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PROSPECTUS DATED JULY 1, 1999
[SENBANC_FUND_LOGO]
HILLIARD LYONS RESEARCH TRUST
Hilliard Lyons Center
501 South 4th Street
Louisville, Kentucky 40202
1-800-444-1854
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL AND COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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SENBANC FUND
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TABLE OF CONTENTS
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SENBANC FUND SUMMARY............................................... 1
SENBANC FUND....................................................... 5
Investment Objective and Principal Types of Investments.......... 5
Investment Philosophy............................................ 5
Main Risks....................................................... 6
Other Types of Investments and Considerations.................... 8
MANAGEMENT OF THE FUND............................................. 9
Trustees and Advisor............................................. 9
Portfolio Manager................................................ 9
SHAREHOLDER INFORMATION............................................ 10
Net Asset Value.................................................. 10
How to Buy Shares................................................ 10
How to Sell (Redeem) Shares...................................... 12
Dividends, Distributions and Taxes............................... 14
DISTRIBUTION ARRANGEMENTS.......................................... 15
Distribution Agreement........................................... 15
Sales Charges.................................................... 16
Distribution Plan................................................ 18
FOR MORE INFORMATION.............................................. Back Cover
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SENBANC FUND
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SUMMARY
INVESTMENT OBJECTIVE
The Senbanc Fund (the "Fund") seeks long-term capital
appreciation.
MAIN INVESTMENT STRATEGIES
The Fund invests primarily in publicly traded equity
securities of banks and financial institutions conducting at
least fifty percent (50%) of their business through banking
subsidiaries (which are generally referred to herein as
"Banks"). "Banks" may include commercial banks, industrial
banks, consumer banks, savings and loans, and bank holding
companies that receive at least fifty percent (50%) of their
income through their bank subsidiaries, as well as regional
and money center banks. The Fund generally invests in equity
securities of Banks which have at least $500 million in
consolidated total assets; however, the Fund's investments
are not influenced by a Bank's market capitalization (large,
medium or small).
Hilliard Lyons Research Advisors, a division of J.J.B.
Hilliard, W.L. Lyons, Inc. and the investment advisor to the
Fund (the "Advisor"), uses a VALUE investment style for the
Fund. The Advisor seeks to identify the most undervalued
Banks by using an investment model which considers financial
ratios and other quantitative information. Generally, such
Banks have at least six years of current or predecessor
operating history and well-managed organizations and
operations. The Fund's portfolio is weighted most heavily to
the equity securities of Banks that the investment model
indicates are most undervalued for the longest period of
time.
MAIN RISKS OF INVESTING
Your investment in the Fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation (the "FDIC") or any other government entity;
therefore, you could lose money by investing in the Fund.
Your investment in the Fund is subject to the following main
risks:
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Market Risk: The Fund is designed for long-term investors
who can accept the risks of investing in a
portfolio with significant holdings of
equity securities. Equity securities tend to
be more volatile than other investment
choices, such as debt and money market
instruments. The value of your investment
may decrease in response to overall stock
market movements or the value of individual
securities held by the Fund.
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SENBANC FUND
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Industry Concentration Because the Fund concentrates in a single
Risk: industry (banking), its performance is
largely dependent on that specific
industry's performance, which may differ in
direction and degree from that of the
overall stock market. Volatile interest
rates or deteriorating economic conditions
can adversely affect the banking industry
and, therefore, the performance of the
equity securities of Banks.
Portfolio Management The skill of the Advisor will play a
Risk: significant role in the Fund's ability to
achieve its investment objective.
Small Company Risk: Investment in smaller companies involves
greater risk than investment in larger, more
established companies. The equity securities
of small and medium-size companies often
fluctuate in price to a greater degree than
equity securities of larger, more mature
companies. Smaller companies may have more
limited financial resources and less liquid
trading markets for their securities.
Nondiversification: This is a nondiversified fund; compared to
other funds, the Fund may invest a greater
percentage of its assets in a particular
issuer or a small number of issuers. As a
consequence, the Fund may be subject to
greater risks and larger losses than
diversified funds.
Initial Investors Not The Fund may not be invested primarily in
Invested Primarily In the equity securities of Banks for a period
Banks: of time (as long as ten months or more)
following its commencement of operations;
therefore, your returns may be lower than
they otherwise would have been if the Fund
had been so invested and if the Fund's
portfolio securities had increased in value.
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SENBANC FUND
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INVESTOR EXPENSES
The tables below describe the fees and expenses that you may
pay if you buy and hold shares of the Fund. Shareholder fees
are paid directly from your account. Annual Fund operating
expenses are paid out of the Fund's assets and are reflected
in the Fund's share price and dividends; therefore, such
expenses are paid indirectly by shareholders.
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SHAREHOLDER FEES (fees paid directly from your account)
Maximum Sales Charge Imposed on Purchases............ 2.25%*
Maximum Deferred Sales Charge........................ None**
Maximum Sales Charge Imposed on Reinvested Dividends
and Other Distributions............................ None
Redemption Fee....................................... None
Exchange Fee......................................... None
Maximum Account Fee.................................. None
ANNUAL FUND OPERATING EXPENSES (expenses that are paid
out of the Fund's assets)
Management Fee....................................... 0.60%(1)
Distribution (12b-1) Fees............................ 0.60%
Other Expenses....................................... 0.63%(2)
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Total Annual Fund Operating Expenses................. 1.83%(2)
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* The Fund has a maximum front-end sales charge of 2.25%;
however, cumulative investments of at least $500,000 over
thirteen (13) months will be assessed a sales charge of
1.75% and cumulative investments of at least $1,000,000
over thirteen (13) months will not be assessed a sales
charge. For more detailed information, refer to the
section of this Prospectus titled "Distribution
Arrangements."
** Purchases of $1,000,000 or more are not subject to an
initial sales charge; however, a contingent deferred
sales charge is payable on these investments in the event
of a share redemption within 12 months following the
share purchase, at the rate of 1% of the lesser of the
value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total
cost of such shares.
(1) The Advisor intends to waive all management fees until
the Fund reaches $20 million in net assets.
(2) "Other Expenses" is based on estimated amounts
annualized for the current fiscal year; therefore, "Total
Annual Fund Operating Expenses" may actually be greater
or less than indicated in the table. However, the Advisor
intends to voluntarily cap the Fund's total annual
operating expenses at 1.75% of the Fund's average daily
net assets indefinitely.
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SENBANC FUND
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EXAMPLE
This hypothetical example is intended to help you compare
the cost of investing in this Fund with the cost of
investing in other mutual funds. The Example assumes that:
- You invest $10,000;
- You redeem all of your shares at the end of the
periods shown;
- Your investment has a 5% annual return; and
- The Fund's operating expenses remain the same.
Although actual annual returns and Fund operating expenses
may be higher or lower, based on these assumptions, your
costs would be:
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1 Year 3 Years
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$ 407 $ 788
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SENBANC FUND
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SENBANC FUND
The Fund is a series of the Hilliard Lyons Research Trust
(the "Trust"), an open-end management investment company.
INVESTMENT OBJECTIVE AND PRINCIPAL TYPES OF INVESTMENTS
The Fund seeks long-term capital appreciation. Under normal
market conditions, the Fund will invest at least 65% of its
total assets in publicly traded equity securities of banks
and financial institutions conducting at least fifty percent
(50%) of their business through banking subsidiaries (which
are generally referred to herein as "Banks"). "Banks" may
include commercial banks, industrial banks, consumer banks,
savings and loans, and bank holding companies that receive
at least fifty percent (50%) of their income through their
bank subsidiaries, as well as regional and money center
banks. A regional bank is one that provides full-service
banking (i.e., savings accounts, checking accounts,
commercial lending and real estate lending), has assets that
are primarily of domestic origin, and typically has a
principal office outside of a large metropolitan area (e.g.,
New York City or Chicago). A money center bank is one with a
strong international banking business and a significant
percentage of international assets, and is typically located
in a large metropolitan area. To the extent that the Fund
invests in the equity securities of bank holding companies,
a portion of the Fund's assets may be indirectly invested in
nonbanking entities, since bank holding companies may derive
a portion of their income from such entities.
Generally, the equity securities in which the Fund will
invest are common stocks; however, the Fund may also at
times acquire (through its common stock holdings) preferred
stock, warrants, rights or other securities that are
convertible into common stock. Although the Fund seeks
opportunities for long-term capital appreciation, the Banks
in which the Fund invests may also pay regular dividends.
INVESTMENT PHILOSOPHY
The Advisor uses a VALUE investment style for the Fund. The
Advisor seeks to identify the most undervalued Banks on a
monthly basis by using an investment model that generates
information which allows the Advisor to compare its
determinations of current net worth with the underlying
market prices of Banks. The investment model considers
financial ratios and other quantitative information in
evaluating and rating Banks which generally have at least
six years of current or predecessor operating history and
well-managed organizations and operations. The Fund's
portfolio is weighted most heavily to the equity securities
of Banks that the investment model indicates are most
undervalued for the longest period of time.
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The Advisor intends to build the Fund's portfolio by
investing each month in the top ten most undervalued Banks
as determined by its investment model. Comparable dollar
amounts will be invested in each of the top ten Banks each
month, insofar as liquidity of those issues and the liquid
resources of the Fund allow. The Advisor generally does not
expect significant turnover within the top ten most
undervalued Banks from month to month. Therefore, limited
turnover will lead to multiple purchases of the securities
of the Banks that stay in the top ten for greater than one
month.
Generally, securities in the Fund's portfolio will be sold
when they are adequately valued (as determined by the
investment model) and when an initial purchase of a Bank's
securities has been held for a minimum of twelve months.
However, if a Bank has announced a major reorganization
(e.g., merger or acquisition), the Fund will generally sell
that Bank's securities regardless of the Bank's rating by
the investment model or the length of time the Bank's
securities have been held by the Fund. If a Bank is no
longer evaluated by the investment model for any reason, the
Bank's securities will be sold by the Fund. In addition,
sales may be made in order to enhance the Fund's cash
position in the case of unusually large redemption requests
of the Fund's shares or as a temporary defensive measure,
and such sales would be of those Bank securities then ranked
as least undervalued.
The Advisor generally expects the Fund's portfolio to
represent Banks of wide geographic dispersion within the
United States. In addition, the Fund generally invests in
equity securities of Banks which have at least $500 million
in consolidated total assets; however, the Fund's
investments are not influenced by a Bank's market
capitalization (large, medium or small). The skill of the
Advisor will play a significant role in the Fund's ability
to achieve its investment objective.
MAIN RISKS
All investments (including those in mutual funds) have
risks, and you could lose money by investing in the Fund. No
investment is suitable for all investors. The Fund is
intended for long-term investors who can accept the risks
entailed in investing in the equity securities of Banks. Of
course, there can be no assurance that the Fund will achieve
its objective.
Your investment in the Fund is not a bank deposit and is not
insured or guaranteed by the Federal Deposit Insurance
Corporation (the "FDIC") or any other government entity.
Because the Fund's investments are concentrated in the
banking industry, an investment in the Fund may be subject
to greater market fluctuations than an investment in a fund
that does not concentrate in a
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particular industry. Thus, we recommend that you consider an
investment in the Fund as only one portion of your overall
investment portfolio.
MARKET RISK. Equity securities tend to be more volatile than
other investment choices, such as debt and money market
instruments. The value of your investment may decrease in
response to overall stock market movements or the value of
individual securities held by the Fund.
INDUSTRY CONCENTRATION RISK. Since the Fund's investments
will be concentrated in the banking industry, they will be
subject to risks in addition to those that apply to the
general equity market. Events may occur that significantly
affect the entire banking industry; therefore, the Fund's
share value may at times increase or decrease at a faster
rate than the share value of a mutual fund with investments
in many industries. The profitability of Banks is largely
dependent upon the availability and cost of capital funds,
and may show significant fluctuation as a result of volatile
interest rate levels. Healthy economic conditions are
important to the operations of Banks, and exposure to credit
losses resulting from possible financial difficulties of
borrowers can have an adverse effect on the financial
performance and condition of Banks. In addition, despite
some measure of deregulation, Banks are still subject to
extensive governmental regulation which may limit their
activities as well as the amounts and types of loans and
other financial commitments that may be made and the
interest rates and fees that may be charged.
NONDIVERSIFICATION. The Fund is NONDIVERSIFIED, meaning that
it is not limited in the proportion of its assets that it
may invest in the obligations of a single issuer. However,
the Fund will comply with diversification requirements
imposed by the Internal Revenue Code for qualification as a
regulated investment company. As a nondiversified fund, the
Fund may invest a greater proportion of its assets in the
securities of a small number of issuers, and may be subject
to greater risk and substantial losses as a result of
changes in the financial condition or the market's
assessment of the issuers.
SMALL COMPANY RISK. The Advisor may invest the Fund's assets
in small and medium-size companies. Investment in smaller
companies involves greater risk than investment in larger
companies. The stocks of smaller companies often fluctuate
in price to a greater degree than stocks of larger
companies. Smaller companies may have more limited financial
resources and less liquid trading markets for their stock.
The Fund's share price may experience greater volatility
when the Fund is more heavily invested in small and
medium-size companies.
INITIAL INVESTORS NOT INVESTED PRIMARILY IN BANKS. The Fund
may not be invested primarily in the equity securities of
Banks for a period of time (as long as ten months or more)
following its commencement of operations; therefore, your
returns may be lower than they otherwise would have been if
the Fund
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had been so invested and if the Fund's portfolio securities
had increased in value. The Advisor anticipates that the
benefit of this strategy is that the Fund will be more
diversified within the banking industry over a period of
time.
OTHER TYPES OF INVESTMENTS AND CONSIDERATIONS
CASH MANAGEMENT AND TEMPORARY DEFENSIVE INVESTMENTS. For
cash management purposes or when the Advisor believes that
market conditions warrant it (i.e. a temporary defensive
position), the Fund may hold part or all of its assets in
cash or debt and money market instruments. Except during the
initial period of time following commencement of operations
and when pursuing such temporary defensive positions in
response to adverse market conditions, the Fund's investment
in debt, including money market instruments, will not exceed
35% of its total assets. Investments in debt and money
market instruments will generally be limited to (1)
obligations of the U.S. government, its agencies and
instrumentalities; and (2) corporate notes, bonds and
debentures rated at least AA by Standard & Poor's
Corporation ("Standard & Poor's") or Aa by Moody's Investors
Service ("Moody's") (see Appendix A to the Statement of
Additional Information ("SAI") -- "Description of Securities
Ratings").
Investments in debt and money market instruments are subject
to interest rate risk and credit risk. In general, the
market value of debt instruments in the Fund's portfolio
will decrease as interest rates rise and increase as
interest rates fall. In addition, to the extent the Fund
invests in debt instruments, there is the risk that an
issuer will be unable to make principal and interest
payments when due. The risks of these types of investments
and strategies are described further in the SAI. To the
extent that the Fund holds cash or invests in debt and money
market instruments, the Fund may not achieve its investment
objective.
There are also specific restrictions on the Fund's
investments. These restrictions are detailed in the SAI.
YEAR 2000. The investment management and advisory services
provided to the Fund by the Advisor and the services
provided to the Fund and its shareholders by the transfer
agent and the custodian depend on the smooth functioning of
their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900
or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a materially
adverse impact on the handling of securities trades, pricing
and account services. The Advisor, transfer agent and
custodian have been actively working on necessary changes to
their own computer systems to prepare for the year 2000 and
expect that their systems will be adapted before that date.
However, there can be no assurance that they will be
successful, or that interactions with other noncomplying
computer systems will not impair their services
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at that time. In addition, there can be no assurance that
the year 2000 issue will not affect the companies in which
the Fund invests or worldwide markets and economies.
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MANAGEMENT OF THE FUND
TRUSTEES AND ADVISOR
The Board of Trustees has overall management responsibility
for the Fund. See the SAI for the names of and additional
information about the Trustees and officers. The Advisor,
which is located at Hilliard Lyons Center, Louisville,
Kentucky 40202, is responsible for providing investment
advisory and management services to the Fund, subject to the
direction of the Board of Trustees. The Advisor is a
division of J.J.B. Hilliard, W.L. Lyons, Inc. ("Hilliard
Lyons"), a registered investment advisor, registered
broker-dealer and member firm of the New York Stock
Exchange, Inc. ("NYSE"), other principal exchanges and the
National Association of Securities Dealers, Inc. ("NASD").
Hilliard Lyons and its affiliate, Hilliard Lyons Trust
Company, a Kentucky chartered trust company, are wholly
owned subsidiaries of PNC Bank Corp. ("PNC"). PNC, a
multi-bank holding company headquartered in Pittsburgh,
Pennsylvania, is one of the largest financial services
organizations in the United States. PNC's address is One PNC
Plaza, 249 Fifth Avenue, Pittsburgh, Pennsylvania
15222-2707.
Together with predecessor firms, Hilliard Lyons has been in
the investment banking business since 1854. Hilliard Lyons
has been registered as an investment advisor since 1973.
Hilliard Lyons also serves as investment advisor to the
Hilliard Lyons Growth Fund, Inc., an open-end mutual fund
with assets as of December 31, 1998 of approximately $88
million, and to the Hilliard Lyons Government Fund, Inc., an
open-end money market mutual fund with assets as of December
31, 1998 of approximately $1,046,000,000. As of December 31,
1998, Hilliard Lyons and its affiliates managed individual,
corporate, fiduciary and institutional accounts with assets
totaling approximately $4,611,000,000. Pursuant to an
investment advisory agreement with the Fund (the "Advisory
Agreement"), the Advisor is paid a management fee at an
annual rate of 0.60% of the Fund's average daily net assets;
however, the Advisor intends to waive its management fee
until the Fund reaches $20 million in net assets.
PORTFOLIO MANAGER
Alan F. Morel is the portfolio manager of the Fund and the
designer and originator of the proprietary programs that
generate The Hilliard Lyons Bank Stock Index, upon which the
Fund's investment model is based. Therefore, the investment
success of the Fund will depend significantly on the efforts
of Mr. Morel. Accordingly, the death, incapacity, removal or
resignation of Mr. Morel could adversely affect the Fund's
performance. Mr. Morel is a Vice President of Hilliard Lyons
and has been employed by Hilliard Lyons as an
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analyst since 1976. Neither Hilliard Lyons nor the Advisor
currently has a written employment agreement with Mr. Morel.
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SHAREHOLDER INFORMATION
NET ASSET VALUE
The net asset value is determined as of the close of regular
trading on the floor of the NYSE (4:00 p.m., Eastern time)
on each day the NYSE is open for trading (referred to herein
as a "business day"). Net asset value per share is
determined by dividing the difference between the values of
the Fund's assets and liabilities by the number of the
Fund's shares outstanding. Investments that are traded on an
exchange or in the over-the-counter market are valued based
on the last sale price as of the close of regular trading on
the NYSE. Short-term obligations with maturities of 60 days
or less are valued at amortized cost. Other securities for
which market quotations are not readily available are valued
at their fair value, as determined in good faith by the
Advisor under procedures established by, and under the
supervision and responsibility of, the Fund's Board of
Trustees.
HOW TO BUY SHARES
GENERAL. Provident Distributors, Inc., Four Fall Corporate
Center, 6th Floor, West Conshohocken, Pennsylvania
19428-2961, is the distributor for the shares of the Fund
(the "Distributor"). Pursuant to a selling agreement between
the Distributor and Hilliard Lyons, Hilliard Lyons is a
selling agent for the shares of the Fund. Therefore, you may
purchase or redeem Fund shares through a Hilliard Lyons
investment broker. The Distributor may enter into selling
agreements with authorized dealers and financial
intermediaries other than Hilliard Lyons (collectively
referred to as "Authorized Dealers") at a future date,
allowing Fund shares to be purchased and redeemed through
such Authorized Dealers. The Fund may modify or waive its
purchase and redemption procedures or requirements to
facilitate any future selling agreements.
INITIAL PURCHASES. Fund shares may be purchased through a
Hilliard Lyons investment broker or Authorized Dealer who
will open an account, explain the shareholder services
available from the Fund and answer any questions. The
minimum initial investment for Fund shares is $250, and the
minimum additional investment is $100. These minimums may be
waived at the discretion of the Fund, and the Fund reserves
the right to change its investment minimums without notice.
ADDITIONAL PURCHASE POLICIES. After you make your initial
investment and your account is established, you may make
additional purchases by telephoning your Hilliard Lyons
investment broker or Authorized Dealer and placing an order.
Purchase orders received by your Hilliard Lyons investment
broker prior to "closing time" on any business day are
executed at the public offering
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price determined that day. The public offering price is the
Fund's net asset value per share plus the applicable
front-end sales charge. Purchase orders received by an
Authorized Dealer on any business day are executed at the
public offering price determined that day, provided the
order is received by the Authorized Dealer and transmitted
to the Transfer Agent prior to "closing time" on that day.
Authorized Dealers are responsible for transmitting purchase
orders to the Transfer Agent promptly. The failure of an
Authorized Dealer to promptly transmit an order may cause
the purchase price to be more or less than the amount you
otherwise would have paid. Purchase orders received after
"closing time" or on a day that is not a business day are
priced as of "closing time" on the next succeeding business
day. "Closing time" is the close of trading on the NYSE
(4:00 p.m., Eastern time) or such other day or time as the
Fund's Trustees may establish in the future. The Fund
reserves the right to reject any purchase order and to
suspend the offering of Fund shares for a period of time.
You may pay for purchases with checks drawn on domestic
offices of U.S. banks or with funds in brokerage accounts
maintained with Hilliard Lyons or Authorized Dealers. If
your check is subsequently dishonored, your Hilliard Lyons
investment broker or Authorized Dealer may have the right to
redeem your shares and to retain any dividends paid or
distributions made with respect to such shares. When your
payment is received by a brokerage firm before a settlement
date, unless otherwise directed by you, the monies may be
held as a free credit balance in your brokerage account and
the brokerage firm may benefit from the temporary use of
these monies.
AUTOMATIC INVESTMENT PLAN. The automatic investment plan
enables you to make regular monthly or quarterly investments
in shares through automatic charges to your bank account.
With your authorization and bank approval, your bank account
is automatically charged by your Hilliard Lyons investment
broker or Authorized Dealer for the amount specified ($100
minimum), which is automatically invested in shares at the
public offering price on or about the date you specify. Bank
accounts are charged on the day or a few days before
investments are credited, depending on the bank's
capabilities, and you will receive a confirmation statement
showing the current transaction. To participate in the
automatic investment plan, contact your Hilliard Lyons
investment broker or Authorized Dealer for an authorization
agreement, which contains details about the automatic
investment plan. If your bank account cannot be charged due
to insufficient funds, a stop-payment order or the closing
of your account, the automatic investment plan may be
terminated and the related investment reversed. You may
change the amount of the investment or discontinue the
automatic investment plan at any time by notifying your
Hilliard Lyons investment broker or Authorized Dealer.
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RETIREMENT PLANS. Shares of the Fund may be purchased in
connection with various retirement plans, including
Individual Retirement Accounts ("IRAs"), section 403(b)
plans and retirement plans for self-employed individuals,
partnerships and corporations and their employees. Detailed
information concerning retirement plans is available from
your Hilliard Lyons investment broker or Authorized Dealer.
There may be fees in connection with establishing and
maintaining retirement plans. You should consult your tax
advisor for specific advice regarding their tax status and
the possible benefits of establishing retirement plans.
HOW TO SELL (REDEEM) SHARES
REDEMPTIONS GENERALLY. You may submit redemption requests to
your Hilliard Lyons investment broker or Authorized Dealer
in person or by telephone, mail or wire. Redemption requests
directed to a Hilliard Lyons investment broker are effected
at the net asset value next computed after receipt of the
request. Redemption requests directed to an Authorized
Dealer are effected at the net asset value next computed
after receipt of the request by the Authorized Dealer and
transmission of the request to the Transfer Agent.
Redemption proceeds are credited to your brokerage account
for disbursement according to your instructions and will
normally be credited to your brokerage account within three
business days. Authorized Dealers are responsible for
transmitting redemption requests to the Transfer Agent
promptly. The failure of an Authorized Dealer to promptly
transmit a redemption request may cause the redemption
proceeds to be more or less than the amount you otherwise
would have received.
TELEPHONE REDEMPTIONS. During periods of dramatic economic
or market changes, you may experience difficulty in
implementing a telephone redemption with your Hilliard Lyons
investment broker or Authorized Dealer because of increased
telephone volume. Your Hilliard Lyons investment broker or
Authorized Dealer may refuse a telephone redemption request
if it believes it is advisable to do so. You will bear the
risk of loss from fraudulent or unauthorized instructions
received over the telephone provided your Hilliard Lyons
investment broker or Authorized Dealer reasonably believes
that the instructions are genuine.
ADDITIONAL INFORMATION ON REDEMPTIONS. If Fund shares were
recently purchased, the redemption proceeds will not be sent
until the check (including a certified or cashier's check)
received for the shares purchased has cleared. Payment for
shares requested to be redeemed may be delayed when the
purchase check has not cleared, but the delay will be no
longer than required to verify that the purchase check has
cleared. The Fund may suspend the right of
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redemption or postpone the date of payment during any period
when (i) trading on the NYSE is restricted or the NYSE is
closed, other than customary weekend or holiday closings,
(ii) the Securities and Exchange Commission (the "SEC") has
by order permitted such suspension or (iii) an emergency, as
defined by the rules of the SEC, exists, making disposal of
portfolio investments or determination of the value of the
net assets of the Fund not reasonably practicable.
The Fund reserves the right to honor any request for
redemption or repurchase by making payment in whole or in
part in readily marketable securities ("redemption in
kind"). These securities will be chosen by the Fund and
valued as they are for purposes of computing the Fund's net
asset value. A shareholder may incur transaction expenses in
converting these securities to cash.
Questions about redemption requirements should be referred
to your Hilliard Lyons investment broker or Authorized
Dealer. Because the Fund incurs certain fixed costs in
maintaining shareholder accounts, the Fund reserves the
right to redeem shareholder accounts of less than $250 in
net asset value. Such shareholder accounts will be redeemed
only if the balance has decreased below that level as a
result of shareholder redemptions and not because of
fluctuations in the net asset value of the Fund's shares. If
the Fund elects to redeem such shares, your Hilliard Lyons
investment broker or Authorized Dealer will notify you of
the Fund's intention to do so and provide you with an
opportunity to increase the amount so invested to $250 or
more within 30 days of the notice.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan
(the "Withdrawal Plan") is available for shareholders of the
Fund whose shares have a minimum net asset value of $10,000.
The Withdrawal Plan allows for monthly or quarterly payments
to the participating shareholder in amounts not less than
$100. Dividends and capital gain distributions on shares
held under the Withdrawal Plan are reinvested in additional
full and fractional shares of the Fund at net asset value.
The Withdrawal Plan may be terminated at any time. You
should not consider withdrawal payments to be dividends,
yield or income. If periodic withdrawals continuously exceed
reinvested dividend and capital gain distributions, your
original investment will be correspondingly reduced and
ultimately exhausted. Furthermore, each withdrawal
constitutes a redemption of shares, and any gain or loss you
realize must be reported for federal and state income tax
purposes. As it generally would not be advantageous to you
to make additional investments in the Fund while
participating in the Withdrawal Plan, purchases of shares in
amounts less than $5,000 by participants in the Withdrawal
Plan will not ordinarily be permitted. You should consult
your tax advisor regarding the tax consequences of
participating in the Withdrawal Plan.
- --------------------------------------------------------------------------------
13
<PAGE>
SENBANC FUND
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
The following discussion of taxation is not intended to be a
full discussion of income tax laws and their effect on
shareholders. You should consult your tax advisor as to the
tax consequences of ownership of the Fund's shares.
REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS. Dividends and
distributions paid by the Fund are automatically reinvested
in additional shares of the Fund unless you indicate
otherwise to your Hilliard Lyons investment broker or
Authorized Dealer.
PAYMENT OF DIVIDENDS AND OTHER DISTRIBUTIONS. The Fund pays
its shareholders dividends from its net investment income
and distributes from any net capital gains that it has
realized. The Fund generally distributes dividends from net
investment income semi-annually and any net realized capital
gains at least annually. The Fund intends to distribute at
least 98% of any net investment income for the calendar year
plus 98% of net capital gains realized from the sale of
securities. The Fund intends to distribute any undistributed
net investment income and net realized capital gains in the
following year.
TAX STATUS OF DIVIDENDS AND OTHER DISTRIBUTIONS. Except for
those shareholders exempt from federal income taxes,
shareholders will be subject to federal income tax at
ordinary income tax rates (up to a maximum marginal rate of
39.6% for individuals) on any dividends received that are
derived from net investment income and net realized
short-term capital gains. Distributions of net realized
long-term capital gains, when designated as such by the
Fund, are taxable to shareholders as long-term capital
gains, regardless of how long shares of the Fund are held.
Long-term capital gain distributions made to individual
shareholders are currently taxed at the maximum rate of 20%.
Distributions are taxable in the year they are paid, whether
they are taken in cash or reinvested in additional shares,
except that certain distributions declared in the last three
months of the year and paid in January are taxable as if
paid on December 31. Dividends and distributions may also be
subject to state and local taxes.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions
received by your qualified retirement plan, such as a 401(k)
Plan or IRA, are generally tax deferred. This means that you
are not required to report Fund distributions on your income
tax return, but rather, when your retirement plan makes
payments to you. Special rules may apply to payments from
your retirement plans.
HOW DISTRIBUTIONS AFFECT THE FUND'S NET ASSET
VALUE. Distributions are paid to shareholders as of the
record date of a distribution of the Fund, regardless of how
long shares have been held. Dividends and capital gains
awaiting distribution are included in the Fund's daily net
asset value. The share price of the Fund drops by the amount
of the distribution, net of any subsequent market
- --------------------------------------------------------------------------------
14
<PAGE>
SENBANC FUND
- --------------------------------------------------------------------------------
fluctuations. You should be aware that distributions from a
taxable mutual fund are not value-enhancing and may create
income tax obligations.
BUYING A DISTRIBUTION. A distribution paid shortly after you
purchase shares in the Fund will reduce the net asset value
of the shares by the amount of the distribution, which
nevertheless will be taxable to you even though it
represents a return of a portion of your investment.
BACKUP WITHHOLDING. Federal income taxes may be required to
be withheld ("backup withholding") at a 31% rate from
taxable dividends, capital gain distributions and redemption
proceeds paid to certain shareholders. Backup withholding
may be required if:
- You fail to furnish your properly certified social
security or other tax identification number;
- You fail to certify that your tax identification
number is correct or that you are not subject to
backup withholding due to the under-reporting of
certain income; or
- The Internal Revenue Service determines that your
account is subject to backup withholding.
These certifications should be completed and returned when
you open an account with your Hilliard Lyons investment
broker or Authorized Dealer. All amounts withheld must be
promptly paid to the IRS. You may claim the amount withheld
as a credit on your federal income tax return.
- --------------------------------------------------------------------------------
DISTRIBUTION ARRANGEMENTS
DISTRIBUTION AGREEMENT
Provident Distributors, Inc. (the "Distributor") acts as the
principal distributor of the Fund's shares pursuant to a
distribution agreement (the "Distribution Agreement") with
the Fund. Hilliard Lyons has entered into a selling
agreement with the Distributor to sell shares of the Fund.
Pursuant to such selling agreement, and as further discussed
below, Hilliard Lyons receives the sales charges and Rule
12b-1 fees otherwise payable to the Distributor with respect
to Fund shares which the Distributor sells through Hilliard
Lyons. The Distributor may enter into additional selling
agreements in the future with Authorized Dealers to sell
shares of the Fund, and any such Authorized Dealers may also
receive the sales charges and Rule 12b-1 fees otherwise
payable to the Distributor with respect to Fund shares which
the Distributor sells through such Authorized Dealers.
- --------------------------------------------------------------------------------
15
<PAGE>
SENBANC FUND
- --------------------------------------------------------------------------------
SALES CHARGES
GENERAL. Purchases of the Fund's shares are subject to a
front-end sales charge of two and one-quarter percent
(2.25%) of the total purchase price; however, sales charges
may be reduced for large purchases as indicated below. Sales
charges are not imposed on shares that are purchased with
reinvested dividends or other distributions. The table below
indicates the front-end sales charge as a percentage of both
the offering price and the net amount invested:
<TABLE>
<CAPTION>
SALES CHARGE AS A %
SALES CHARGE AS A % OF NET AMOUNT
AMOUNT OF PURCHASE OF OFFERING PRICE INVESTED
- --------------------------------------- --------------------- ---------------------
<S> <C> <C>
Less than $500,000 2.25% 2.30%
At least $500,000 but less than
$1,000,000 1.75% 1.78%
$1,000,000 or greater 0.00% 0.00%
</TABLE>
No sales charge is payable at the time of purchase on
investments of $1 million or more; however, a 1% contingent
deferred sales charge is imposed in the event of redemption
within 12 months following any such purchase. See
"Contingent Deferred Sales Charge on Certain Redemptions"
below. The Distributor may pay a commission at the rate of
1% to Hilliard Lyons investment brokers or Authorized
Dealers who initiate and are responsible for purchases of $1
million or more.
COMBINED PURCHASE PRIVILEGE. Certain purchases of Fund
shares made at the same time by you, your spouse and your
children under age 25 may be combined for purposes of
determining the "Amount of Purchase." The combined purchase
privilege may also apply to certain employee benefit plans
and trust estates. The combined purchase privilege is
further discussed in the SAI. You may also further discuss
the combined purchase privilege with your Hilliard Lyons
investment broker or Authorized Dealer.
CUMULATIVE QUANTITY DISCOUNT. You may combine the value of
shares held in the Fund, along with the dollar amount of
shares being purchased, to qualify for a cumulative quantity
discount. The value of shares held is the higher of their
cost or current net asset value. For example, if you hold
shares having a value of $475,000 and purchase $25,000 of
additional shares, the sales charge applicable to the
additional investment would be 1.75%, the rate applicable to
a single purchase of $500,000. In order to receive the
cumulative quantity discount, the value of shares held must
be brought to the attention of your Hilliard Lyons
investment broker or Authorized Dealer.
LETTER OF INTENT. If you anticipate purchasing at least
$500,000 of shares within a 13-month period, the shares may
be purchased at a reduced sales charge by
- --------------------------------------------------------------------------------
16
<PAGE>
SENBANC FUND
- --------------------------------------------------------------------------------
completing and returning a Letter of Intent (the "Letter"),
which can be provided to you by your Hilliard Lyons
investment broker or Authorized Dealer. The reduced sales
charge may also be obtained on shares purchased within the
90 days prior to the date of receipt of the Letter. Shares
purchased under the Letter are eligible for the same reduced
sales charge that would have been available had all the
shares been purchased at the same time. There is no
obligation to purchase the full amount of shares indicated
in the Letter. Should you invest more or less than indicated
in the Letter during the 13-month period, the sales charge
will be recalculated based on the actual amount purchased. A
portion of the amount of the intended purchase normally will
be held in escrow in the form of Fund shares pending
completion of the intended purchase.
SALES CHARGE WAIVERS. The Fund sells shares at net asset
value without imposition of sales charge to the following
persons: (i) current and retired (as determined by Hilliard
Lyons) employees of Hilliard Lyons and its affiliates, their
spouses and children under the age of 25 and employee
benefit plans for such employees, provided orders for such
purchases are placed by the employee; (ii) any other
investment company in connection with the combination of
such company with the Fund by merger, acquisition of assets
or otherwise; (iii) employees and Trustees of the Fund and
registered representatives of Authorized Dealers; (iv)
existing advisory clients of the Advisor or Hilliard Lyons
Trust Company on purchases effected by transferring all or a
portion of their investment management or trust account to
the Fund, provided that such account had been maintained for
a period of six months prior to the date of purchase of Fund
shares; (v) investors purchasing shares through a Hilliard
Lyons investment broker to the extent that the purchase of
such shares is funded by the proceeds from the sale of
shares of any mutual fund (for which the investor paid a
front-end sales charge) other than a money market fund (a)
purchased within three years of the date of the purchase of
Fund shares and held for at least six months or (b)
purchased at any time and for which Hilliard Lyons was not a
selling dealer, provided that in either case the order for
Fund shares must be received within 30 days after the sale
of the other mutual fund; (vi) trust companies, bank trust
departments and registered investment advisors purchasing
for accounts over which they exercise investment authority
and which are held in a fiduciary, agency, advisory,
custodial or similar capacity, provided that the amount
collectively invested or to be invested in the Fund by such
entity or advisor during the subsequent 13-month period
totals at least $100,000; (vii) employer-sponsored
retirement plans with assets of at least $100,000 or 25 or
more eligible participants; and (viii) accounts established
under a fee-based program sponsored and maintained by a
registered broker-dealer or other financial intermediary and
approved by the Distributor.
- --------------------------------------------------------------------------------
17
<PAGE>
SENBANC FUND
- --------------------------------------------------------------------------------
In order to take advantage of a sales charge waiver, a
purchaser must certify to a Hilliard Lyons investment broker
or Authorized Dealer eligibility for a waiver and must
notify a Hilliard Lyons investment broker or Authorized
Dealer whenever eligibility for a waiver ceases to exist. A
Hilliard Lyons investment broker or Authorized Dealer
reserves the right to request additional information from a
purchaser in order to verify that such purchaser is so
eligible.
CONTINGENT DEFERRED SALES CHARGE ON CERTAIN
REDEMPTIONS. Purchases of $1 million or more are not subject
to an initial sales charge; however, a contingent deferred
sales charge is payable on these investments in the event of
a share redemption within 12 months following the share
purchase, at the rate of 1% of the lesser of the value of
the shares redeemed (exclusive of reinvested dividends and
capital gain distributions) or the total cost of such
shares. The contingent deferred sales charge is further
discussed in the SAI.
DISTRIBUTION PLAN
The Board of Trustees has adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "1940 Act") under which
the Fund reimburses the Distributor at an annualized rate of
up to 0.60% of the Fund's average daily net assets for
distribution expenses actually incurred. Rule 12b-1 of the
1940 Act regulates the manner in which a mutual fund may
assume the costs of distributing and promoting the sale of
its shares. Pursuant to the Distribution Plan, the
Distributor may be reimbursed for expenses incurred in
connection with any activity primarily intended to result in
the sale of the Fund's shares. If the amount reimbursed is
insufficient to pay the expenses of distribution, the
Advisor bears the additional expenses. Any amount of excess
distribution expenses incurred by the Distributor in any
quarter for which the Distributor is not reimbursed can be
carried forward from one quarter to the next but no expenses
may be carried over from year to year. Because Rule 12b-1
fees are continually paid out of the Fund's assets, such
fees will increase the cost of your investment and may
potentially cost you more than paying other types of sales
charges.
Under its terms, the Distribution Plan remains in effect so
long as it is approved at least annually by vote of the
Board of Trustees, including a majority of the Trustees who
are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of
the Distribution Plan. The Distributor is obligated to
provide the Trustees quarterly reports of amounts expended
under the Distribution Plan and the purpose for which the
expenditures were made.
- --------------------------------------------------------------------------------
18
<PAGE>
[SENBANC_FUND_LOGO]
- ------------------------------------------------
INVESTMENT ADVISOR
Hilliard Lyons Research Advisors
Hilliard Lyons Center
501 South 4th Street
Louisville, Kentucky 40202
DISTRIBUTOR
Provident Distributors, Inc.
Four Fall Corporate Center
6th Floor
West Conshohocken, Pennsylvania 19428
CUSTODIAN
PFPC Trust Company
400 Bellevue Parkway
Wilmington, Delaware 19809
ADMINISTRATOR, TRANSFER AGENT AND
FUND ACCOUNTANT
PFPC Inc.
400 Bellevue Parkway
Wilmington, Delaware 19809
INDEPENDENT AUDITORS
Ernst & Young LLP
Two Commerce Square
2001 Market Street
Philadelphia, Pennsylvania 19103
LEGAL COUNSEL
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
- ------------------------------------------------
FOR MORE INFORMATION
More information on the Fund is available without charge, upon request,
including the following:
ANNUAL/SEMI-ANNUAL REPORTS
The annual and semi-annual reports to shareholders will include a discussion
of the Fund's holdings and recent market conditions and the Fund's investment
strategies that affected performance.
STATEMENT OF ADDITIONAL INFORMATION (SAI).
The SAI provides more details about the Fund and its policies. A current SAI
is on file with the Securities and Exchange Commission and is incorporated by
reference.
TO OBTAIN INFORMATION:
BY TELEPHONE
Call 1-800-444-1854
BY MAIL
Write to:
Senbanc Fund
c/o Hilliard Lyons Research Trust
Hilliard Lyons Center
501 South 4th Street
Louisville, Kentucky 40202
ON THE INTERNET
Text-only versions of Fund documents can be viewed online or downloaded from the
SEC at http://www.sec.gov
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, D.C. (1-800-SEC-0330) or by sending your request and a duplicating
fee to the SEC's Public Reference Section, Washington, D.C. 20549-6009.
Investment Company Act File No.: 811-09281
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION DATED JULY 1, 1999
HILLIARD LYONS RESEARCH TRUST
HILLIARD LYONS CENTER
501 SOUTH 4TH STREET
LOUISVILLE, KENTUCKY 40202
1-800-444-1854
SENBANC FUND
This Statement of Additional Information ("SAI") is not a prospectus, but
provides additional information that should be read in conjunction with the
Fund's prospectus dated July 1, 1999, and any supplements thereto
("Prospectus"). The Prospectus may be obtained at no charge by telephoning
1-800-444-1854.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Investment Strategies and Risks. . . . . . . . . . . . . . . . . . . . . . . .1
Fund Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Purchases and Redemptions. . . . . . . . . . . . . . . . . . . . . . . . . . .6
Net Asset Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Investment Advisory Services . . . . . . . . . . . . . . . . . . . . . . . . 11
Distributor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Administrator and Fund Accountant. . . . . . . . . . . . . . . . . . . . . . 14
Custodian. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Transfer Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Income Tax Considerations. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Investment Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial Statements. . . . . .. . . . . . . . . . . . . . . . . . . . . . . 21
Appendix A -- Description of Securities Ratings. . . . . . . . . . . . . . .A-1
</TABLE>
<PAGE>
GENERAL INFORMATION
Senbanc Fund (the "Fund") is a series of the Hilliard Lyons Research Trust
(the "Trust"), an open-end management investment company. Hilliard Lyons
Research Advisors (the "Advisor") provides management and investment advisory
services to the Fund. The Trust is a Delaware business trust organized under a
declaration of trust ("Declaration of Trust") dated January 12, 1999. The
Declaration of Trust may be amended by a vote of either the Fund's shareholders
or its Board of Trustees (the "Board"). The Trust may issue an unlimited number
of shares in one or more series or classes as the Board may authorize. Each
share of a series of the Trust is entitled to participate pro rata in any
dividends and other distributions declared by the Board on shares of that
series, and all shares of a series of the Trust have equal rights in the event
of liquidation of that series. Currently, the Fund is the only series
authorized and outstanding. The Fund commenced operations on July 8, 1999.
As a business trust, the Trust is not required to hold annual shareholder
meetings; however, such meetings may be called by a majority of the Trustees
and shall be called by any Trustee upon written request of shareholders
holding, in the aggregate, not less than 10% of the outstanding shares of the
Trust. The request must specify the purpose or purposes for which the
shareholder meeting is to be called. Shareholders have the power to vote
only with respect to the election of Trustees and for certain other matters
as designated in the Declaration of Trust. The Fund and all future series of
the Trust, if any, will vote as a single class on matters affecting all
series of the Trust (e.g., election of Trustees) and separately on matters
affecting each series of the Trust (e.g., approval of the advisory agreement)
or when required by the Investment Company Act of 1940 (the "1940 Act") or
other applicable law. Voting rights are not cumulative, so that shareholders
of more than fifty percent (50%) of the shares voting in any election of
Trustees can, if they so choose, elect all of the Trustees of the Trust.
INVESTMENT STRATEGIES AND RISKS
The following information supplements the discussion of the Fund's investment
objective, strategies and risks discussed in the Prospectus.
INVESTMENT OBJECTIVE
The Fund seeks long-term capital appreciation. There is no assurance that the
Fund will achieve its investment objective. The investment objective is
fundamental and may only be changed with shareholder approval.
INVESTMENT PHILOSOPHY
The Advisor uses a VALUE investment style for the Fund. The Advisor seeks to
identify the most undervalued Banks (as defined below under the section titled
"Principal Types of Investments and Related Risks") by using an investment model
that considers financial ratios and other quantitative information. Generally,
such Banks have at least six years of current or predecessor operating history
and well-managed organizations and operations. The Fund's portfolio is weighted
most heavily to the equity securities of Banks that the investment model
indicates are most undervalued for the longest period of time.
PRINCIPAL TYPES OF INVESTMENTS AND RELATED RISKS
Under normal market conditions, the Fund will invest at least 65% of its total
assets in publicly traded equity securities of banks and financial institutions
conducting at least fifty percent (50%) of their business through banking
subsidiaries (which are generally referred to herein as "Banks"). Banks may
include commercial banks, industrial banks, consumer banks, savings and loans,
and bank holding companies that receive at least fifty percent (50%) of their
income through their bank subsidiaries, as well as regional and money center
banks. A regional bank is one that provides full-service banking (i.e.,
savings accounts, checking accounts, commercial lending and real estate
lending), has assets that are primarily of domestic origin, and typically
has a principal office outside of a large metropolitan area (e.g., New York
City or Chicago). A money center bank is one with a strong international
banking business and a significant percentage of international assets,
and is typically located in a large metropolitan area. To the extent that
the Fund invests in the equity securities of bank holding companies, a
portion of the Fund's assets may be indirectly invested in nonbanking
entities, since bank holding companies may derive a portion of their
income from such entities.
1
<PAGE>
Generally, the equity securities in which the Fund invests are common stocks;
however, the Fund may also at times acquire (through its common stock holdings)
preferred stock, warrants, rights or other securities that are convertible into
common stock. The Fund generally invests in equity securities of Banks which
have at least $500 million in consolidated total assets; however, the Fund's
investments are not influenced by a Bank's market capitalization (large, medium
or small).
Your investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation (the "FDIC") or any
other government entity; therefore, you could lose money by investing in the
Fund. The Fund is not a complete investment program. We recommend that you
consider an investment in the Fund as only one portion of your overall
investment portfolio.
MARKET RISK. Investments in equity securities are subject to inherent
market risks and fluctuations in value due to earnings, economic conditions and
other factors beyond the Advisor's control. Therefore, the return and net asset
value of the Fund will fluctuate, and you could lose money by investing in the
Fund.
INDUSTRY CONCENTRATION RISK. Since the Fund's investments will be
concentrated in the banking industry, the Fund will be subject to risks in
addition to those that apply to the general equity market. Events may occur
that significantly affect the entire banking industry. Thus, the Fund's share
value may at times increase or decrease at a faster rate than the share value of
a mutual fund with investments in many industries. In addition, despite some
measure of deregulation, Banks are still subject to extensive governmental
regulation which limits their activities. The availability and cost of funds to
Banks are crucial to their profitability. Consequently, volatile interest
rates and deteriorating economic conditions can adversely affect their financial
performance and condition.
Banks are subject to extensive governmental regulations which may limit
both the amounts and types of loans and other financial commitments that may be
made and the interest rates and fees that may be charged. The profitability of
Banks is largely dependent upon the availability and cost of capital funds, and
may show significant fluctuation as a result of volatile interest rate levels.
In addition, healthy economic conditions are important to the operations of
Banks, and exposure to credit losses resulting from possible financial
difficulties of borrowers can have an adverse effect on the value of the Fund.
NONDIVERSIFICATION RISK. The Fund is NONDIVERSIFIED, meaning that it is
not limited in the proportion of its assets that it may invest in the
obligations of a single issuer. However, the Fund will comply with
diversification requirements imposed by the Internal Revenue Code for
qualification as a regulated investment company. As a nondiversified fund, the
Fund may invest a greater proportion of its assets in the securities of a small
number of issuers, and may be subject to greater risk and substantial losses as
a result of changes in the financial condition or the market's assessment of the
issuers.
SMALL COMPANY RISK. The Advisor may invest the Fund's assets in small and
medium-size companies. Investment in smaller companies involves greater risk
than investment in larger companies. The stocks of smaller companies often
fluctuate in price to a greater degree than stocks of larger companies. Smaller
companies may have more limited financial resources and less liquid trading
markets for their stock. The Fund's share price may experience greater
volatility when the Fund is more heavily invested in small and medium-size
companies.
INITIAL INVESTORS NOT INVESTED PRIMARILY IN BANKS. The Fund may not be
invested primarily in the equity securities of Banks for a period of time (as
long as ten months or more) following its commencement of operations;
therefore, your returns may be lower than they otherwise would have been if
the Fund had been so invested and if the Fund's portfolio securities had
increased in value. The Advisor anticipates that the benefit of this strategy
is that the Fund will be more diversified within the banking industry over a
period of time.
2
<PAGE>
OTHER TYPES OF INVESTMENTS AND RELATED RISKS
Although they are not principal types of investments and strategies of the Fund,
the Fund may also invest to a limited extent in the following types of
investments and is subject to the risks of such investments.
DEBT SECURITIES AND MONEY MARKET INSTRUMENTS. For cash management purposes
or when the Advisor believes that market conditions warrant it (i.e., a
temporary defensive position), the Fund may invest a portion of its total
assets in obligations of the U.S. government, its agencies and
instrumentalities and debt securities of companies in any industry, including
corporate notes, bonds and debentures. Investments in debt securities are
subject to interest rate risk and credit risk. The market value of debt
securities in the Fund's portfolio will decrease as interest rates rise and
increase as interest rates fall. In addition, to the extent the Fund invests
in debt securities, the Fund's share price will be subject to losses from
possible financial difficulties of borrowers whose debt securities are held by
the Fund. Debt securities in which the Fund may invest will generally be
rated at least Aa by Moody's Investors Service ("Moody's"), AA by Standard
& Poor's Corporation ("Standard & Poor's" or "S&P") or the equivalent by other
nationally recognized ratings agencies (see Appendix A -- "Description of
Securities Ratings"). In general, the ratings of Moody's and S&P represent
the opinions of these agencies as to the quality of the securities which they
rate. It should be emphasized, however, that such ratings are relative and
subjective and are not absolute standards of quality. Subsequent to its
purchase by the Fund, an issue of securities may cease to be rated or its
rating may be reduced below the minimum required for purchase by
the Fund. Neither of these events will require the sale of the securities by
the Fund, but the Advisor will consider the event in its determination of
whether the Fund should continue to hold the securities. To the extent that the
Fund holds cash or invests in debt securities and money market instruments, the
Fund may not achieve its investment objective.
CONVERTIBLE SECURITIES. The Fund may generally not purchase but may
acquire (through its holdings in common stocks) convertible securities. These
may include corporate notes or preferred stock, but are ordinarily long-term
debt obligations convertible at a stated exchange rate into common stock of the
issuer. All convertible securities entitle the holder to exchange the
securities for a specified number of shares of common stock, usually of the same
company, at specified prices within a certain period of time. They also entitle
the holder to receive interest or dividends until the holder elects to exercise
the conversion privilege.
As with all debt securities, the market value of convertible securities tends to
decrease as interest rates rise and, conversely, to increase as interests rates
fall. Convertible securities generally offer lower interest or dividend yields
than nonconvertible securities of similar quality. However, when the market
price of the common stock underlying a convertible security approaches or
exceeds the conversion price, the price of the convertible security tends to
reflect the value of the underlying common stock. As the market price of the
underlying common stock declines, the convertible security tends to trade
increasingly on a yield basis, and thus may not depreciate to the same extent as
the underlying common stock.
The provisions of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holders' claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders.
In the case of convertible preferred stock, the holders' claims on assets and
earnings are subordinated to the claims of all creditors and are senior to the
claims of common shareholders.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may generally not
purchase but may acquire (through its holdings in common stocks) securities on a
when-issued or delayed delivery basis. Delivery of and payment for these
securities may occur a month or more after the date of the transaction. The
purchase price and the interest rate payable, if any, are fixed on the purchase
commitment date or at the time the settlement date is fixed. The securities so
purchased are subject to market fluctuation, and no income accrues to the Fund
until settlement takes place. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed delivery basis, it must record
the transaction and reflect the value of such securities each day in determining
its net asset value. At the time it is received, a when-issued security may be
valued at less than its purchase price. The Fund must make commitments for such
when-issued transactions only when it intends to acquire the securities. To
facilitate such purchases, the Fund must maintain with the custodian a
segregated account of liquid assets in the name of the Fund in an amount at
least equal to such
3
<PAGE>
commitments. On delivery dates for such transactions, the Fund must meet its
obligations from maturities or sales of the securities held in the segregated
account or from cash on hand.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Securities may be illiquid because they are unlisted or
subject to legal restrictions on resale, or due to other factors which, in the
Advisor's opinion, raise questions concerning the Fund's ability to liquidate
the securities in a timely and orderly manner without substantial loss. While
such purchases may be made at an advantageous price and offer attractive
opportunities for investment not otherwise available on the open market, the
Fund may not have the same freedom to dispose of such securities as in the case
of the purchase of securities in the open market or in a public distribution.
These securities may be resold in a liquid dealer or institutional trading
market, but the Fund may experience delays in its attempts to dispose of such
securities. If adverse market conditions develop, the Fund may not be able to
obtain as favorable a price as that prevailing at the time the decision is made
to sell. In any case, where a thin market exists for a particular security,
public knowledge of a proposed sale of a large block may depress the market
price of such securities.
REPURCHASE AGREEMENTS. From time to time, the Fund may enter into
repurchase agreements with qualified banks or securities broker-dealers which
furnish collateral at least equal in value or market price to the amount of
their repurchase obligation. Under the terms of a typical repurchase agreement,
the Fund acquires an underlying debt obligation for a relatively short period
(usually not more than seven days), subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the underlying
securities is monitored on an ongoing basis by the Advisor to ensure that the
value is at least equal at all times to the total amount of the repurchase
obligation, including interest. The Fund bears a risk of loss in the event that
the other party to a repurchase agreement defaults on its obligations and the
Fund is delayed or prevented from exercising its rights to dispose of the
underlying securities, including the risk of a possible decline in the value of
the underlying securities during the period in which the Fund seeks to assert
its rights to them, the risk of incurring expenses associated with asserting
those rights and the risk of losing all or a part of the income from the
agreement. In addition, if bankruptcy proceedings are commenced with respect to
the seller of the security, realization upon the collateral by the Fund may be
delayed or limited.
The Fund only enters into repurchase agreements involving U.S. government
obligations, or obligations of its agencies or instrumentalities, usually for a
period of seven days or less. The term of each of the Fund's repurchase
agreements is always less than one year and the Fund does not enter into
repurchase agreements of a duration of more than seven days if, taken together
with all other illiquid securities in the Fund's portfolio, more than 15% of its
net assets would be so invested.
WARRANTS AND RIGHTS. The Fund may generally not purchase but may acquire
(through its holdings in common stocks) warrants and rights, which are
securities permitting, but not obligating, their holder to purchase the
underlying securities at a predetermined price. Generally, warrants and rights
do not carry with them the right to receive dividends or exercise voting rights
with respect to the underlying securities, and they do not represent any rights
in the assets of the issuer. As a result, an investment in warrants and rights
may be considered to entail greater investment risk than certain other types of
investments. In addition, the value of warrants and rights does not necessarily
change with the value of the underlying securities, and they cease to have value
if they are not exercised on or prior to their expiration date. Investment in
warrants and rights increases the potential profit or loss to be realized from
the investment of a given amount of the Fund's assets as compared with investing
the same amount in the underlying stock.
LENDING. The Fund may make short-term loans of its portfolio securities to
banks, brokers and dealers. Lending portfolio securities exposes the Fund to
the risk that the borrower may fail to return the loaned securities or may not
be able to provide additional collateral or that the Fund may experience delays
in recovery of the loaned securities or loss of rights in the collateral if the
borrower fails financially. To minimize these risks, the borrower must agree to
maintain collateral marked to market daily, in the form of cash or U.S.
government obligations, with the Fund's custodian in an amount at least equal to
the market value of the loaned securities.
4
<PAGE>
BORROWING. The Fund may have to deal with unpredictable cashflows as
shareholders purchase and redeem shares. Under adverse conditions, the Fund
might have to sell portfolio securities to raise cash to pay for redemptions at
a time when investment considerations would not favor such sales. In addition,
frequent purchases and sales of portfolio securities tend to decrease Fund
performance by increasing transaction expenses.
The Fund may deal with unpredictable cashflows by borrowing money. Through such
borrowings the Fund may avoid selling portfolio securities to raise cash to pay
for redemptions at a time when investment considerations would not favor such
sales. In addition, the Fund's performance may be improved due to a decrease in
the number of portfolio transactions. After borrowing money, if subsequent
shareholder purchases do not provide sufficient cash to repay the borrowed
monies, the Fund will liquidate portfolio securities in an orderly manner to
repay the borrowed money.
To the extent that the Fund borrowed money prior to selling securities, the Fund
would be leveraged such that the Fund's net assets may appreciate or depreciate
in value more than an unleveraged portfolio of similar securities. Since
substantially all of the Fund's assets will fluctuate in value and the interest
obligations on borrowings may be fixed, the net asset value per share of the
Fund will increase more when the Fund's portfolio assets increase in value and
decrease more when the Fund's portfolio assets decrease in value than would
otherwise be the case. Moreover, interest costs on borrowings may fluctuate
with changing market rates of interest and may partially offset or exceed the
returns which the Fund earns on portfolio securities. Under adverse conditions,
the Fund might be forced to sell portfolio securities to meet interest or
principal payments at a time when market conditions would not be conducive to
favorable selling prices for the securities.
FUND POLICIES
FUNDAMENTAL POLICIES
The Fund has adopted the following fundamental policies for the protection of
shareholders that may not be changed without the approval of a majority of the
Fund's outstanding shares, defined in the 1940 Act as the lesser of (i) 67% of
the Fund's shares present at a meeting if the holders of more than 50% of the
outstanding shares are present in person or by proxy, or (ii) more than 50% of
the Fund's outstanding shares. Under these policies, THE FUND MAY NOT:
1. Borrow money, except as permitted under the 1940 Act and as interpreted or
modified by a regulatory authority having jurisdiction from time to time;
2. Issue senior securities, except as permitted under the 1940 Act and as
interpreted by a regulatory authority having jurisdiction from time to
time;
3. Purchase physical commodities or contracts relating to physical
commodities;
4. Engage in the business of underwriting securities issued by others, except
to the extent that the Fund may be deemed an underwriter in connection with
the disposition of portfolio securities;
5. Purchase or sell real estate, which term does not include securities of
companies which deal in real estate or mortgages or investments secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and sell real estate acquired as a result of the Fund's
ownership of securities;
5
<PAGE>
6. Make loans to other persons except (i) loans of portfolio securities, and
(ii) to the extent that entry into repurchase agreements and the purchase
of debt instruments or interests in indebtedness in accordance with the
Fund's investment objective and policies may be deemed to be loans; or
7. Concentrate its investments in a particular industry, as that term is used
in the 1940 Act, and as interpreted or modified by a regulatory authority
having jurisdiction, from time to time, except that the Fund will
concentrate its investments in the banking industry.
NONFUNDAMENTAL POLICIES
In addition to the fundamental policies mentioned above, the Board
voluntarily adopted the following policies and restrictions which are observed
in the conduct of its affairs. These represent intentions of the Board based
upon current circumstances. They differ from fundamental investment policies in
that they may be changed or amended by action of the Board without prior notice
to or approval of shareholders. Accordingly, the Fund may not:
1. Invest for the purpose of exercising control over management of any
company;
2. Invest its assets in securities of any investment company, except by open
market purchases, including an ordinary broker's commission, or in
connection with a merger, acquisition of assets, consolidation or
reorganization, and any investments in the securities of other investment
companies will be in compliance with the 1940 Act; or
3. Invest more than 15% of the value of its net assets in illiquid securities.
If any percentage limitation is adhered to at the time of an investment, a later
increase or decrease in the percentage resulting from a change in the value of
portfolio securities or in the amount of the Fund's assets will not constitute a
violation of such restriction.
PURCHASES AND REDEMPTIONS
Read the Fund's Prospectus for information regarding the purchase and redemption
of Fund shares, including any applicable sales charges. The following
information supplements information in the Fund's Prospectus.
GENERAL
CONTINGENT DEFERRED SALES CHARGE ON CERTAIN REDEMPTIONS. Purchases of $1
million or more are not subject to an initial sales charge; however, a
contingent deferred sales charge is payable on these investments in the event of
a share redemption within 12 months following the share purchase, at the rate of
1% of the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gain distributions) or the total cost of such shares. In
determining whether a
6
<PAGE>
contingent deferred sales charge is payable, and the amount of the charge, it is
assumed that shares purchased with reinvested dividend and capital gain
distributions and then other shares held the longest are the first redeemed.
The contingent deferred sales charge is waived in the event of (a) the death or
disability (as defined in Section 72(m)(7) of the Internal Revenue Code of 1986,
as amended (the "Code")) of the shareholder, (b) a lump sum distribution from a
benefit plan qualified under the Employee Retirement Income Security Act of 1974
("ERISA"), or (c) systematic withdrawals from ERISA plans if the shareholder is
at least 59 1/2 years old. The Fund applies the waiver for death or disability
to shares held at the time of death or the initial determination of disability
of either an individual shareholder or one who owns the shares of a joint
tenant with the right of survivorship or as a tenant in common.
REDEMPTION IN-KIND. The Fund may redeem securities in-kind. In
general, however, the Fund anticipates redeeming in cash, and to the extent it
redeems in-kind, the Fund anticipates it would first redeem in cash with
respect to each shareholder during any 90-day period to the lesser of (1)
$250,000 or (2) 1% of the net asset value ("NAV") of the Fund at the beginning
of such period. The market value of securities paid in-kind shall be
determined as of the close of trading on the New York Stock Exchange, Inc.
("NYSE") on the business day on which the redemption is effective. In such
case a shareholder might incur transaction costs if he or she sold the
securities received.
REDUCING OR ELIMINATING THE FRONT-END SALES CHARGE
You can reduce or eliminate the front-end sales charge on shares of the
Fund as follows:
QUANTITY DISCOUNTS. Purchases of at least $500,000 can reduce the sales
charges you pay, and purchases of at least $1,000,000 can eliminate the sales
charges you pay.
COMBINED PURCHASE PRIVILEGE. The following purchases may be combined for
purposes of determining the "Amount of Purchase": (a) individual purchases, if
made at the same time, by a single purchaser, the purchaser's spouse and
children under the age of 25 purchasing shares for their own accounts, including
shares purchased by an employee benefit plan(s) exclusively for the benefit of
such individual(s) (such as an IRA, individual-type section 403(b) plan or
single-participant Keogh-type plan) or by a Company, as defined in Section
2(a)(8) of the 1940 Act, solely controlled, as defined in the 1940 Act, by such
individual(s), or (b) individual purchases by trustees or other fiduciaries
purchasing shares (i) for a single trust estate or a single fiduciary account,
including an employee benefit plan, or (ii) concurrently by two or more employee
benefit plans of a single employer or of employers affiliated with each other in
accordance with Section 2(a)(3)(c) of the 1940 Act (excluding in either case an
employee benefit plan described in "(a)" above), provided such trustees or other
fiduciaries purchase shares in a single payment. Purchases made for nominee or
street name accounts may not be combined with purchases made for such other
accounts.
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<PAGE>
ACCUMULATED PURCHASES. If you make an additional purchase of Fund shares,
you can count previous shares purchased and still invested in the Fund in
calculating the applicable sales charge on the additional purchase.
LETTER OF INTENT. You can sign a Letter of Intent committing to purchase
at least $500,000 (or $1,000,000) in Fund shares within a 13-month period to
combine such purchases in calculating the sales charge. A portion of your Fund
shares will be held in escrow. If you complete your purchase commitments as
stated in the Letter of Intent, your Fund shares held in escrow will be released
to your account. If you do not fulfill the Letter of Intent, the appropriate
amount of Fund shares held in escrow will be redeemed to pay the sales charges
that were not applied to your purchases.
DEALER REALLOWANCES
As shown in the table below, Provident Distributors, Inc. the distributor for
the shares of the Fund, may provide dealer reallowances up to the full sales
charge for purchases of the Fund's shares in which a front-end sales charge
is applicable.
<TABLE>
<CAPTION>
MAXIMUM SALES CHARGE ALLOWED TO DEALERS
AMOUNT OF PURCHASE AS A PERCENTAGE OF OFFERING PRICE
- ------------------ ---------------------------------
<S> <C>
Less than $500,000.........2.25%
At least $500,000
but less
than $1,000,000............1.75%
$1,000,000 or greater......0.00%
</TABLE>
NET ASSET VALUE
Each security traded on a national securities exchange or traded
over-the-counter and quoted on the Nasdaq System is valued based on the last
sale price as of the close of regular trading on the floor of the NYSE on the
date of valuation. Securities so traded for which there was no sale on the date
of valuation and other securities are valued at the mean of the most recent bid
and asked quotations, except that bonds not traded on a securities exchange or
quoted on the Nasdaq System are valued at prices provided by a recognized
pricing service unless the Advisor believes that any such price does not
represent a fair value. Each money market instrument having a maturity of
60 days or less from the valuation date is valued on an amortized cost basis.
Other securities and assets are valued at fair value, as determined in good
faith by the Advisor under procedures established by, and under the supervision
and responsibility of, the Fund's Board.
The net asset value per share of the Fund's shares is determined on each
"business day," currently any day the NYSE is open for business. The NYSE is
presently scheduled to be closed on New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day, and on the preceding Friday or subsequent Monday when one of
these holidays falls on a Saturday or Sunday, respectively.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times. The
prices of such securities used in computing the net asset value of the Fund's
shares are determined as of such times. Occasionally, events affecting the
value of such securities may occur in the interim, which will not be reflected
in the computation of the Fund's net asset value. If events materially
affecting the value of the Fund's securities occur during such period, then
these securities are valued at their fair value as determined in good faith by
the Board.
8
<PAGE>
MANAGEMENT
The Trust's Board manages the business affairs of the Trust. The Board
establishes policies and reviews and approves contracts and their continuance.
The Board also elects the officers and selects the Trustees to serve as
committee members.
The following table sets forth certain information with respect to the Trustees
and executive officers of the Fund:
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME; ADDRESS AGE WITH FUND DURING PAST FIVE YEARS
- ------------- --- ---------------- ----------------------------
<S> <C> <C> <C>
James W. Stuckert* 61 Trustee, Chairman and Chief Executive
Hilliard Lyons Chairman of the Officer of Hilliard Lyons since
501 South 4th Street Board December 1995. Formerly
Louisville, Kentucky Executive Vice President and
40202 Director of Hilliard Lyons.
William W. Crawford, Jr.** 45 Trustee Private Investor. Formerly Vice
18 Indian Hills Trail President of Risk Management of
Louisville, KY 40207 NP Energy, Inc.
Robert L. Decker**,*** 51 Trustee Executive Vice President and
Churchill Downs Chief Financial Officer of
1748 Casselberry Road Churchill Downs since March 1997.
Louisville, Kentucky Formerly Vice President - Finance
40205 of the Hilton International Hotel
Company, a division of Ladbroke
Group PLC.
W. Patrick Mulloy** 45 Trustee President and Chief Executive
Atria Senior Quarters Officer of Atria, Inc. Formerly
501 South Fourth Avenue Attorney and Partner of
Suite 140 Greenbaum, Doll & McDonald,
Louisville, Kentucky Louisville, Kentucky.
40202
James M. Rogers 48 President Director, Executive Vice President
Hilliard Lyons and Chief and Chief Operating Officer of
501 South 4th Street Executive Hilliard Lyons.
Louisville, Kentucky 40202 Officer
Alan F. Morel 50 Vice President Vice President of Research Department
Hilliard Lyons of Hilliard Lyons.
501 South 4th Street
Louisville, Kentucky 40202
Joseph C. Curry, Jr. 54 Treasurer, Senior Vice President of Hilliard Lyons;
Hilliard Lyons Chief Financial Vice President of Hilliard Lyons Trust
501 South 4th Street Officer and Company; Secretary and Treasurer of
Louisville, Kentucky 40202 Chief Accounting Hilliard Lyons Growth Fund, Inc; and
Officer President of Hilliard Lyons Government
Fund, Inc.
Kathleen L. Huddleston 34 Secretary Manager of Mutual Fund Operations
Hilliard Lyons of Hilliard Lyons since January 1999.
501 South 4th Street Formerly Assistant Vice President of
Louisville, Kentucky 40202 Operations of Raymond James & Associates.
</TABLE>
9
<PAGE>
* Trustee who is an "interested person" of the Fund and of the Advisor, as
defined in the 1940 Act.
** Trustee who is a member of the Audit Committee and Nominating Committee of
the Board of Trustees.
*** Churchill Downs Incorporated, of which Robert L. Decker is the Executive
Vice President and Chief Financial Officer, has a $250 million credit
facility on which PNC Bank is the lead agent.
Officers and Trustees affiliated with the Advisor serve without any
compensation from the Fund. In compensation for their services to the Fund,
Trustees who are not affiliates of the Fund or the Advisor are paid $750 for
each meeting of the Board or Committee Meeting of the Board, and $1,250 as a
quarterly retainer, plus reimbursement for out-of-pocket expenses. The Fund
has no retirement or pension plans. The following table sets forth the
compensation estimated to be paid by the Fund during its first full fiscal
year to each of the noninterested Trustees:
<TABLE>
<CAPTION>
ESTIMATED AGGREGATE
NAME OF TRUSTEE COMPENSATION FROM THE FUND
--------------- --------------------------
<S> <C>
William W. Crawford, Jr. $9,500
Robert L. Decker $9,500
W. Patrick Mulloy $9,500
</TABLE>
As of July 1, 1999, none of the Fund's officers and Trustees owned shares of the
Fund.
As of July 1, 1999, Hilliard Lyons, the initial shareholder of the Fund,held
10,000 shares or 100% of the Fund.
PRINCIPAL SHAREHOLDERS
As of July 1, 1999, no persons owned of record or beneficially 5% or more of the
shares of the Fund except the persons indicated below:
<TABLE>
<CAPTION>
NAME AND ADDRESS % OWNED
---------------- -------
<S> <C>
Hilliard Lyons 100%
501 South 4th Street
Louisville, Kentucky 40202
</TABLE>
10
<PAGE>
INVESTMENT ADVISORY SERVICES
Hilliard Lyons Research Advisors (the "Advisor"), a division of J.J.B.
Hilliard, W.L. Lyons, Inc. ("Hilliard Lyons"), acts as the Fund's investment
advisor and performs certain administrative services for the Fund.
The Advisor is located at Hilliard Lyons Center, Louisville, Kentucky 40202.
Hilliard Lyons and its affiliate, Hilliard Lyons Trust Company, a Kentucky
chartered trust company, are wholly owned subsidiaries of PNC Bank Corp.
("PNC"). PNC, a multi-bank holding company headquartered in Pittsburgh,
Pennsylvania, is one of the largest financial services organizations in the
United States. PNC's address is One PNC Plaza, 249 Fifth Avenue, Pittsburgh,
Pennsylvania 15222-2707. Together with predecessor firms, Hilliard Lyons has
been in the investment banking business since 1854. It is a registered
investment advisor and a registered broker-dealer and member firm of the
NYSE, other principal exchanges and the National Association of Securities
Dealers, Inc. As of December 31, 1998, Hilliard Lyons and its affiliates
managed individual, corporate, fiduciary and institutional accounts with
assets aggregating approximately $4.6 billion.
The Advisor's obligations pursuant to the Advisory Agreement with the Fund
include, subject to the general supervision of the Board, (a) acting as
investment advisor for the Fund's assets and supervising and managing the
investment and reinvestment of the Fund's assets, (b) supervising continuously
the investment program of the Fund and the composition of its investment
portfolio, (c) arranging for the purchase and sale of securities and other
assets held in the investment portfolio of the Fund (subject to certain
restrictions and covenants), (d) maintaining books and records with respect to
the Fund's securities transactions and rendering to the Fund's Board such
periodic and special reports as the Board may request, and (e) maintaining a
policy and practice of conducting its investment advisory services independently
of the commercial banking operations of its affiliates.
As compensation for its services, the Fund has agreed to pay the Advisor a
monthly fee in arrears at an annual rate equal to 0.60% of the Fund's average
daily net assets. The Advisor has voluntarily agreed to waive the fees
payable to it under the Advisory Agreement until the Fund reaches $20 million
in net assets and, if necessary, reimburse the Trust by the amount by which
the Fund's total annual operating expenses for any year exceed 1.75% of
average daily net assets. The Advisory Agreement does not prohibit the
Advisor or any of its affiliates from providing similar services to other
investment companies and other clients (whether or not their investment
objectives and policies are similar to those of the Fund) or from engaging in
other activities. When other clients of the Advisor desire to purchase or
sell a security at the same time such security is purchased or sold for the
Fund, such purchases and sales will, to the extent feasible, be allocated
among the Fund and such clients in a manner believed by the Advisor to be
equitable to such clients and the Fund. However, it cannot be expected that
all of the Advisor's clients, including the Fund, will receive equal
treatment at all times.
The Advisory Agreement was approved by the Board and by a majority of the
Trustees who are not parties to the Advisory Agreement or "interested persons"
(as such term is defined in the 1940 Act) of any party thereto, on May 4, 1999
and became effective on July 1, 1999. It
11
<PAGE>
will continue in effect until June 30, 2001 and from year to year thereafter
provided such continuance is specifically approved at least annually (a) by
the vote of a majority of the outstanding shares of the Fund (as defined
under "Fund Policies") or by a majority of the Trustees of the Fund, and (b)
by the vote of a majority of the Trustees of the Fund who are not parties to
the Advisory Agreement or "interested persons" (as such term is defined in
the 1940 Act) of any party thereto, cast in person at a meeting called for
the purpose of voting on such approval. The Advisory Agreement will terminate
automatically if assigned (as defined in the 1940 Act) and is terminable at
any time without penalty by the Trustees of the Fund or by vote of a majority
of the outstanding shares of the Fund on 60 days' written notice to the
Advisor and by the Advisor on 60 days' written notice to the Fund.
DISTRIBUTOR
Provident Distributors, Inc., Four Fall Corporate Center, 6th Floor, West
Conshohocken, Pennsylvania 19428-2961, is the distributor for the shares of the
Fund (the "Distributor").
The Distributor's obligations pursuant to the Distribution Agreement with the
Fund include (a) using reasonable time and effort in assisting in the sale and
distribution of the Fund's shares and (b) qualifying and maintaining its
qualification as a broker-dealer in such states where shares of the Fund are
qualified for sale. As compensation for its services and related expenses, the
Fund has agreed to reimburse the Distributor through the operation of the Fund's
Distribution Plan, as further discussed below. The Distribution Agreement does
not prohibit the Distributor or any of its affiliates from providing similar
services to other investment companies and other clients (whether or not their
investment objectives and policies are similar to those of the Fund) or from
engaging in other activities.
The Distribution Agreement was approved by the Board and by a majority of the
Trustees who are not parties to the Distribution Agreement or "interested
persons" (as such term is defined in the 1940 Act) of any party thereto, on
May 4, 1999 and became effective on July 1, 1999. It will continue in effect
until June 30, 2000 and from year to year thereafter provided such
continuance is specifically approved at least annually (a) by the vote of a
majority of the outstanding shares of the Fund (as defined under "Fund
Policies") or by a majority of the Trustees of the Fund, and (b) by the vote
of a majority of the Trustees of the Fund who are not parties to the
Distribution Agreement or "interested persons" (as such term is defined in
the 1940 Act) of any party thereto, cast in person at a meeting called for
the purpose of voting on such approval. The Distribution Agreement will
terminate automatically if assigned (as defined in the 1940 Act) and is
terminable at any time without penalty by the Trustees of the Fund or by vote
of a majority of the outstanding shares of the Fund on 60 days' written
notice to the Distributor and by the Distributor on 60 days' written notice
to the Fund.
Hilliard Lyons has entered into a selling agreement with the Distributor to sell
shares of the Fund. Pursuant to such selling agreement, Hilliard Lyons receives
the sales charges and Rule 12b-1 fees otherwise payable to the Distributor with
respect to Fund shares which the Distributor sells through
12
<PAGE>
Hilliard Lyons. The Distributor may enter into additional selling agreements
in the future with authorized dealers and financial intermediaries (collectively
referred to as "Authorized Dealers") to sell shares of the Fund, and any such
Authorized Dealers may also receive the sales charges and Rule 12b-1 fees
otherwise payable to the Distributor with respect to Fund shares which the
Distributor sells through such Authorized Dealers.
RULE 12b-1 FEES
The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 (the "Distribution Plan") that allows the Fund to pay distribution and
other fees for the sale and distribution of its shares and for services provided
to shareholders. Because these fees are paid out of the Fund's assets on an
ongoing basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges. Pursuant to the
Distribution Plan, the Fund reimburses the Distributor at an annualized rate of
up to 0.60% of the Fund's average daily net assets for distribution expenses
actually incurred.
Rule 12b-1 regulates the manner in which a mutual fund may assume the costs of
distributing and promoting the sale of its shares. In unanimously approving the
Distribution Plan, the Fund's Board of Trustees determined that there is a
reasonable likelihood that the Distribution Plan will benefit the Fund and its
shareholders. Pursuant to the Distribution Plan, the Distributor may be
reimbursed for expenses incurred in connection with any activity primarily
intended to result in the sale of the Fund's shares, including without
limitation (i) printing and distributing copies of any prospectuses and annual
and interim reports of the Fund (after the Fund has prepared and set in type
such materials) that are used by the Distributor or brokers, dealers and other
financial intermediaries who may have a selling agreement with the Distributor
(collectively referred to as "Intermediaries") in connection with the offering
of the Fund's shares; (ii) preparing, printing or otherwise manufacturing and
distributing any other literature or materials of any nature used by the
Distributor and Intermediaries in connection with promoting, distributing or
offering the Fund's shares; (iii) advertising, promoting and selling the Fund's
shares to broker-dealers, banks and the public; (iv) distribution-related
overhead and the provision of information programs and shareholder services
intended to enhance the attractiveness of investing in the Fund; (v) incurring
initial outlay expenses in connection with compensating Intermediaries for (a)
selling the Fund's shares and (b) providing personal services to shareholders
and the maintenance of shareholder accounts including paying interest on and
incurring other carrying costs on funds borrowed to pay such initial outlays;
and (vi) acting as agent for the Fund in connection with implementing the
Distribution Plan. If the amount reimbursed is insufficient to pay the expenses
of distribution, the Advisor bears the additional expenses. Any amount of excess
distribution expenses incurred by the Distributor in any quarter for which the
Distributor is not reimbursed can be carried forward from one quarter to the
next, but no expenses may be carried over from year to year.
Under its terms, the Distribution Plan remains in effect so long as it is
approved at least annually by vote of the Fund's Board of Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the
13
<PAGE>
Distribution Plan. The Distributor is obligated to provide the Trustees
quarterly reports of amounts expended under the Distribution Plan and the
purpose for which the expenditures were made.
ADMINISTRATOR AND FUND ACCOUNTANT
PFPC Inc. ("PFPC") is the administrator and Fund accountant for the Fund
pursuant to an Administration and Accounting Services Agreement dated July 1,
1999 between the Trust and PFPC. The asset-based fee for administrative and
accounting services for the Fund is 0.11% of the first $250 million of
average daily net assets; 0.085% of the next $250 million of average daily
net assets; 0.06% of the next $250 million of average daily net assets; and
0.04% of the average daily net assets in excess of $750 million.
There is a minimum monthly fee of $8,333 (excluding out-of-pocket expenses).
PFPC has agreed to waive a portion of the minimum monthly fees payable under the
Administration and Accounting Services Agreement during the first year of
operations for the Fund to the extent such fees are applicable. The maximum
minimum fee payable to PFPC during the first year of operations for the Fund
will be approximately $46,000.
CUSTODIAN
PFPC Trust Company ("PFPC Trust") is the custodian for the Fund pursuant to a
Custodian Services Agreement dated July 1, 1999 between the Trust and PFPC
Trust. As custodian, PFPC Trust is responsible for holding all securities and
cash of the Fund, receiving and paying for securities purchased, delivering
against payment securities sold receiving and collecting income from investments
and performing other administrative duties, all as directed by authorized
persons. PFPC Trust does not exercise any supervisory function in such matters
as purchase and sale of portfolio securities, payment of dividends or payment of
expenses of the Fund. The asset-based fee for custodian services for the Fund is
0.015% of the first $100 million of average daily gross assets; 0.01% of the
next $400 million of average daily gross assets; and 0.008% of average daily
gross assets over $500 million.
There is a minimum monthly fee of $1,500 (excluding transaction charges and
out-of-pocket expenses). PFPC Trust has agreed to waive a portion of the minimum
monthly fees payable under the Custodian Services Agreement for the first year
of operations for the Fund to the extent such fees are applicable. The maximum
minimum fee payable to PFPC Trust during the first year of operations for the
Fund will be approximately $9,000.
14
<PAGE>
TRANSFER AGENT
PFPC Inc. ("PFPC") is the Fund's transfer agent, registrar, dividend-disbursing
agent and shareholder servicing agent pursuant to a Transfer Agency Services
Agreement dated July 1, 1999 between the Trust and PFPC. As transfer agent,
PFPC provides certain bookkeeping and data processing services and services
pertaining to the maintenance of shareholder accounts. The following
account-based fees for transfer agency services for the Fund apply: Annual or
Semi-Annual Dividend -- $10.00 per account per annum; Quarterly Dividend --
$12.00 per account per annum; Monthly Dividend -- $15.00 per account per annum;
Daily Accrual Dividend -- $18.00 per account per annum; and Inactive Account --
$0.30 per account per month
There is a minimum monthly fee of $3,000 (excluding transaction charges,
networking charges and out-of-pocket expenses). PFPC has agreed to waive a
portion of the minimum monthly fees payable under the Transfer Agency Services
Agreement for the first year of operations for the Fund to the extent such fees
are applicable. The maximum minimum fee payable to PFPC during the first year of
operations for the Fund will be approximately $18,000.
15
<PAGE>
INDEPENDENT AUDITORS
The independent auditors for Hilliard Lyons Research Trust are Ernst &
Young LLP. The independent auditors audit and report on the Fund's annual
financial statements, review certain regulatory reports and the Fund's
federal income tax returns, and perform other professional accounting,
auditing, tax and advisory services when engaged to do so by Hilliard Lyons
Research Trust.
COUNSEL
Vedder, Price, Kaufman & Kammholz, 222 North LaSalle Street, Chicago, Illinois
60601, is legal counsel to the Fund.
PORTFOLIO TURNOVER
The Fund does not seek to realize profits by participating in short-term market
movements and intends to purchase securities for long-term capital appreciation.
While the rate of portfolio turnover is not a limiting factor when the Advisor
deems changes appropriate, it is anticipated, given the Fund's investment
objective, that its annual portfolio turnover should not exceed 25%; however,
the Fund's actual portfolio turnover rate may be higher than the Advisor's
estimate. Portfolio turnover is calculated by dividing the lesser of the Fund's
purchases or sales of portfolio securities during the period in question by the
monthly average of the value of the Fund's portfolio securities during that
period. Excluded from consideration in the calculation are all securities with
maturities of one year or less when purchased by the Fund.
PORTFOLIO TRANSACTIONS
In addition to making the investment decisions of the Fund, the Advisor
implements such decisions by arranging the execution of the purchase or sale of
portfolio securities with the objective of obtaining prompt, efficient and
reliable executions of such transactions at the most favorable prices obtainable
("best execution"). The Advisor is authorized to place orders for securities
transactions with various broker-dealers, including Hilliard Lyons, subject to
the requirements of applicable laws and regulations. Transactions in securities
other than those for which a securities exchange is the principal market are
generally made with principals or market makers at a negotiated "net" price
16
<PAGE>
which usually includes a profit to the dealer. Brokerage commissions are paid
primarily for effecting transactions in securities traded on an exchange,
although transactions in the over-the-counter market may be executed on an
agency basis if it appears likely that a more favorable overall price can be
obtained.
With respect to transactions handled by Hilliard Lyons on a national securities
exchange, the commissions must conform to Rule 17e-1 under the 1940 Act, which
permits an affiliated person of a registered investment company to receive
brokerage commissions from such registered investment company, provided that
such commissions are reasonable and fair compared to commissions received by
other brokers in connection with comparable transactions involving similar
securities during a comparable period of time. The Board has adopted
"procedures" which provide that commissions paid to Hilliard Lyons may not
exceed (i) those which would have been charged by other qualified brokers for
comparable customers in similar transactions or (ii) those charged by Hilliard
Lyons for comparable customers in similar transactions. Rule 17e-1 requires
that the Board, including its Trustees who are not "interested persons" of the
Fund, or Hilliard Lyons determine no less frequently than quarterly that all
transactions effected pursuant to the Rule 17e-1 during the preceding quarter
were effected in compliance with such procedures. Hilliard Lyons is also
required to furnish reports and maintain records in connection with such
reviews.
The use of Hilliard Lyons as a broker for the Fund is subject to the provisions
of Section 11(a) under the Securities Exchange Act of 1934 (the "1934 Act").
Section 11(a)(1)(H) permits an exchange member to execute on that exchange's
floor, using its own floor brokers, trades on behalf of its managed accounts,
including affiliated investment advisors and investment companies. Members must
comply with the following two conditions, set out in Section 11(a)(1)(H), in
order to execute these trades lawfully: (1) A member must obtain from the
person(s) authorized to transact business for a managed account written
authorization permitting the member to effect trades on behalf of the account
before doing so (if a customer already has provided a member with an
authorization pursuant to Rule 11(a)2-2(T), the member need not obtain another
written authorization to meet the Section 11(a)(1)(H) authorization
requirement); and (2) at least annually, the member must disclose to the same
person(s) the amount of the aggregate compensation the member received in
effecting such transactions. Further, members will be required to comply with
any rules the SEC may prescribe with respect to the above two express
requirements. The SEC has not indicated any such plans to date. The Advisor
previously obtained authorization from the Fund pursuant to Rule 11(a)2-2(T) and
has disclosed to the Fund the amount of the aggregate compensation Hilliard
Lyons received in effecting all such transactions.
When consistent with the objective of obtaining best execution, Fund brokerage
may be directed to brokers or dealers, other than Hilliard Lyons, which charge
commissions that are higher than might be charged by another qualified broker or
dealer and which furnish at no extra charge brokerage and/or research services
to the Advisor considered by the Advisor to be useful or desirable in its
investment management of the Fund and its other advisory accounts. Such
brokerage and research services are of the type described in Section 28(e) of
the 1934 Act. These research and other services may include, but are not
limited to, general economic and security market reviews, industry and
company reviews, evaluations of securities, recommendations as to the
purchase and sale of securities, and access to third party publications,
computer and electronic equipment and software. Under Section 28(e), the
commissions charged by a broker furnishing such brokerage or research services
may be greater than that which another qualified broker might charge if the
Advisor determines, in good faith, that the
17
<PAGE>
amount of such commission is reasonable in relation to the value of brokerage
or research services provided by the executing broker, viewed in terms of
either the particular transaction or the overall responsibilities of the
Advisor or its affiliate to the accounts over which they exercise investment
discretion. The Advisor need not place or attempt to place a specific dollar
value on such services or on the portion of the commission which reflects such
services but is required to keep records sufficient to demonstrate the basis
of its determinations.
Investment research obtained by allocations of Fund brokerage is used to augment
the internal research and investment strategy capabilities of the Advisor.
Research services furnished by brokers through which the Fund effects securities
transactions are used by the Advisor in carrying out its investment management
responsibilities with respect to all of its accounts. Such investment
information may be useful to one or more of the other accounts of the Advisor
and research information received for the commissions of such other accounts may
be useful to the Fund as well as such other accounts.
INCOME TAX CONSIDERATIONS
Each dividend and capital gain distribution, if any, declared by the Fund on its
outstanding shares will be paid on the payment date fixed by the Board in cash
or in additional shares of the Fund having an aggregate net asset value as of
the record date of such dividend or distribution equal to the cash amount of
such dividend or distribution. Dividends and capital gain distributions will
normally be reinvested in additional shares of the Fund at net asset value
without a sales charge, unless otherwise elected at purchase. A shareholder may
change such election at any time prior to the record date for a particular
dividend or distribution by written request to your Hilliard Lyons investment
broker or Authorized Dealer.
It is the present policy of the Fund to make distributions semi-annually of
its net investment income and annually of its net realized capital gains, if
any, at the end of the year in which earned or at the beginning of the next
year. There is no fixed dividend rate, and there can be no assurance that
the Fund will pay any dividends or realize any capital gains. Investors
considering buying shares of the Fund just prior to a dividend or capital
gain distribution record date should be aware that, although the price of
shares purchased at that time may reflect the amount of the forthcoming
distribution, those who purchase just prior to such date will receive a
distribution that will nevertheless be taxable to them.
The Fund is subject to a nondeductible 4% excise tax measured with respect to
certain undistributed amounts of ordinary income and capital gains. If
necessary to avoid this tax, and if in the best interests of the shareholders,
the Fund's Board will, to the extent permitted by the SEC, declare and pay
distributions of its net investment income and net realized capital gains more
frequently than stated above. To avoid the tax, the Fund must distribute during
each calendar year at least the sum of (1) 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) 98%
of its capital gains in excess of its capital losses for the 12-month period
ending on October 31 of the calendar year, and (3) all ordinary income and net
capital gains for previous years that were not previously distributed. A
distribution will be treated as paid during the calendar year if it is actually
paid during the calendar year or declared by the Fund in October,
18
<PAGE>
November or December of the year, payable to shareholders of record as of a
specified date in such a month and actually paid by the Fund during January of
the following year. Any such distributions paid during January of the following
year will be deemed to be paid and received on December 31 of the year the
distributions are declared, rather than when the distributions are received.
The Fund intends to qualify for tax treatment as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended (the "Code").
Qualification as a regulated investment company relieves the Fund of federal
income tax on that part of its net ordinary income and net realized capital
gains which it pays out to its shareholders. To qualify, the Fund must meet
certain relatively complex tests relating to the source of its income and the
diversification of its assets, and must distribute at least 90% of its
investment company taxable income (as defined in the Code). In addition, the
Fund must diversify its holdings so that, at the end of each fiscal quarter,
(i) at least 50% of the market value of the Fund's assets is represented by
cash, cash items, United States government securities, securities of other
regulated investment companies and other securities with such other
securities limited, in respect of any one issuer, to an amount not greater
than 5% of the value of the Fund's assets and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than United
States government securities or the securities of other regulated investment
companies). The Fund does not anticipate any difficulty in meeting these
requirements. Dividends out of net ordinary income and distributions of net
short-term capital gains are taxable to shareholders as ordinary income. In
the case of corporate shareholders, such distributions are eligible for the
70% dividends-received deduction, subject to proportionate reduction of the
amount eligible for deduction if the aggregate qualifying dividends received
by the Fund from domestic corporations in any year are less than its "gross
income" as defined by the Code. A corporation's dividends-received deduction
will be disallowed unless the corporation holds shares in the Fund at least
46 days. Furthermore, a corporation's dividends-received deduction will be
disallowed to the extent the corporation's investment in shares of the Fund
is financed with indebtedness.
The excess of net long-term capital gains over the net short-term capital losses
realized and distributed by the Fund to its shareholders as capital gain
distributions is taxable to the shareholders as long-term capital gains,
irrespective of the length of time a shareholder may have held the shares. Such
long-term capital gain distributions are not eligible for the dividends-received
deduction referred to above. Any dividend or distribution received by a
shareholder on shares of the Fund shortly after the purchase of such shares will
have the effect of reducing the net asset value of such shares by the amount of
such dividend or distribution. Furthermore, such dividend or distribution,
although in effect a return of capital, is subject to applicable income taxation
as described above regardless of the length of time the shares may have been
held. If a shareholder held shares less than six months and during that period
received a distribution taxable to such shareholder as long-term capital gain,
any loss realized on the sale of such shares during such six-month period would
be a long-term loss to the extent of such distribution. The tax treatment of
distributions from the Fund is the same whether the distributions are received
in additional shares or in cash. Shareholders
19
<PAGE>
receiving distributions in the form of additional shares will have a cost basis
for federal income tax purposes in each share received equal to the net asset
value on the reinvestment date.
Federal income taxes may be required to be withheld ("backup withholding") at a
31% rate from taxable dividends, capital gain distributions and redemption
proceeds paid to certain shareholders. Backup withholding may be required if
(i) a shareholder fails to furnish a properly certified social security or other
tax identification number; (ii) a shareholder fails to certify that the
shareholder's tax identification number is correct or that the shareholder is
not subject to backup withholding due to the under-reporting of certain income;
or (iii) the Internal Revenue Service determines that a shareholder's account is
subject to backup withholding. These certifications should be completed and
returned when a shareholder opens an account with a Hilliard Lyons investment
broker or Authorized Dealer. All amounts withheld must be promptly paid to the
IRS. A shareholder may claim the amount withheld as a credit on the
shareholder's federal income tax return.
The Fund may be subject to state or local taxes in the jurisdiction in which the
Fund may be deemed to be doing business. Dividends and distributions declared
by the Fund may also be subject to state and local taxes.
Shareholders should consult their tax advisors about the application of the
provisions of tax law in light of their particular tax situations.
INVESTMENT PERFORMANCE
The Fund may quote certain total return figures from time to time. A "total
return" on a per share basis is the amount of dividends distributed per share
plus or minus the change in the net asset value per share for a period. A
"total return percentage" may be calculated by dividing the value of a share at
the end of a period by the value of the share at the beginning of the period and
subtracting one. For a given period, an "average annual total return" may be
computed by finding the average annual compounded rate that would equate a
hypothetical initial amount invested of $1,000 (adjusting to deduct the
maximum sales charge) to the ending redeemable value.
Average Annual Total Return is computed as follows: ERV = P(1+T) to the
power of n
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period at the end of the period
(or fractional portion thereof).
Investment performance figures assume reinvestment of all dividends and
distributions and do not take into account any federal, state, or local income
taxes which shareholders must pay on a current basis. They are not necessarily
indicative of future results. The performance of the Fund is a result
20
<PAGE>
of conditions in the securities markets, portfolio management and operating
expenses. Although investment performance information 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. Of
course, past performance is not indicative of future results.
As the Fund commenced operations on July 8, 1999, there is currently no
annual performance information for the Fund.
In advertising, sales literature and other publications, the Fund's performance
may be quoted in terms of total return or average annual total return, which may
be compared with various indices and investments, other performance measures or
rankings, or other mutual funds or indices or averages of other mutual funds.
OTHER INFORMATION
The Fund's Prospectus and this SAI omit certain information contained in the
Registration Statement, which the Fund has filed with the Securities and
Exchange Commission under the Securities Act of 1933, and reference is hereby
made to the Registration Statement for further information with respect to the
Fund and the securities offered hereby. The Registration Statement is available
for inspection by the public at the Securities and Exchange Commission in
Washington, D.C.
FINANCIAL STATEMENTS
The following financial statement has been audited and is attached hereto:
1. Report of Independent Auditors.
2. Statement of Assets and Liabilities dated as of June 2, 1999.
3. Notes to Financial Statement.
21
<PAGE>
APPENDIX A -- DESCRIPTION OF SECURITIES RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the credit
quality of the security being rated. However, the ratings are general and are
not absolute standards of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Advisor believes that the quality of debt securities
in which the Fund may invest should be continuously reviewed and that individual
analysts give different weights to the various factors involved in credit
analysis. A rating is not a recommendation to purchase, sell or hold a security
because it does not take into account market value or suitability for a
particular investor. When a security has received a rating from more than one
service, each rating should be evaluated independently. Ratings are based on
current information furnished by the issuer or obtained by the rating services
from other sources which they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability of such
information, or for other reasons.
The following is a description of the characteristics of ratings of corporate
debt securities used by Moody's Investors Service, Inc. ("Moody's") and Standard
& Poor's Corporation ("S&P").
RATINGS BY MOODY'S
Aaa. Bonds rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or exceptionally stable margin and
principal is secure. Although the various protective elements are likely to
change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa bonds or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa bonds.
A. Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
A-1
<PAGE>
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca. Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay interest and
repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than for debt in higher rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC or C is regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1. This rating is reserved for income bonds on which no interest is being
paid.
A-2
<PAGE>
D. Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears. The D rating is also used upon the filing of a
bankruptcy petition if debt service payments are jeopardized.
Notes:
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Foreign debt is rated on the same basis as domestic debt measuring the
creditworthiness of the issuer; ratings of foreign debt do not take into account
currency exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks. Examples of such obligations are:
securities whose principal or interest return is 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.
A-3
<PAGE>
Report of Independent Auditors
To the Shareholder and Board of Trustees
Hilliard Lyons Research Trust - Senbanc Fund
We have audited the accompanying statement of assets and liabilities of Hilliard
Lyons Research Trust - Senbanc Fund (the "Fund") as of June 2, 1999. This
statement of assets and liabilities is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this statement of
assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Hilliard
Lyons Research Trust - Senbanc Fund at June 2, 1999, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
June 2, 1999
<PAGE>
Senbanc Fund
Statement of Assets and Liabilities
June 2, 1999
<TABLE>
<S> <C>
Assets:
Cash $ 74,408
Prepaid Insurance 16,507
Prepaid Blue Sky 14,085
---------
Total Assets 105,000
---------
Liabilities:
Offering costs payable 5,000
---------
Nets Assets $100,000
---------
---------
Paid in capital (Applicable to 10,000
shares of beneficial interest issued
and outstanding) $100,000
---------
---------
Net Asset Value Per Share (based on net assets of $ 10.00
$100,000 and 10,000 shares outstanding)
---------
---------
MAXIMUM OFFERING PRICE PER SHARE:
Net asset value $ 10.00
Sales Charge (2.25% of offering price
or 2.30% of the amount invested per share) 0.23
---------
Offering price $ 10.23
---------
---------
</TABLE>
<PAGE>
SENBANC FUND
NOTES TO FINANCIAL STATEMENTS
1. Organization
Senbanc Fund (the "Fund") is a series of the Hilliard Lyons Research Trust (the
"Trust"), an open-end management investment company. Hilliard Lyons Research
Advisors (the "Advisor") provides management and investment advisory services to
the Fund. The Trust is a Delaware business trust organized under a declaration
of trust ("Declaration of Trust") dated January 12, 1999.
Costs incurred and to be incurred in connection with the organization of the
Fund will be borne by the Advisor. Costs incurred by the Fund in connection with
the initial offering of its shares have been deferred and will be amortized over
a one year period beginning on the date the Fund commences operations.
2. Agreements
Pursuant to an advisory agreement between the Fund and the Advisor, the Advisor
will manage the Fund's business and investment affairs. As compensation under
the Advisory Agreement, the Advisor will receive from the Fund an advisory fee,
which is computed daily and paid monthly, equal to .60% of the Fund's average
daily net assets.
The Advisor has voluntarily agreed to waive the fees payable to it under the
Advisory Agreement until the Fund reaches $20 million in net assets and, if
necessary, reimburse the Fund by the amount by which the Fund's total annual
operating expenses for any year exceed 1.75% of average daily net assets.
Pursuant to an Administration and Accounting Services Agreement, the Fund
retains PFPC, Inc. ("PFPC"), an indirect wholly-owned subsidiary of PFPC
Worldwide, Inc., as Administrator and Accounting Services Agent. In addition,
PFPC Trust Company serves as the Fund's custodian and PFPC serves as transfer
and dividend disbursing agent.
3. Service Plan
The Fund has adopted a plan under Rule 12b-1 of the Investment Company Act of
1940 (the "Distribution Plan") that allows the Fund to pay distribution and
other fees for the sale and distribution of its shares and for services provided
to shareholders. Pursuant to the Distribution Plan, the Fund reimburses the
Distributor at an annualized rate of up to .60% of the Fund's average daily net
assets.
