experts, economists
and government officials; comparative performance evaluation
and technical measurement services and quotation services;
and products and other services (such as third party
publications, reports and analyses, and computer and
electronic access, equipment, software, information and
accessories that deliver, process or otherwise utilize
information, including the research described above) that
assist the Adviser in carrying out its responsibilities.
Research received from brokers or dealers is supplemental to
the Adviser's own research program. The fees payable to
Centurion under its advisory agreement with each Fund, and
the fees payable to the sub-advisers under their respective
sub-advisory agreements with Centurion, are not reduced by
reason of the Adviser receiving any brokerage and research
services. For the fiscal period ended September 30, 1999,
Centurion US Equity Fund paid $20,011 to brokers because of
research services provided. For the fiscal period ended
September 30, 1999, the Centurion US Equity Fund directed
brokerage transactions totaling approximately $12,000,000 to
brokers because of research services provided.
Investment decisions for a Fund concerning specific
portfolio securities are made independently from those for
other clients advised by the Adviser. Such other investment
clients may invest in the same securities as the applicable
Fund. When purchases or sales of the same security are made
at substantially the same time on behalf of such other
clients, transactions are averaged as to price and available
investments allocated as to amount, in a manner which the
Adviser believes to be equitable to each client, including
the applicable Fund. In some instances, this investment
procedure may adversely affect the price paid or received by
the Fund or the size of the position obtained or sold for
the Fund. To the extent permitted by law, the Adviser may
aggregate the securities to be sold or purchased for a Fund
with those to be sold or purchased for such other investment
clients in order to obtain best execution. In no instance
will portfolio securities be purchased from or sold to the
Adviser or its affiliates.
Transactions for a Fund may be effected on foreign
securities exchanges. In transactions for securities not
actively traded on a foreign securities exchange, each Fund
will deal directly with the dealers who make a market in the
securities involved, except in those circumstances where
better prices and execution are available elsewhere. Such
dealers usually are acting as principal for their own
account. On occasion, securities may be purchased directly
from the issuer. Such portfolio securities are generally
traded on a net basis and do not normally involve brokerage
commissions. Securities firms may receive brokerage
commissions on certain portfolio transactions, including
options, futures and options on futures transactions and the
purchase and sale of underlying securities upon exercise of
options.
Each Fund may participate, if and when practicable, in
bidding for the purchase of securities for its portfolio
directly from an issuer in order to take advantage of the
lower purchase price available to members of such a group.
A Fund will engage in this practice, however, only when the
Adviser, in its sole discretion, believes such practice to
be otherwise in the Fund's interest.
Each fund has paid the following in brokerage commissions
for portfolio transactions:
Fund
Fiscal
Period
Ended
9/30/99
U.S. Equity Fund
$164,681
International
Equity Fund
175,318
U.S. Contra Fund
45,868
International
Contra Fund*
N/A
*The International Contra Fund had no outstanding shares as
of September 30, 1999
Portfolio Turnover
As discussed in the Prospectus, the Company
anticipates that investors in the Contra Funds, as part of a
tactical or strategic asset allocation strategy, may
frequently redeem or exchange shares of these Funds. The
Contra Funds may have to dispose of certain portfolio
investments to maintain sufficient liquid assets to meet
such redemption and exchange requests, thereby resulting in
higher portfolio turnover. Because each Contra Fund's
portfolio turnover rate to a great extent will depend on the
purchase, redemption and exchange activity of the Fund's
investors, it is difficult to estimate what the Fund's
actual turnover rate will be in the future. Additionally,
because of the investment techniques employed by the U.S.
Equity Fund and the International Equity Fund to reduce the
realization of capital gains, it is anticipated that the
annual portfolio turnover rate for the these Funds will not
exceed 50% and 100%, respectively, under normal market
conditions.
A Fund's portfolio turnover rate is calculated by the
value of the securities purchased or sold, excluding all
securities whose maturities at the time of acquisition were
one year or less, divided by the average monthly value of
such securities owned during the year. Based on this
calculation, instruments, including options and futures
contracts, with remaining maturities of less than one year
are excluded from the portfolio turnover rate. In any given
period, all of a Contra Fund's investments may have a
remaining maturity of less than one year; in which case, the
portfolio turnover rate for that period would be equal to
zero.
The portfolio turnover rates are as follows:
Fund
Fiscal
Period
Ended
9/30/99
U.S. Equity Fund
89%
International
Equity Fund
102%
U.S. Contra Fund
0%
International
Contra Fund*
N/A
*The International Contra Fund had no outstanding shares as
of September 30, 1999
MANAGEMENT OF THE FUNDS
Officers and Board of Directors
The business and affairs of each Fund is managed by
the Company's Board in accordance with the laws of the State
of Maryland. The Board elects officers who are responsible
for the day-to-day operations of the Funds and who execute
policies formulated by the Board. Under the Company's
Charter, the Board may classify or reclassify any unissued
shares of the Company into one or more additional classes by
setting or changing in any one or more respects their
relative rights, voting powers, restrictions, limitations as
to dividends, qualifications and terms and conditions of
redemption. The Board may similarly classify or reclassify
any class of the Company's shares into one or more series
and, without shareholder approval, may increase the number
of authorized shares of the Company.
The names (and ages) of the Company's directors and
officers, their addresses, present positions and principal
occupations during the past five years and other
affiliations are set forth below. An asterisk appears after
the name of each director who is an "interested person" of
the Company, as defined in the 1940 Act.
Name (Age) and Address
Position and Principal Occupation(s)
Charles P. Dickinson (61)
5219 N. Casa Blanca Dr. #54
Paradise Valley, AZ 85253
Director. President of The Dickinson Co., a
farming company, since 1972.
Gerard P. Dipoto, Jr.* (53)
2425 E. Camelback Rd, Suite 530
Phoenix, AZ 85016-4200
Chairman of the Board, President and Chief
Executive Officer. President of Centurion
since 1997; Executive Vice President of
Sales, Marketing and Relationship Management
at Investors Fiduciary Trust Company from
1987 to 1997.
Timothy E. Kloenne (55)
5730 E. Leith Lane
Scottsdale, AZ 85254
Director. President of Klontech Industrial
Sales, Inc., a quality control and
inspection equipment sales company, since
1971.
Joseph F. Smith (51)
9736 Legler St.
Lenexa, KS 66219
Director. Executive Vice President and
Chief Technology Officer of Gold Banc
Corporation, Inc., since 1999; Owner of
Compunet Engineering, a computer networking
company, from 1995-1999; Executive Vice
President and Director at Investors
Fiduciary Trust Company from 1993 to 1995.
Thomas M. Smith (56)
2525 E. Camelback Rd., Suite
150
Phoenix, AZ 85016
Director. Realtor at Coldwell Banker Success
Realty since 1990.
Ron A. Link (35)
2425 E. Camelback Rd, Suite 530
Phoenix, AZ 85016-4200
Treasurer. Information Systems Manager at
Centurion since March 1998; Senior Staff CPA
at Ferraro & McMurthy, P.C. from 1995 to
1998; Staff CPA at Zolondek, Blumenthal,
Green, Freed & Strossels, P.C. from 1993 to
1995.
Irving P. David (39)
388 Greenwich Street
New York, NY 10013
Controller. A Director of Salomon Smith
Barney Inc. ("SSB") and SSB Citi Fund
Management LLC ("SSB Citi") (successor to
SSBC Fund Management Inc.) since 1994;
Controller of several investment companies
associated with SSB.
Paul A. Monroe (39)
2425 E. Camelback Rd, Suite 530
Phoenix, AZ 85016-4200
Vice President. Operations Manager at
Centurion since 1997; Project Manager at
Bank One, NA from 1996 to 1997; Assistant
Vice President and Manager at First
Interstate Bank of Arizona, NA/Wells Fargo
from February 1996 to September 1996;
Assistant Vice President and Manager at Bank
One, NA from 1977 to 1996.
Jennifer L. Stecker (31)
2425 E. Camelback Rd, Suite 530
Phoenix, AZ 85016-4200
Secretary. Finance Manager at Centurion
since March 1998; Financial Analyst at
MicroAge, Inc. from 1997 to 1998; Securities
Specialist at Centurion from 1994 to 1997;
Sales Assistant at Principal Financial Group
from 1993 to 1994.
No employee of Centurion or any of its affiliates
receives compensation from the Company for acting as an
officer or director of the Company. The Company pays each
director who is not an "affiliated person" (as defined in
the 1940 Act) of the Adviser, administrator or distributor
an annual fee of $5,000 and $1,250 for each meeting of the
Board attended by him for his services as director, and
reimburses such director for expenses incurred with his
attendance at Board meetings.
Directors' Total Compensation:
Name of Director Total Compensation
from the Company
Charles P. Dickinson
$7,500
Gerard P. Dipoto, Jr.
None*
Timothy E. Kloenne
$7,500
Joseph F. Smith
$7,500
Thomas M. Smith
$7,500
* Mr. Dipoto receives compensation as an affiliate of
Centurion and, accordingly, receives no compensation
from the Company.
As of January 4, 2000, the directors and officers as a group
owned less than 1% of the outstanding common stock of the
trust. To the best knowledge of the trustees, as of January
4, 2000, the following shareholders or "groups" (as such
term is defined in Section 13(d) of the Securities Exchange
Act of 1934) owned beneficially or of record more than 5% of
the shares of the following classes:
Shareholder
Percent Ownership
A. U.S. Equity Fund*
Centurion Trust Company
2425 East Camelback Road
Suite 530
Phoenix, AZ 85016-4270
Owned 2,777,409.552 shares
100%
B. International Equity Fund*
Centurion Trust Company
2425 East Camelback Road
Suite 530
Phoenix, AZ 85016-4270
Owned 2,765,213.339 shares
100%
C. U.S. Contra Fund*
Centurion Trust Company
2425 East Camelback Road
Suite 530
Phoenix, AZ 85016-4270
Owned 4,7774,806.261 shares
100%
The International Contra Fund had no outstanding shares as
of September 30, 1999
*Centurion may be deemed to control each Fund because it has
complete investment discretion and voting authority with
respect to the shares of the Fund held by its clients.
Investment Advisers
Centurion, located at 2425 East Camelback Road, Suite
530, Phoenix, AZ 85016-4200, serves as investment manager to
the Funds. Centurion is a wholly-owned subsidiary of CCM
Group Inc., a holding company organized under the laws of
the State of Arizona. For a description of the fees paid to
Centurion for its services as investment manager to each of
the Funds, see the Prospectus.
Parametric, located at 7310 Columbia Center, 710 Fifth
Avenue, Seattle, Washington 98104-7090, serves as co-sub-
adviser to the U.S. Equity Fund. PIMCO Advisors, L.P., a
publicly traded investment management organization, is
Parametric's supervisory partner and Parametric Management
Inc. is the partnership's managing partner. For its
services as co-sub-adviser to the U.S. Equity Fund,
Centurion pays Parametric 0.30% of the first $25 million of
the average daily net assets of the Fund allocated to
Parametric and 0.25% of the amount in excess of $25 million.
FISI, located at One World Trade Center, Suite 2101,
New York, NY 10048-0080, effectively serves as co-sub-
adviser to the International Equity Fund. FISI is a wholly-
owned subsidiary of Friends Ivory & Sime plc ("Friends"), a
global investment management company, which in turn is
majority-owned by Friends Provident Life Office, a mutual
life assurance company registered in England. As discussed
in the Prospectus, FISI has entered into a sub-advisory
arrangement with Friends whereby Friends will perform
certain investment advisory and portfolio transaction
services for the International Equity Fund, as may be agreed
upon from time to time by FISI and Friends. Currently,
Friends is responsible for the day-to-day management of the
International Equity Fund's assets allocated to FISI, and
FISI reviews investment performance, policies and
guidelines, maintains certain books and records, and
facilitates communication between Friends and Centurion.
For its services as co-sub-adviser to the International
Equity Fund, Centurion pays FISI 0.30% of the first $50
million of the average daily net assets of the Fund
allocated to FISI, 0.275% of the next $50 million and 0.25%
of the amount in excess of $100 million.
Credit Suisse Asset Management LLC ("CSAM"), located
at One Citicorp Center, 153 East 53rd Street, New York, NY
10022, serves as sub-adviser to the Contra Funds and co-sub-
adviser to each of the Equity Funds. CSAM is a limited
liability company that is wholly-owned by Credit Suisse
Group, the second largest Swiss bank. For its services as
sub-adviser to the Contra Funds, Centurion pays CSAM 0.85%
of the average daily net assets of each Contra Fund. For
its services as co-sub-adviser to the Equity Funds,
Centurion pays CSAM 0.10% of the average daily net assets of
each Equity Fund.
Centurion serves as investment manager to the Funds
pursuant to separate investment management agreements
("Management Agreements"). Centurion, in turn, has entered
into separate sub-advisory agreements ("Sub-Advisory
Agreements") with each sub-adviser selected to manage all or
a portion of a particular Fund's portfolio according to its
investment goal and strategies. Each Adviser bears all
expenses in connection with the performance of its services
under the applicable Management Agreement or Sub-Advisory
Agreement. Each Fund pays Centurion a fee for services
provided under the Management Agreement that is computed
daily and paid monthly based on the value of the Fund's
average net assets. From this amount, Centurion pays the
Fund's sub-adviser(s) a fee for services provided under the
Sub-Advisory Agreement that is likewise computed daily and
paid monthly based on the value of the Fund's average net
assets. Centurion and/or each Fund's sub-adviser may
voluntarily waive a portion of its fees from time to time
and temporarily limit the expenses to be borne by a Fund.
The adviser fees paid by each fund to Centurion in
fiscal period ended September 30, 1999 was:
Fund
Fiscal
Period
Ended
9/30/99
Fee Waiver and
Expense
Reimbursement
U.S. Equity Fund
$280,701
N/A
International Equity
Fund
$309,463
N/A
U.S. Contra Fund
$345,060
$134,166
International Contra
Fund*
N/A
N/A
*The International Contra Fund had no
outstanding shares as of September 30, 1999.
Administrator
SSB Citi, located at 388 Greenwich Street, New York,
NY 10013, serves as administrator for the Company pursuant
to an administration agreement ("Administration Agreement").
As administrator, SSB Citi generally oversees all aspects of
the Company's administration and operations. SSB Citi
furnishes the Company with statistical and research data,
clerical help, accounting, data processing, bookkeeping,
internal auditing and legal services and certain other
services required by the Company; prepares tax returns and
reports to the Company's shareholders; and prepares reports
to and filings with the SEC and state blue sky authorities.
Each Fund pays SSB Citi a fee for services provided under
the Administration Agreement that is computed daily and paid
monthly at an annual rate of 0.20% of the Fund's average
daily net assets or $50,000, whichever amount is greater.
SSB Citi may voluntarily waive a portion of its fees from
time to time and temporarily limit the expenses to be borne
by a Fund.
The administrator fees paid to SSB Citi in fiscal
period ended September 30, 1999 were:
Fund
Fiscal
Period
Ended
9/30/99
U.S. Equity Fund
$79,196
International Equity
Fund
$86,450
U.S. Contra Fund
$57,510
International Contra
Fund*
N/A
*The International Contra Fund had no
outstanding shares as of September 30, 1999.
The consultant fees paid to SSB in fiscal period ended
September 30, 1999 for each Fund were:
Fund
Fiscal
Period
Ended
9/30/99
Fee Waiver and
Expense
Reimbursement
U.S. Equity Fund
$19,830
N/A
International Equity
Fund
$21,636
N/A
U.S. Contra Fund
$0
$14,377
International Contra
Fund*
N/A
N/A
*The International Contra Fund had no
outstanding shares as of September 30, 1999.
SSB acting through its Consulting Group Division
("CGD") would provide limited consulting services. CGD would
provide the Funds with (i) certain statistical and other
factual information and (ii) advice regarding economic
factors and trends. These functions will not make SSB an
"investment adviser" to the Funds within the meaning of the
1940 Act.
Distributor
CFBDS, Inc. located at 21 Milk Street, 5th Floor,
Boston, MA 02109, serves as the distributor for the Company
and is responsible for making shares of the Funds available
to investors. The distributor provides shareholder and
distribution services to the Funds at no charge.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The offering price of each Fund's shares is equal to
the Fund's per share net asset value. Information on how to
purchase and redeem Fund shares and how such shares are
priced is included in the Prospectus.
Under the 1940 Act, each Fund may suspend the right of
redemption or postpone the date of payment upon redemption
for any period during which the NYSE is closed, other than
customary weekend and holiday closings, or during which
trading on the NYSE is restricted, or during which (as
determined by the SEC) an emergency exists as a result of
which disposal or fair valuation of portfolio securities is
not reasonably practicable, or for such other periods as the
SEC may permit. (Each Fund may also suspend or postpone the
recordation of an exchange of its shares upon the occurrence
of any of the foregoing conditions.)
If the Board determines that conditions exist which
make payment of redemption proceeds wholly in cash unwise or
undesirable, a Fund may make payment wholly or partly in
securities or other investment instruments which may not
constitute securities as such term is defined in the
applicable securities laws. If a redemption is paid wholly
or partly in securities or other property, a shareholder
would incur transaction costs in disposing of the redemption
proceeds. Each Fund intends to comply with Rule 18f-1
promulgated under the 1940 Act with respect to redemptions
in kind.
EXCHANGE PRIVILEGE
An exchange privilege among the Funds is available to
investors in each Fund. The exchange privilege enables
shareholders to acquire shares in a Fund with a different
investment goal when they believe that a shift between Funds
is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the
shares being acquired may legally be sold. Prior to any
exchange, shareholders should review a copy of the current
prospectus of each Fund into which an exchange is being
considered.
Upon receipt of proper instructions and all necessary
supporting documents, shares submitted for exchange are
redeemed at the then-current net asset value of the Fund and
the proceeds are invested on the same day, at a price as
described above, in shares of the Fund being acquired. The
exchange privilege may be modified or terminated at any time
upon 30 days' notice to shareholders.
ADDITIONAL INFORMATION CONCERNING TAXES
The following is a summary of the material United
States federal income tax considerations regarding the
purchase, ownership and disposition of shares of a Fund.
Each prospective shareholder is urged to consult his own tax
adviser with respect to the specific federal, state, local
and foreign tax consequences of investing in a Fund. The
summary is based on the laws in effect on the date of this
Statement of Additional Information, which are subject to
change.
The Funds and Their Investments
Each Fund intends to qualify to be treated as a
regulated investment company each taxable year under the
Internal Revenue Code of 1986, as amended (the "Code"). To
so qualify, a Fund must, among other things: (a) derive at
least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities,
loans and gains from the sale or other disposition of stock
or securities or foreign currencies, or other income
(including, but not limited to, gains from options, futures
or forward contracts) derived with respect to its business
of investing in such stock, securities or currencies; and
(b) diversify its holdings so that, at the end of each
quarter of a Fund's taxable year, (i) at least 50% of the
market value of a Fund's assets is represented by cash,
securities of other regulated investment companies, United
States government securities and other securities, with such
other securities limited, in respect of any one issuer, to
an amount not greater than 5% of a Fund's 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
assets is invested in the securities (other than United
States government securities or securities of other
regulated investment companies) of any one issuer or any two
or more issuers that a Fund controls and are determined to
be engaged in the same or similar trades or businesses or
related trades or businesses.
As a regulated investment company, each Fund will not
be subject to United States federal income tax on its net
investment income (i.e., income other than its net realized
long- and short-term capital gains) and its net realized
long- and short-term capital gains, if any, that it
distributes to its shareholders, provided that an amount
equal to at least 90% of the sum of its investment company
taxable income (i.e., 90% of its taxable income minus the
excess, if any, of its net realized long-term capital gains
over its net realized short-term capital losses (including
any capital loss carryovers), plus or minus certain other
adjustments as specified in the Code) and its net tax-exempt
income for the taxable year is distributed, but will be
subject to tax at regular corporate rates on any taxable
income or gains that it does not distribute. Furthermore,
each Fund will be subject to a United States corporate
income tax with respect to such distributed amounts in any
year that it fails to qualify as a regulated investment
company or fails to meet this distribution requirement.
The Code imposes a 4% nondeductible excise tax on each
Fund to the extent a Fund does not distribute by the end of
any calendar year at least 98% of its net investment income
for that year and 98% of the net amount of its capital gains
(both long-and short-term) for the one-year period ending,
as a general rule, on October 31 of that year. For this
purpose, however, any income or gain retained by a Fund that
is subject to corporate income tax will be considered to
have been distributed by year-end. In addition, the minimum
amounts that must be distributed in any year to avoid the
excise tax will be increased or decreased to reflect any
underdistribution or overdistribution, as the case may be,
from the previous year. Each Fund anticipates that it will
pay such dividends and will make such distributions as are
necessary in order to avoid the application of this tax.
With regard to a Fund's investments in foreign
securities, exchange control regulations may restrict
repatriations of investment income and capital or the
proceeds of securities sales by foreign investors such as a
Fund and may limit a Fund's ability to pay sufficient
dividends and to make sufficient distributions to satisfy
the 90% and excise tax distribution requirements.
If, in any taxable year, a Fund fails to qualify as a
regulated investment company under the Code or fails to meet
the distribution requirement, it would be taxed in the same
manner as an ordinary corporation and distributions to its
shareholders would not be deductible by a Fund in computing
its taxable income. In addition, in the event of a failure
to qualify, a Fund's distributions, to the extent derived
from a Fund's current or accumulated earnings and profits
would constitute dividends (eligible for the corporate
dividends-received deduction) which are taxable to
shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been
treated in the shareholders' hands as long-term capital
gains. If a Fund fails to qualify as a regulated investment
company in any year, it must pay out its earnings and
profits accumulated in that year in order to qualify again
as a regulated investment company. In addition, if a Fund
failed to qualify as a regulated investment company for a
period greater than one taxable year, a Fund may be required
to recognize any net built-in gains (the excess of the
aggregate gains, including items of income, over aggregate
losses that would have been realized if it had been
liquidated) in order to qualify as a regulated investment
company in a subsequent year.
A Fund's transactions in foreign currencies, forward
contracts, options and futures contracts (including options
and futures contracts on foreign currencies) will be subject
to special provisions of the Code (including provisions
relating to "hedging transactions" and "straddles") that,
among other things, may affect the character of gains and
losses realized by a Fund (i.e., may affect whether gains or
losses are ordinary or capital), accelerate recognition of
income to a Fund and defer Fund losses. These rules could
therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (a)
will require a Fund to mark-to-market certain types of the
positions in its portfolio (i.e., treat them as if they were
closed out) and (b) may cause a Fund to recognize income
without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise
taxes. Each Fund will monitor its transactions, will make
the appropriate tax elections and will make the appropriate
entries in its books and records when it acquires any
foreign currency, forward contract, option, futures contract
or hedged investment in order to mitigate the effect of
these rules and prevent disqualification of a Fund as a
regulated investment company.
A Fund's investment in Section 1256 contracts, such as
regulated futures contracts, most forward currency forward
contracts traded in the interbank market and options on most
stock indices, are subject to special tax rules. All
section 1256 contracts held by a Fund at the end of its
taxable year are required to be marked to their market
value, and any unrealized gain or loss on those positions
will be included in the Fund's income as if each position
had been sold for its fair market value at the end of the
taxable year. The resulting gain or loss will be combined
with any gain or loss realized by the Fund from positions in
section 1256 contracts closed during the taxable year.
Provided such positions were held as capital assets and were
not part of a "hedging transaction" nor part of a
"straddle," 60% of the resulting net gain or loss will be
treated as long-term capital gain or loss, and 40% of such
net gain or loss will be treated as short-term capital gain
or loss, regardless of the period of time the positions were
actually held by the Fund.
As a result of entering into index swaps, a Fund may
make or receive periodic net payments. A Fund may also may
or receive a payment when a swap is terminated prior to
maturity through an assignment of the swap or other closing
transaction. Periodic net payments will contititute
ordianary income or deductions, while termination of a swap
will result in capital gain or loss (which will be a long-
term capital gain or loss if a Fund has been a party to the
swap for more than one year.
Passive Foreign Investment Companies. If a Fund
purchases shares in certain foreign investment entities,
called "passive foreign investment companies" (a "PFIC"), it
may be subject to United States federal income tax on a
portion of any "excess distribution" or gain from the
disposition of such shares even if such income is
distributed as a taxable dividend by a Fund to its
shareholders. Additional charges in the nature of interest
may be imposed on a Fund in respect of deferred taxes
arising from such distributions or gains. If a Fund were to
invest in a PFIC and elected to treat the PFIC as a
"qualified electing fund" under the Code, in lieu of the
foregoing requirements, a Fund might be required to include
in income each year a portion of the ordinary earnings and
net capital gains of the qualified electing fund, even if
not distributed to a Fund, and such amounts would be subject
to the 90% and excise tax distribution requirements
described above. In order to make this election, a Fund
would be required to obtain certain annual information from
the passive foreign investment companies in which it
invests, which may be difficult or not possible to obtain.
Alternatively, a Fund may make a mark-to-market
election that would result in a Fund being treated as if it
had sold and repurchased all of the PFIC stock at the end of
each year. In this case, a Fund would report gains as
ordinary income and would deduct losses as ordinary losses
to the extent of previously recognized gains. The election,
once made, would be effective for all subsequent taxable
years of a Fund, unless revoked with the consent of the IRS.
By making the election, a Fund could potentially ameliorate
the adverse tax consequences with respect to its ownership
of shares in a PFIC, but in any particular year may be
required to recognize income in excess of the distributions
it receives from PFICs and its proceeds from dispositions of
PFIC company stock. A Fund may have to distribute this
"phantom" income and gain to satisfy its distribution
requirement and to avoid imposition of the 4% excise tax.
Each Fund will make the appropriate tax elections, if
possible, and take any additional steps that are necessary
to mitigate the effect of these rules.
Taxation of United States Shareholders
Dividends and Distributions. Any dividend declared by
a Fund in October, November or December of any calendar year
and payable to shareholders of record on a specified date in
such a month shall be deemed to have been received by each
shareholder on December 31 of such calendar year and to have
been paid by a Fund not later than such December 31,
provided that such dividend is actually paid by a Fund
during January of the following calendar year. Each Fund
intends to distribute annually to its shareholders
substantially all of its investment company taxable income,
and any net realized long-term capital gains in excess of
net realized short-term capital losses (including any
capital loss carryovers). Each Fund currently expects to
distribute any excess annually to its shareholders.
However, if a Fund retains for investment an amount equal to
all or a portion of its net long-term capital gains in
excess of its net short-term capital losses and capital loss
carryovers, it will be subject to a corporate tax (currently
at a rate of 35%) on the amount retained. In that event, a
Fund will designate such retained amounts as undistributed
capital gains in a notice to its shareholders who (a) will
be required to include in income for United Stares federal
income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, (b) will
be entitled to credit their proportionate shares of the 35%
tax paid by the Fund on the undistributed amount against
their United States federal income tax liabilities, if any,
and to claim refunds to the extent their credits exceed
their liabilities, if any, and (c) will be entitled to
increase their tax basis, for United States federal income
tax purposes, in their shares by an amount equal to 65% of
the amount of undistributed capital gains included in the
shareholder's income. Organizations or persons not subject
to federal income tax on such capital gains will be entitled
to a refund of their pro rata share of such taxes paid by a
Fund upon filing appropriate returns or claims for refund
with the Internal Revenue Service (the "IRS").
Dividends of net investment income and distributions
of net realized short-term capital gains are taxable to a
United States shareholder as ordinary income, whether paid
in cash or in shares. Distributions of net-long-term
capital gains, if any, that a Fund designates as capital
gains dividends are taxable as long-term capital gains,
whether paid in cash or in shares and regardless of how long
a shareholder has held shares of a Fund. Dividends and
distributions paid by a Fund (except for the portion
thereof, if any, attributable to dividends on stock of U.S.
corporations received by a Fund) will not qualify for the
deduction for dividends received by corporations.
Distributions in excess of a Fund's current and accumulated
earnings and profits will, as to each shareholder, be
treated as a tax-free return of capital, to the extent of a
shareholder's basis in his shares of a Fund, and as a
capital gain thereafter (if the shareholder holds his shares
of a Fund as capital assets).
Shareholders receiving dividends or distributions in
the form of additional shares should be treated for United
States federal income tax purposes as receiving a
distribution in the amount equal to the amount of money that
the shareholders receiving cash dividends or distributions
will receive, and should have a cost basis in the shares
received equal to such amount.
Investors considering buying shares just prior to a
dividend or capital gain distribution should be aware that,
although the price of shares just purchased at that time may
reflect the amount of the forthcoming distribution, such
dividend or distribution may nevertheless be taxable to
them.
If a Fund is the holder of record of any stock on the
record date for any dividends payable with respect to such
stock, such dividends are included in a Fund's gross income
not as of the date received but as of the later of (a) the
date such stock became ex-dividend with respect to such
dividends (i.e., the date on which a buyer of the stock
would not be entitled to receive the declared, but unpaid,
dividends) or (b) the date a Fund acquired such stock.
Accordingly, in order to satisfy its income distribution
requirements, a Fund may be required to pay dividends based
on anticipated earnings, and shareholders may receive
dividends in an earlier year than would otherwise be the
case.
Sales of Shares. Upon the sale or exchange of his
shares, a shareholder will realize a taxable gain or loss
equal to the difference between the amount realized and his
basis in his shares. Such gain or loss will be treated as
capital gain or loss, if the shares are capital assets in
the shareholder's hands, and will be long-term capital gain
or loss if the shares are held for more than one year and
short-term capital gain or loss if the shares are held for
one year or less. Any loss realized on a sale or exchange
will be disallowed to the extent the shares disposed of are
replaced, including replacement through the reinvesting of
dividends and capital gains distributions in a Fund, within
a 61-day period beginning 30 days before and ending 30 days
after the disposition of the shares. In such a case, the
basis of the shares acquired will be increased to reflect
the disallowed loss. Any loss realized by a shareholder on
the sale of a Fund share held by the shareholder for six
months or less will be treated for United States federal
income tax purposes as a long-term capital loss to the
extent of any distributions or deemed distributions of long-
term capital gains received by the shareholder with respect
to such share.
Foreign Taxes. A Fund may elect for U.S. income tax
purposes to treat foreign income taxes paid by it as paid by
its shareholders if: (i) the Fund qualifies as a regulated
investment company, (ii) certain asset and distribution
requirements are satisfied, and (iii) more than 50% of the
Fund's total assets at the close of its fiscal year consists
of stock or securities of foreign corporations. A Fund may
qualify for and make this election in some, but not
necessarily all, of its taxable years. If a Fund were to
make an election, shareholders of the Fund would be required
to take into account an amount equal to their pro rata
portions of such foreign taxes in computing their taxable
income and then treat an amount equal to those foreign taxes
as a U.S. federal income tax deduction or as a foreign tax
credit against their U.S. federal income taxes. Shortly
after any year for which it makes such an election, a Fund
will report to its shareholders the amount per share of such
foreign income tax that must be included in each
shareholder's gross income and the amount which will be
available for the deduction or credit. No deduction for
foreign taxes may be claimed by a shareholder who does not
itemize deductions. Certain limitations will be imposed on
the extent to which the credit (but not the deduction) for
foreign taxes may be claimed.
Backup Withholding. Each Fund may be required to
withhold, for United States federal income tax purposes, 31%
of the dividends and distributions payable to shareholders
who fail to provide a Fund with their correct taxpayer
identification number or to make required certifications, or
who have been notified by the IRS that they are subject to
backup withholding. Certain shareholders are exempt from
backup withholding. Backup withholding is not an additional
tax and any amount withheld may be credited against a
shareholder's United States federal income tax liabilities.
Notices. Shareholders will be notified annually by a
Fund as to the United States federal income tax status of
the dividends, distributions and deemed distributions
attributable to undistributed capital gains (discussed above
in "Dividends and Distributions") made by a Fund to its
shareholders. Furthermore, shareholders will also receive,
if appropriate, various written notices after the close of a
Fund's taxable year regarding the United States federal
income tax status of certain dividends, distributions and
deemed distributions that were paid (or that are treated as
having been paid) by a Fund to its shareholders during the
preceding taxable year.
Other Taxation
Distributions also may be subject to additional state,
local and foreign taxes depending on each shareholder's
particular situation.
The foregoing is only a summary of certain material tax
consequences affecting the fund and its shareholders.
Shareholders are advised to consult their own tax advisers
with respect to the particular tax consequences to them of
an investment in the funds.
PERFORMANCE DATA
From time to time, the fund may quote its total return in
advertisements or in reports and other communications to
shareholders. The fund may include comparative performance
information in advertising or marketing the fund's shares.
Such performance information may include the following
industry and financial publications: Barron's, Business
Week, CDA Investment Technologies, Inc., Changing Times,
Forbes, Fortune, Institutional Investor, Investors Daily,
Money, Morningstar Mutual Fund Values, The New York Times,
USA Today and The Wall Street Journal.
Average Annual Total Return
A fund's "average annual total return," as described below,
is computed according to a formula prescribed by the SEC.
The formula can be expressed as follows:
P(1 + T)n = ERV
Where: P = a hypothetical initial
payment of $1,000.
T = average annual total
return.
n = number of years.
ERV = Ending Redeemable Value
of a hypothetical $1,000
investment made at the
beginning of a 1-, 5- or
10-year period at the
end of a 1-, 5- or 10-
year period (or
fractional portion
thereof), assuming
reinvestment of all
dividends and
distributions.
The ERV assumes complete redemption of the hypothetical
investment at the end of the measuring period. A fund's net
investment income changes in response to fluctuations in
interest rates and the expenses of the fund.
Aggregate Annual Total Return
Fund
1-Year
5-Year
10-
Year
Inception1
U.S. Equity Fund
N/A
N/A
N/A
4.00
%
International Equity Fund
N/A
N/A
N/A
7.30
%
U.S. Contra Fund
N/A
N/A
N/A
(24.50)
%
International Contra Fund
N/A
N/A
N/A
N/A
1 With the exception of the International Contra Fund
which is not currently offered, each of the above
Funds commenced operations on December 7, 1998.
Aggregate Total Return
Each Fund's "aggregate total return," as described below,
represents the cumulative change in the value of an
investment in the Fund for the specified period and is
computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment
of $10,000.
ERV = Ending Redeemable Value of a
hypothetical $10,000
investment made at the
beginning of the 1-, 5- or 10-
year period at the end of the
1-, 5- or 10-year period (or
fractional portion thereof),
assuming reinvestment of all
dividends and distributions.
The ERV assumes complete redemption of the hypothetical
investment at the end of the measuring period.
Average Annual Total Return
Fund
1-Year
5-Year
10-
Year
Inceptio
n1
U.S. Equity Fund
N/A
N/A
N/A
4.00 %
International Equity Fund
N/A
N/A
N/A
7.30 %
U.S. Contra Fund
N/A
N/A
N/A
(24.50)%
International Contra Fund
N/A
N/A
N/A
N/A
1 With the exception of the International Contra Fund
which is not currently offered, each of the above
Funds commenced operations on December 7, 1998.
Performance will vary from time to time depending upon
market conditions, the composition of each Fund's portfolio
and its operating expenses. Consequently, any given
performance quotation should not be considered
representative of a Fund's performance for any specified
period in the future. Because performance will vary, it may
not provide a basis for comparing an investment in a Fund
with certain bank deposits or other investments that pay a
fixed yield for a stated period of time. Investors
comparing a Fund's performance with that of other mutual
funds should give consideration to the quality and maturity
of the respective investment companies' portfolio
securities.
OTHER INFORMATION
Capital Stock
Investors in a Fund are entitled to one vote for each
full share held and fractional votes for fractional shares
held. Shareholders of a Fund will vote in the aggregate
except where otherwise required by law. There will normally
be no meetings of investors for the purpose of electing
members of the Board unless and until such time as less than
a majority of the members holding office have been elected
by investors. Any director of the Company may be removed
from office upon the vote of shareholders holding at least a
majority of the Company's outstanding shares, at a meeting
called for that purpose. A meeting will be called for the
purpose of voting on the removal of a Board member at the
written request of holders of 10% of the outstanding shares
of the Company.
All shareholders of a Fund, upon liquidation, will
participate ratably in the Fund's net assets. Shares do not
have cumulative voting rights, which means that holders of
more than 50% of the shares voting for the election of
directors can elect all directors. Shares are transferable
but have no preemptive, conversion or subscription rights.
Independent Accountant
KPMG LLP ("KPMG"), with principal offices located at
345 Park Avenue, New York, NY 10154, serves as the
independent accountant for the Company. The Statements of
Assets and Liabilities, as of September 30, 1999, and the
Statements of Operations, Statement of Changes in Net Assets
and the financial highlights for the period ended September
30, 1999, of each Fund that are incorporated by reference in
this Statement of Additional Information have been audited
by KPMG, and have been included herein by reference in
reliance upon the report of such firm of independent
accountants given upon their authority as experts in
accounting and auditing.
Counsel
Willkie Farr & Gallagher serves as counsel for the
Company, as well as counsel to Centurion.
Custodians and Transfer Agent
PNC Bank, National Association ("PNC"), located at
17th and Chestnut Streets, Philadelphia, PA 19103, and The
Chase Manhattan Bank ("Chase"), located at 4 Chase MetroTech
Center, Brooklyn, NY 11245, serve as co-custodians of each
Fund's assets. Under their respective custody agreements
with the Company, PNC and Chase are authorized to establish
separate accounts for foreign securities owned by the Funds
to be held with foreign branches of U.S. banks as well as
certain foreign banks and securities depositories as sub-
custodians of assets owned by the Funds.
PFPC Global Fund Services, located at Exchange Place,
Boston, MA 02109, serves as the Company's transfer agent.
FINANCIAL STATEMENTS
The fund's annual report for the fiscal year ended September
30, 1999 is incorporated herein by reference in its
entirety. The annual report was filed on January 19, 2000,
Accession Number 91155-00-000039
.
APPENDIX
DESCRIPTION OF RATINGS
Commercial Paper Ratings
Commercial paper rated A-1 by Standard and Poor's
Ratings Services ("S&P") indicates that the degree of safety
regarding timely payment is strong. Those issues determined
to possess extremely strong safety characteristics are
denoted with a plus sign designation. Capacity for timely
payment on commercial paper rated A-2 is satisfactory, but
the relative degree of safety is not as high as for issues
designated A-1.
The rating Prime-1 is the highest commercial paper
rating assigned by Moody's. Issuers rated Prime-1 (or
related supporting institutions) are considered to have a
superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting
institutions) are considered to have a strong capacity for
repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Corporate Bond Ratings
The following summarizes the ratings used by S&P for
corporate bonds:
AAA - This is the highest rating assigned by S&P to a
debt obligation and indicates an extremely strong capacity
to pay interest and repay principal.
AA - Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from AAA issues
only in small degree.
A - Debt rated A has a strong capacity to pay interest
and repay principal although it is somewhat more susceptible
to the adverse effects of changes in circumstances and
economic conditions than debt in higher-rated categories.
BBB - This is the lowest investment grade. Debt rated
BBB is regarded as having an adequate capacity to pay
interest and repay principal. Although it normally exhibits
adequate protection parameters, adverse economic conditions
or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated
categories.
BB, B and CCC - Debt rated BB and B are regarded, on
balance, as predominately speculative with respect to
capacity to pay interest and repay principal in accordance
with the terms of the obligation. BB represents a lower
degree of speculation than B, and CCC the highest degree of
speculation. While such bonds will likely have some quality
and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse
conditions.
BB - Debt rated BB has less near-term vulnerability to
default than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions, which could lead to
inadequate capacity to meet timely interest and principal
payments. The BB rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied BBB rating.
B - Debt rated B has a greater vulnerability to
default but currently has the capacity to meet interest
payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal.
The B rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BB or BB-
rating.
CCC - Debt rated CCC has a currently identifiable
vulnerability to default and is dependent upon favorable
business, financial and economic conditions to meet timely
payment of interest and repayment of principal. In the
event of adverse business, financial or economic conditions,
it is not likely to have the capacity to pay interest and
repay principal. The CCC rating category is also used for
debt subordinated to senior debt that is assigned an actual
or implied B or B- rating.
CC - This rating is typically applied to debt
subordinated to senior debt that is assigned an actual or
implied CCC rating.
C - This rating is typically applied to debt
subordinated to senior debt which is assigned an actual or
implied CCC- debt rating. The C rating may be used to cover
a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
Additionally, the rating CI is reserved for income
bonds on which no interest is being paid. Such debt is
rated between debt rated C and debt rated D.
To provide more detailed indications of credit
quality, the ratings may be modified by the addition of a
plus or minus sign to show relative standing within this
major rating category.
D - Debt rated D is in payment default. The D rating
category is used when interest payments or principal
payments are not made on the date due even if the applicable
grace period has not expired, unless S&P 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 if debt service payments are jeopardized.
The following summarizes the ratings used by Moody's
for corporate bonds:
Aaa - Bonds that 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 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 that 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 risks appear somewhat larger than in 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
sometime 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 desirable investments. Assurance of
interest and principal payments or of maintenance of other
terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers (1, 2 and 3) with
respect to the bonds rated "Aa" through "B." The modifier 1
indicates that the bond being rated ranks in the higher end
of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the
bond ranks in the lower end of its generic rating category.
Caa - Bonds that are rated Caa are of poor standing.
These issues may be in default or present elements of danger
may exist 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 comprise 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.
