[SYM FINANCIAL CORPORATION LOGO]
PROSPECTUS
JANUARY 2, 2001
<PAGE>
[SYM FINANCIAL CORPORATION LOGO]
SYM SELECT GROWTH FUND,
A SERIES OF TRUST FOR INVESTMENT MANAGERS
The SYM Select Growth Fund seeks long-term growth of capital. The Fund will
pursue this objective by investing primarily in the common stocks of domestic
companies with the potential for growth.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus
is January 2, 2001
--------------------------------------------------------------------------------
1
<PAGE>
TABLE OF CONTENTS
Risk Return Summary ........................................................ 3
Performance Information .................................................... 5
Fees and Expenses .......................................................... 6
Investment Advisor ......................................................... 7
Shareholder Information .................................................... 8
Pricing of Fund Shares ..................................................... 11
Dividends and Distributions ................................................ 12
Tax Consequences ........................................................... 12
--------------------------------------------------------------------------------
2
<PAGE>
RISK RETURN SUMMARY
--------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT GOAL?
The Fund seeks long-term growth of capital.
Of course, there can be no guarantee that the Fund will achieve its
investment objective. This investment objective may be changed only by approval
of the Fund's shareholders. You will be notified of any other changes that are
material and, if such changes are made, you should consider whether the Fund
remains an appropriate investment for you.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
Under normal circumstances, at least 65% of the Fund's total assets will be
invested in the common stocks of companies selected for their growth potential.
The Fund will invest primarily in the common stocks of domestic companies of any
size, from larger, well-established companies to smaller, emerging growth
companies. The Fund considers companies with a market capitalization of under $1
billion to be small-size companies, companies with a market capitalization from
$1 billion to $5 billion to be medium-size companies and those with a market
capitalization in excess of $5 billion to be large-size companies. Many
large-size companies may be considered to be "multi-national" due to the fact
that they have operations in foreign countries.
The Advisor intends to structure the Fund's portfolio so that it will
select and maintain a "core" position of between 30 and 50 stocks.
The Advisor is a top down tactical asset allocation investment firm. This
investment process begins with an analysis of the economy. This includes
identifying current and projected economic themes as well as evaluating
quantitative economic indicators (i.e., money supply, housing starts,
employment, etc.)
Once the "big picture" is identified, the Advisor determines the
sectors/industries that are best positioned to take advantage of the developing
economic environment.
As the appropriate sectors/industries are identified, the Advisor "drills
down" to the individual security level of the respective sector/industry to
identify the market leaders by using fundamental and technical analysis. It is
the Advisor's opinion that "market leaders" are companies with above-average or
accelerating earnings growth that have the potential to produce above-average
rates of return compared to other companies in the same sector/industry. A stock
selection is made from this universe of market leaders.
The Advisor will allocate Fund assets among the appropriate
sectors/industries with the possibility of over-weighting specific
sectors/industries that the Advisor believes have the most appreciation
opportunity.
--------------------------------------------------------------------------------
3
<PAGE>
The Advisor will focus on companies that:
* have experienced above-average, long-term growth in earnings;
* have excellent prospects for future growth; or
* are undervalued relative to the company's long-term earnings
prospects, the current market value of the company's assets, or the
domestic equity markets generally.
The Fund typically will sell a stock when the Advisor determines that the
attributes that led to its purchase no longer exist. Securities may also be sold
when the Advisor believes a stock has reached its appreciation potential or when
a company's fundamentals and corresponding stock price have deteriorated. The
Advisor will consider selling a security when, through appreciation in value,
that security represents a greater proportion of the Fund's assets than the
Advisor believes is appropriate in the current market. The Advisor will also
consider selling a security when the Advisor believes that security has the
potential to decline 20% or more in value.
The Fund anticipates that its portfolio turnover rate will be approximately
100%. A high portfolio turnover rate (100% or more) has the potential to result
in the realization and distribution to shareholders of higher capital gains.
This may mean that you would be likely to have a higher tax liability. A high
portfolio turnover rate also leads to higher transaction costs, which could
negatively affect the Fund's performance.
Under normal market conditions, the Fund will stay fully invested in common
stocks. However, the Fund may temporarily depart from its principal investment
strategies by making short term investments in cash equivalents in response to
adverse market, economic, or political conditions. This may result in the Fund
not achieving its investment objective.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
As with all mutual funds, there is the risk that you could lose money on
your investment in the Fund. For example, the following risks could affect the
value of your investment:
MANAGEMENT RISK. Management risk means that the value of your investment in
the Fund varies with the success or failure of the Advisor's investment
strategies and the Advisor's research, analysis and security selection
decisions. If the Advisor's investment strategies do not produce the expected
results, your investment could be diminished or even lost.
MARKET RISK. The value of a share of the Fund - its "net asset value" or
"NAV"- depends upon the market value of all of the Fund's investments. The
principal risk of investing in the Fund is that the market value of securities
held by the Fund will move up and down. These up and down fluctuations, which
can occur rapidly and unpredictably, may cause the
--------------------------------------------------------------------------------
4
<PAGE>
Fund's investments to be worth less than the price originally paid, or less than
it was worth at an earlier time; this in turn will affect the Fund's net asset
value per share. Market risk may affect a single company, industry or sector of
the economy, or the market as a whole.
MULTI-NATIONAL COMPANY RISK. To the extent the Fund invests in the
securities of multi-national companies, the Fund will be subject to risks not
typically associated with investing in the securities of domestic companies with
no foreign exposure. These risks include changes in currency rates and exchange
control regulations, future political and economic developments and the
possibility of seizure or nationalization of companies, or the imposition of
withholding taxes on income.
SMALLER COMPANY RISK. Investing in securities of smaller companies may
involve greater risk than investing in larger companies because they can be
subject to more abrupt or erratic price share changes than larger companies.
Small companies may have limited product lines, markets or financial resources
and their management may be dependent on a limited number of key individuals.
Securities of these companies may have limited market liquidity and their share
prices can be extremely volatile.
OVER-WEIGHTING RISK. To the extent the Fund's investments in a particular
industry or industry sector are over-weighted, events may occur that impact that
industry or industry sector more significantly than the stock market as a whole.
WHO MAY WANT TO INVEST IN THE FUND? The Fund may be appropriate for
investors who:
* Are pursuing a long-term investment horizon
* Want to add an investment in stocks with a growth potential to
diversify their equity portfolio
* Can accept the greater risks of investing in a portfolio with
significant holdings in common stocks
The Fund may not be appropriate for investors who:
* Need regular income or stability of principal
* Are pursuing a short-term goal
PERFORMANCE INFORMATION
--------------------------------------------------------------------------------
Because the Fund has been in operation for less than a full calendar year, its
total return bar chart and performance table have not been included.
--------------------------------------------------------------------------------
5
<PAGE>
FEES AND EXPENSES
--------------------------------------------------------------------------------
The following table describes the fees and expenses that a shareholder in the
Fund will pay.
SHAREHOLDER FEES
(Fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases ................... None
Maximum deferred sales charge (load) ............................... None
ANNUAL OPERATING EXPENSES
(Expenses that are deducted from Fund assets)
Management Fees .................................................... 1.00%
Other Expenses* .................................................... 0.50%
----
Total Annual Fund Operating Expenses ............................... 1.50%
====
----------
* Other expenses are estimated for the first fiscal year of the Fund. The
Advisor has contractually agreed to reduce its fees and/or pay expenses of
the Fund for an indefinite period, but not less than one year, to ensure that
Total Annual Fund Operating Expenses will not exceed 1.50% per year. The
Advisor may be reimbursed for any waiver of its fees or expenses paid on
behalf of the Fund if the Fund's expenses are less than the limit agreed to
by the Fund. The Trustees may terminate this expense reimbursement
arrangement at any time.
EXAMPLE
Use this example to compare the costs of investing in the Fund to those of
investing in other mutual funds. Of course, your actual costs may be higher or
lower.
This example assumes that you invest $10,000 in the Fund for the time
periods indicated. The Example also assumes that your investment has a 5% return
each year, that dividends and distributions are reinvested and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, under the assumptions, your costs would be:
One Year ................................................. $153
Three Years .............................................. $474
--------------------------------------------------------------------------------
6
<PAGE>
INVESTMENT ADVISOR
--------------------------------------------------------------------------------
SYM Financial Corporation is the investment advisor to the Fund. The
Advisor's address is 100 Capital Drive, P.O. Box 50, Warsaw, IN 46581. Founded
in 1968, the Advisor provides investment advisory services to individual and
institutional clients and has assets under management in excess of $500 million.
The Advisor provides the Fund with advice on buying and selling securities. The
Advisor also furnishes the Fund with office space and certain administrative
services and provides most of the personnel needed by the Fund. For its
services, the Fund pays the Advisor a monthly management fee which is calculated
at the annual rate of 1.00% of the Fund's average daily net assets.
PORTFOLIO MANAGER
Mr. Neil M. Donahoe is responsible for the management of the Fund's
portfolio. Mr. Donahoe, Vice President and leader of the Advisor's investment
committee, has been associated with the Advisor since 1987. During this time,
Mr. Donahoe has functioned as a financial advisor, securities analyst and
broker. As leader of the Advisor's investment committee, Mr. Donahoe is
responsible for all of the Advisor's investment activities. Mr. Donahoe has been
a Certified Financial Planner since 1986 and received a Masters Degree in
Financial Planning in 1996. Mr. Donahoe has been in the investment industry
since 1983, having had experience serving both individual and institutional
investors.
EXPENSE LIMITATION AGREEMENT
The Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce its fees and/or pay expenses of the Fund for an
indefinite period to ensure that Total Fund Operating Expenses will not exceed
1.50% of average daily net assets annually. Any reduction in advisory fees or
payment of expenses made by the Advisor are subject to reimbursement by the Fund
if requested by the Advisor in subsequent fiscal years. The Fund must pay its
current ordinary operating expenses before the Advisor is entitled to any
reimbursement of fees and/or expenses. Under the expense limitation provision of
the Investment Advisory Agreement, reimbursements made by the Advisor in the
Fund's first three years of operation remain eligible for reimbursement as
follows: reimbursements incurred in the first and second years of the Fund's
operation are eligible for reimbursement through the end of the Fund's sixth
fiscal year; reimbursements made in the third year of operation are eligible for
reimbursement through the end of the seventh fiscal year. Before the Advisor may
receive any such reimbursement, the Trustees must review and approve it. The
Trustees may terminate this expense reimbursement arrangement at any time.
--------------------------------------------------------------------------------
7
<PAGE>
SHAREHOLDER INFORMATION
--------------------------------------------------------------------------------
HOW TO BUY SHARES
You may open a Fund account with $2,000 and add to your account at any time
with $100 or more. You may open a retirement plan account with $1,000 and add to
your account at any time with $100 or more. These minimums will be waived if you
open your Fund account through the Automatic Investment Plan (see "Automatic
Investment Plan," below). The minimum investment requirement may be waived from
time to time by the Fund in certain other circumstances.
You may purchase shares of the Fund by check or wire. All purchases by
check must be in U.S. dollars. Third party checks and cash will not be accepted.
A charge may be imposed if your check does not clear. The Fund is not required
to issue share certificates. The Fund reserves the right to reject any purchase
in whole or in part.
BY CHECK
If you are making an initial investment in the Fund, simply complete the
Account Application included with this Prospectus and mail or overnight deliver
(such as FedEx) it with a check (made payable to "SYM Select Growth Fund") to:
SYM Select Growth Fund
c/o ICA Fund Services Corp.
4455 East Camelback Rd., Ste 261E
Phoenix, AZ 85018
If you are making a subsequent purchase, a stub is attached to the account
statement you will receive after each transaction. Detach the stub from the
statement and mail it together with a check made payable to "SYM Select Growth
Fund" to the Fund in the envelope provided with your statement or to the address
noted above. Your account number should be written on the check.
BY WIRE
If you are making an initial investment in the Fund, before you wire funds,
the Transfer Agent must have a completed Account Application. You can mail or
overnight deliver your Account Application to the Transfer Agent at the above
address. You may also fax the Account Application to the Transfer Agent at (602)
522-8172. Upon receipt of your completed Account Application, the Transfer Agent
will establish an account for you. Once your have faxed your new Account
Application, you may instruct your bank to send the wire. Your bank must include
both the name of the Fund
--------------------------------------------------------------------------------
8
<PAGE>
you are purchasing and your name so that monies can be correctly applied. Your
bank should transmit immediately available funds by wire to:
Firstar Bank, N.A. Cinti/Trust
ABA Routing #0420-0001-3
SYM Select Growth Fund
DDA #19945-6856
Account name (shareholder name)
Shareholder account number
If you are making a subsequent purchase, your bank should wire funds as
indicated above. IT IS ESSENTIAL THAT YOUR BANK INCLUDE COMPLETE INFORMATION
ABOUT YOUR ACCOUNT IN ALL WIRE INSTRUCTIONS. If you have questions about how to
invest by wire, you may call the Transfer Agent at (800) 576-8229. Your bank may
charge you a fee for sending a wire to the Fund.
You may buy and sell shares of the Fund through certain brokers (and their
agents) that have made arrangements with the Fund to sell its shares. When you
place your order with such a broker or its authorized agent, your order is
treated as if you had placed it directly with the Fund's Transfer Agent, and you
will pay or receive the next price calculated by the Fund. The broker (or agent)
holds your shares in an omnibus account in the broker's (or agent's) name, and
the broker (or agent) maintains your individual ownership records. The Advisor
may pay the broker (or its agent) for maintaining these records as well as
providing other shareholder services. The broker (or its agent) may charge you a
fee for handling your order. The broker (or agent) is responsible for processing
your order correctly and promptly, keeping you advised regarding the status of
your individual account, confirming your transactions and ensuring that you
receive copies of the Fund's prospectus.
AUTOMATIC INVESTMENT PLAN
For your convenience, the Fund offers an Automatic Investment Plan. Under
this Plan, you authorize the Fund to withdraw from your personal checking
account each month an amount that you wish to invest, which must be at least
$100. If you wish to enroll in this Plan, complete the appropriate section in
the Account Application. The Fund may terminate or modify this privilege at any
time. You may terminate your participation in the Plan at any time by notifying
the Transfer Agent in writing.
RETIREMENT PLANS
The Fund offers Individual Retirement Account ("IRA") plans. You may obtain
information about opening an IRA account by calling (800) 576-8229. If you wish
to open a Keogh, Section 403(b) or other retirement plan, please contact your
securities dealer.
--------------------------------------------------------------------------------
9
<PAGE>
HOW TO SELL SHARES
You may sell (redeem) your Fund shares on any day the New York Stock
Exchange ("NYSE") is open for business either directly to the Fund or through
your investment representative.
You may redeem your shares by simply sending a written request to the
Transfer Agent. You should give your account number and state whether you want
all or some of your shares redeemed. The letter should be signed by all of the
shareholders whose names appear on the account registration. Certain redemptions
require a signature guarantee. Call the Transfer Agent for details. You should
send your redemption request to:
SYM Select Growth Fund
c/o ICA Fund Services Corp.
4455 East Camelback Rd., Ste 261E
Phoenix, AZ 85018
If you complete the Redemption by Telephone portion of the Account
Application, you may redeem all or some of your shares by calling the Transfer
Agent at (800) 576-8229 before the close of regular trading on the NYSE. This is
normally 4:00 p.m., Eastern time. Redemption proceeds will be mailed on the next
business day to the address that appears on the Transfer Agent's records. If you
request, redemption proceeds will be wired on the next business day to the bank
account you designated on the Account Application. The minimum amount that may
be wired is $1,000. Wire charges, if any, will be deducted from your redemption
proceeds. Telephone redemptions cannot be made if you notify the Transfer Agent
of a change of address within 30 days before the redemption request. If you have
a retirement account, you may not redeem shares by telephone.
When you establish telephone privileges, you are authorizing the Fund and
its Transfer Agent to act upon the telephone instructions of the person or
persons you have designated on your Account Application. Redemption proceeds
will be transferred to the bank account you have designated on your Account
Application.
Before acting upon an instruction received by telephone, the Fund and the
Transfer Agent will use procedures to confirm that the telephone instructions
are genuine. These procedures may include recording the telephone call and
asking the caller for a form of personal identification. If the Fund and the
Transfer Agent follow these procedures, they will not be liable for any loss,
expense, or cost arising out of any telephone redemption request that is
reasonably believed to be genuine. This includes any fraudulent or unauthorized
request. The Fund may change, modify or terminate these privileges at any time
upon at least 60 days' notice to shareholders.
--------------------------------------------------------------------------------
10
<PAGE>
You may request telephone redemption privileges after your account is
opened by calling the Transfer Agent at (800) 576-8229 for instructions.
You may have difficulties in making a telephone redemption during periods
of abnormal market activity. If this occurs, you may make your redemption
request in writing.
Payment of your redemption proceeds will be made promptly, but not later
than seven days after the receipt of your written request in proper form. For
example, your redemption may be delayed if you do not sign your written request.
If you made your initial investment by wire, payment of your redemption proceeds
for those shares will not be made until one business day after your completed
Account Application is received by the Fund. If you did not purchase your shares
with a certified check or wire, the Fund may delay payment of your redemption
proceeds for up to 15 days from date of purchase or until your check has
cleared, whichever occurs first.
The Fund may redeem the shares in your account if the value of your account
is less than $500 as a result of redemptions you have made. This does not apply
to retirement plan or Uniform Gifts or Transfers to Minors Act accounts. You
will be notified that the value of your account is less than $500 before the
Fund makes an involuntary redemption. You will then have 30 days in which to
make an additional investment to bring the value of your account to at least
$500 before the Fund takes any action.
The Fund has the right to pay redemption proceeds to you in whole or in
part by a distribution of securities from the Fund's portfolio. It is not
expected that the Fund would do so except in unusual circumstances.
PRICING OF FUND SHARES
--------------------------------------------------------------------------------
The price of the Fund's shares is based on the Fund's net asset value. This
is calculated by dividing the Fund's assets, minus its liabilities, by the
number of shares outstanding. The Fund's assets are the market value of
securities held in its portfolio, plus any cash and other assets. The Fund's
liabilities are fees and expenses owed by the Fund. The number of Fund shares
outstanding is the amount of shares which have been issued to shareholders. The
price you will pay to buy Fund shares or the amount you will receive when you
sell your Fund shares is based on the net asset value next calculated after your
order is received by the Transfer Agent with complete information and meeting
all the requirements discussed in this Prospectus.
The net asset value of the Fund's shares is determined as of the close of
the regular daily trading session on the NYSE. This is normally 4:00 p.m.,
Eastern time. Fund shares will not be priced on days that the NYSE is closed for
trading (including certain U.S. holidays).
11
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
--------------------------------------------------------------------------------
The Fund will make distributions of dividends and capital gains, if any, at
least annually, typically after year end. The Fund will make another
distribution of any additional undistributed capital gains earned during the
12-month period ended October 31 on or about December 31.
All distributions will be reinvested in Fund shares unless you choose one
of the following options: (1) receive dividends in cash while reinvesting
capital gain distributions in additional Fund shares; or (2) receive all
distributions in cash. If you wish to change your distribution option, write to
the Transfer Agent in advance of the payment for the distribution.
TAX CONSEQUENCES
--------------------------------------------------------------------------------
The Fund intends to make distributions of dividends and capital gains.
Dividends are taxable to you as ordinary income. The rate you pay on capital
gain distributions will depend on how long the Fund held the securities that
generated the gains, not on how long you owned your Fund shares. You will be
taxed in the same manner whether you receive your dividends and capital gain
distributions in cash or reinvest them in additional Fund shares.
If you sell your Fund shares, it is considered a taxable event for you.
Depending on the purchase price and the sale price of the shares you sell, you
may have a gain or a loss on the transaction. You are responsible for any tax
liabilities generated by your transaction.
--------------------------------------------------------------------------------
12
<PAGE>
SYM SELECT GROWTH FUND,
A SERIES OF TRUST FOR INVESTMENT MANAGERS (THE "TRUST")
For investors who want more information about the Fund, the following document
is available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Fund and is incorporated by reference into this
Prospectus.
You can get free copies of the SAI, request other information and discuss
your questions about the Fund by contacting the Fund at:
ICA Fund Services Corp.
4455 East Camelback Road Suite 261E
Phoenix, AZ 85018 Telephone:
1-800-576-8229
You can review and copy information including the Fund's SAI at the Public
Reference Room of the Securities and Exchange Commission in Washington, D.C. You
can obtain information on the operation of the Public Reference Room by calling
1-202-942-8090. Reports and other information about the Fund are also available:
* Free of charge from the Commission's EDGAR database on the
Commission's Internet website at http://www.sec.gov., or
* For a fee, by writing to the Public Reference Room of the Commission,
Washington, DC 20549-0102, or
* For a fee, by electronic request at the following e-mail address:
[email protected].
(The Trust's SEC Investment Company Act
file number is 811-09393)
--------------------------------------------------------------------------------
13
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 2, 2001
SYM SELECT GROWTH FUND,
A SERIES OF TRUST FOR INVESTMENT MANAGERS
100 CAPITAL DRIVE
P.O. BOX 50
WARSAW, IN 46581
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 January 2, 2001, as may
be revised, of SYM Select Growth Fund (the "Fund"), a series of Trust for
Investment Managers (the "Trust"). SYM Financial 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-16
Distributions and Tax Information......................................... B-18
Trustees and Executive Officers........................................... B-20
The Fund's Investment Advisor............................................. B-21
The Fund's Administrator.................................................. B-21
The Fund's Distributor.................................................... B-22
Execution of Portfolio Transactions....................................... B-22
Portfolio Turnover........................................................ B-24
Additional Purchase and Redemption Information............................ B-24
Determination of Share Price.............................................. B-26
Performance Information................................................... B-28
General Information....................................................... B-30
Appendix.................................................................. B-30
B-1
<PAGE>
THE TRUST
The Trust for Investment Managers (the "Trust") is an open-end management
investment company organized as a Delaware business trust. The Trust consists of
various series which represent separate investment portfolios. This SAI relates
only to the Fund.
The Trust is registered with the Securities and Exchange Commission ("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 diversified, which under applicable federal law means that
as to 75% of its total assets, not more than 5% may be invested in the
securities of a single issuer and that it may hold no more than 10% of the
voting securities of a single issuer. 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).
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
B-2
<PAGE>
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 33-1/3% 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
any dividends or interest which accrue during the period of the loan. No
securities will be sold short if, after effect is given to any such short sale,
the total market value of all securities sold short would exceed 5% of the value
of the Fund's net assets.
B-3
<PAGE>
Whenever the Fund engages in short sales, its custodian will segregate
liquid assets equal to the difference between (a) the market value of the
securities sold short at the time they were sold short and (b) any assets
required to be deposited with the broker in connection with the short sale (not
including the proceeds from the short sale). The segregated assets are marked to
market daily, provided that at no time will the amount deposited in it plus the
amount deposited with the broker be less than the market value of the securities
at the time they were sold short.
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 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 Investment Company Act of 1940 (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. Government
B-4
<PAGE>
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor of 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 restrictions on 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
there are contractual or legal restrictions on resale to the general public or
B-5
<PAGE>
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 5% of its total assets the
securities of foreign issuers that are not publicly traded in the United States,
including American Depositary Receipts (ADRs").
AMERICAN DEPOSITARY RECEIPTS. 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, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to 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 accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
could have a significant adverse effect upon the securities markets of such
countries.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. Accordingly, a change in the value of any such currency
against the U.S. dollar will result in a corresponding change in the U.S. dollar
value of the Fund's assets denominated in that currency. Such changes will also
affect the Fund's income. The value of the Fund's assets may also be affected
significantly by currency restrictions and exchange control regulations enacted
from time to time.
B-6
<PAGE>
EURO CONVERSION. Several European countries adopted a single uniform
currency known as the "euro," effective January 1, 1999. The euro conversion,
that will take place over a several-year period, could have potential adverse
effects on the Fund's ability to value its portfolio holdings in foreign
securities, and could increase the costs associated with the Fund's operations.
The Fund and the Advisor are working with providers of services to the Fund in
the areas of clearance and settlement of trade in an effect to avoid any
material impact on the Fund due to the euro conversion; there can be no
assurance, however, that the steps taken will be sufficient to avoid any adverse
impact on the Fund.
MARKET CHARACTERISTICS. The Advisor expects that foreign securities in
which the Fund invests will be purchased in over-the-counter markets or on
exchanges located in the countries in which the principal offices of the issuers
of the various securities are located, if that is the best available market.
Foreign exchanges and markets may be more volatile than those in the United
States. While growing in volume, they usually have substantially less volume
than U.S. markets, and the Fund's foreign securities may be less liquid and more
volatile than U.S. securities. Moreover, settlement practices for transactions
in foreign markets may differ from those in United States markets, and may
include delays beyond periods customary in the United States. Foreign security
trading practices, including those involving securities settlement where Fund
assets may be released prior to receipt of payment or securities, may expose the
Fund to increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer.
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 certain 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.
COSTS. To the extent that the Fund invests in foreign securities, its
expense ratio is likely to be higher than those of investment companies
investing only in domestic securities, since the cost of maintaining the custody
of foreign securities is higher.
OPTIONS ON SECURITIES AND SECURITIES INDICES
PURCHASING PUT AND CALL OPTIONS. The Fund is authorized to purchase put and
call options with respect to securities which are otherwise eligible for
purchase by the Fund and with respect to various stock indices subject to
certain restrictions. Put and call options are derivative securities traded on
United States and foreign exchanges. The Fund will engage in trading of such
derivative securities exclusively for hedging purposes.
If the Fund purchases a put option, the Fund acquires the right to sell the
underlying security at a specified price at any time during the term of the
option (for "American-style" options) or on the option expiration date (for
B-7
<PAGE>
"European-style" options). Purchasing put options may be used as a portfolio
investment strategy when the Advisor perceives significant short-term risk but
substantial long-term appreciation for the underlying security. The put option
acts as an insurance policy, as it protects against significant downward price
movement while it allows full participation in any upward movement. If the Fund
holds a stock which the Advisor believes has strong fundamentals, but for some
reason may be weak in the near term, the Fund may purchase a put option on such
security, thereby giving itself the right to sell such security at a certain
strike price throughout the term of the option. Consequently, the Fund will
exercise the put only if the price of such security falls below the strike price
of the put. The difference between the put's strike price and the market price
of the underlying security on the date the Fund exercises the put, less
transaction costs, is the amount by which the Fund hedges against a decline in
the underlying security. If during the period of the option the market price for
the underlying security remains at or above the put's strike price, the put will
expire worthless, representing a loss of the price the Fund paid for the put,
plus transaction costs. If the price of the underlying security increases, the
premium paid for the put option less any amount for which the put may be sold
reduces the profit the Fund realizes on the sale of the securities.
If the Fund purchases a call option, it acquires the right to purchase the
underlying security at a specified price at any time during the term of the
option. The purchase of a call option is a type of insurance policy to hedge
against losses that could occur if the Fund has a short position in the
underlying security and the security thereafter increases in price. The Fund
will exercise a call option only if the price of the underlying security is
above the strike price at the time of exercise. If during the option period the
market price for the underlying security remains at or below the strike price of
the call option, the option will expire worthless, representing a loss of the
price paid for the option, plus transaction costs. If the Fund purchases the
call option to hedge a short position in the underlying security and the price
of the underlying security thereafter falls, the premium paid for the call
option less any amount for which such option may be sold reduces the profit the
Fund realizes on the cover of the short position in the security.
Prior to exercise or expiration, an option may be sold when it has
remaining value by a purchaser through a "closing sale transaction," which is
accomplished by selling an option of the same series as the option previously
purchased. The Fund generally will purchase only those options for which the
Advisor believes there is an active secondary market to facilitate closing
transactions.
WRITING CALL OPTIONS. The Fund may write covered call options. A call
option is "covered" if the Fund owns the security underlying the call or has an
absolute right to acquire the security without additional cash consideration
(or, if additional cash consideration is required, cash or cash equivalents in
such amount as are held in a segregated account by the Fund's custodian). The
writer of a call option receives a premium and gives the purchaser the right to
buy the security underlying the option at the exercise price. The writer has the
obligation upon exercise of the option to deliver the underlying security
against payment of the exercise price during the option period. If the writer of
an exchange-traded option wishes to terminate his obligation, he may effect a
"closing purchase transaction." This is accomplished by buying an option of the
same series as the option previously written. A writer may not effect a closing
purchase transaction after it has been notified of the exercise of an option.
B-8
<PAGE>
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price, expiration date or both. Also, effecting a
closing transaction allows the cash or proceeds from the concurrent sale of any
securities subject to the option to be used for other investments of the Fund.
If the Fund desires to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
The Fund realizes a gain from a closing transaction if the cost of the
closing transaction is less than the premium received from writing the option or
if the proceeds from the closing transaction are more than the premium paid to
purchase the option. The Fund realizes a loss from a closing transaction if the
cost of the closing transaction is more than the premium received from writing
the option or if the proceeds from the closing transaction are less than the
premium paid to purchase the option. However, because increases in the market
price of a call option will generally reflect increases in the market price of
the underlying security, appreciation of the underlying security owned by the
Fund generally offsets, in whole or in part, any loss to the Fund resulting from
the repurchase of a call option.
STOCK INDEX OPTIONS. The Fund may also purchase put and call options with
respect to the S&P 500 and other stock indices. The Fund may purchase such
options as a hedge against changes in the values of portfolio securities or
securities which it intends to purchase or sell, or to reduce risks inherent in
the ongoing management of the Fund.
The distinctive characteristics of options on stock indices create certain
risks not found in stock options generally. Because the value of an index option
depends upon movements in the level of the index rather than the price of a
particular stock, whether the Fund will realize a gain or loss on the purchase
or sale of an option on an index depends upon movements in the level of stock
prices in the stock market generally rather than movements in the price of a
particular stock. Accordingly, successful use by the Fund of options on a stock
index depends on the Advisor's ability to predict correctly movements in the
direction of the stock market generally. This requires different skills and
techniques than predicting changes in the price of individual stocks.
Index prices may be distorted if circumstances disrupt trading of certain
stocks included in the index, such as if trading were halted in a substantial
number of stocks included in the index. If this happens, the Fund could not be
able to close out options which it had purchased, and if restrictions on
exercise were imposed, the Fund might be unable to exercise an option it holds,
which could result in substantial losses to the Fund. The Fund purchase put or
call options only with respect to an index which the Advisor believes includes a
sufficient number of stocks to minimize the likelihood of a trading halt in the
index.
RISKS OF INVESTING IN OPTIONS. There are several risks associated with
transactions in options on securities and indices. Options may be more volatile
B-9
<PAGE>
than the underlying instruments and, therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves. There are also significant differences
between the securities and options markets that could result in an imperfect
correlation between these markets, causing a given transaction not to achieve
its objective. In addition, a liquid secondary market for particular options may
be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of option of underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of
an exchange or clearing corporation may not at all times be adequate to handle
current trading volume; or one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options), in which event the
secondary market on that exchange (or in that class or series of options) would
cease to exist, although outstanding options that had been issued by a clearing
corporation as a result of trades on that exchange would continue to be
exercisable in accordance with their terms.
A decision as to whether, when and how to use options involves the exercise
of skill and judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected events. The extent to
which the Fund may enter into options transactions may be limited by the
Internal Revenue Code requirements for qualification of the Fund as a regulated
investment company.
In addition, foreign options exchanges do not afford to participants many
of the protections available in United States option exchanges. For example,
there may be no daily price fluctuation limits in such exchanges or markets, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the Fund as an option writer could lose amounts substantially
in excess of its initial investment, due to the margin and collateral
requirements typically associated with such option writing. See "Dealer Options"
below.
DEALER OPTIONS. The Fund may engage in transactions involving dealer
options as well as exchange-traded options. Certain risks are specific to dealer
options. While the Fund might look to a clearing corporation to exercise
exchange-traded options, if the Fund purchases a dealer option it must rely on
the selling dealer to perform if the Fund exercises the option. Failure by the
dealer to do so would result in the loss of the premium paid by the Fund as well
as loss of the expected benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while
dealer options may not. Consequently, the Fund can realize the value of a dealer
option it has purchased only by exercising or reselling the option to the
issuing dealer. Similarly, when the Fund writes a dealer option, the Fund can
close out
B-10
<PAGE>
the option prior to its expiration only by entering into a closing purchase
transaction with the dealer. While the Fund seeks to enter into dealer options
only with dealers who will agree to and can enter into closing transactions with
the Fund, no assurance exists that the Fund will at any time be able to
liquidate a dealer option at a favorable price at any time prior to expiration.
Unless the Fund, as a covered dealer call option writer, can effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) used as cover until the option expires or is exercised. In the event of
insolvency of the other party, the Fund may be unable to liquidate a dealer
option. With respect to options written by the Fund, the inability to enter into
a closing transaction may result in material losses to the Fund. For example,
because the Fund must maintain a secured position with respect to any call
option on a security it writes, the Fund may not sell the assets which it has
segregated to secure the position while it is obligated under the option. This
requirement may impair the Fund's ability to sell portfolio securities at a time
when such sale might be advantageous.
The Staff of the SEC takes the position that purchased dealer options are
illiquid securities. The Fund may treat the cover used for written dealer
options as liquid if the dealer agrees that the Fund may repurchase the dealer
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the dealer option would be considered illiquid only to
the extent the maximum purchase price under the formula exceeds the intrinsic
value of the option. With that exception, however, the Fund will treat dealer
options as subject to the Fund's limitation on illiquid securities. If the SEC
changes its position on the liquidity of dealer options, the Fund will change
its treatment of such instruments accordingly.
FOREIGN CURRENCY OPTIONS
The Fund may buy or sell put and call options on foreign currencies. A put
or call option on a foreign currency gives the purchaser of the option the right
to sell or purchase a foreign currency at the exercise price until the option
expires. The Fund use foreign currency options separately or in combination to
control currency volatility. Among the strategies employed to control currency
volatility is an option collar. An option collar involves the purchase of a put
option and the simultaneous sale of call option on the same currency with the
same expiration date but with different exercise (or "strike") prices.
Generally, the put option will have an out-of-the-money strike price, while the
call option will have either an at-the-money strike price or an in-the-money
strike price. Foreign currency options are derivative securities. Currency
options traded on U.S. or other exchanges may be subject to position limits
which may limit the ability of the Fund to reduce foreign currency risk using
such options.
As with other kinds of option transactions, writing options on foreign
currency constitutes only a partial hedge, up to the amount of the premium
received. The Fund could be required to purchase or sell foreign currencies at
disadvantageous exchange rates, thereby incurring losses. The purchase of an
option on foreign currency may constitute an effective hedge against exchange
rate fluctuations; however, in the event of exchange rate movements adverse to
the Fund's position, the Fund may forfeit the entire amount of the premium plus
related transaction costs.
B-11
<PAGE>
FORWARD CURRENCY CONTRACTS
The Fund may enter into forward currency contracts in anticipation of
changes in currency exchange rates. A forward currency contract is an obligation
to purchase or sell a specific currency at a future date, which may be any fix
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. For example, the Fund might purchase a
particular currency or enter into a forward currency contract to preserve the
U.S. dollar price of securities it intends to or has contracted to purchase.
Alternatively, it might sell a particular currency on either a spot or forward
basis to hedge against an anticipated decline in the dollar value of securities
it intends to or has contracted to sell. Although this strategy could minimize
the risk of loss due to a decline in the value of the hedged currency, it could
also limit any potential gain from an increase in the value of the currency.
FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may invest in futures contracts and in options on futures
contracts as a hedge against changes in market conditions or interest rates. The
Fund trades in such derivative securities for bona fide hedging purposes and
otherwise in accordance with the rules of the Commodity Futures Trading
Commission ("CFTC"). The Fund segregates liquid assets in a separate account
with its Custodian when required to do so by CFTC guidelines in order to cover
its obligation in connection with futures and options transactions.
The Fund does not pay or receive funds upon the purchase or sale of a
futures contract. When it enters into a domestic futures contract, the Fund
deposits in a segregated account with its Custodian liquid assets equal to
approximately 5% of the contract amount. This amount is known as initial margin.
The margin requirements for foreign futures contracts may be different.
The nature of initial margin in futures transactions differs from that of
margin in securities transactions. Futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit on
the contract which is returned to the Fund upon termination of the futures
contract, assuming it satisfies all contractual obligations. Subsequent payments
(called variation margin) to and from the broker will be made on a daily basis
as the price of the underlying stock index fluctuates, to reflect movements in
the price of the contract making the long and short positions in the futures
contract more or less valuable. For example, when the Fund purchases a stock
index futures contract and the price of the underlying stock index rises, that
position will have increased in value and the Fund will receive from the broker
a variation margin payment equal to that increase in value. Conversely, when the
Fund purchases a stock index futures contract and the price of the underlying
stock index declines, the position will be less valuable requiring the Fund to
make a variation margin payment to the broker.
At any time prior to expiration of a futures contract, the Fund may elect
to close the position by taking an opposite position, which will operate to
terminate the Fund's position in the futures contract. A final determination of
variation margin is made on closing the position. The Fund either pays or
receives cash, thus realizing a loss or a gain.
B-12
<PAGE>
STOCK INDEX FUTURES CONTRACTS. The Fund may invest in futures contracts on
stock indices. A stock index futures contracts is a bilateral agreement pursuant
to which the parties agree to take or make delivery of an amount of cash equal
to a specified dollar amount times the difference between the index value at the
close of the last trading day of the contract and the price at which the
contract is originally struck. No physical delivery of the underlying stocks in
the index is made. Currently, stock index futures contracts can be purchased or
sold with respect to various indices on both domestic and foreign exchanges.
FOREIGN CURRENCY FUTURES CONTRACTS. The Fund may use foreign currency
future contracts for hedging purposes. A foreign currency futures contract
provides for the future sale by one party and purchase by another party of a
specified quantity of a foreign currency at a specified price and time. A public
market exists in futures contracts covering several foreign currencies,
including the Australian dollar, the Canadian dollar, the British pound, the
German mark, the Japanese yen, the Swiss franc, and certain multinational
currencies such as the Euro. Other foreign currency futures contracts are likely
to be developed and traded in the future. The Fund will only enter into futures
contracts and futures options which are standardized and traded on a U.S. or
foreign exchange, board of trade, or similar entity, or quoted on an automated
quotation system.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS. There are several risks related
to the use of futures as a hedging device. One risk arises because of the
imperfect correlation between movements in the price of the futures contract and
movements in the price of the securities which are the subject of the hedge. The
price of the future may move more or less than the price of the securities being
hedged. If the price of the future moves less than the price of the securities
which are the subject of the hedge, the hedge will not be fully effective, but
if the price of the securities being hedged has moved in an unfavorable
direction, the Fund would be in a better position than if it had not hedged at
all. If the price of the securities being hedged has moved in a favorable
direction, this advantage will be partially offset by the loss on the future. If
the price of the future moves more than the price of the hedged securities, the
Fund will experience either a loss or a gain on the future which will not be
completely offset by movements in the price of the securities which are subject
to the hedge.
To compensate for the imperfect correlation of movements in the price of
securities being hedged and movements in the price of the futures contract, the
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of securities being hedged if the historical volatility of the
prices of such securities has been greater than the historical volatility over
such time period of the future. Conversely, the Fund may buy or sell fewer
futures contracts if the historical volatility of the price of the securities
being hedged is less than the historical volatility of the futures contract
being used. It is possible that, when the Fund has sold futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of securities held in the Fund's portfolio may decline. If this occurs,
the Fund will lose money on the future and also experience a decline in value in
B-13
<PAGE>
its portfolio securities. However, the Advisor believes that over time the value
of a diversified portfolio will tend to move in the same direction as the market
indices upon which the futures are based.
When futures are purchased to hedge against a possible increase in the
price of securities before the Fund is able to invest its cash (or cash
equivalents) in securities (or options) in an orderly fashion, it is possible
that the market may decline instead. If the Fund then decides not to invest in
securities or options at that time because of concern as to possible further
market decline or for other reasons, it will realize a loss on the futures
contract that is not offset by a reduction in the price of securities purchased.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the securities
being hedged, the price of futures may not correlate perfectly with movement in
the stock index or cash market due to certain market distortions. 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 index or cash market and
futures markets. In addition, the deposit requirements in the futures market are
less onerous than margin requirements in the securities market. Therefore,
increased participation by speculators in the futures market may also cause
temporary price distortions. As a result of price distortions in the futures
market and the imperfect correlation between movements in the cash market and
the price of securities and movements in the price of futures, a correct
forecast of general trends by the Advisor may still not result in a successful
hedging transaction over a very short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Fund
intends to purchase or sell futures only on exchanges or boards of trade where
there appears to be an active secondary market, 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. In such event, it may not be
possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments of
variation margin. When futures contracts have been used to hedge portfolio
securities, such securities will not be sold until the futures contract can be
terminated. In such circumstances, an increase in the price of the securities,
if any, may partially or completely offset losses on the futures contract.
However, as described above, there is no guarantee that the price of the
securities will in fact correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures contract.
Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
B-14
<PAGE>
day and therefore does not limit potential losses, because the limit may prevent
the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses.
Successful use of futures by the Fund depends on the Advisor's ability to
predict correctly movements in the direction of the market. For example, if the
Fund hedges against the possibility of a decline in the market adversely
affecting stocks held in its portfolio and stock prices increase instead, the
Fund will lose part or all of the benefit of the increased value of the stocks
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The Fund may have to sell securities at a time
when it may be disadvantageous to do so.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures contracts or options, the Fund could experience
delays and losses in liquidating open positions purchased or sold through the
broker, and incur a loss of all or part of its margin deposits with the broker.
OPTIONS ON FUTURES CONTRACTS. The Fund may purchase options on the futures
contracts it can purchase or sell, as described above. A futures option gives
the holder, in return for the premium paid, the right to buy (call) from or sell
(put) to the writer of the option a futures contract at a specified price at any
time during the period of the option. Upon exercise, the writer of the option is
obligated to pay the difference between the cash value of the futures contract
and the exercise price. Like the buyer or seller of a futures contract, the
holder or writer of an option has the right to terminate its position prior to
the scheduled expiration of the option by selling, or purchasing an option of
the same series, at which time the person entering into the closing transaction
will realize a gain or loss. There is no guarantee that such closing
transactions can be effected.
Investments in futures options involve some of the same considerations as
investments in futures contracts (for example, the existence of a liquid
secondary market). In addition, the purchase of an option also entails the risk
that changes in the value of the underlying futures contract will not be fully
reflected in the value of the option. Depending on the pricing of the option
compared to either the futures contract upon which it is based, or upon the
price of the securities being hedged, an option may or may not be less risky
than ownership of the futures contract or such securities. In general, the
market prices of options are more volatile than the market prices on the
underlying futures contracts. Compared to the purchase or sale of futures
contracts, however, the purchase of call or put options on futures contracts may
frequently involve less potential risk to the Fund because the maximum amount at
risk is limited to the premium paid for the options (plus transaction costs).
B-15
<PAGE>
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND RELATED OPTIONS. The Fund
will not engage in transactions in futures contracts or related options for
speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase and where the transactions are economically appropriate to
the reduction of risks inherent in the ongoing management of the Fund. The Fund
may not purchase or sell futures or purchase related options if, immediately
thereafter, more than 25% of its net assets would be hedged. The Fund also may
not purchase or sell futures or purchase related options if, immediately
thereafter, the sum of the amount of margin deposits on the Fund's existing
futures positions and premiums paid for such options would exceed 5% of the
market value of the Fund's net assets.
Upon the purchase of futures contracts, the Fund will deposit an amount of
cash or liquid debt or equity securities, equal to the market value of the
futures contracts, in a segregated account with the Fund's Custodian or in a
margin account with a broker to collateralize the position and thereby insure
that the use of such futures is unleveraged.
These restrictions, which are derived from current federal and state
regulations regarding the use of options and futures by mutual funds, are not
"fundamental restrictions" and the Trustees of the Trust may change them if
applicable law permits such a change and the change is consistent with the
overall investment objective and policies of the Fund.
The extent to which the Fund may enter into futures and options
transactions may be limited by the Internal Revenue Code requirements for
qualification of the Fund as a regulated investment company.
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.
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.
B-16
<PAGE>
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 Advisor to be of comparable quality. These rating symbols are
described in the Appendix.
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).
4. The Fund may not purchase or sell real estate, commodities or commodity
contracts, except to the extent described in this SAI with respect to futures
and related options.
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.
B-17
<PAGE>
6. The Fund may not invest 25% or more of the market value of its assets in
the securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
7. With respect to 75% of its assets, the Fund may not invest more than 5%
of its total assets in securities of a single issuer or hold more than 10% of
the voting securities of such issuer. (Does not apply to investment in the
securities of the U.S. Government, its agencies or instrumentalities.)
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.
Except with respect to borrowing, 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.
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.
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 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
B-18
<PAGE>
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. Distributions of 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 computing a shareholder's liability for
the alternative minimum tax.
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.
B-19
<PAGE>
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. The current Trustees and officers, their affiliations, ages 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.
George J. Rebhan (66) Trustee
1920 Mission St., South Pasadena, CA 91030. Retired. Formerly President,
Hotchkis and Wiley Funds. (mutual funds), 1985-93.
B-20
<PAGE>
Ashley T. Rabun (48) Trustee
2161 India St., San Diego, CA 92101. Founder and Chief Executive Officer,
InvestorReach, Inc., (financial services marketing and distribution consulting).
Formerly Partner and Director, Nicholas-Applegate Capital Management, 1992-96
(investment management).
James Clayburn LaForce (73) Trustee
Dean Emeritus, John E. Anderson Graduate School of Management, University
of California, Los Angeles.
Robert H. Wadsworth* (60) Trustee and President
4455 E. Camelback Rd., Suite 261E, Phoenix, AZ 85018. President of the
Wadsworth Group (consulting); President of Investment Company Administration,
LLC ("ICA")(mutual fund administrator and the Trust's Administrator) and First
Fund Distributors, Inc.("FFD")(registered broker-dealer and the Trust's
Distributor).
Thomas W. Marschel* (30) Treasurer
4455E. Camelback Rd., Suite 261E, Phoenix, Arizona 85018. Employed by
Investment Company Administration LLC (since July, 1996); Secretary, Advisors
Series Trust; formerly employed by Bank One, N.A. (From August, 1995 until July,
1996)
B-21
<PAGE>
Chris O. Moser* (51) Secretary
4455 E. Camelback Rd. Suite 261-E, Phoenix, AZ 85018. Employed by
Investment Company Administration, LLC (since July 1996); Formerly employed by
Bank One, N.A. (From August 1995 until July 1996.
----------
* Indicates an "interested person" of the Trust as defined in the 1940 Act.
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 FUNDS INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided to
the Fund by SYM Financial Corporation, the Advisor, pursuant to an Investment
Advisory Agreement (the "Advisory 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 1.00%.
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 FUNDS 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.
B-22
<PAGE>
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.,
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.
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.
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
B-23
<PAGE>
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-dealers 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
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
B-24
<PAGE>
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 formula, nor 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-25
<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. To protect the Fund and its shareholders, a signature
guarantee is required for all written redemption requests over $100,000.
Signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution." These include banks, broker-dealers, credit unions and
savings institutions. A broker-dealer guaranteeing signatures must be a member
of clearing corporation or maintain net capital of at least $100,000. Credit
unions must be authorized to issue signature guarantees. Signature guarantees
will be accepted from any eligible guarantor institution which participates in a
signature guarantee program. A notary public cannot provide a signature
guarantee. Certain other transactions also require 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-26
<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
The net asset value of the Fund's shares will fluctuate and is determined
as of the close of trading on the New York Stock Exchange (the "NYSE")
(generally 4:00 p.m. Eastern time) each business day. 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 for the following holidays: 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-27
<PAGE>
The net asset value per share is computed by dividing the value of the
securities held by the Fund plus any cash or other assets (including interest
and dividends accrued but not yet received) minus all liabilities (including
accrued expenses) by the total number of shares in the Fund outstanding at such
time.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value, at fair value as determined in good faith by the
Advisor and the Trust's Valuation Committee pursuant to procedures approved by
or under the direction of the Board.
Generally, trading in and valuation of foreign securities is substantially
completed each day at various times prior to the close of the NYSE. In addition,
trading in and valuation of foreign securities may not take place on every day
in which the NYSE is open for trading. In that case, the price used to determine
the Fund's net asset value on the last day on which such exchange was open will
be used, unless the Trust's Board of Trustees determines that a different price
should be used. Furthermore, trading takes place in various foreign markets on
days in which the NYSE is not open for trading and on which the Fund's net asset
value is not calculated. Occasionally, events affecting the values of such
securities in U.S. dollars on a day on which the Fund calculates its net asset
value may occur between the times when such securities are valued and the close
of the NYSE that will not be reflected in the computation of the Fund's net
asset value unless the Board or its delegates deem that such events would
materially affect the net asset value, in which case an adjustment would be
made.
The Fund's securities, including ADRs, which are traded on securities
exchanges are valued at the last sale price on the exchange on which such
securities are traded, as of the close of business on the day the securities are
being valued or, lacking any reported sales, at the mean between the last
available bid and asked price. Securities that are traded on more than one
exchange are valued on the exchange determined by the Advisor to be the primary
market. Securities primarily traded in the NASDAQ National Market System for
which market quotations are readily available shall be valued at the last sale
price on the day of valuation, or if there has been no sale on such day, at the
mean between the bid and asked prices. Over-the-counter ("OTC") securities which
are not traded in the NASDAQ National Market System shall be valued at the most
recent trade price. Securities and assets for which market quotations are not
readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Board.
Short-term debt obligations with remaining maturities in excess of 60 days
are valued at current market prices, as discussed above. Short-term securities
with 60 days or less remaining to maturity are, unless conditions indicate
otherwise, amortized to maturity based on their cost to the Fund if acquired
within 60 days of maturity or, if already held by the Fund on the 60th day,
based on the value determined on the 61st day.
Corporate debt securities are valued on the basis of valuations provided by
dealers in those instruments, by an independent pricing service, approved by the
Board, or at fair value as determined in good faith by procedures approved by
the Board. Any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and evaluations
of various relationships between securities and yield to maturity information.
B-28
<PAGE>
All other assets of the Fund are valued in such manner as the Board in good
faith deems appropriate to reflect their fair value.
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
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.
B-29
<PAGE>
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 and audit the Fund's financial statements.
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
unlimited 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-30
<PAGE>
APPENDIX
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 well-established 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".
B-31
