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THE COMMUNITY REINVESTMENT ACT
QUALIFIED INVESTMENT FUND
(THE "FUND")
INVESTMENT ADVISOR:
CRAFund Advisors, Inc.
1751 West Cypress Creek Road
Fort Lauderdale, FL 33309 THE FUND'S INVESTMENT OBJECTIVE IS TO
PROVIDE (1) A HIGH LEVEL OF CURRENT
ADMINISTRATOR: INCOME AND (2) INVESTMENTS THAT WILL BE
Declaration Service Company DEEMED TO BE QUALIFIED UNDER THE
555 North Lane, Suite 6160 COMMUNITY REINVESTMENT ACT OF 1977.
Conshohocken, PA 19428
LEGAL COUNSEL:
Drinker Biddle & Reath LLP
18th and Cherry Streets
Philadelphia, PA 19103-6996
PROSPECTUS
INDEPENDENT AUDITORS:
KPMG LLP
1600 Market Street
Philadelphia, PA 19103 SEPTEMBER 28, 2000
CUSTODIAN:
First Union National Bank
1339 Chestnut Street
Philadelphia, PA 19101-7618
THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT APPROVED OR DISAPPROVED THE
FUND'S SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. IT
IS A CRIMINAL OFFENSE TO STATE
OTHERWISE.
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TABLE OF CONTENTS
PAGE
RISK/RETURN SUMMARY............................................................1
Investment Objective...........................................................1
Principal Investment Strategy..................................................1
Principal Risks................................................................1
Performance Information........................................................3
Fees and Expenses..............................................................3
INVESTMENT OBJECTIVE AND POLICIES..............................................4
Investment Objective...........................................................4
Principal Investment Strategy..................................................4
Community Reinvestment Act of 1977.............................................4
Investment Policies............................................................5
FUND INVESTMENTS...............................................................6
RISK FACTORS...................................................................8
FEDERAL TAXES..................................................................8
PRICING OF FUND SHARES.........................................................9
PURCHASING SHARES.............................................................10
Purchase Inquiries............................................................10
Exchange of Securities........................................................10
Purchases By Wire Transfer....................................................10
Purchases by Check............................................................11
REDEEMING SHARES..............................................................11
DIVIDENDS AND DISTRIBUTIONS...................................................12
INVESTMENT ADVISOR............................................................12
DISTRIBUTION PLAN.............................................................13
FINANCIAL HIGHLIGHTS..........................................................13
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RISK/RETURN SUMMARY
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide (1) a high level of current
income and (2) investments that will be deemed to be qualified under the
Community Reinvestment Act of 1977, as amended (the "CRA").
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to invest in debt securities
that will cause shares of the Fund to be deemed to be qualified under the CRA,
so that financial institutions that are subject to the CRA may receive
investment test or similar credit under the CRA with respect to shares of the
Fund held by them.
PRINCIPAL RISKS
There is no assurance that shares of the Fund will be deemed to be
qualified investments under the CRA. The Fund's investment adviser, CRAFund
Advisors, Inc. (the "Advisor"), believes that shares of the Fund will be deemed
qualified investments under the CRA and will cause financial institutions to
receive CRA credit with respect to shares of the Fund owned by them. This
judgment is based on written responses that the Office of the Comptroller of the
Currency (the "OCC") has provided to other pooled investment vehicles, and other
interpretive pronouncements of the Federal Financial Institutions Examination
Council (the "FFIEC"). It is also based on a CRA Performance Evaluation by the
OCC of an institution which is a shareholder of the Fund. The institution
received an outstanding rating from the OCC under the investment test for its
CRA qualified investments. In the CRA Performance Evaluation, the OCC
characterized the institution's investment in the Fund as among "some of the
more significant contributions" by the institution and specifically described
the Fund as an "innovative concept." The Advisor believes that these responses
and interpretations by the OCC and FFIEC and the OCC Performance Evaluation of a
shareholder indicate that interests in a pooled or commingled investment fund
may be deemed qualified under the CRA if the Fund holds underlying investments
that would be so qualified. The Fund believes it is the first pooled investment
vehicle to register under the Securities Act of 1933 and make a public offering
of shares to financial instutions to provide them with CRA credit.
The Fund's goal of holding securities that will allow shares of the Fund to
be deemed qualified under the CRA will cause the Advisor to take this factor
into account in determining which securities the Fund will purchase and sell.
Accordingly, portfolio decisions will not be exclusively based on the investment
characteristics of the securities, which may or may not have an adverse effect
on the Fund's investment performance. For example, the Fund may hold short-term
investments that produce relatively low yields pending the selection of
long-term investments believed to be CRA-qualified. In addition, the Fund may
sell securities for CRA purposes at times when such sales may not be desirable
for investment purposes. Such sales could occur, for example, if a financial
institution redeems its shares of the Fund, or if investments that have been
designated to specific shareholders for CRA-qualifying purposes are ultimately
determined not to be, or to have ceased to be, CRA-qualifying. See "INVESTMENT
OBJECTIVE AND POLICIES - Community Reinvestment Act of 1977."
The Fund commenced operations on August 30, 1999. The Advisor is new,
having been organized to provide investment advice to the Fund. Its associated
personnel have experience in fixed-income and CRA-qualifying investments, but
had no experience in managing a mutual fund prior to the Fund's commencement of
operations.
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The prices of fixed-income debt securities tend to move in the opposite
direction to interest rates. When rates are rising, the prices of debt
securities tend to fall. When rates are falling, the prices of debt securities
tend to rise.
The value of debt securities also depends on the ability of issuers to make
principal and interest payments. If an issuer cannot meet its payment
obligations or if its credit rating is lowered, the value of its debt securities
will fall. The ability of a state or local government issuer to make payments
can be affected by many factors, including economic conditions, the flow of tax
revenues and changes in the level of federal, state or local aid. Some municipal
obligations are payable only from limited revenue sources or private entities.
Prepayments of principal on mortgage-backed securities may tend to increase
due to refinancing of mortgages as interest rates decline. When this occurs, the
Fund may lose a portion of its principal investment to the extent the Fund paid
any premium for a security. In addition, the Fund's yield may be affected by
reinvestment of prepayments at lower rates than the original investment.
The Fund is a non-diversified investment company. Compared to a diversified
investment company, the Fund may invest a greater percentage of its assets in
the securities of a particular issuer. A change in value of such securities will
affect the value of the Fund's portfolio more than it would affect a diversified
investment company.
The Fund may sell securities that it has held for less than one year. When
it does so, the Fund may realize short-term capital gains, which are taxed at
higher rates than long-term capital gains.
All mutual funds are affected by changes in the economy and swings in
investment markets. You could lose money if the Fund's investments fall in
value.
PERFORMANCE INFORMATION
There is no performance information for the Fund because the Fund does not
have a full calendar year of operation.
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FEES AND EXPENSES
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load) NONE
Maximum Sales Charge (Load) Imposed on Reinvested NONE
Dividends
Redemption Fee (as a percentage of amount redeemed) NONE
Exchange Fee NONE
Annual Fund Operating Expenses (expenses that are deducted from Fund assets)
Management Fees 0.50%
Distribution (12b-1) Fees1 0.25%
Other Expenses 7.27%
TOTAL ANNUAL FUND OPERATING EXPENSES 8.02%
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Fee Waivers and Expense Reimbursements (7.02)%
NET ANNUAL FUND OPERATING EXPENSES2 1.00%
1 If you hold your shares for a substantial period of time, distribution fees
may total more than the economic equivalent of the maximum front-end sales
charge currently allowed by the Conduct Rules of the National Association
of Securities Dealers, Inc.
2 The Advisor has contractually agreed to waive fees and reimburse expenses
in order to keep total operating expenses from exceeding 1.00% for the
period commencing on the date of this prospectus and ending May 31, 2003.
Example: This example is intended to help you compare the costs of
investing in the Fund with the costs of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions, your costs would be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$102 $318 $2,690 $6,002
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INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide (1) a high level of current
income and (2) investments that will be deemed to be qualified under the CRA.
The Fund's Board of Trustees may change the investment objective without
shareholder approval.
PRINCIPAL INVESTMENT STRATEGY
The Fund's principal investment strategy is to invest in debt securities
that will cause shares of the Fund to be qualified under the CRA, so that
financial institutions that are subject to the CRA may receive investment test
or similar credit under the CRA with respect to shares of the Fund held by them.
The Advisor believes that securities held by the Fund will provide returns that
are competitive with those of similar securities that are not CRA-qualified.
COMMUNITY REINVESTMENT ACT OF 1977
The CRA requires the federal bank regulatory agencies to encourage most
banks and similar institutions that are insured by the Federal Deposit Insurance
Corporation to help meet the credit needs of their local communities, including
low and moderate income neighborhoods. Larger retail institutions receive an
overall CRA rating based on their evaluated performance in three areas: lending,
service and investments. For an institution with $250 million or more in assets
or for an institution whose holding company has $1 billion or more in assets,
the investment test comprises 25% of the overall CRA rating. While smaller banks
are subject only to a lending test, they can use their qualified investments to
enhance their overall rating. Banks that are designated as limited purpose or
wholesale banks for CRA purposes can elect to be evaluated partially or totally
on their qualified investment performance.
In most cases, qualified investments are required to be responsive to the
credit and community development needs of a financial institution's assessment
(geographical) area or a broader statewide or regional area that includes the
institution's assessment area. For such a financial institution to receive CRA
investment test credit with respect to the Fund's shares, the Fund must hold
CRA-qualifying investments that relate to the financial institution's assessment
(geographical) area. Institutions that have been designated by their regulators
as "wholesale" or "limited purpose" under the CRA may receive credit for
qualified investments wholly outside of their assessment (geographical) area,
provided they have otherwise adequately addressed their assessment area needs.
Although each shareholder of the Fund will indirectly own an undivided interest
in all the Fund's investments, the Fund will designate specific securities to
specific shareholders for CRA-qualifying purposes.
Investments are not designated as CRA-qualifying at the time of issuance by
any governmental agency. Accordingly, the Advisor must evaluate whether each
potential investment may be CRA-qualifying with respect to a specific
shareholder. The final
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determinations of whether securities are CRA-qualifying are made by the federal
and state bank regulatory agencies during their periodic examinations of these
institutions. There is no assurance that the agencies will concur with the
Advisor's evaluation of securities as CRA-qualifying. If the Advisor became
aware that a security acquired for CRA-qualifying purposes was not likely to
produce CRA investment test credit, for example due to a change in circumstances
pertaining to the security, ordinarily the Fund would sell that security and
attempt to acquire a replacement security that the Advisor deemed to be
CRA-qualifying.
In determining whether a particular investment is a qualified investment,
the Advisor will consider whether the investment has as its primary purpose
community development. The Advisor will consider whether such investment: (1)
provides affordable housing for low-or-moderate income individuals; (2) provides
community services targeted to low-or-moderate income individuals; (3) funds
activities that (a) finance businesses or farms that meet the size eligibility
standards of the Small Business Administration's Development Company or Small
Business Investment Company programs or have annual revenues of $1 million or
less and (b) promote economic development; or (4) funds activities that
revitalize or stabilize low-or-moderate income areas. An activity may be deemed
to promote economic development if it supports permanent job creation,
retention, and/or improvement for persons who are currently low-or-moderate
income, or supports permanent job creation, retention, and/or improvement in
low-or-moderate income areas targeted for redevelopment by federal, state, local
or tribal governments. The Advisor maintains documentation, readily available to
a financial institution or an examiner, supporting its judgment that a security
would be a qualifying investment for CRA investment test credit purposes.
The Fund will require time after selling shares to acquire a significant
volume of investments in particular geographic areas relevant to shareholders.
The length of time will depend upon the depth of the market for CRA-qualified
investments in the relevant areas. In some cases, the Advisor expects that
CRA-qualified investments will be immediately available. In others, it may take
weeks or months to acquire a significant volume of CRA-qualified investments in
a particular area. The Advisor believes that investments in the Fund during
these time periods will be considered CRA-qualified provided the purpose of the
Fund includes serving the investing institution's assessment area(s) and the
Fund is likely to achieve a significant volume of investments in the region
after a reasonable period of time. As the Fund continues to operate, it may
dispose of securities that were acquired for CRA-qualifying purposes, in which
case the Advisor will normally attempt to acquire a replacement security that
would be CRA-qualifying.
INVESTMENT POLICIES
Under normal circumstances, the Fund will invest primarily in securities
which have a rating in the highest category assigned by a nationally recognized
statistical rating organization ("Rating Agency"), for example, AAA by Standard
& Poor's Ratings Group and/or Aaa by Moody's Investors Services, Inc., or which
are deemed by the Advisor to be of comparable quality to securities so rated, or
which are credit-enhanced by one or more entities with one of the above credit
ratings.
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The Fund may also invest up to 25% of its net assets in investment grade
securities that are rated in the second or third highest rating categories
assigned by a Rating Agency, or which are deemed by the Advisor to be of
comparable quality to securities so rated, or which are credit-enhanced by one
or more entities with one of the above credit ratings.
Under normal circumstances, the Fund will invest at least 90% of its net
assets in CRA-qualifying securities. Such securities would include
single-family, multi-family and economic development loan-backed securities. As
a result, the Fund will invest a significant amount of its assets in securities
issued by the Federal National Mortgage Association ("FNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC"), and Government National Mortgage Association
("GNMA").
The Fund may invest a significant amount of its assets in taxable municipal
bonds whose primary purpose is community development.
The Fund may invest in certificates of deposit that are insured by the
Federal Deposit Insurance Corporation ("FDIC") and are issued by financial
institutions that are (1) certified as Community Development Financial
Institutions, or (2) minority- or women-owned and primarily lend or facilitate
lending in low- or moderate-income areas or to low- or moderate-income
individuals to promote community development. The Fund may also invest in
certain securities issued by the Small Business Administration.
The Fund may temporarily hold investments that are not part of its
principal investment strategy to try to avoid losses during unfavorable market
conditions or pending the acquisition of investments believed to be
CRA-qualified. These investments may include cash (which will not earn any
income), money market instruments, debt securities issued or guaranteed by the
U.S. Government or its agencies and repurchase agreements. This strategy could
prevent the Fund from achieving its investment objective and could reduce the
Fund's return and affect its performance during a market upswing.
FUND INVESTMENTS
GNMA securities and U.S. Treasury bills, notes and bonds are direct
obligations of the U.S. Government and are backed by the full faith and credit
of the U.S. Government. Accordingly, these securities carry minimal credit risk.
FNMA and FHLMC securities are issued by U.S. Government-sponsored
enterprises. These securities are not backed by the full faith and credit of the
U.S. Government, but generally enjoy a very high level of creditworthiness.
Taxable municipal bonds are rated as to their creditworthiness by various
Rating Agencies. The Fund will invest only in these securities if they conform
to the credit
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qualifications described above under "INVESTMENT OBJECTIVE AND POLICIES -
Investment Policies."
The Fund may invest in mortgage-backed securities ("MBSs"), such as those
issued by GNMA, FHLMC and FNMA, which generally pay monthly payments consisting
of both interest and principal. The value of MBSs are based on the underlying
pools of mortgages that serve as the asset base for the securities. The value of
MBSs will be significantly influenced by changes in interest rates because
mortgage-backed pool valuations fluctuate with interest rate changes.
Specifically, when interest rates decline, many borrowers refinance existing
loans, resulting in principal prepayments which leads to early payment of the
securities. Prepayment of an investment in MBSs can result in a loss to the Fund
to the extent of any premium paid for MBSs. In addition, a decline in interest
rates that leads to prepayment of MBSs may result in a reinvestment requirement
at a time when the interest rate environment presents less attractive investment
alternatives.
Certificates of deposit ("CDs") are promissory notes issued by banks and
other financial institutions for fixed periods of time at fixed rates of
interest. The Fund may invest in CDs issued by Community Development Financial
Institutions or other eligible depositories. Early withdrawal of CDs may result
in penalties being assessed against the holder of the CD.
The Fund may invest in repurchase agreements with broker-dealers, banks and
other financial institutions, provided that the Fund's custodian always has
possession of the securities serving as collateral for the repurchase agreements
or has proper evidence of book entry receipt of said securities. In a repurchase
agreement, the Fund purchases securities subject to the seller's simultaneous
agreement to repurchase those securities from the Fund at a specified time
(usually one day) and price. The repurchase price reflects an agreed-upon
interest rate during the time of investment. All repurchase agreements entered
into by the Fund must be collateralized by U.S. Government securities, the
market values of which equal or exceed 102% of the principal amount of the
Fund's investment. If an institution with whom the Fund has entered into a
repurchase agreement enters insolvency proceedings, the resulting delay, if any,
in the Fund's ability to liquidate the securities serving as collateral could
cause the Fund some loss if the securities declined in value prior to
liquidation. To minimize the risk of such loss, the Fund will enter into
repurchase agreements only with institutions and dealers the Advisor considers
creditworthy under guidelines approved by the Fund's Board of Trustees.
The Fund may also engage in reverse repurchase transactions in which the
Fund sells its securities and simultaneously agrees to repurchase the securities
at a specified time and price. Reverse repurchase transactions are considered to
be borrowings by the Fund.
The Fund may purchase securities on a when-issued basis, and it may
purchase or sell securities for delayed-delivery. These transactions occur when
securities are purchased or sold by the Fund with payment and delivery taking
place at some future date. The Fund may enter into such transactions when, in
the Advisor's opinion, doing so may secure an advantageous yield and/or price to
the Fund that might otherwise be unavailable. The Fund has not established
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any limit on the percentage of assets it may commit to such transactions, but
the Fund will maintain a segregated account with its custodian consisting of
cash, cash equivalents, U.S. Government securities or other high-grade liquid
debt securities in an amount equal to the aggregate fair market value of its
commitments to such transactions. A risk of investing in this manner is that the
yield or price obtained in a transaction may be less favorable than the yield or
price available in the market when the security delivery takes place.
For further information concerning the Fund's investment policies and
restrictions, see "Investment Policies and Restrictions" in the Fund's Statement
of Additional Information.
RISK FACTORS
The following information supplements the information set forth in
"RISK/RETURN SUMMARY - Principal Risks" and "FUND INVESTMENTS" above.
Your investment in the Fund is not a deposit or obligation of, or insured
or guaranteed by, any entity or person, including the U.S. Government and the
FDIC. The Fund may be particularly appropriate for banks and other financial
institutions that are subject to the CRA. The value of the Fund's investments
will vary from day-to-day, reflecting changes in market conditions, interest
rates and other political and economic factors. There is no assurance that the
Fund can achieve its investment objective, since all investments are inherently
subject to market risk. There also can be no assurance that the Fund's
investments will receive investment test credit under the CRA with respect to
the Fund's shares.
Changes in laws, regulations or the interpretation of laws and regulations
could pose risks to the successful realization of the Fund's investment
objectives. It is not known what changes, if any, will be made to the CRA over
the life of the Fund. CRA regulations play an important part in influencing the
readiness and capacities of financial institutions to originate CRA-qualifying
securities. Changes in the CRA might impact upon Fund operations and might pose
a risk to the successful realization of the Fund's investment objectives.
Many investments purchased by the Fund will have one or more forms of
credit enhancement. An investor in a credit enhanced debt instrument typically
relies upon the credit rating of the credit enhancer to evaluate an issue's
credit quality and appropriate pricing level. There can be no assurance that the
credit rating of a public or private entity used as a credit enhancer on a Fund
investment will remain unchanged over the period of the Fund's ownership of that
investment.
FEDERAL TAXES
The Fund intends to qualify each year as a regulated investment company
under applicable federal tax provisions. In any fiscal year in which the Fund
qualifies as a regulated investment company and distributes to shareholders all
of its net investment income and net capital gains, the Fund generally will not
have to pay any federal tax.
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Generally, all ordinary and capital gains distributions to you will be
taxable whether they are reinvested or received in cash, unless you are exempt
from taxation or entitled to a tax deferral. Early each calendar year, you will
be notified as to the amount and federal tax status of all distributions paid to
you from the prior year. Such distributions may also be subject to state or
local taxes.
The Fund's investment strategies will generally cause its annual
distributions to consist primarily of ordinary income. You will generally not be
eligible for any dividends received deduction with respect to Fund
distributions.
You may recognize gain or loss on redemptions of Fund shares based on the
difference between your redemption proceeds and your basis in the shares.
Certain restrictions on loss recognition may apply, however, such as the "wash
sale" limitation, which disallows a loss on a sale of stock or securities if
substantially identical stock or securities are purchased within 30 days before
or after the sale.
You should note that if you purchase Fund shares just prior to a capital
gain distribution, the purchase price will reflect the amount of the upcoming
distribution, but you will be taxable on the entire amount of the distribution
received, even though, as an economic matter, the distribution simply
constitutes a return of capital. This is known as "buying into a dividend."
Shareholders may also be subject to state and local taxes on distributions
and redemptions. State income taxes may not apply however, to the portions of
each Fund's distributions, if any, that are attributable to interest on federal
securities or interest on securities of the particular state or localities
within the state.
The foregoing is only a summary of certain tax considerations under current
law, which may be subject to change in the future. Shareholders who are
nonresident aliens, foreign trusts or estates, or foreign corporations or
partnerships, may be subject to different United States federal income tax
treatment. You should consult your tax adviser for further information regarding
federal, state, local and/or foreign tax consequences relevant to your specific
situation.
PRICING OF FUND SHARES
The price of the Fund's shares is based on the Fund's net asset value
(NAV). The NAV per share is determined as of the close of trading (normally 4:00
p.m. Eastern Time) every day the New York Stock Exchange is open for trading.
The Fund will not price its shares on national holidays or other days when the
New York Stock Exchange is closed for trading. NAV per share is calculated by
dividing the total value of the Fund's assets after subtracting liabilities by
the number of shares outstanding. The Fund's portfolio securities are valued at
market value based on dealer bid quotations. Securities for which quotations are
not available and any other assets are valued at fair value as determined in
good faith by the Advisor, subject to the review and supervision of the Fund's
Board of Trustees.
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PURCHASING SHARES
Shares of the Fund are sold at the NAV per share next determined after
receipt of a purchase order by the Fund. See "Purchases By Wire Transfer" and
"Purchases By Check" below. The minimum initial investment is $250,000. There is
no minimum requirement for subsequent purchases. Shares are sold without any
front-end sales charge, which means that the full amount of your purchase price
will be invested in Fund shares. The Fund imposes no deferred sales charges.
PURCHASE INQUIRIES. If you are considering investing in the Fund, contact
Neil M. Solomon at the Advisor, toll-free at 1-877-272-1977. Mr. Solomon will
provide information concerning your investment options and can provide all
materials and procedures required to open an account. New accounts can be opened
through an exchange of securities, by wire transfer, or by check purchase. These
options also are available to existing shareholders and are discussed further
below.
EXCHANGE OF SECURITIES. The Fund may issue its shares in exchange for
securities owned by an investor. The Fund will issue its shares only in exchange
for securities that the Advisor believes are CRA-qualified. To determine the
number of Fund shares that will be issued in the exchange, the investor's
securities will be valued at the mean between their bid and asked quotations,
which differs from the method used for valuing the Fund's portfolio securities.
See "PRICING OF FUND SHARES" above. This method of valuing exchanged securities
benefits both existing shareholders and the investor exchanging the securities
("Purchaser"). The Purchaser will receive a greater number of Fund shares by
exchanging securities at the mean between the bid price and asked price than it
would if it liquidated the securities at the lower bid price and then purchased
Fund shares with the cash proceeds. This benefit may provide the Purchaser with
an incentive to go through the additional procedures associated with an
exchange. On the other hand, if the Fund purchased the same type of securities
with cash, it would pay the higher asked price. In either case, the Fund must
value the securities for purposes of determining the NAV per share in accordance
with its valuation policies. See "PRICING OF FUND SHARES" above. Thus, the
Purchaser benefits by receiving a greater number of Fund shares while the
existing shareholders benefit from the Fund's acquisition of securities at a
lower price than it would otherwise pay. In addition, both the Purchaser and the
Fund avoid incurring any brokerage transaction costs.
To discuss arrangements for purchasing Fund shares in exchange for your
securities, contact Neil M. Solomon at the Advisor toll-free at 1-877-272-1977.
PURCHASES BY WIRE TRANSFER. You may purchase shares by making a wire
transfer of federal funds to Declaration Service Company, the Fund's servicing
agent. You must include the full name in which your account is registered and
the Fund account number, and should address the wire transfer as follows:
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First Union National Bank
ABA # 031201467
For Account of The Community Reinvestment Act Qualified Investment Fund
Acct. # 2000003245873
For further credit (Your Name)
Acct. # (Your Acct. No.)
Before making an initial investment by wire transfer, you must first call
Neil M. Solomon at the Advisor at 1-877-272-1977 to request an account number
and furnish the Fund with your taxpayer identification number. In addition, you
must promptly forward a completed new account application with signature(s) of
authorized officer(s) and appropriate corporate resolutions or other evidence of
authority to: Neil M. Solomon, CRAFund Advisors, Inc., 1751 West Cypress Creek
Road, Fort Lauderdale, FL 33309. The Fund will not be responsible for the
consequence of delays in the wire transfer system. See "Purchase Inquiries"
above.
PURCHASES BY CHECK. You can purchase shares by sending a check to The
Community Reinvestment Act Qualified Investment Fund, c/o CRAFund Advisors,
Inc., 1751 West Cypress Creek Road, Fort Lauderdale, FL 33309, Attention: Neil
M. Solomon, including the name in which the account is registered and the
account number. Initial share purchases must be accompanied by a completed new
account application with signature(s) of authorized officer(s) and appropriate
corporate resolutions or other evidence of authority. See "Purchase Inquiries"
above. Checks are accepted subject to collection. If shares are purchased by
check and redeemed within seven business days of purchase, the Fund may hold
redemption proceeds until the purchase check has cleared, a period of up to
fifteen days.
You will receive a statement showing the number of shares purchased, the
net asset value at which your shares were purchased, and the new balance of Fund
shares owned each time you purchase shares of the Fund. The Fund does not issue
share certificates. All full and fractional shares will be carried on the books
of the Fund.
All applications to purchase shares of the Fund are subject to acceptance
by authorized officers of the Fund and are not binding until accepted. The Fund
reserves the right to reject purchase orders.
REDEEMING SHARES
You may redeem your shares in the Fund at any time and for any reason. Upon
receipt by the Fund of a redemption request and any other required documents in
proper form, your shares of the Fund will be redeemed at their next determined
NAV.
Redemption requests must be in writing and sent to The Community
Reinvestment Act Qualified Investment Fund, c/o CRAFund Advisors, Inc., 1751
West Cypress Creek Road, Fort Lauderdale, FL 33309, Attention: Neil M. Solomon.
To be in proper form, your redemption request must:
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o Specify the number of shares or dollar amount to be redeemed, if less
than all shares are to be redeemed; and
o Be signed by the authorized representative(s) exactly as their names
appear on the account.
The Fund will not process a redemption request unless it has received a
completed new account application and other documentation described in
"PURCHASING SHARES - Purchases by Wire Transfer" and "PURCHASING SHARES -
Purchases by Check" above. Further documentation may be requested to evidence
the authority of the person or entity making the redemption request.
When you redeem your shares, they may be worth more or less than you paid
for them, depending upon the value of the Fund's portfolio securities at the
time of redemption.
Payment for shares redeemed is made within seven days after receipt by the
Fund of a request for redemption in proper form. The Fund will normally pay
redemption proceeds in cash but reserves the right to deliver securities owned
by the Fund instead of cash. The Fund reserves the right to suspend or postpone
redemptions during any period when (a) trading on any of the major U.S. stock
exchanges is restricted, as determined by the Securities and Exchange Commission
("SEC"), or that the major exchanges are closed for other than customary weekend
and holiday closings, (b) the SEC has by order permitted such suspension, or (c)
an emergency, as determined by the SEC, exists making disposal of portfolio
securities or valuation of net assets of the Fund not reasonably practicable.
The Fund may redeem all shares held by a shareholder whose account value is less
than the minimum initial investment as a result of redemptions.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to declare and pay dividends from net investment income
monthly. The Fund intends to make distributions of capital gains, if any, at
least annually, usually in December. Dividends and distributions are reinvested
in additional shares unless you indicate in the account application or otherwise
in writing that you want to have dividends and distributions paid in cash.
INVESTMENT ADVISOR
CRAFund Advisors, Inc. is a registered investment adviser founded in
November 1998, with headquarters at 1751 West Cypress Creek Road, Fort
Lauderdale, Florida 33309.
The Advisor was organized to provide investment advice to the Fund. It
currently has no other clients. Its personnel are employees of the Fund's
distributor, SunCoast Capital Group, Ltd. ("Sun Coast"), or SunCoast Capital
Group, Inc., which is the principal stockholder of the Fund's distributor. Todd
J. Cohen, Peter Cooper and David A. Zwick collectively own all of the
12
<PAGE>
outstanding stock of SunCoast Capital Group, Inc. and 75% of the outstanding
stock of the Advisor. The Fund's distributor may act as broker for the Fund and
will receive payments pursuant to the Fund's distribution plan. See
"DISTRIBUTION PLAN" below.
Todd J. Cohen has managed the Fund since it commenced operations in August
1999. Mr. Cohen is President of SunCoast. He oversees SunCoast's fixed-income
securities trading operations. Mr. Cohen has 12 years of experience in trading
fixed-income securities. He has managed the Fund since it commenced operation on
August 30, 1999.
Under the terms of an investment advisory agreement, the Advisor, subject
to the supervision of the Fund's Board of Trustees, will manage the investment
operations of the Fund in accordance with the Fund's investment policies. The
Fund will pay to the Advisor monthly a fee equal to an annual rate of 0.50% of
the Fund's average daily net assets. For the period from commencement of
operations on August 30, 1999 through May 31, 2000, the Advisor received a fee
(after waivers) of 0.00% of the Fund's average daily net assets.
DISTRIBUTION PLAN
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940, as amended. The distribution plan allows the
Fund to pay fees for the sale and distribution of its shares. Because they are
paid from Fund assets on an on-going basis, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges. Under the distribution plan, the Fund will pay SunCoast up to
0.25% per year of the Fund's average daily net assets for activities primarily
intended to result in sales of the Fund's shares.
FINANCIAL HIGHLIGHTS
The financial highlights table presented below is intended to help you
understand the financial performance of the Fund for the period from its
commencement of operations on August 30, 1999 through May 31, 2000. Certain
information reflects the financial results for a single share in the Fund. The
total return in the table represents the rate that an investor would have earned
on an investment in the Portfolio assuming reinvestment of all dividends and
distributions. This information has been audited by KPMG LLP, independent
auditors. Their report, along with the Fund's financial statements, are included
in the Fund's Annual Report to Shareholders and are incorporated by reference
into the Statement of Additional Information.
13
<PAGE>
THE COMMUNITY REINVESTMENT ACT
QUALIFIED INVESTMENT FUND
(For a Share Outstanding from August 30, 1999 through May 31, 2000)
FOR THE PERIOD
ENDED
MAY 31, 2000*
------------
NET ASSET VALUE, BEGINNING OF PERIOD ........................... $ 10.00
----------
INVESTMENT OPERATIONS:
Net investment income .................................... 0.36
Net realized and unrealized loss on investments .......... (0.23)
----------
Total from investment operations .................... $ 0.13
----------
DISTRIBUTIONS:
From net investment income ............................... (0.36)
----------
NET ASSET VALUE, END OF PERIOD ................................. $ 9.77
==========
TOTAL RETURN ................................................... 1.30%
RATIOS/SUPPLEMENTARY DATA:
Net assets, end of period (in 000's) ..................... $ 9,709
Ratio of expenses to average net assets:
Before expense reimbursement ............................. 8.02%1
After expense reimbursement .............................. 1.00%1
Ratio of net investment income to average net assets:
Before expense reimbursement ............................. 2.39%1
After expense reimbursement .............................. 6.33%1
Portfolio turnover rate ...................................... 98.58%
* The investment portfolio commenced operations on August 30, 1999.
1 Annualized.
14
<PAGE>
WHERE TO FIND MORE INFORMATION
You will find more information about the Fund in the following documents:
ANNUAL AND SEMI-ANNUAL REPORTS
The Fund's annual and semi-annual reports contain more information about
the Fund and a discussion about the market conditions and investment strategies
that had a significant effect on the Fund's performance during the last fiscal
period.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains detailed information about the Fund and its policies. By
law, it is incorporated by reference into (considered to be part of) this
prospectus.
You can get a free copy of these documents, request other information about
the Fund and make shareholder inquiries by calling Neil M. Solomon at the Fund
toll-free at 1-877-272-1977 or writing to:
The Community Reinvestment Act Qualified Investment Fund
CRAFund Advisors, Inc.
1751 West Cypress Creek Road
Fort Lauderdale, FL 33309
Attention: Neil M. Solomon
or on the Internet at www.CRAFUND.com
You can write to the Securities and Exchange Commission ("SEC") Public
Reference Section and ask them to mail you information about the Fund, including
the SAI. The SEC will charge you a duplicating fee for this service. You can
also visit the Public Reference Room to review and copy the documents. For
information about the operation of the Public Reference Room, call the SEC.
Public Reference Section of the SEC
Washington, DC 20549-0102
202-942-8090
Reports and other information about the Fund are also available on the
SEC's Edgar database at http://www.sec.gov. Copies of this information may also
be obtained, after paying a duplicating fee, by electronic request to the SEC's
e-mail address at [email protected]
The Fund's Investment Company Act File No. is 811-09221.
<PAGE>
THE COMMUNITY REINVESTMENT ACT QUALIFIED INVESTMENT FUND
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS. IT RELATES TO
AND SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR THE COMMUNITY
REINVESTMENT ACT QUALIFIED INVESTMENT FUND, DATED SEPTEMBER 28, 2000. YOU MAY
OBTAIN A COPY OF THE PROSPECTUS, FREE OF CHARGE, BY WRITING TO THE COMMUNITY
REINVESTMENT ACT QUALIFIED INVESTMENT FUND, CRAFUND ADVISORS, INC., 1751 WEST
CYPRESS CREEK ROAD, FORT LAUDERDALE, FL 33309, ATTENTION: NEIL M. SOLOMON, BY
TOLL-FREE PHONE REQUEST AT 1-877-272-1977, OR ON THE INTERNET AT
WWW.CRAFUND.COM.
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 28, 2000
(As revised October 17, 2000)
<PAGE>
TABLE OF CONTENTS
PAGE
DEFINED TERMS..................................................................1
THE FUND AND ITS SHARES........................................................1
INVESTMENT POLICIES AND RESTRICTIONS...........................................3
Investment Quality..........................................................3
U.S. Government Agency Securities...........................................3
Zero Coupon Bonds...........................................................3
Repurchase Agreements and Reverse Repurchase Agreements.....................3
Taxable Municipal Bonds.....................................................4
Other Securities............................................................4
Securities Lending..........................................................5
Liquidity...................................................................5
Illiquid Securities.........................................................5
Investment Restrictions.....................................................5
INVESTMENT ADVISOR.............................................................7
TRUSTEES AND OFFICERS..........................................................8
PERFORMANCE INFORMATION.......................................................11
TAX INFORMATION...............................................................12
PORTFOLIO TRANSACTIONS........................................................13
DISTRIBUTOR...................................................................14
DISTRIBUTION PLAN.............................................................15
CUSTODIAN.....................................................................15
SERVICING AGENT...............................................................16
CODE OF ETHICS................................................................16
COUNSEL.......................................................................16
INDEPENDENT AUDITORS..........................................................17
FINANCIAL STATEMENTS..........................................................17
MISCELLANEOUS.................................................................17
APPENDIX A...................................................................A-1
<PAGE>
DEFINED TERMS
In this Statement of Additional Information, the terms listed below have the
following meanings:
ADVISOR - CRAFund Advisors, Inc., investment adviser to the Fund.
CRA - The Community Reinvestment Act of 1977, as amended.
FUND - The Community Reinvestment Act Qualified Investment Fund.
1940 ACT - The Investment Company Act of 1940, as amended.
PROSPECTUS - The prospectus for the Fund as described on the front cover page of
this Statement of Additional Information.
THE FUND AND ITS SHARES
The Fund was organized on January 15, 1999, as a business trust under the laws
of the State of Delaware. The Fund is registered as an open-end, management
investment company under the 1940 Act.
The Fund offers a single class of shares of beneficial interest. Shares when
issued will be fully paid and nonassessable. All shares represent an equal
proportionate interest in the assets belonging to the Fund (subject to the
Fund's liabilities). Shareholders have no preemptive or other similar rights to
subscribe to any additional shares of the Fund or other securities issued by the
Fund or the Fund's Trustees.
Shareholders have the power to vote only: (a) for the election of one or more
Trustees in order to comply with the provisions of the 1940 Act; (b) with
respect to any contract required by the 1940 Act to be approved by shareholders;
(c) with respect to termination of the Fund to the extent required by applicable
law; (d) with respect to any plan adopted pursuant to Rule 12b-1 under the 1940
Act, and related matters, to the extent required by the 1940 Act; and (e) with
respect to such additional matters relating to the Fund as may be required by
the Fund's Agreement and Declaration of Trust, the Fund's by-laws or as the
Trustees may consider necessary or desirable. Each whole share is entitled to
one vote and each fractional share is entitled to a proportionate fractional
vote. There is no cumulative voting in the election of Trustees. Shares may be
voted in person or by proxy. The Agreement and Declaration of Trust permits the
termination of the Trust or any series or class of the Trust by the Trustees
without Shareholder approval.
The Agreement and Declaration of Trust provides that the Trustees and officers,
when acting in their capacity as such, will not be personally liable to any
person other than the Fund or a beneficial owner for any act, omission or
obligation of the Fund, or any Trustee or any officer of the Fund. Neither a
Trustee nor an officer of the Fund shall be liable for any act or omission in
his capacity as Trustee or as an officer of the Fund, or for any act or omission
of any other officer or employee of the Fund or of any other person or party,
provided that the Agreement and
<PAGE>
Declaration of Trust does not protect any Trustee or officer against any
liability to the Fund or to shareholders to which he would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of the office of Trustee or the
duties of such officer.
All dividends and other distributions will be distributed pro rata to the Fund's
shareholders in proportion to the number of shares they held on the record date
established for payment of the dividend or other distribution. In the event of a
liquidation of the Fund, shareholders will be entitled to distribution of Fund
assets remaining after the payment of all Fund liabilities. Such assets will be
distributed to shareholders in proportion to the number of shares held by them.
The Fund reserves the right to pay redemption proceeds wholly or partly in
securities or other assets. The Fund may postpone the payment of redemption
proceeds and may suspend the right of redemption during any period or at any
time when and to the extent permissible under the 1940 Act. The Fund may redeem
shares involuntarily if the Trustees determine that failure to do so may have
materially adverse consequences to shareholders. In the event of an involuntary
redemption, shareholders would have no further rights other than to receive the
redemption price. In addition, the Fund may redeem some or all shares held by:
(1) a shareholder whose account value is less than the minimum required
investment amount as a result of redemptions;
(2) all shareholders of the Fund if the value of all shares is less than
the minimum amount established by the Board of Trustees; or
(3) any shareholder to reimburse the Fund for any loss or expense it has
sustained or incurred resulting from:
(a) the shareholder's failure to make full payment for share
purchases;
(b) any defective redemption request;
(c) indebtedness incurred in connection with facilitating (i) requests
pending receipt of collected funds from investments sold on the date of the
shareholder's redemption request, (ii) redemption requests when the
shareholder has also notified the Fund of its intention to deposit funds in
its account on the date of the redemption request, or (iii) the purchase of
investments pending receipt of collected funds when the shareholder has
notified the Fund of its intention to deposit funds in its accounts on the
date of the purchase of the investments; or
(d) a transaction effected for the benefit of the shareholder.
-2-
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The following investment information supplements that set forth in the
Prospectus, which describes the Fund's principal investment strategies and the
types of securities in which the Fund primarily invests.
INVESTMENT QUALITY. The Fund invests primarily in securities rated in the
highest rating category assigned by a nationally recognized statistical rating
organization ("Rating Agency"), e.g., AAA by Standard & Poor's Ratings Group
and/or Aaa by Moody's Investor Services, Inc. or which are deemed by the Advisor
to be of comparable quality to securities so rated. The Fund may also invest up
to 25% of its net assets in other "investment grade" securities that are rated
in the second or third highest rating category assigned by a Rating Agency or
which are deemed by the Advisor to be of comparable quality to securities so
rated. See Appendix A for more information on the ratings of Rating Agencies.
U.S. GOVERNMENT AGENCY SECURITIES. The Fund invests a significant amount in
securities issued by the Government National Mortgage Association ("GNMA"),
Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC"). GNMA obligations are guaranteed by GNMA and are backed by
the full faith and credit of the U.S. Treasury. FNMA obligations are guaranteed
by FNMA and are supported by FNMA's ability to borrow directly from the U.S.
Treasury. FHLMC obligations are guaranteed by FHLMC and are supported by FHLMC's
ability to borrow directly from the U.S. Treasury.
ZERO COUPON BONDS. The Fund may invest in zero coupon bonds. Zero coupon bonds
do not make interest payments; instead, they are sold at a discount from their
face value and are redeemed at face value when they mature. Because zero coupon
bonds do not pay current income, their prices can be very volatile when interest
rates change. In calculating its dividend, the Fund takes into account as income
a portion of the difference between a zero coupon bond's purchase price and its
face value.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Unless a repurchase
agreement has a remaining maturity of seven days or less or may be terminated on
demand upon notice of seven days or less, the repurchase agreement will be
considered illiquid and will be subject to the Fund's 15% limit on investments
in illiquid securities as stated below. Repurchase agreements are considered to
be loans under the 1940 Act.
Reverse repurchase agreements involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price. The Fund
would pay interest on amounts obtained pursuant to a reverse repurchase
agreement. Whenever the Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account liquid assets such as cash or liquid
portfolio securities until the repurchase date that are equal in value to the
repurchase price (including accrued interest). The Fund will monitor the account
to ensure such equivalent value is maintained. Reverse repurchase agreements are
considered to be borrowings by the Fund under the 1940 Act.
-3-
<PAGE>
TAXABLE MUNICIPAL BONDS. The Fund may invest a significant amount in taxable
municipal bonds that are designed primarily to finance community development.
The two principal classifications of taxable municipal bonds which may be held
by the Fund are "general obligation" bonds and "revenue" bonds. General
obligation bonds are generally secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal and interest. Revenue bonds
are generally payable only from the revenues derived from a particular facility
or class of facilities or, in some cases, from the proceeds of a special excise
tax or other specific revenue source such as the user of the facility being
financed.
The Fund may also invest in "moral obligation" bonds, which are normally issued
by special purpose public authorities. If the issuer of moral obligation bonds
is unable to meet its debt service obligations from current revenues, it may
draw on a reserve fund, the restoration of which is a moral commitment but not a
legal obligation of the state or municipality which created the issuer.
There are, of course, variations in the quality of taxable municipal bonds, both
within a particular category and between categories, and the yields on taxable
municipal bonds depend upon a variety of factors, including general market
conditions, the financial condition of the issuer, general conditions of the
taxable municipal bond market, the size of a particular offering, the maturity
of the obligation, and the rating of the issue. The ratings of a Rating Agency
represent its opinion as to the quality of taxable municipal bonds. It should be
emphasized that these ratings are general and are not absolute standards of
quality. Taxable municipal bonds with the same maturity, interest rate and
rating may have different yields. Taxable municipal bonds of the same maturity
and interest rate with different ratings may have the same yield. Subsequent to
its purchase by the Fund, an issue of taxable municipal bonds may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund.
The payment of principal and interest on most taxable municipal bonds purchased
by the Fund will depend upon the ability of the issuers to meet their
obligations. Each state, the District of Columbia, each of their political
subdivisions, agencies, instrumentalities and authorities and each multistate
agency of which a state is a member is a separate "issuer" as that term is used
in this Statement of Additional Information. An issuer's obligations under its
taxable municipal bonds are subject to the provisions of bankruptcy, insolvency
and other laws affecting the rights and remedies of creditors, such as the
federal Bankruptcy Code and laws, if any, which may be enacted by federal or
state legislatures extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of such obligations or upon
the ability of municipalities to levy taxes. The power or ability of an issuer
to meet its obligations for the payment of interest on and principal of its
taxable municipal securities may be materially adversely affected by litigation
or other conditions.
OTHER SECURITIES. As the universe of CRA-qualified securities expands, the Fund
may purchase qualified securities that the Advisor believes are consistent with
the achievement of the Fund's investment objective. The Fund and its
shareholders will bear the risks associated with investments in any such
securities. The Advisor will invest only in securities that meet the credit
standards set forth in the Prospectus and this Statement of Additional
Information and that the
-4-
<PAGE>
Advisor believes will not be inconsistent with the Fund's objective of providing
financial institutions with investment test credit under the CRA.
SECURITIES LENDING. The Fund may lend its portfolio securities to financial
institutions such as banks and broker/dealers in accordance with the investment
limitations described below. Such loans involve risks of delay in receiving
additional collateral or in recovering the securities loaned or even loss of
rights in the collateral, should the borrower of the securities fail
financially. Any portfolio securities purchased with cash collateral will be
subject to possible depreciation in value. The Fund will continue to accrue
interest on the securities loaned and will also earn income on the loans. Any
cash collateral received by the Fund will be invested in high quality,
short-term money market instruments. Loans will generally be short term, will be
made only to borrowers that the Advisor deems to be of good standing and only
when, in the Advisor's judgment, the income to be earned from the loan justifies
the attendant risk.
LIQUIDITY. To maintain liquidity, the Fund may hold a portion of its net assets
in repurchase agreements or other short-term instruments and/or cash. Under
normal conditions, the Fund will hold no more than 10% of its net assets in such
instruments.
ILLIQUID SECURITIES. The Fund will not invest more than 15% of the value of its
net assets in illiquid securities, including repurchase agreements with
remaining maturities in excess of seven days, time deposits with maturities in
excess of seven days, restricted securities, non-negotiable time deposits and
other securities which are not readily marketable.
Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"),
allows for a broader institutional trading market for securities otherwise
subject to restrictions 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 Fund's
investment in Rule 144A securities could have the effect of increasing the level
of illiquidity of the Fund during any period that qualified institutional buyers
were no longer interested in purchasing these securities. For purposes of the
15% limitation on purchases of illiquid securities described above, Rule 144A
securities will not be considered to be illiquid if the Advisor has determined,
in accordance with guidelines established by the Fund's Board of Trustees, that
an adequate trading market exists for such securities.
INVESTMENT RESTRICTIONS. The following investment restrictions are fundamental
policies of the Fund and may be changed only with the approval of a "majority of
the outstanding voting securities" of the Fund as defined in the 1940 Act (see
"Miscellaneous" below):
The Fund will not:
1. Make loans, except that the Fund (i) may purchase or hold debt
instruments in accordance with its investment objective and policies,
and may enter into repurchase agreements with respect to portfolio
securities, and (ii) may lend portfolio securities against collateral
consisting of cash or securities which are consistent with the Fund's
permitted investments,
-5-
<PAGE>
where the value of the collateral is equal at all times to at least
100% of the value of the securities loaned.
2. Borrow money or issue senior securities, except that the Fund may
borrow from domestic banks for temporary purposes and may engage in
reverse repurchase transactions to the extent permitted by the 1940
Act; or mortgage, pledge, or hypothecate any assets except in
connection with any such borrowing and in amounts not in excess of the
lesser of the dollar amounts borrowed or, subject to any limitations
imposed by the 1940 Act. The Fund will not purchase securities while
borrowings (including reverse repurchase agreements) in excess of 5%
of its total assets are outstanding.
3. Act as an underwriter within the meaning of the Securities Act of
1933; except insofar as the Fund might be deemed to be an underwriter
upon disposition of restricted portfolio securities; and except to the
extent that the purchase of securities directly from the issuer
thereof in accordance with the Fund's investment objective, policies
and limitations may be deemed to be underwriting.
4. Purchase or sell real estate; except that the Fund may purchase
securities that are secured by real estate and may purchase securities
of issuers which deal in real estate or interests therein; however,
the Fund will not purchase or sell interests in real estate limited
partnerships.
5. 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 one or more issuers conducting their principal business
activities in the same industry, although this limitation does not
apply to mortgage-backed securities; provided, however, that there is
no limitation with respect to obligations issued or guaranteed by the
U.S. Government, any state, territory or possession of the U.S.
Government, the District of Columbia or any of their authorities,
agencies, or instrumentalities (including U.S. Government-sponsored
enterprises) or political subdivisions, including municipal bonds.
6. Purchase or sell commodities or commodity contracts, or invest in
futures contracts or options related thereto.
The Fund has also adopted the following restrictions which may be changed by the
Board of Trustees without shareholder approval:
The Fund may not:
7. Invest in companies for the purpose of exercising management or
control.
-6-
<PAGE>
8. Purchase foreign securities.
9. Invest in or sell put options, call options, straddles, spreads, or
any combination thereof.
10. Purchase securities on margin (except such short-term credits as may
be necessary for the clearance of purchases), make short sales of
securities, or maintain a short position.
11. Purchase securities of other investment companies except in connection
with a merger, consolidation, reorganization, or acquisition of
assets, or as is permitted by the 1940 Act.
If a percentage limitation is satisfied at the time of investment, a later
increase in such percentage resulting from a change in the value of the Fund's
portfolio securities generally will not constitute a violation of the
limitation. With respect to borrowings, if a Fund's asset coverage at any time
falls below that required by the 1940 Act, the Fund will reduce its borrowings
in the manner required by the 1940 Act to the extent necessary to satisfy the
asset coverage requirement.
INVESTMENT ADVISOR
The Advisor, located at 1751 West Cypress Creek Road, Fort Lauderdale, FL 33309,
was organized under the laws of the State of Florida as an investment advisory
corporation in 1998. The Advisor is also registered with the Securities and
Exchange Commission as an investment adviser under the Investment Advisers Act
of 1940, as amended.
The following persons are affiliated persons of both the Fund and the Advisor:
Todd J. Cohen is Trustee of the Fund and President and Director of the Advisor.
David A. Zwick is Trustee and President of the Fund and Director of the Advisor.
Neil M. Solomon is Treasurer of the Fund and Vice President, Treasurer and
Secretary of the Advisor.
The Advisor provides investment advisory services to the Fund pursuant to an
investment advisory agreement with the Fund (the "Advisory Agreement"). Under
the terms of the Advisory Agreement, the Advisor provides a continuous
investment program for the Fund, including investment research and management
with respect to all securities and investments and cash equivalents in the Fund.
The Advisor determines what securities and other investments will be purchased,
retained or sold by the Fund and implements such determinations through the
placement of orders for the execution of portfolio transactions with or through
brokers or dealers as the Advisor may select.
For the services provided and expenses assumed under the Advisory Agreement, the
Advisor is entitled to receive advisory fees, computed daily and paid monthly,
at the annual rate of 0.50% of the Fund's average daily net assets. For the
fiscal period from August 30, 1999 (commencement
-7-
<PAGE>
of operations) through May 31, 2000, the Advisor was paid $0 in advisory fees
(after waivers). For the same period, the Advisor waived $17,278 in advisory
fees.
The Advisor has contracturally agreed to waive fees and reimburse expenses in
order to keep total operating expenses from exceeding 1.00% for the period
commencing on the date of this statement of additional information and ending
May 31, 2003. The Advisor may recoup amounts previously waived or reimbursed to
the extent that actual fees and expenses for a specific month are less than the
annual rate of 1.00% of the Fund's average daily net assets, but any such
recoupment will be limited to the fiscal year with respect to which the amounts
were waived or reimbursed. Such recoupment may include the Fund's organizational
expenses to the extent that they have been paid by the Advisor and not
previously reimbursed by the Fund. The recoupment of organizational expenses may
not be taken after May 31, 2002.
The Advisory Agreement provides that the Advisor shall not be liable for any
loss suffered by the Fund or its shareholders as a consequence of any act or
omission in connection with services under the Advisory Agreement, except by
reason of the Advisor's willful misfeasance, bad faith, gross negligence, or
reckless disregard of its obligations and duties under the Advisory Agreement.
The Advisory Agreement has an initial term of two years and will continue in
effect from year to year as long as such continuance is approved at least
annually (i) by the vote of a majority of Trustees who are not parties to the
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
such party, cast in person at a meeting called for the purpose of voting on such
approval; and (ii) by the Board of Trustees, or by a vote of the majority of the
outstanding voting securities of the Fund (as defined in the 1940 Act). The
Advisory Agreement will terminate automatically in the event of its assignment
(as defined in the 1940 Act).
TRUSTEES AND OFFICERS
The Board of Trustees of the Fund manages the business and affairs of the Fund
in accordance with the laws of the State of Delaware and the Fund's Agreement
and Declaration of Trust and its bylaws. The Trustees and officers of the Fund
are listed below:
<TABLE>
<CAPTION>
Name, Age, Address, Position with Fund Principal Occupation for the Last Five Years
-------------------------------------- --------------------------------------------
<S> <C>
David A. Zwick* Secretary, Treasurer and Director, SunCoast
Trustee and President Capital Group, Ltd. (broker-dealer) since
c/o CRAFund Advisors, Inc. December 1992; Director, the Advisor since
1751 West Cypress Creek Road November 1998.
Fort Lauderdale, FL 33309
Age 34
-8-
<PAGE>
Name, Age, Address, Position with Fund Principal Occupation for the Last Five Years
-------------------------------------- --------------------------------------------
John E. Taylor President and CEO, National Community
Trustee and Chairman Reinvestment Coalition, December 1993 to
National Community Reinvestment Coalition present; Director, America Works Partnership.
733 15th Street, NW, Suite 540
Washington, DC 20005
Age 50
Todd J. Cohen* President and Director, the Advisor since
Trustee November 1998; President, SunCoast Capital
c/o CRAFund Advisors, Inc. Group, Ltd. (broker-dealer) since December
1751 West Cypress Creek Road 1992.
Fort Lauderdale, FL 33309
Age 34
D. Keith Cobb Retired Private Investor; Vice Chairman and
Trustee Chief Executive Officer, Alamo Rent A Car,
2521 Del Lago Drive Inc. (auto rentals), 1995-1997; National
Ft. Lauderdale, FL 33316 Managing Partner - Financial Services, KPMG
Age 59 Peat Marwick (certified public accountants),
1993-1995; Director, Dispatch Management
Systems, Inc.; Director, RHR International;
Director, Laundromax, Inc.; Director,
Renaissance Cruises, Inc.; Director, Federal
Reserve Bank of Atlanta, Miami Branch;
Director, First Fleet Corp.; Director, ERide
Corp.
Burton Emmer Assistant to Chief Executive Officer, CHS
Trustee Electronics, Inc., October 1998 to present;
CHS Electronics, Inc. Partner, Grant Thornton LLP (certified public
2000 NW 84th Avenue accountants), August 1979 to August 1998.
Miami, FL 33122
Age 63
Heinz Riehl President, Riehl World Training & Consulting,
Trustee Inc. (bank consulting), 1996 to present;
Riehl World Training & Consulting, Inc. Faculty Member, New York University, 1982 to
25-13 Old Kings Highway North present; Senior Vice President, Citibank,
Darien, CT 06820 until 1996; Member, Foreign Exchange
Age 63 Committee, New York Federal Reserve Bank,
1980-1995.
-9-
<PAGE>
Name, Age, Address, Position with Fund Principal Occupation for the Last Five Years
-------------------------------------- --------------------------------------------
Irvin M. Henderson President and CEO, Henderson & Company, 1993
1519 Lynne Avenue to present; Director, National Community
Henderson, NC 27536 Reinvestment Coalition; Director, Woodstock
Age: 44 Institute; Director, Community Reinvestment
Association of North Carolina; Director,
North Carolina Fair Housing.
Robert Orrin Lehrman President and CEO, Community Bankers
317 Madison Avenue Association of New York State, August 1984
New York, NY 10017 until January 1997; self-employed attorney
Age: 65 and business consultant from January 1997 to
present.
Neil M. Solomon Vice President, Secretary and Treasurer, the
Treasurer Advisor since November 1998; Vice President
c/o CRAFund Advisors, Inc. and Chief Financial Officer, SunCoast Capital
1751 West Cypress Creek Road Group, Ltd. (broker-dealer) since July 1996;
Fort Lauderdale, FL 33309 Controller, Costa Cruise Lines, May 1994 to
Age: 29 July 1996; Associate - Audit, Coopers &
Lybrand, May 1992 to May 1994.
Michael P. Malloy Partner, Drinker Biddle & Reath LLP (law
Secretary firm) since 1993.
Drinker Biddle & Reath LLP
One Logan Square
18th and Cherry Sts.
Philadelphia, PA 19103
Age: 41
</TABLE>
* May be deemed to be an "interested person" of the Fund as defined in the 1940
Act.
Each disinterested Trustee received an annual fee of $12,000. For the fiscal
year ended May 31, 2000, the Trustees and Officers received aggregate fees of
$60,000. Drinker Biddle & Reath LLP, of which Mr. Malloy is a partner, receives
legal fees as counsel to the Fund. As of the date of this Statement of
Additional Information, the Trustees and Officers of the Fund, as a group, owned
less than 1% of the outstanding shares of the Fund.
The table below sets forth the compensation that the disinterested Trustees of
the Fund received for the period ended May 31, 2000. Trustees who are interested
persons receive no compensation.
Aggregate Total
Compensation Compensation
Name of Person/Position from the Fund Paid to Trustees
----------------------- ------------- ----------------
D. Keith Cobb $12,000 $12,000
Trustee
-10-
<PAGE>
Aggregate Total
Compensation Compensation
Name of Person/Position from the Fund Paid to Trustees
----------------------- ------------- ----------------
Burton Emmer $12,000 $12,000
Trustee
Jack M. Guttentag* $12,000 $12,000
Trustee
Heinz Riehl $12,000 $12,000
Trustee
John E. Taylor $12,000 $12,000
Trustee
*Mr. Guttentag resigned from the Trust on September 5, 2000.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return" for a
period is the percentage change in value during the period of an investment in
Fund shares, including the value of shares acquired through reinvestment of all
dividends and capital gains distributions. "Average Annual Total Return" is the
average annual compounded rate of change in value represented by the Total
Return for the period.
n
Average Annual Total Return is computed as follows: P(1+T) = ERV
Where: P = a hypothetical initial investment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment at the
beginning of the applicable period
The formula for calculating Aggregate Total Return is as follows:
Aggregate Total Return = [(ERV/P) - 1]
Based on the foregoing calculations, the Fund's Aggregate Total Return for the
period from August 30, 1999 (commencement of operations) to May 31, 2000 was
1.30%.
The Fund may also advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
-11-
<PAGE>
6
Yield = 2[(a-b/cd + 1) - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
Based on the foregoing calculations, the Fund's 30-day yield for the 30-day
period ended May 31, 2000 was 6.77%.
The Fund imposes no sales charges. Income taxes are not taken into account. The
Fund's performance is a function of conditions in the securities markets,
portfolio management, and operating expenses. Although information such as that
shown above is useful in reviewing the Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
In reports or other communications to investors or in advertising material, the
Fund may describe general economic and market conditions affecting the Fund and
may compare its performance with (1) that of other mutual funds as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar investment
services that monitor the performance of mutual funds or as set forth in the
publications listed below, (2) one or more benchmark indices, or (3) other
appropriate indices of investment securities or with data developed by the
Advisor derived from such indices. Performance information may also include
evaluation of the Fund by nationally recognized ranking services and information
as reported in financial publications such as Business Week, Fortune,
Institutional Investor, Money Magazine, Forbes, Barron's, The Wall Street
Journal, The New York Times, or other national, regional or local publications.
In reports or other communications to investors or in advertising, the Fund may
also describe the general biography or work experience of the portfolio
manager(s) of the Fund and may include quotations attributable to the portfolio
manager(s) describing approaches taken in managing the Fund's investments,
research methodology, underlying stock selection or the Fund's investment
objective. The Fund may also discuss the continuum of risk and return relating
to different investments. In addition, the Fund may from time to time compare
its expense ratios to those of investment companies with similar objective and
policies, as advertised by Lipper Analytical Services, Inc. or similar
investment services that monitor mutual funds.
TAX INFORMATION
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code, and to distribute its income to shareholders each
year, so that the Fund itself generally will be relieved of federal income and
excise taxes. If the Fund were to fail to so qualify: (1) the Fund would be
taxed at regular corporate rates without any deduction for
-12-
<PAGE>
distributions to shareholders; and (2) shareholders would be taxed as if they
received ordinary dividends, although corporate shareholders could be eligible
for the dividends received deduction. Moreover, if the Fund were to fail to make
sufficient distributions in a year, the Fund would be subject to corporate
income taxes and/or excise taxes in respect of the shortfall or, if the
shortfall is large enough, the Fund could be disqualified as a regulated
investment company.
A 4% non-deductible excise tax is imposed on regulated investment companies that
fail to distribute with respect to each calendar year at least 98% of their
ordinary taxable income for the calendar year and capital gain net income
(excess of capital gains over capital losses) for the one year period ending
October 31 of such calendar year and 100% of any such amounts that were not
distributed in the prior year. The Fund intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and any capital gain net
income prior to the end of each calendar year to avoid liability for this excise
tax.
Dividends declared in October, November or December of any year that are payable
to shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by the Fund on December 31 of such
year if such dividends are actually paid during January of the following year.
The Fund will be required in certain cases to withhold and remit to the United
States Treasury 31% of taxable dividends or gross sale proceeds paid to any
shareholder who (i) has failed to provide a correct tax identification number,
(ii) is subject to back-up withholding by the Internal Revenue Service for
failure to properly include on his or her return payments of taxable interest or
dividends, or (iii) has failed to certify to the Fund that he or she is not
subject to back-up withholding when required to do so or that he or she is an
"exempt recipient."
PORTFOLIO TRANSACTIONS
Debt securities are generally traded in the over-the-counter market. Over-the-
counter securities are generally purchased and sold directly with principal
market makers who retain the difference in their cost in the security and its
selling price (mark-up). In some instances, the Advisor feels that better prices
are available from non-principal market makers that are paid commissions
directly.
Decisions to buy and sell securities for the Fund are made by the Advisor
subject to overall review by the Fund's Board of Trustees. The Advisor places
orders pursuant to its investment determinations for the Fund either directly
with the issuer or with a broker or dealer. In executing portfolio transactions
and selecting brokers or dealers, the Advisor uses its best efforts to seek on
behalf of the Fund the best overall terms available. In assessing the best
overall terms available for any transaction, the Advisor considers all factors
that it deems relevant, including the breadth of the market in the security, the
price of the security, the financial condition and execution capability of the
broker or dealer, and the reasonableness of the commission, if any, both for the
specific transaction and on a continuing basis. When the Fund purchases or sells
securities through brokers on an agency basis, in evaluating the best overall
terms available, and in selecting the broker to execute a particular
transaction, the Advisor may also consider the
-13-
<PAGE>
brokerage and research services (as those terms are defined in Section 28(e) of
the Securities Exchange Act of 1934) provided to the Fund and/or other accounts
over which the Advisor or an affiliate of the Advisor exercises investment
discretion. The Advisor is authorized to pay to a broker who provides such
brokerage and research services a commission for executing a portfolio
transaction for the Fund which is in excess of the amount of commission another
broker would have charged for effecting that transaction if, but only if, the
Advisor determines in good faith that such commission was reasonable in relation
to the value of the brokerage and research services provided by such broker,
viewed in terms of that particular transaction or in terms of the overall
responsibilities of the Advisor to the Fund.
In addition, the Advisor is authorized to take into account the sale of shares
of the Fund in allocating to brokers or dealers purchase and sale orders for the
Fund's portfolio securities, provided that the Advisor believes that the quality
of the transaction and the commission are comparable to what they would be with
other qualified firms. The Advisor will make investment decisions for the Fund
independently from those of other clients of the Advisor. However, the same
security may be held in the portfolio of the Fund and one or more other clients
when the same security is believed suited for the investment objectives of the
Fund and such other client(s). Should two or more clients of the Advisor
simultaneously be engaged in the purchase or sale of the same security, to the
extent possible, the transactions will be allocated as to price and amount in a
manner fair and equitable to each client and the Fund.
The Advisor may execute portfolio transactions through SunCoast Capital Group,
Ltd. ("SunCoast"), which is the Fund's distributor and an affiliate of the
Advisor. The Advisor will do so only if it believes that SunCoast will provide
the Fund with the best available price and execution. Such transactions will be
subject to the requirements of applicable law and will be reviewed by the Fund's
Board of Trustees. SunCoast may not engage in portfolio transactions with the
Fund when it acts as principal.
DISTRIBUTOR
SunCoast, located at 1751 West Cypress Creek Road, Fort Lauderdale, FL 33309
serves as principal underwriter for the Fund's shares. The following persons are
affiliated persons (as defined in the 1940 Act) of both the Fund and SunCoast:
David A. Zwick is Trustee and President of the Fund and Treasurer, Secretary,
Director and Shareholder of SunCoast; Todd J. Cohen is Trustee of the Fund and
President and Shareholder of SunCoast; and Neil M. Solomon is Treasurer of the
Fund and Executive Vice President of SunCoast.
Shares of the Fund are sold on a continuous basis. The distribution agreement
between the Fund and SunCoast requires SunCoast to use all reasonable efforts in
connection with the distribution of the Fund's shares. However, SunCoast has no
obligation to sell any specific number of shares and will only sell shares for
orders it receives.
-14-
<PAGE>
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the 1940
Act. The Distribution Plan authorizes the Fund to pay SunCoast annual fees of up
to .25% of the average daily net assets of the Fund in consideration for
distribution and other services and the assumption of related expenses. Amounts
paid to SunCoast may be used to cover expenses that are related to (a)
distribution of the Fund's shares, (b) ongoing servicing and/or maintenance of
the accounts of the Fund's shareholders, (c) payments to institutions for
selling the Fund's shares, and (d) sub-transfer agency, sub-accounting,
administrative or similar services related to the Fund's shares. The Fund may
pay SunCoast the full fee provided for by the Distribution Plan even if
SunCoast's costs for providing its services are less than the full amount.
Certain officers, directors and/or shareholders of SunCoast are also interested
persons (as defined in the 1940 Act) of the Fund and may be considered to have a
direct or indirect financial interest in the Distribution Plan.
The Distribution Plan has been approved by the Board of Trustees of the Fund,
including a majority of the Trustees who are not interested persons of the Fund
(as defined in the 1940 Act) and who have no direct or indirect financial
interest in the operation of the Distribution Plan or in any agreement related
thereto (the "Disinterested Trustees"). In approving the Distribution Plan, the
Trustees considered various factors and determined that there is a reasonable
likelihood that the Distribution Plan would benefit the Fund and its
shareholders. The Distribution Plan may be terminated by a vote of a majority of
the Disinterested Trustees. The Trustees review quarterly a written report of
the amounts expended pursuant to the Distribution Plan and the purposes for
which such expenditures were made. The Distribution Plan may be amended by a
vote of the Trustees, provided that any material amendments also require the
vote of a majority of the Disinterested Trustees. Any amendment to materially
increase the costs that the Fund's shares bear under the Distribution Plan
requires approval by a majority of the outstanding voting shares (as defined in
the 1940 Act). For so long as the Distribution Plan is in effect, selection and
nomination of Disinterested Trustees will be committed to the discretion of the
Disinterested Trustees. Any agreement related to the Distribution Plan may be
terminated at any time without the payment of any penalty by a vote of a
majority of the Disinterested Trustees. The Distribution Plan will continue in
effect for successive one-year periods, provided that each such continuance is
specifically approved by a majority of the Board of Trustees, including a
majority of the Disinterested Trustees.
For the period ended May 31, 2000, the Fund reimbursed the Distributor $8,639
for distribution costs incurred.
CUSTODIAN
First Union National Bank (the "Custodian"), with offices at 123 South Broad
Street, Philadelphia, PA 19109, acts as custodian for the Fund. As such, the
Custodian holds all securities and cash of the Fund, delivers and receives
payment for securities sold, receives and pays for securities purchased,
collects income from investments and performs other duties, all as directed by
officers of the Fund. The Custodian does not exercise any supervisory function
over
-15-
<PAGE>
the management of the Fund, the purchase and sale of securities or the payment
of distributions to shareholders.
SERVICING AGENT
Declaration Service Company ("DSC"), with principal business offices at 555
North Lane, Suite 6160, Conshohocken, PA 19428, provides accounting,
administrative, transfer agency, dividend disbursing agency, and shareholder
servicing agency services for the Fund pursuant to an investment company
services agreement (the "Services Agreement"). Under the Services Agreement, DSC
is responsible for a wide variety of functions, including but not limited to:
o Fund accounting services
o Financial statement preparation
o Valuation of the Fund's portfolio securities
o Pricing the Fund's shares
o Assistance in preparing tax returns
o Preparation and filing of required regulatory reports
o Communications with shareholders
o Coordination of Board and shareholder meetings
o Monitoring the Fund's legal compliance
o Maintaining shareholder account records
Under the Services Agreement, the Fund pays DSC for Fund accounting and
administration services at the annual rate of 0.10% of the first $75 million of
average annual assets, plus 0.075% of the next $75 million of average annual
assets, plus 0.04% of the next $150 million of average annual assets, plus 0.03%
of average annual assets in excess of $300 million. The Fund also pays DSC
$10,000 per year for transfer agency and shareholder services fees. Fees payable
under the Services Agreement are subject to a minimum annual fee of $60,000.
For the period from August 30, 1999 (commencement of operations) through May 31,
2000, the Fund paid DSC $45,000 (net of waivers). For the same period, DSC
waived $0.
CODE OF ETHICS
The Fund, Advisor and the Distributor have adopted codes of ethics under Rule
17j-1 of the 1940 Act that permit investment personnel subject to their
particular codes of ethics to invest in securities, including securities that
may be purchased or held by the Fund, for their own accounts. The Codes of
Ethics are on public file with, and are available from, the Securities and
Exchange Commission's Public Reference Room in Washington, D.C.
COUNSEL
Drinker Biddle & Reath LLP (of which Michael P. Malloy, Secretary of the Fund,
is a partner), One Logan, 18th and Cherry Streets, Philadelphia, PA 19103-6996,
is counsel to the Fund and will pass upon certain legal matters on its behalf.
-16-
<PAGE>
INDEPENDENT AUDITORS
KPMG LLP, with offices at 1600 Market Street, 12th Floor, Philadelphia, PA
19103, serves as the Fund's independent auditors. KPMG LLP performs an annual
audit of the Fund's financial statements. Reports of its activities are provided
to the Fund's Board of Trustees.
FINANCIAL STATEMENTS
The Fund's Annual Report to Shareholders for the fiscal period ended May 31,
2000 has been filed with the Securities and Exchange Commission. The financial
statements in such Annual Report (the "Financial Statements") are incorporated
by reference into this Statement of Additional Information. The Financial
Statements included in such Annual Report have been audited by the Fund's
independent auditors, KPMG LLP, whose report thereon also appears in such Annual
Report and is incorporated herein by reference. The Financial Statements in such
Annual Report have been incorporated by reference in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
MISCELLANEOUS
As used in this Statement of Additional Information and in the Fund's
Prospectus, a majority of the outstanding shares of the Fund means, with respect
to the approval of an investment advisory agreement or a change in a fundamental
investment policy, the lesser of (1) 67% of the shares of the Fund represented
at a meeting at which the holders of more than 50% of the outstanding shares of
the Fund are present in person or by proxy, or (2) more than 50% of the
outstanding shares of the Fund.
As of September 19, 2000 the following institutions owned of record 5% or more
of the Fund's outstanding shares:
Name and Address Amount of Shares Owned Percentage of Fund Owned
---------------- ---------------------- ------------------------
Monroe Bank & Trust 100,000 8.19%
102 East Front Street
Monroe, MI 48161
Green Point Bank 314,501 25.74%
90 Park Avenue, 4th Floor
New York, NY 10016
-17-
<PAGE>
Name and Address Amount of Shares Owned Percentage of Fund Owned
---------------- ---------------------- ------------------------
Central National Bank 92,954 7.61%
24 Church Street
Canajoharie, NY 13317
Advanta Corp 101,420 8.80%
Welsh & McKean Road
P. O. Box 844
Spring House, PA 19477-0844
San Diego National Bank 211,594 17.32%
1420 Kettner Boulevard
San Diego, CA 92101
First North American 101,112 8.28%
9960 Mayland Drive
Richmond, VA 23233
Aliant Bank 74,740 6.12%
200 Aliant Parkway
Alexander City, AL 35010
-18-
<PAGE>
APPENDIX A
----------
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
----------------------------------------------
The following summarizes the ratings used by Standard & Poor's for
corporate and municipal debt:
"AAA" - An obligation rated "AAA" has the highest rating assigned by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is extremely strong.
"AA" - An obligation rated "AA" differs from the highest rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
"A" - An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
"BBB" - An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
Obligations rated "BB," "B," "CCC," "CC" and "C" are regarded as having
significant speculative characteristics. "BB" indicates the least degree of
speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
"BB" - An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
"B" - An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
"CCC" - An obligation rated "CCC" is currently vulnerable to nonpayment,
and is dependent upon favorable business, financial and economic conditions for
the obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
"CC" - An obligation rated "CC" is currently highly vulnerable to
nonpayment.
A-1
<PAGE>
"C" - The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action taken, but payments on this obligation
are being continued.
"D" - An obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
- PLUS (+) OR MINUS (-) - The ratings from "AA" through "CCC" may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
- "r" - The `r' highlights obligations that Standard & Poor's believes have
significant noncredit risks. Examples of such obligations are securities with
principal or interest return indexed to equities, commodities, or currencies;
certain swaps and options; and interest-only and principal-only mortgage
securities. The absence of an `r' symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability in total return.
- N.R. Indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
The following summarizes the ratings used by Moody's for corporate and
municipal long-term debt:
"Aaa" - Bonds are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as "gilt edged."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa" - Bonds are judged to be of high quality by all standards. Together
with the "Aaa" group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in "Aaa" securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risk appear somewhat larger than the "Aaa" securities.
"A" - Bonds 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 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
A-2
<PAGE>
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba" - Bonds 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 are generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
"Caa " - Bonds are of poor standing. Such issues may be in default or there
may be present elements of danger with respect to principal or interest.
"Ca" - Bonds represent obligations which are speculative in a high degree.
Such issues are often in default or have other marked shortcomings.
"C" - Bonds are the lowest rated class of bonds, and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Con. (...) - Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the ratings used by Fitch for corporate and municipal
bonds:
"AAA" - Bonds considered to be investment grade and of the highest credit
quality. These ratings denote the lowest expectation of credit risk and are
assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
A-3
<PAGE>
"A" - Bonds considered to be investment grade and of high credit quality.
These ratings denote a low expectation of credit risk and indicate strong
capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit quality.
These ratings denote that there is currently a low expectation of credit risk.
The capacity for timely payment of financial commitments is considered adequate,
but adverse changes in circumstances and in economic conditions are more likely
to impair this capacity. This is the lowest investment grade category.
"BB" - Bonds considered to be speculative. These ratings indicate that
there is a possibility of credit risk developing, particularly as the result of
adverse economic change over time; however, business or financial alternatives
may be available to allow financial commitments to be met. Securities rated in
this category are not investment grade.
"B" - Bonds are considered highly speculative. These ratings indicate that
significant credit risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued
payment is contingent upon a sustained, favorable business and economic
environment.
"CCC", "CC" and "C" - Bonds have high default risk. Default is a real
possibility, and capacity for meeting financial commitments is solely reliant
upon sustained, favorable business or economic developments. "CC" ratings
indicate that default of some kind appears probable, and "C" ratings signal
imminent default.
"DDD," "DD" and "D" - Bonds are in default. The ratings of obligations in
this category are based on their prospects for achieving partial or full
recovery in a reorganization or liquidation of the obligor. While expected
recovery values are highly speculative and cannot be estimated with any
precision, the following serve as general guidelines. "DDD" obligations have the
highest potential for recovery, around 90%-100% of outstanding amounts and
accrued interest. "DD" indicates potential recoveries in the range of 50%-90%,
and "D" the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
- To provide more detailed indications of credit quality, the Fitch ratings
from and including "AA" to "CCC" may be modified by the addition of a plus (+)
or minus (-) sign to denote relative standing within these major rating
categories.
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- 'NR' indicates the Fitch does not rate the issuer or issue in question.
- 'Withdrawn': A rating is withdrawn when Fitch deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
- RatingAlert: Ratings are placed on RatingAlert to notify investors that
there is a reasonable probability of a rating change and the likely direction of
such change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. RatingAlert is typically resolved over a relatively short
period.
Thomson Financial BankWatch assesses the likelihood of an untimely
repayment of principal or interest over the term to maturity of long term debt
and preferred stock which are issued by United States commercial banks, thrifts
and non-bank banks; non-United States banks; and broker-dealers. The following
summarizes the rating categories used by Thomson BankWatch for long-term debt
ratings:
"AAA" - This designation indicates that the ability to repay principal and
interest on a timely basis is extremely high.
"AA" - This designation indicates a very strong ability to repay principal
and interest on a timely basis, with limited incremental risk compared to issues
rated in the highest category.
"A" - This designation indicates that the ability to repay principal and
interest is strong. Issues rated "A" could be more vulnerable to adverse
developments (both internal and external) than obligations with higher ratings.
"BBB" - This designation represents the lowest investment-grade category
and indicates an acceptable capacity to repay principal and interest. Issues
rated "BBB" are more vulnerable to adverse developments (both internal and
external) than obligations with higher ratings.
"BB" - A rating of BB suggests that the likelihood of default is
considerably less than for lower-rated issues, although there are significant
uncertainties that could affect the ability to adequately service debt
obligations.
"B" - Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely basis.
"CCC" - Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances.
"CC" - This rating is applied to issues that are subordinate to other
obligations rated CCC and are afforded less protection in the event of
bankruptcy or reorganization.
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"D" - This designation indicates that the long-term debt is in default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may include a
plus or minus sign designation which indicates where within the respective
category the issue is placed.
MUNICIPAL NOTE RATINGS
----------------------
A Standard and Poor's note rating reflects the liquidity factors and market
access risks unique to notes due in three years or less. The following
summarizes the ratings used by Standard & Poor's for municipal notes:
"SP-1" - The issuers of these municipal notes exhibit a strong capacity to
pay principal and interest. Those issues determined to possess a very strong
capacity to pay debt service are given a plus (+) designation.
"SP-2" - The issuers of these municipal notes exhibit satisfactory capacity
to pay principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
"SP-3" - The issuers of these municipal notes exhibit speculative capacity
to pay principal and interest.
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade ("MIG") and variable rate demand
obligations are designated Variable Moody's Investment Grade ("VMIG"). Such
ratings recognize the differences between short-term credit risk and long-term
risk. The following summarizes the ratings by Moody's Investors Service, Inc.
for short-term notes:
"MIG-1"/"VMIG-1" - This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
"MIG-2"/"VMIG-2" - This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
"MIG-3"/"VMIG-3" - This designation denotes favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
"MIG-4"/"VMIG-4" - This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
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"SG" - This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
Fitch uses the short-term ratings described under Commercial Paper Ratings
for municipal notes.
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