STATEMENT OF ADDITIONAL INFORMATION
MAY 3, 2000,
AS AMENDED OCTOBER 6, 2000
ASTROP FIRST INTERNET FUND,
A SERIES OF TRUST FOR INVESTMENT MANAGERS
3133 MAPLE DRIVE, N.E., SUITE 200
ATLANTA, GA 30305
1-800-576-8229
This Statement of Additional Information ("SAI") is not a prospectus and it
should be read in conjunction with the Prospectus dated May 3, 2000, as may be
revised, of the Astrop First Internet Fund (the "Fund"), a series of Trust for
Investment Managers (the "Trust"). Astrop Research Corporation (the "Advisor")
is the advisor to the Fund. A copy of the Fund's Prospectus is available by
calling the telephone number listed above.
TABLE OF CONTENTS
The Trust .............................................................. B-2
Investment Objective and Policies ...................................... B-2
Investment Restrictions ................................................ B-12
Distributions and Tax Information ...................................... B-13
Trustees and Executive Officers ........................................ B-15
The Fund's Investment Advisor .......................................... B-17
The Fund's Administrator ............................................... B-17
The Fund's Distributor ................................................. B-18
Execution of Portfolio Transactions .................................... B-18
Portfolio Turnover ..................................................... B-20
Additional Purchase and Redemption Information ......................... B-20
Determination of Share Price ........................................... B-22
Performance Information ................................................ B-23
General Information .................................................... B-24
Appendix A ............................................................. B-25
Appendix B ............................................................. B-28
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THE TRUST
The Trust for Investment Managers (the "Trust") is an open-end management
investment company organized as a Delaware business trust. The Trust may consist
of various series which represent separate investment portfolios. This SAI
relates only to the Fund.
The Trust is registered with the SEC as a management investment company. Such a
registration does not involve supervision of the management or policies of the
Fund. The Prospectus of the Fund and this SAI omit certain of the information
contained in the Registration Statement filed with the SEC. Copies of such
information may be obtained from the SEC upon payment of the prescribed fee.
INVESTMENT OBJECTIVE AND POLICIES
The Fund has the investment objective of seeking long-term growth of capital.
The Fund is nondiversified, which under the Investment Company Act of 1940
("1940 Act") means that there is no restriction under the 1940 Act on how much
the Fund may invest in the securities of any one issuer. In addition, the Fund
may invest more than 25% of its assets in what may be considered a single
industry sector. The following information supplements the discussion of the
Fund's investment objective and policies as set forth in its Prospectus. There
can be no guarantee that the Fund's objective will be attained.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in convertible
securities and warrants. A convertible security is a fixed-income security (a
debt instrument or a preferred stock) which may be converted at a stated price
within a specified period of time into a certain quantity of the common stock of
the same or a different issuer. Convertible securities are senior to common
stocks in an issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a specified
period a predetermined number of shares of common stock at a fixed price. Unlike
convertible debt securities or preferred stock, warrants do not pay a fixed
dividend. Investments in warrants involve certain risks, including the possible
lack of a liquid market for resale of the warrants, potential price fluctuations
as a result of speculation or other factors, and failure of the price of the
underlying security to reach or have reasonable prospects of reaching a level at
which the warrant can be prudently exercised (in which event the warrant may
expire without being exercised, resulting in a loss of the Fund's entire
investment therein).
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INVESTMENT COMPANIES. The Fund may invest in shares of other investment
companies in pursuit of its investment objective. This may include investment in
money market mutual funds in connection with the Fund's management of daily cash
positions. In addition to the advisory and operational fees the Fund bears
directly in connection with its own operation, the Fund and its shareholders
will also bear the pro rata portion of each other investment company's advisory
and operational expenses.
BORROWING. The Fund is authorized to borrow money from time to time for
temporary, extraordinary or emergency purposes or for clearance of transactions
in amounts not to exceed 3 1/3% of the value of its total assets at the time of
such borrowings. The use of borrowing by the Fund involves special risk
considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all of the Fund's assets fluctuate
in value, while the interest obligation resulting from a borrowing will be fixed
by the terms of the Fund's agreement with its lender, the net asset value per
share of the Fund will tend to increase more when its portfolio securities
increase in value and to decrease more when its portfolio assets decrease in
value than would otherwise be the case if the Fund did not borrow funds. In
addition, interest costs on borrowings may fluctuate with changing market rates
of interest and may partially offset or exceed the return earned on borrowed
funds. Under adverse market conditions, the Fund might have to sell portfolio
securities to meet interest or principal payments at a time when fundamental
investment considerations would not favor such sales.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities in an
amount not exceeding 33-1/3% of its total assets to financial institutions such
as banks and brokers if the loan is collateralized in accordance with applicable
regulations. Under the present regulatory requirements which govern loans of
portfolio securities, the loan collateral must, on each business day, at least
equal the value of the loaned securities and must consist of cash, letters of
credit of domestic banks or domestic branches of foreign banks, or securities of
the U.S. Government or its agencies. To be acceptable as collateral, letters of
credit must be irrevocable and obligate a bank to pay amounts demanded by the
Fund if the demand meets the terms of the letter. Such terms and the issuing
bank would have to be satisfactory to the Fund. Any loan might be secured by any
one or more of the three types of collateral. The terms of the Fund's loans must
permit the Fund to reacquire loaned securities on three days' notice or in time
to vote on any serious matter and must meet certain tests under the Internal
Revenue Code (the "Code").
SHORT SALES. The Fund is authorized to make short sales of securities. In a
short sale, the Fund sells a security which it does not own, in anticipation of
a decline in the market value of the security. To complete the sale, the Fund
must borrow the security (generally from the broker through which the short sale
is made) in order to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The Fund is said to have a "short position" in the securities
sold until it delivers them to the broker. The period during which the Fund has
a short position can range from as little as one day to more than a year. Until
the security is replaced, the proceeds of the short sale are retained by the
broker, and the Fund is required to pay to the broker a negotiated portion of
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any dividends or interest which accrue during the period of the loan. To meet
current margin requirements, the Fund is also required to deposit with the
broker additional cash or securities so that the total deposit with the broker
is maintained daily at 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
Short sales by the Fund create opportunities to increase the Fund's return but,
at the same time, involve specific risk considerations and may be considered a
speculative technique. Since the Fund in effect profits from a decline in the
price of the securities sold short without the need to invest the full purchase
price of the securities on the date of the short sale, the Fund's net asset
value per share will tend to increase more when the securities it has sold short
decrease in value, and to decrease more when the securities it has sold short
increase in value, than would otherwise be the case if it had not engaged in
such short sales. The amount of any gain will be decreased, and the amount of
any loss increased, by the amount of any premium, dividends or interest the Fund
may be required to pay in connection with the short sale. Furthermore, under
adverse market conditions the Fund might have difficulty purchasing securities
to meet its short sale delivery obligations, and might have to sell portfolio
securities to raise the capital necessary to meet its short sale obligations at
a time when fundamental investment considerations would not favor such sales.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. Under such
agreements, the seller of the security agrees to repurchase it at a mutually
agreed upon time and price. The repurchase price may be higher than the purchase
price, the difference being income to the Fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to the Fund together
with the repurchase price on repurchase. In either case, the income to the Fund
is unrelated to the interest rate on the U.S. Government security itself. Such
repurchase agreements will be made only with banks with assets of $500 million
or more that are insured by the Federal Deposit Insurance Corporation or with
Government securities dealers recognized by the Federal Reserve Board and
registered as broker-dealers with the Securities and Exchange Commission ("SEC")
or exempt from such registration. The Fund will generally enter into repurchase
agreements of short durations, from overnight to one week, although the
underlying securities generally have longer maturities. The Fund may not enter
into a repurchase agreement with more than seven days to maturity if, as a
result, more than 15% of the value of its net assets would be invested in
illiquid securities including such repurchase agreements.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan from
the Fund to the seller of the U.S. Government security subject to the repurchase
agreement. It is not clear whether a court would consider the U.S. Government
security acquired by the Fund subject to a repurchase agreement as being owned
by the Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with respect
to the seller of the U.S. Government security before its repurchase under a
repurchase agreement, the Fund may encounter delays and incur costs before being
able to sell the security. Delays may involve loss of interest or a decline in
price of the U.S. Government security. If a court characterizes the transaction
as a loan and the Fund has not perfected a security interest in the U.S.
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Government security, the Fund may be required to return the security to the
seller's estate and be treated as an unsecured cof the seller. As an unsecured
creditor, the Fund would be at the risk of losing some or all of the principal
and income involved in the transaction. As with any unsecured debt instrument
purchased for the Fund, the Advisor seeks to minimize the risk of loss through
repurchase agreements by analyzing the creditworthiness of the other party, in
this case the seller of the U.S. Government security.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, the Fund will
always receive as collateral for any repurchase agreement to which it is a party
securities acceptable to it, the market value of which is equal to at least 100%
of the amount invested by the Fund plus accrued interest, and the Fund will make
payment against such securities only upon physical delivery or evidence of book
entry transfer to the account of its Custodian. If the market value of the U.S.
Government security subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
U.S. Government security to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. It is possible that the Fund will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities.
ILLIQUID SECURITIES. The Fund may not invest more than 15% of the value of its
net assets in securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid. The Advisor will monitor the
amount of illiquid securities in the Fund's portfolio, under the supervision of
the Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal ron resale because they have not been registered under the
Securities Act of 1933 (the "Securities Act"), securities which are otherwise
not readily marketable and repurchase agreements having a maturity of longer
than seven days. Securities which have not been registered under the Securities
Act are referred to as private placement or restricted securities and are
purchased directly from the issuer or in the secondary market. Mutual funds do
not typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and the Fund might be unable to sell restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemption requests within seven days. The Fund
might also have to register such restricted securities in order to sell them,
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
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there are contractual or legal restrictions on resale to the general public or
to certain institutions may not reflect the actual liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the SEC under the Securities Act,
the Trust's Board of Trustees may determine that such securities are not
illiquid securities despite their legal or contractual restrictions on resale.
In all other cases, however, securities subject to restrictions on resale will
be deemed illiquid.
FOREIGN SECURITIES. The Fund may invest up to 20% of its total assets the
securities of foreign issuers in the form of American Depositary Receipts
(ADRs"). ADRs are depositary receipts for foreign securities denominated in U.S.
dollars and traded on U.S. securities markets. These are certificates evidencing
ownership of shares of a foreign-based issuer held in trust by a bank or similar
financial institution. Designed for use in U.S. securities markets, ADRs are
alternatives to the purchase of the underlying securities in their national
market and currencies. ADRs may be purchased through "sponsored" or
"unsponsored" facilities. A sponsored facility is established jointly by the
issuer of the underlying security and a depositary, whereas a depositary may
establish an unsponsored facility without participation by the issuer of the
depositary security. Holders of unsponsored depositary receipts generally bear
all the costs of such facilities and the depositary of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited security or to pass through voting
rights to the holders of such receipts of the deposited securities.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and diversification and balance of
payments position. The internal politics of some foreign countries may not be as
stable as those of the United States. Governments in some foreign countries also
continue to pto a significant degree, through ownership interest or regulation,
in their respective economies. Action by these governments could include
restrictions on foreign investment, nationalization, expropriation of goods or
imposition of taxes, and could have a significant effect on market prices of
securities and payment of interest. The economies of many foreign countries are
heavily dependent upon international trade and are affected by the trade
policies and economic conditions of their trading partners. If these trading
partners enacted protectionist trade legislation, it could have a significant
adverse effect upon the securities markets of such countries.
CURRENCY FLUCTUATIONS. The Fund will invest only in securities denominated in
U.S. dollars. For this reason, the value of the Fund's assets may not be subject
to risks associated with variations in the value of foreign currencies relative
to the U.S. dollar to the same extent as might otherwise be the case. Changes in
the value of foreign currencies against the U.S. dollar may, however, affect the
value of the assets and/or income of foreign companies whose U.S. dollar
denominated securities are held by the Fund. Such companies may also be affected
significantly by currency rand exchange control regulations enacted from time to
time.
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LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest and dividends payable on some of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to Fund shareholders.
OPTIONS ON SECURITIES. The Fund may write (sell) covered call options to a
limited extent on its portfolio securities ("covered options") in an attempt to
enhance gain.
When the Fund writes a covered call option, it gives the purchaser of the option
the right, upon exercise of the option, to buy the underlying security at the
price specified in the option (the "exercise price") at any time during the
option period, generally ranging up to nine months. If the option expires
unexercised, the Fund will realize income to the extent of the amount received
for the option (the "premium"). If the call option is exercised, a decision over
which the Fund has no control, the Fund must sell the underlying security to the
option holder at the exercise price. By writing a covered option, the Fund
forgoes, in exchange for the premium less the commission ("net premium") the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
The Fund may terminate its obligation as writer of a call option by purchasing
an option with the same exercise price and expiration date as the option
previously written. This transaction is called
a "closing purchase transaction."
Closing sale transactions enable the Fund immediately to realize gains or
minimize losses on its options positions. There is no assurance that a liquid
secondary market on an options exchange will exist for any particular option, or
at any particular time, and for some options no secondary market may exist. If
the Fund is unable to effect a closing purchase transaction with respect to
options ihas written, it will not be able to terminate its obligations or
minimize its losses under such options prior to their expiration. If the Fund is
unable to effect a closing sale transaction with respect to options that it has
purchased, it would have to exercise the option in order to realize any profit.
The hours of trading for options may not conform to the hours during which the
underlying securities are traded. To the extent that the options markets close
before the markets for the underlying securities, significant price and rate
movements may take place in the underlying markets that cannot be reflected in
the options markets. The purchase of options is a highly specialized activity
which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions.
OPTIONS ON SECURITIES INDICES. The Fund may write (sell) covered call options on
securities indices in an attempt to increase gain. A securities index option
written by the Fund would obligate it, upon exercise of the options, to pay a
cash settlement, rather than to deliver actual securities, to the option holder.
Although the Fund will not ordinarily own all of the securities comprising the
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stock indices on which it writes call options, such options will usually be
written on those indices which correspond most closely to the composition of the
Fund's portfolio. As with the writing of covered call options on securities, the
Fund will realize a gain in the amount of the premium received upon writing an
option if the value of the underlying index increases above the exercise price
and the option is exercised, the Fund will be required to pay a cash settlement
that may exceed the amount of the premium received by the Fund. The Fund may
purchase call options in order to terminate its obligations under call options
it has written.
The Fund may purchase call and put options on securities indices for the purpose
of hedging against the risk of unfavorable price movements adversely affecting
the value of the Fund's securities or securities the Fund intends to buy.
Securities index options will not be purchased for speculative purposes. Unlike
an option on securities, which gives the holder the right to purchase or sell
specified securities at a specified price, an option on a securities index gives
the holder the right, upon the exercise of the option, to receive a cash
"exercise settlement amount" equal to (i) the difference between the exercise
price of the option and the value of the underlying securities index on the
exercise date multiplied by (ii) a fixed "index multiplier."
A securities index fluctuates with changes in the market value of the securities
included in the index. For example, some securities index options are based on a
broad market index such as the Standard & Poor's 500 or the Value Line Composite
Index, or a narrower market index such as the Standard & Poor's 100. Indices may
also be based on industry or market segments.
The Fund may purchase put options in order to hedge against an anticipated
decline in stock market prices that might adversely affect the value of the
Fund's portfolio securities. If the Fund purchases a put option on a stock
index, the amount of payment it receives on exercising the option depends on the
extent of any decline in the level of the stock index below the exercise price.
Such payments would tend to offset a decline in the value of the Fund's
portfolio securities. If, however, the level of the stock index increases and
remains above the exercise price while the put option is outstanding, the Fund
will not be able to profitably exercise the option and will lose the amount of
the premium and any transaction costs. Such loss may be partially offset by an
increase in the value of the Fund's portfolio securities. The Fund may write put
options on stock indices in order to close out positions in stock index put
options which it has purchased.
The Fund may purchase call options on stock indices in order to participate in
an anticipated increase in stock market prices or to lock in a favorable price
on securities that it intends to buy in the future.
If the Fund purchases a call option on a stock index, the amount of the payment
it receives upon exercising the option depends on the extent of any increase in
the level of the stock index above the exercise price. Such payments would in
effect allow the Fund to benefit from stock market appreciation even though it
may not have had sufficient cash to purchase the underlying stocks. Such
payments may also offset increases in the price of stocks that the Fund intends
to purchase. If, however, the level of the stock index declines and remains
below the exercise price while the call option is outstanding, the Fund will not
be able to exercise the option profitably and will lose the amount of the
premium and transaction costs. Such loss may be partially offset by a reduction
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in the price the Fund pays to buy additional securities for its portfolio. The
Fund may write call options on stock indices in order to close out positions in
stock index call options which it has purchased.
The effectiveness of hedging through the purchase of options on securities
indices will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected stock index. Perfect correlation is not possible because the securities
held or to be acquired by the Fund will not exactly match the composition of the
stock indices on which the options are available. In addition, the purchase of
stock index options involves the risk that the premium and transaction costs
paid by the Fund in purchasing an option will be lost as a result of
unanticipated movements in prices of the securities comprising the stock index
on which the option is based.
FUTURES. The Fund may buy and sell interest rate and stock index futures
contracts. A futures contract is an agreement between two parties to buy and
sell a security or an index for a set price on a future date. Futures contracts
are traded on designated "contract markets" which, through their clearing
corporations, guarantee performance of the contracts.
Entering into a futures contract for the sale of securities has an effect
similar to the actual sale of securities, although sale of the futures contract
might be accomplished more easily and quickly. Entering into futures contracts
for the purchase of securities has an effect similar to the actual purchase of
the underlying securities, but permits the continued holding of securities other
than the underlying securities.
A stock index futures contract may be used as a hedge by the Fund with regard to
market risk as distinguished from risk relating to a specific security. A stock
index futures contract does not require the physical delivery of securities, but
merely provides for profits and losses resulting from changes in the market
value of the contract to be credited or debited at the close of each trading day
to the respective accounts of the parties to the contract. On the contract's
expiration date, a final cash settlement occurs. Changes in the market value of
a particular stock index futures contract reflects changes in the specified
index of equity securities on which the future is based.
There are several risks in connection with the use of futures contracts. In the
event of an imperfect correlation between the futures contract and the portfolio
position which is intended to be protected, the desired protection may not be
obtained and the Fund may be exposed to risk of loss. Further, unanticipated
changes in interest rates or stock price movements may result in a poorer
overall performance for the Fund than if it had not entered into any futures on
stock indices.
In addition, the market prices of futures contracts may be affected by certain
factors. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the sand
futures markets. Second, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in
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the securities market. Therefore, increased participation by speculators in the
futures market may also cause temporary price distortions.
Finally, positions in futures contracts may be closed out only on an exchange or
board of trade which provides a secondary market for such futures. There is no
assurance that a liquid secondary market on an exchange or board of trade will
exist for any particular contract or at any particular time.
CORPORATE DEBT SECURITIES. The Fund may invest in debt securities, including
debt securities rated below investment grade. Bonds rated below BBB by S&P or
Baa by Moody's, commonly referred to "junk bonds," typically carry higher coupon
rates than investment grade bonds, but also are described as speculative by both
S&P and Moody's and may be subject to greater market price fluctuations, less
liquidity and greater risk of income or principal including greater possibility
of default and bankruptcy of the issuer of such securities than more highly
rated bonds. Lower rated bonds also are more likely to be sensitive to adverse
economic or company developments and more subject to price fluctuations in
response to changes in interest rates. The market for lower-rated debt issues
generally is thinner and less active than that for higher quality securities,
which may limit the Fund's ability to sell such securities at fair value in
response to changes in the economy or financial markets. During periods of
economic downturn or rising interest rates, highly leveraged issuers of lower
rated securities may experience financial stress which could adversely affect
their ability to make payments of interest and principal and increase the
possibility of default.
Ratings of debt securities represent the rating agencies' opinions regarding
their quality, are not a guarantee of quality and may be reduced after the Fund
has acquired the security. If a security's rating is reduced while it held by
the Fund, the Advisor will consider whether the Fund should continue to hold the
security but is not required to dispose of it. Credit ratings attempt to
evaluate the safety of principal and interest payments and do not evaluate the
risks of fluctuations in market value. Also, rating agencies may fail to make
timely changes in credit ratings in response to subsequent events, so that an
issuer's current financial conditions may be better or worse than the rating
indicates. The ratings for corporate debt securities are described in Appendix
A.
MORTGAGE-RELATED SECURITIES. The Fund may invest in mortgage-related securities.
These securities include mortgage pass-through securities, which represent
interests in pools of mortgages in which payments of both interest and principal
on the securities are generally made monthly, in effect "passing through"
monthly payments made by the individual borrowers on the residential mortgage
loans which underlie the securities (net of fees paid to the issuer or guarantor
of the securities). Early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to the sale of underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose a Portfolio to a lower rate of return upon reinvestment of
principal. Also, if a security subject to repayment has been purchased at a
premium, in the event of prepayment the value of the premium would be lost.
Payment of principal and interest on some mortgage pass-through securities (but
not the market value of the securities themselves) may be guaranteed by the full
faith and credit of the U. S. Government (in the case of securities guaranteed
by GNMA), or by agencies and instrumentalities of the U.S. Government (in the
case of securities guaranteed by FNMA or the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are supported only by the discretionary authority
of the U.S. Government to purchase the agency's obligations). Mortgage
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pass-through securities created by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers) may be supported by various
forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance, and letters of credit, which may be issued by governmental
entities, private insurers or the mortgage poolers.
Collateralized mortgage obligations ("CMO's") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, semi-annually. CMO's may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage pass-th
securities guaranteed by GNMA, FHLMC, or FNMA. CMO's are structured into
multiple classes, with each class bearing a different stated maturity. Monthly
payments of principal, including prepayments, are first returned to investors
holding the shortest maturity class. Investors holding the longer maturity
classes receive principal only after the first class has been retired. Other
mortgage related securities include those that directly or indirectly represent
a participation in or are secured by and payable from mortgage loans on real
property, such as CMO residuals or stripped mortgage- backed securities, and may
be structured in classes with rights to receive varying proportions of principal
and interest. Certain of these government interest-only and principal-only fixed
mortgage- backed securities may be considered liquid under guidelines to be
established by the Board of Trustees, if, under such procedures, they can be
disposed of promptly in the ordinary course of business at a value reasonably
close to that used in the calculation of net asset value per share. Any
interest-only and principal-only securities not determined to be liquid under
these guidelines will be subject to the Fund's limitations on illiquid
securities as set forth under "Illiquid Securities," above.
SHORT-TERM INVESTMENTS. The Fund may invest in any of the following securities
and instruments:
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The Fund may
acquire certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar- denominated obligations of domestic banks, savings and loan associations
or financial institutions which, at the time of purchase, have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully insured
by the U.S. Government.
B-11
<PAGE>
In addition to purchasing certificates of deposit and bankers' acceptances, to
the extent permitted under its investment objective and policies stated above
and in its prospectus, the Fund may make interest-bearing time or other
interest-bearing deposits in commercial or savings banks. Time deposits are
non-negotiable deposits maintained at a banking institution for a specified
period of time at a specified interest rate.
COMMERCIAL PAPER AND SHORT-TERM NOTES. The Fund may invest a portion of its
assets in commercial paper and short-term notes. Commercial paper consists of
unsecured promissory notes issued by corporations. Issues of commercial paper
and short-term notes will normally have maturities of less than nine months and
fixed rates of return, although such instruments may have maturities of up to
one year.
Commercial paper and short-term notes will consist of issues rated at the time
of purchase "A-2" or higher by Standard & Poor's Ratings Group, "Prime-1" or
"Prime-2" by Moody's Investors Service, Inc., or similarly rated by another
nationally recognized statistical rating organization or, if unrated, will be
determined by the Adviser to be of comparable quality. These rating symbols are
described in Appendix B.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by the Fund
and (unless otherwise noted) are fundamental and cannot be changed without the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the 1940 Act.
1. The Fund may not make loans to others, except (a) through the purchase of
debt securities in accordance with its investment objectives and policies, (b)
to the extent the entry into a repurchase agreement is deemed to be a loan.
2. The Fund may not:
(a) Borrow money, except as stated in the Prospectus and this SAI. Any such
borrowing will be made only if immediately thereafter there is an asset coverage
of at least 300% of all borrowings.
(b) Mortgage, pledge or hypothecate any of its assets except in connection
with any such borrowings.
3. The Fund may not purchase securities on margin, participate on a joint or
joint and several basis in any securities trading account, or underwrite
securities. (Does not preclude the Fund from obtaining such short-term credit as
may be necessary for the clearance of purchases and sales of its portfolio
securities).
B-12
<PAGE>
4. The Fund may not purchase or sell real estate, commodities or commodity
contracts. (As a matter of operating policy, the Board of Trustees may authorize
the Fund in the future to engage in certain activities regarding futures
contracts for bona fide hedging purposes; any such authorization will be
accompanied by appropriate notification to shareholders).
5. The Fund may not issue senior securities, as defined in the 1940 Act, except
that this restriction shall not be deemed to prohibit the Fund from (a) making
any permitted borrowings, mortgages or pledges, or (b) entering into options,
futures, forward or repurchase transactions.
6. The Fund may concentrate more than 25% of its assets in the securities of
companies engaged in the Internet industry sector.
7. The Fund is non-diversified, i.e., as to 50% of the value of its total
assets: (i) no more than 5% of the value of its total assets may be invested in
the securities of any one issuer (other than U.S. Government securities); and
(ii) the Fund may not purchase more than 10% of the outstanding voting
securities an issuer.
The Fund observes the following policies, which are not deemed fundamental and
which may be changed without shareholder vote.
1. The Fund may not invest in any issuer for purposes of exercising control or
management.
2. The Fund may not invest in securities of other investment companies except as
permitted under the 1940 Act.
3. The Fund may not invest, in the aggregate, more than 15% of its net assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable and repurchase agreements with more than seven days
to maturity.
4. With respect to fundamental investment restriction 2(a) above, the Fund will
not purchase portfolio securities while outstanding borrowings exceed 5% of its
assets.
If a percentage restriction described in the Prospectus or in this SAI is
adhered to at the time of investment, a subsequent increase or decrease in a
percentage resulting from a change in the values of assets will not constitute a
violation of that restriction, except with respect to borrowing or the purchase
of restricted or illiquid securities.
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS. Dividends from net investment income and distributions from net
profits from the sale of securities are generally made annually. Also, the Fund
expects to distribute any undistributed net investment income on or about
December 31 of each year. Any net capital gains realized through the period
ended October 31 of each year will also be distributed by December 31 of each
year.
B-13
<PAGE>
Each distribution by the Fund is accompanied by a brief explanation of the form
and character of the distribution. In January of each year the Fund will issue
to each shareholder a statement of the federal income tax status of all
distributions.
TAX INFORMATION. Each series of the Trust is treated as a separate entity for
federal income tax purposes. The Fund intends to continue to qualify and elect
to be treated as a "regulated investment company" under Subchapter M of the
Code, provided that it complies with all applicable requirements regarding the
source of its income, diversification of its assets and timing of distributions.
It is the Fund's policy to distribute to its shareholders all of its investment
company taxable income and any net realized capital gains for each fiscal year
in a manner that complies with the distribution requirements of the Code, so
that the Fund will not be subject to any federal income tax or excise taxes
based on net income. To avoid the excise tax, the Fund must also distribute (or
be deemed to have distributed) by December 31 of each calendar year (i) at least
98% of its ordinary income for such year, (ii) at least 98% of the excess of its
realized capital gains over its realized capital losses for the one-year period
ending on October 31 during such year and (iii) any amounts from the prior
calendar year that were not distributed and on which the Fund paid no federal
excise tax.
The Fund's ordinary income generally consists of interest and dividend income,
less expenses. Net realized capital gains for a fiscal period are computed by
taking into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains are
taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent the Portfolio designates the amount
distributed as a qualifying dividend. This designated amount cannot, however,
exceed the aggregate amount of qualifying dividends received by the Portfolio
for its taxable year. The deduction, if any, may be reduced or eliminated if
Portfolio shares held by a corporate investor are treated as debt-financed or
are held for fewer than 46 days.
Any long-term capital gain distributions are taxable to shareholders as
long-term capital gains regardless of the length of time they have held their
shares. Capital gains distributions are not eligible for the dividends-received
deduction referred to in the previous paragraph. Dof any ordinary income and net
realized capital gains will be taxable as described above, whether received in
shares or in cash. Shareholders who choose to receive distributions in the form
of additional shares will have a cost basis for federal income tax purposes in
each share so received equal to the net asset value of a share on the
reinvestment date. Distributions are generally taxable when received. However,
distributions declared in October, November or December to shareholders of
record on a date in such a month and paid the following January are taxable as
if received on December 31. Distributions are includable in alternative minimum
taxable income in ca shareholder's liability for the alternative minimum tax.
B-14
<PAGE>
Under the Code, the Fund will be required to report to the Internal Revenue
Service all distributions of ordinary income and capital gains as well as gross
proceeds from the redemption of Portfolio shares, except in the case of exempt
shareholders, which includes most corporations. Pursuant to the backup
withholding provisions of the Code, distributions of any taxable income and
capital gains and proceeds from the redemption of Fund shares may be subject to
withholding of federal income tax at the current maximum federal tax rate of 31
percent in the case of non-exempt shareholders who fail to furnish the Fund with
their taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. If the backup withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in additional shares, will be reduced by the amounts required
to be withheld. Corporate and other exempt shareholders should provide the Fund
with their taxpayer identification numbers or certify their exempt status in
order to avoid possible erroneous application of backup withholding. The Fund
reserves the right to refuse to open an account for any person failing to
certify the person's taxpayer identification number.
The Fund will not be subject to corporate income tax in the State of Delaware as
long as its qualifies as regulated investment companies for federal income tax
purposes. Distributions and the transactions referred to in the preceding
paragraphs may be subject to state and local income taxes, and the tax treatment
thereof may differ from the federal income tax treatment.
The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
In addition, the foregoing discussion of tax law is based on existing provisions
of the Code, existing and proposed regulations thereunder, and current
administrative rulings and court decisions, all of which are subject to change.
Any such charges could affect the validity of this discussion. The discussion
also represents only a general summary of tax law and practice currently
applicable to the Fund and certain shareholders therein, and, as such, is
subject to change. In particular, the consequences of an investment in shares of
the Fund under the laws of any state, local or foreign taxing jurisdictions are
not discussed herein. Each prospective investor should consult his or her own
tax advisor to determine the application of the tax law and practice in his or
her own particular circumstances.
TRUSTEES AND EXECUTIVE OFFICERS
The Trustees of the Trust, who were elected for an indefinite term by the
initial shareholders of the Trust, are responsible for the overall management of
the Trust, including general supervision and review of the investment activities
of the Fund. The Trustees, in turn, elect the officers of the Trust, who are
responsible for administering the day-to-day operations of the Trust and its
separate series.
B-15
<PAGE>
The current Trustees and officers, their affiliations, dates of birth and
principal occupations for the past five years are set forth below. Unless noted
otherwise, each person has held the position listed for a minimum of five years.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME, ADDRESS AND AGE WITH TRUST PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
--------------------- ---------- ----------------------------------------------
<S> <C> <C>
George J. Rebhan, 7/10/34 Trustee Retired. Formerly, President Hotchkis and Wiley
1920 Mission St. Fund (mutual funds) from 1985 to 1993.
South Pasadena, CA 91030
Ashley T. Rabun 5/10/52 Trustee Founder and Chief Executive Officer,
2161 India St. InvestorReach, Inc. (financial services and
San Diego, CA 92101 marketing and distribution Consulting). Formerly,
Partner and Director, Nicholas-Applegate Capital
Management (investment management) from 1992 to
1996.
James Clayburn LaForce 12/28/28 Trustee Dean Emeritus, John E. Anderson Graduate School
P.O. Box 1595 of Management, University of California, Los
San Diego, CA 92101 Angeles.
Robert H. Wadsworth* 1/25/40 Trustee and President of Investment Company Administration,
4455 Camelback Rd. President LLC ("ICA") (mutual fund administrator and the
Phoenix, AZ 85018 Trust's Administrator) and First Fund
Distributors, Inc. (registered broker-dealer and
the Fund's Distributor).
Robert M. Slotky* 6/16/47 Treasurer Senior Vice President, ICA since May 1997.
2020 E. Financial Way Formerly, instructor of accounting at California
Glendora, CA 91741 State University-Northridge (1997); Chief
Financial Officer, Wanger Asset Management L.P.
and Treasurer of Acorn Investment Trust
(1992-1996).
</TABLE>
----------
* Indicates an "interested person" of the Trust as defined in the 1940 Act.
B-16
<PAGE>
Set forth below is the rate of compensation received by the following Trustees
from all portfolios of the Trust. This total amount is allocated among the
portfolios. Disinterested Trustees receive an annual retainer of $7,500. The
Trustees also receive a fee of $750 for any special meeting or committee meeting
attended on a date other than that of a regularly scheduled meeting.
Disinterested trustees are also reimbursed for expenses in connection with each
Board meeting attended. No other compensation or retirement benefits were
received by any Trustee or officer from the portfolios of the Trust.
NAME OF TRUSTEE TOTAL ANNUAL COMPENSATION
--------------- -------------------------
George J. Rebhan $7,500
Ashley T. Rabun $7,500
James Clayburn LaForce $7,500
As of the date of this SAI, the Trustees and officers of the Trust as a group
did not own more than 1% of the outstanding shares of the Fund.
THE FUND'S INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided to the
Fund by Astrop Research Corporation, the Advisor, pursuant to an Investment
Advisory Agreement. (the "Advisor Agreement"). As compensation, the Fund pays
the Advisor a monthly management fee (accrued daily) based upon the average
daily net assets of the Fund at the annual rate of 0.95%.
The Advisory Agreement continues in effect for successive annual periods so long
as such continuation is approved at least annually by the vote of (1) the Board
of Trustees of the Trust (or a majority of the outstanding shares of the Fund,
and (2) a majority of the Trustees who are not interested persons of any party
to the Advisory Agreement, in each case cast in person at a meeting called for
the purpose of voting on such approval. The Advisory Agreement may be terminated
at any time, without penalty, by either party to the Advisory Agreement upon
sixty days' written notice and is automatically terminated in the event of its
"assignment," as defined in the 1940 Act.
THE FUND'S ADMINISTRATOR
The Fund has an Administration Agreement with Investment Company Administration,
LLC (the "Administrator"), a corporation owned and controlled in part by Mr.
Wadsworth with offices at 4455 E. Camelback Rd., Ste. 261-E, Phoenix, AZ 85018.
The Administration Agreement provides that the Administrator will prepare and
coordinate reports and other materials supplied to the Trustees; prepare and/or
supervise the preparation and filing of all securities filings, periodic
financial reports, prospectuses, statements of additional information, marketing
materials, tax returns, shareholder reports and other regulatory reports or
filings required of the Fund; prepare all required notice filings necessary to
maintain the Fund's ability to sell shares in all states where the Fund
currently does, or intends to do business; coordinate the preparation, printing
and mailing of all materials (e.g., Annual Reports) required to be sent to
shareholders; coordinate the preparation and payment of Fund related expenses;
monitor and oversee the activities of the Fund's servicing agents (i.e.,
B-17
<PAGE>
transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary the Fund's daily expense accruals; and perform such additional
services as may be agreed upon by the Fund and the Administrator. For its
services, the Administrator receives a monthly fee at the following annual rate:
AVERAGE NET ASSETS FEE OR FEE RATE
------------------ ---------------
Less than $15 million $30,000
$15 to $50 million 0.20%
$50 to $100 million 0.15%
$100 to $150 million 0.10%
Over $150 million 0.05%
THE FUND'S DISTRIBUTOR
First Fund Distributors, Inc., (the "Distributor"), a corporation partially
owned by Mr. Wadsworth, acts as the Fund's principal underwriter in a continuous
public offering of the Fund's shares. After its initial two year term, the
Distribution Agreement between the Fund and the Distributor continues in effect
for periods not exceeding one year if approved at least annually by (I) the
Board of Trustees or the vote of a majority of the outstanding shares of the
Fund (as defined in the 1940 Act) and (ii) a majority of the Trustees who are
not interested persons of any such party, in each case cast in person at a
meeting called for the purpose of voting on such approval. The Distribution
Agreement may be terminated without penalty by the parties thereto upon sixty
days' written notice, and is automatically terminated in the event of its
assignment as defined in the 1940 Act.
The Trust, on behalf of the Fund, has adopted a Distribution Plan in accordance
with Rule 12b-1 (the "Plan") under the 1940 Act that permits the Fund to pay
distribution fees for the sale and distribution of its shares. The Plan provides
that the Fund will pay a fee to the Adviser as Distribution Coordinator at an
annual rate of up to 0.25% of the Fund's average daily net assets. The Plan
provides for the compensation to the Adviser as Distribution Coordinator
regardless of the F distribution expenses. Under the Plan, the Trustees will be
furnished quarterly with information detailing the amount of expenses paid under
the Plan and the purposes for which payments were made. The Plan may be
terminated at any time by vote of a majority of the Trustees of the Trust who
are not interested persons. Continuation of the Plan is considered by such
Trustees no less frequently than annually.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreement, the Advisor determines which securities are
to be purchased and sold by the Fund and which broker-dealers are eligible to
execute the Fund's portfolio transactions. Purchases and sales of securities in
the over-the-counter market will generally be executed directly with a
"market-maker" unless, in the opinion of the Advisor, a better price and
execution can otherwise be obtained by using a broker for the transaction.
B-18
<PAGE>
Purchases of portfolio securities for the Fund also may be made directly from
issuers or from underwriters. Where possible, purchase and sale transactions
will be effected through dealers (including banks) which specialize in the types
of securities which the Fund will be holding, unless better executions are
available elsewhere. Dealers and underwriters usually act as principal for their
own accounts. Purchases from underwriters will include a concession paid by the
issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter that has provided research or other services as discussed
below.
In placing portfolio transactions, the Advisor will use its reasonable efforts
to choose broker- capable of providing the services necessary to obtain the most
favorable price and execution available. The full range and quality of services
available will be considered in making these determinations, such as the size of
the order, the difficulty of execution, the operational facilities of the firm
involved, the firm's risk in positioning a block of securities, and other
factors. In those instances where it is reasonably determined that more than one
broker-dealer can offer the services needed to obtain the most favorable price
and execution available, consideration may be given to those broker-dealers
which furnish or supply research and statistical information to the Advisor that
it may lawfully and appropriately use in its investment advisory capacities, as
well as provide other services in addition to execution services. The Advisor
considers such information, which is in addition to and not in lieu of the
services required to be performed by it under its Agreement with the Fund, to be
useful in varying degrees, but of indeterminable value. Portfolio transactions
may be placed with broker-dealers who sell shares of the Fund subject to rules
adopted by the National Association of Securities Dealers, Inc.
While it is the Fund's general policy to seek first to obtain the most favorable
price and execution available in selecting a broker-dealer to execute portfolio
transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Advisor, even if the specific services are not directly useful to the Fund and
may be useful to the Advisor in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, the
Fund may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Advisor to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker- dealer. The standard of
reasonableness is to be measured in light of the Advisor's overall
responsibilities to the Fund.
Investment decisions for the Fund are made independently from those of other
client accounts or mutual funds ("Funds") managed or advised by the Advisor.
Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts or Funds.
In such event, the position of the Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
B-19
<PAGE>
these client accounts or Funds seeks to acquire the same security as the Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such security. Similarly, the Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts or Funds simultaneously
purchases or sells the same security that the Fund is purchasing or selling,
each day's transactions in such security will be allocated between the Fund and
all such client accounts or Funds in a manner deemed equitable by the Advisor,
taking into account the respective sizes of the accounts and the amount being
purchased or sold. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as the Fund is
concerned. In other cases, however, it is believed that the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund.
The Fund does not effect securities transactions through brokers in accordance
with any fnor does it effect securities transactions through brokers solely for
selling shares of the Fund, although the Fund may consider the sale of shares as
a factor in allocating brokerage. However, as stated above, broker-dealers who
execute brokerage transactions may effect purchase of shares of the Fund for
their customers.
PORTFOLIO TURNOVER
Although the Fund generally will not invest for short-term trading purposes,
portfolio securities may be sold without regard to the length of time they have
been held when, in the opinion of the Advisor, investment considerations warrant
such action. Portfolio turnover rate is calculated by dividing (1) the lesser of
purchases or sales of portfolio securities for the fiscal year by (2) the
monthly average of the value of portfolio securities owned during the fiscal
year. A 100% turnover rate would occur if all the securities in the Fund's
portfolio, with the exception of securities whose maturities at the time of
acquisition were one year or less, were sold and either repurchased or replaced
within one year. A high rate of portfolio turnover (100% or more) generally
leads to transaction costs and may result in a greater number of taxable
transactions. See "Execution of Portfolio Transactions."
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The information provided below supplements the information contained in the
Fund's Prospectus regarding the purchase and redemption of Fund shares.
HOW TO BUY SHARES. The public offering price of Fund shares is the net asset
value. The Fund receives the net asset value. Shares are purchased at the public
offering price next determined after the Transfer Agent receives your order in
proper form. In most cases, in order to receive that day's public offering
price, the Transfer Agent must receive your order in proper form before the
close of regular trading on the New York Stock Exchange ("NYSE"), normally 4:00
p.m., Eastern time.
The NYSE annually announces the days on which it will not be open for trading.
The most recent announcement indicates that it will not be open on the following
days: New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, the NYSE may close on days not included in that announcement.
B-20
<PAGE>
The Trust reserves the right in its sole discretion (i) to suspend the continued
offering of the Fund's shares, (ii) to reject purchase orders in whole or in
part when in the judgment of the Advisor or the Distributor such rejection is in
the best interest of the Fund, and (iii) to reduce or waive the minimum for
initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
HOW TO SELL SHARES. You can sell your Fund shares any day the NYSE is open for
regular trading. The Fund may require documentation for the sale of shares by a
corporation, partnership, agent or fiduciary, or a surviving joint owner.
Contact the Transfer Agent for details.
SIGNATURE GUARANTEES. If you sell shares having a net asset value of $10,000 a
signature guarantee is required. Certain other transactions, including
redemptions, also require a signature guarantee. Signature guarantees may be
obtained from a bank, broker-dealer, credit union (if authorized under state
law), securities exchange or association, clearing agency or savings
institution. A notary public cannot provide a signature guarantee.
DELIVERY OF REDEMPTION PROCEEDS. Payments to shareholders for shares of the Fund
redeemed directly from the Fund will be made as promptly as possible but no
later than seven days after receipt by the Fund's Transfer Agent of the written
request in proper form, with the appropriate documentation as stated in the
Prospectus, except that the Fund may suspend the right of redemption or postpone
the date of payment during any period when (a) trading on the NYSE is restricted
as determined by the SEC or the NYSE is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable; or (c) for such other period as the SEC may permit for the
protection of the Fund's shareholders. Under unusual circumstances, the Fund may
suspend redemptions, or postpone payment for more than seven days, but only as
authorized by SEC rules.
The value of shares on redemption or repurchase may be more or less than the
investor's cost, depending upon the market value of the Fund's portfolio
securities at the time of redemption or repurchase.
TELEPHONE REDEMPTIONS. Shareholders must have selected telephone transactions
privileges on the Account Application when opening a Fund account. Upon receipt
of any instructions or inquiries by telephone from a shareholder or, if held in
a joint account, from either party, or from any person claiming to be the
shareholder, the Fund or its agent is authorized, without notifying the
shareholder or joint account parties, to carry out the instructions or to
respond to the inquiries, consistent with the service options chosen by the
shareholder or joint shareholders in his or their latest Account Application or
other written request for services, including purchasing or redeeming shares of
the Fund and depositing and withdrawing monies from the bank account specified
in the Bank Account Registration section of the shareholder's latest Account
Application or as otherwise properly specified to the Fund in writing.
B-21
<PAGE>
The Transfer Agent will employ these and other reasonable procedures to confirm
that instructions communicated by telephone are genuine; if it fails to employ
reasonable procedures, the Fund and the Transfer Agent may be liable for any
losses due to unauthorized or fraudulent instructions. If these procedures are
followed, an investor agrees, however, that to the extent permitted by
applicable law, neither the Fund nor its agents will be liable for any loss,
liability, cost or expense arising out of any redemption request, including any
fraudulent or unauthorized request. For information, consult the Transfer Agent.
During periods of unusual market changes and shareholder activity, you may
experience delays in contacting the Transfer Agent by telephone. In this event,
you may wish to submit a written redemption request, as described in the
Prospectus. The Telephone Redemption Privilege may be modified or terminated
without notice.
REDEMPTIONS-IN-KIND. The Trust has filed an election under SEC Rule 18f-1
committing to pay in cash all redemptions by a shareholder of record up to
amounts specified by the rule (in excess of the lesser of (i) $250,000 or (ii)
1% of the Fund's assets). The Fund has reserved the right to pay the redemption
price of its shares in excess of the amounts specified by the rule, either
totally or partially, by a distribution in kind of portfolio securities (instead
of cash). The securities so distributed would be valued at the same amount as
that assigned to them in calculating the net asset value for the shares being
sold. If a shareholder receives a distribution in kind, the shareholder could
incur brokerage or other charges in converting the securities to cash.
AUTOMATIC INVESTMENT PLAN. As discussed in the Prospectus, the Fund provides an
Automatic Investment Plan for the convenience of investors who wish to purchase
shares of the Fund on a regular basis. All record keeping and custodial costs of
the Automatic Investment Plan are paid by the Fund. The market value of the
Fund's shares is subject to fluctuation, so before undertaking any plan for
systematic investment, the investor should keep in mind that this plan does not
assure a profit nor protect against depreciation in declining markets.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of shares of
the Fund will be determined once daily as of the close of public trading on the
NYSE (normally 4:00 p.m., Eastern time) on each day that the NYSE is open for
trading. The Fund does not expect to determine the net asset value of its shares
on any day when the NYSE is not open for trading even if there is sufficient
trading in its portfolio securities on such days to materially affect the net
asset value per share. However, the net asset value of the Fund's shares may be
determined on days the NYSE is closed or at times other than 4:00 p.m. if the
Board of Trustees decides it is necessary.
B-22
<PAGE>
In valuing the Fund's assets for calculating net asset value, readily marketable
portfolio securities listed on a national securities exchange or on NASDAQ are
valued at the last sale price on the business day as of which such value is
being determined. If there has been no sale on such exchange or on NASDAQ on
such day, the security is valued at the closing bid price on such day. Readily
marketable securities traded only in the over-the-counter market and not on
NASDAQ are valued at the current or last bid price. If no bid is quoted on such
day, the security is valued by such method as the Board of Trustees of the Trust
shall determine in good faith to reflect the security's fair value. All other
assets of the Fund are valued in such manner as the Board of Trustees in good
faith deems appropriate to reflect their fair value.
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
From time to time, the Fund may state its total return in advertisements and
investor communications. Total return may be stated for any relevant period as
specified in the advertisement or communication. Any statements of total return
will be accompanied by information on the Fund's average annual compounded rate
of return for the most recent one, five and ten year periods, or shorter periods
from inception, through the most recent calendar quarter. The Fund may also
advertise aggregate and average total return information over different periods
of time.
The Fund's total return may be compared to relevant indices, including Standard
& Poor's 500 Composite Stock Index and indices published by Lipper Analytical
Services, Inc. From time to time, evaluations of the Fund's performance by
independent sources may also be used in advertisements and in information
furnished to present or prospective investors in the Fund.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's total return for any period should
not be considered as a representation of what an investment may earn or what an
investor's total return may be in any future period.
The Fund's average annual compounded rate of return is determined by reference
to a hypothetical $1,000 investment that includes capital appreciation and
depreciation for the stated period, according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial purchase order of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase
at the end of the period
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<PAGE>
Aggregate total return is calculated in a similar manner, except that the
results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period.
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through periodic
reports. Financial statements certified by independent public accountants will
be submitted to shareholders at least annually.
Firstar Institutional Custody Services, located at 425 Walnut St., Cincinnati,
Ohio 45201 acts as Custodian of the securities and other assets of the Fund. ICA
Fund Services Corp., 4455 East Camelback Rd., Ste. 261-E, Phoenix, AZ 85018,
acts as the Fund's transfer and shareholder service agent. The Custodian and
Transfer Agent do not participate in decisions relating to the purchase and sale
of securities by the Fund.
Tait, Weller & Baker, 8 Penn Center Plaza, Philadelphia, PA 19103, are the
independent auditors for the Fund.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th Floor, San
Francisco, California 94104, are legal counsel to the Fund.
The Trust was organized as a Delaware business trust on April 27, 1999. The
Agreement and Declaration of Trust permits the Board of Trustees to issue an
limited number of full and fractional shares of beneficial interest, without par
value, which may be issued in any number of series. The Board of Trustees may
from time to time issue other series, the assets and liabilities of which will
be separate and distinct from any other series.
Shares issued by the Fund have no preemptive, conversion, or subscription
rights. Shareholders have equal and exclusive rights as to dividends and
distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Advisory
Agreement); all series of the Trust vote as a single class on matters affecting
all series jointly or the Trust as a whole (e.g., election or removal of
Trustees). Voting rights are not cumulative, so that the holders of more than
50% of the shares voting in any election of Trustees can, if they so choose,
elect all of the Trustees. While the Trust is not required and does not intend
to hold annual meetings of shareholders, such meetings may be called by the
Trustees in their discretion, or upon demand by the holders of 10% or more of
the outstanding shares of the Trust, for the purpose of electing or removing
Trustees.
The Boards of the Trust, the Advisor and the Distributor have adopted Codes of
Ethics under Rule 17j-1 of the 1940 Act. These Codes permit, subject to certain
conditions, personnel of the Advisor and Distributor to invest in securities
that may be purchased or held by the Fund.
B-24
<PAGE>
APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations or protective elements
may be of greater amplitude or there may be other elements present which make
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
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<PAGE>
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospectus of ever attaining any
real investment standing.
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
modified 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; athe modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA are highest grade debt obligations. This rating indicates
an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC, C: Bonds rated BB, B, CCC, CC and C are regarded on balance as
predominantly speculative with respect to capacity to pay interest and repay
principal BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Bonds rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
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<PAGE>
CCC: Bonds rated CCC have a currently identifiable vulnerability to default and
are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
additional of a plus or minus sign to show relative standing with the major
categories.
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APPENDIX B
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Prime-1 -- Issuers (or related supporting institutions) rated "Prime-1" have a
superior ability for repayment of senior short-term debt obligations. "Prime-1"
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in w industries, high rates of return
on funds employed, conservative capitalization structures with moderate reliance
on debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well-established access
to a range of financial markets and assured sources of alternate liquidity.
Prime-2 -- Issuers (or related supporting institutions) rated "Prime-2" have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
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