Filed with the Securities and Exchange Commission on November 24, 1999
1933 Act Registration File No. 333-82833
1940 Act File No. 811-09445
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. 3 |X|
Post-Effective Amendment No. |_|
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 3 |X|
INGENUITY CAPITAL TRUST
(Exact Name of Registrant as Specified in Charter)
26888 Almaden Court
Los Altos, CA 94022
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (888) 884-8482
Kendrick W. Kam
Ingenuity Capital Management LLC
26888 Almaden Court
Los Altos, CA 94022
(Name and Address of Agent for Service)
Copies of all communications to:
Roy W. Adams, Jr.
Attorney At Law
1024 Country Club Drive
Suite 135
Moraga, CA 94556
Approximate Date of Proposed Public Offering: As soon as practical after the
effective date of this Registration Statement.
It is proposed that this filing will become effective
_______ immediately upon filing pursuant to paragraph (b)
_______ on ____________ pursuant to paragraph (b)
_______ 60 days after filing pursuant to paragraph (a)(1)
_______ on ____________ pursuant to paragraph (a)(1)
_______ 75 days after filing pursuant to paragraph (a)(2)
_______ on ____________ pursuant to paragraph (a)(2) of Rule 485.
INGENUITY CAPITAL TRUST
THE MEDICAL SPECIALISTS FUND
PROSPECTUS
, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Ingenuity Capital Trust (the "Trust") currently offers one series of shares to
investors, The Medical Specialists Fund (the "Fund"). The Fund is
non-diversified and its investment objective is long-term growth of capital.
Current income is not a consideration when selecting the Fund's investments.
TABLE OF CONTENTS
Risk/Return Summary............................................................4
Investment Objective, Principal Investment Strategies and Related Risks........7
Operation of the Fund..........................................................9
How to Purchase Shares........................................................10
How to Redeem Shares..........................................................12
Shareholder Services..........................................................14
Dividends and Distributions...................................................14
Taxes.........................................................................14
Calculation of Share Price....................................................15
Financial Highlights..........................................................16
RISK/RETURN SUMMARY
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WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Medical Specialists Fund's investment objective is long-term growth of
capital.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
The Medical Specialists Fund seeks to achieve its objective by investing at
least 65% of its assets in the medical/healthcare industry in common stock, of
companies that the Investment Adviser considers to have a strong earnings growth
outlook and potential for capital appreciation. The Investment Adviser defines
the medical/healthcare industry to include cardiovascular medical devices,
minimally invasive surgical tools, pharmaceuticals, biotechnology
pharmaceuticals, generic drugs and managed care providers. The Fund may invest
in the stocks of small, medium and large-sized companies.
WHAT ARE THE PRINCIPAL RISK FACTORS OF INVESTING IN THE FUND?
CONCENTRATION OF INVESTMENTS IN THE MEDICAL/HEALTHCARE INDUSTRY RISKS: The Fund
will be subject to greater risk because of its concentration of investments in
the medical/healthcare industry generally and within specific segments thereof.
Some of the special risks include technological research and development,
obsolescence and greater governmental regulation than many other industries.
Companies in some segments of the medical/healthcare industry may be subject to
short product cycles and aggressive pricing which may increase their volatility.
The value of investments in the medical/healthcare industry can and often does
fluctuate dramatically and may expose you to greater than average financial and
market risk. Additionally, companies in this industry are dependent upon
consumer and business acceptance as new technologies evolve. Concentrating
investments in a single issuer or a group of issuers makes the value of the
Fund's shares more susceptible to adverse developments affecting a single issuer
or industry than a more diversified fund.
STOCK MARKET RISKS: The return on and value of an investment in the Fund will
fluctuate in response to stock market movements. Stocks and other equity
securities are subject to market risks and fluctuations in value due to
earnings, economic conditions and other factors beyond the control of the Fund
or Investment Adviser. As a result, there is a risk that you could lose money by
investing in the Fund.
PORTFOLIO MANAGEMENT RISKS: The strategies used by the portfolio manager in
selecting stocks for the Fund's portfolio may not always be successful. The
stocks selected by the portfolio manager may decline in value or not increase in
value when the stock market in general is rising.
SMALL AND MEDIUM-SIZED COMPANIES RISKS: Small and medium-size companies often
have narrower markets and more limited managerial and financial resources than
larger, more established companies. As a result, their performance can be more
volatile and they face greater risk of business failure, which could increase
the volatility of the Fund's portfolio.
NON DIVERSIFICATION RISKS: The Fund is a non-diversified fund. As such, the Fund
has added risk because it may invest a greater percentage of assets in a more
limited number of issuers compared to other mutual funds.
PERFORMANCE SUMMARY
The bar chart and table show performance information of the Firsthand Medical
Specialists Fund, a series of Firsthand Funds, managed by the Investment
Adviser. The Firsthand Medical Specialists Fund is to be reorganized into the
Fund. The bar chart indicates the risks of investing in the Firsthand Medical
Specialists Fund by showing the changes in its performance from year to year (on
a calendar year basis). The table shows how the Firsthand Medical Specialists
Fund's average annual returns for one-year and since inception compare to those
of broad-based securities market indices. HOW THE FIRSTHAND MEDICAL SPECIALISTS
FUND PERFORMED IN THE PAST IS NOT NECESSARILY AN INDICATION OF HOW THE FUND WILL
PERFORM IN THE FUTURE.
Medical Specialists Fund
Calendar Year Returns as of 12/31
1998 -4.55%
BEST QUARTER: 3 months ending December 31, 1998 31.9%
WORST QUARTER 3 months ending June 30, 1998 -19.7%
AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 1998
One Year Since Inception*
THE MEDICAL SPECIALISTS FUND -4.55% -3.21%
Standard & Poor's 500 Index(1) 28.58% 26.22%
Russell 3000 Healthcare Index(2) ___% ___%
* The Fund commenced the public offering its shares on December 10,
1997, as The Firsthand Medical Specialists Fund, a series of The
Firsthand Funds, a Delaware business trust.
(1) The Standard & Poor's 500 Index is a widely recognized, unmanaged index of
common stock prices.
(2) The Russell 3000 Healthcare Index is comprised of 255 healthcare stocks in
the Russell 3000 (large and small-cap) Index.
EXPENSE INFORMATION
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge (load) imposed on purchases None(1)
Maximum sales charge (load) imposed on reinvested dividends None
Maximum deferred sales charge (load) None
Exchange fee None
Redemption fee None(2)
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees 1.50%
Distribution (12b-1) Fees None
Other Expenses(3) 0.45%
Total Annual Fund Operating Expenses (4) 1.95%
(1) IRA Accounts are assessed a $12.50 annual fee.
(2) The Fund's transfer agent charges a wire redemption fee of $12.
(3) The percentage in "Other Expenses" is based on estimated amounts for the
current fiscal year. The Investment Adviser receives an annual compensation of
0.45% of average daily net assets for Fund administration duties.
From this compensation, the Investment Advisor pays all expenses of the Fund.
(4) Under the Investment Advisory and Management Agreement dated November 24,
1999, the Investment Adviser has contractually agreed that the Fund's total
annual operating expenses will be 1.95% of the Fund's average daily net assets
up to $200 million, 1.90% of such assets from $200 million to $500 million,
1.85% of such assets from $500 million to $1 billion, and 1.80% of such assets
in excess of $1 billion. This arrangement is definite for two years until
November 23, 2001 and will continue thereafter as long as the Fund's Board of
Trustees annually renews the Investment Advisory and Management Agreement.
EXAMPLE:
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. It assumes that you invest
$10,000 in a Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year, your dividends and distributions have been
reinvested, and that the Fund's operating expenses remain the same. Although
your actual cost may be higher or lower, based on these assumptions your costs
would be:
1 YEAR 3 YEAR*
$ 198 $ 612
* The amount shown for the Example's 3-Year operating expenses assumes that the
Investment Advisory and Management Agreement is re-approved by the Fund's Board
of Trustees after the initial 2-year period.
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISK FACTORS
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INVESTMENT OBJECTIVE
The investment objective of the Fund is long-term growth of capital.
PRINCIPAL INVESTMENT STRATEGIES
To achieve its goal of long-term growth of capital, the Fund invests at least
65% of its assets in securities of companies in the medical/healthcare industry.
At any point in time, however, the Fund may invest more than 25% of its assets
in any one segment of the medical/healthcare industry.
The Fund considers the medical/healthcare industry to consist of companies that
are subject to the same factors (economic, regulatory, ETC.) that drive the
medical/healthcare segment of the economy as a whole or are anticipated to be in
the future.
The Fund expects generally that a company in the medical/healthcare industry
would be PRIMARILY engaged in that industry, I.E., a majority of the company's
actual or anticipated (i) products or services, or (ii) assets, revenues or
profits would be related to that industry's markets or related or directed to
other companies within that industry.
The following list illustrates some of the types of medical/healthcare companies
in which the Fund may invest:
o PHARMACEUTICALS
o BIOTECHNOLOGY PHARMACEUTICALS
o GENERIC DRUGS
o MINIMALLY INVASIVE SURGICAL TOOLS
o CARDIOVASCULAR MEDICAL DEVICES
o MANAGED CARE PROVIDERS
The equity securities in which the Fund may invest include common stock,
preferred stock, convertible preferred stock and warrants. The securities
selected will typically be traded on a national securities exchange, the NASDAQ
System or over-the-counter, and may include securities of both large (over $1
billion capitalized) companies as well as smaller (less than $1 billion
capitalized) companies. Although certain of the Fund's investments may produce
dividends, interest or other income, current income is not a consideration in
selecting the Fund's investments.
The Investment Adviser selects securities for the Fund's portfolio by valuing a
company and purchasing securities of the company when the Investment Adviser
believes that the company's value exceeds the market price. The Investment
Adviser values a company by focusing on the company's fundamental worth. A
company's fundamental worth is the value of the basic businesses of the company,
including products, technologies, customer relationships and other sustainable
competitive advantages.
The Investment Adviser considers the following factors when analyzing
fundamental worth of a company:
o assets and earning power;
o price-earnings ratios compared with sales;
o balance sheet strength; and
o a strong competitive position in market share, brand identification,
technological exclusivity, product and service.
The Investment Adviser considers three factors when selling securities from the
Fund's portfolio:
(1) Whether the objective of the Fund has been met;
(2) Whether the Investment Adviser's outlook has changed about the security; and
(3) Whether the security is no longer attractive because it no
longer meets the Fund's criteria for purchase or because of
circumstances impacting the security's value (e.g. unexpected
regulatory delays).
RISK FACTORS
CONCENTRATION OF INVESTMENTS IN THE MEDICAL/HEALTHCARE INDUSTRY RISKS
The Fund will invest primarily in companies within the medical/healthcare
industry. The Fund will be subject to greater risk because of its concentration
of investments in this a single industry. Investments in the medical/healthcare
industry include the risk that the economic prospects, and the share prices, of
companies in the medical/healthcare industry can fluctuate dramatically due to
changes in the regulatory or competitive environments. Additionally, products
and services in the medical/healthcare industry are subject to risk of rapid
obsolescence caused by scientific developments and technological advances. Also,
the medical/healthcare industry generally is more susceptible to effects caused
by changes in the economic climate, broad market swings, moves in a dominant
industry stock or regulatory changes than are most non-medical/healthcare
related industries. Accordingly, investments by the Fund in companies in the
medical/healthcare industry may expose investors to greater than average
financial and market risk.
STOCK MARKET RISKS
The Fund invests primarily in equity securities (principally common stocks),
which by definition entail risk of loss of capital. Investments in equity
securities are subject to inherent market risks and fluctuation in value due to
earnings, economic conditions and other factors beyond the control of the Fund
or the Investment Adviser. Securities in the Fund's portfolio may not increase
as much as the market as a whole and some undervalued securities may continue to
be undervalued for long periods of time. Some securities may be inactively
traded, and thus may not be readily bought or sold. Although profits in some
Fund holdings may be realized quickly, it is not expected that most investments
will appreciate rapidly. The Fund may invest up to 15% of its net assets in
illiquid securities.
SMALL AND MEDIUM-SIZED COMPANIES RISKS
The Fund may, from time to time, invest a substantial portion of its assets in
companies with small or medium-sized capitalization. While small or medium-sized
capitalization companies generally are thought to have potential for rapid
growth, they often involve higher risks because they lack the management
experience, financial resources, product diversification and competitive
strengths of larger corporations. In addition, in many instances the securities
of smaller companies are traded only over-the-counter or on a regional
securities exchange, and the frequency and volume of their trading is
substantially less than is typical of larger companies. Therefore, the
securities of small capitalization companies may be subject to wider price
fluctuations than the fluctuations for larger capitalization companies. When
making large sales of securities having small trading volumes, the Fund may have
to sell portfolio holdings at discounts from quoted prices or may have to make a
series of small sales over an extended period of time.
TEMPORARY DEFENSIVE MEASURES
For defensive purposes, the Fund may temporarily hold all or a portion of its
assets in money market instruments. Such action may help the Fund minimize or
avoid losses during adverse market, economic or political conditions. During
such a period, the Fund may not achieve its investment objective. For example,
should the market advance during this period, the Fund may not participate as
much as it would have if it had been more fully invested.
PORTFOLIO TURNOVER RISKS
The Investment Adviser may engage in active trading of its portfolio securities
to achieve its investment goals. This practice could result in the Fund
experiencing a high turnover rate (100% or more). High portfolio turnover rates
lead to increased costs, could cause you to pay higher taxes and could
negatively affect the Fund's performance.
YEAR 2000 PROBLEM
The Fund and its service providers depend upon the smooth functioning of their
computer systems. Unfortunately, because of the way dates are encoded and
calculated, many computer systems in use today cannot recognize the year 2000,
but revert to 1900 or another incorrect date. Computer failures due to the year
2000 problem could negatively impact the handling of securities trades and
pricing and account services. The Fund has received representation from its
software vendors and service providers regarding their readiness and initiatives
for the Year 2000 issue. However, due to the uncertainty of the Year 2000 issue
and the Fund's reliance on various service providers to perform essential
functions, the Fund could have difficulty calculating its net asset value,
processing orders for share sales and delivering account statements and other
information to shareholders. For instance, brokers and other intermediaries that
hold shareholder accounts may still experience incompatibility problems. It is
important to keep in mind that year 2000 issues may also negatively impact the
companies in which the Fund invests and, by extension, the value of those
companies' shares held by the Fund.
OPERATION OF THE FUND
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THE FUND
The Fund commenced the public offering its shares on December 10, 1997, as The
Firsthand Medical Specialists Fund, a series of The Firsthand Funds
("Firsthand"), a Delaware business trust. The Firsthand Medical Specialists Fund
will be reorganized into the Fund in the near future.
INVESTMENT ADVISER
The Trust retains Ingenuity Capital Management LLC (the "Investment Adviser"),
to manage the investments of the Fund. The Investment Adviser is located at
26888 Almaden Court, Los Altos, California, 94022. Kendrick W. Kam is the
President of the Investment Adviser and also serves as a Trustee of the Trust.
The Investment Adviser has no other assets under management besides the Fund.
The Investment Adviser receives a management fee at the annual rate of 1.50% of
its average daily net assets from the Fund. The Investment Advisory and
Management Agreement requires the Investment Adviser to waive its management
fees and, if necessary, reimburse expenses of the Fund to the extent necessary
to limit each Fund's total operating expenses to 1.95% of its average net assets
up to $200 million, 1.90% of such assets from $200 million to $500 million,
1.85% of such assets from $500 million to $1 billion, and 1.80% of such assets
in excess of $1 billion.
PORTFOLIO MANAGER
Kendrick W. Kam has served as portfolio manager of the Fund ever since its
inception as a series of Firsthand. From 1994 until 1999, prior to becoming
President of the Investment Advisor, Mr. Kam served as portfolio manager for
three Firsthand Funds, which were all technology and medical-related mutual
funds. Prior to 1994, Mr. Kam was co-founder and Vice President of Marketing and
Finance for Novoste Puerto Rico, Inc., a medical device company headquartered in
Aguadilla, Puerto Rico. Mr. Kam has a Bachelor of Science Degree in Finance from
Santa Clara University and a Masters of Business Administration in Marketing
from Stanford University.
FUND ADMINISTRATION, TRANSFER AGENT, AND CUSTODY SERVICES
Ingenuity Capital Management LLC provides administrative services to the Fund.
Firstar Mutual Fund Services, LLC provides transfer agent services to the Fund
and is located in Milwaukee, Wisconsin. Firstar Bank, N.A., serves as custodian
for the Fund.
DISTRIBUTOR
Rafferty Capital Markets, Inc. (the "Underwriter"), serves as principal
underwriter for the Fund and as such, is the exclusive agent for the
distribution of shares of the Fund.
HOW TO PURCHASE SHARES
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OPENING AN ACCOUNT - $10,000 MINIMUM
You may open an account directly through the Fund's Transfer Agent or through a
brokerage firm or financial institution that has agreed to sell the Fund's
shares. An account application is included with this prospectus.
Your initial investment in the Fund ordinarily must be at least $10,000. Lower
minimums are available if you are purchasing shares of the Fund through certain
brokerage firms. If you are investing for an IRA, the minimum initial investment
is $2,000.
ADDITIONAL INVESTMENTS - $50 MINIMUM
You may purchase and add shares to your account through the Fund's Transfer
Agent or through a brokerage firm or financial institution that has agreed to
sell the Fund's shares. The minimum additional investment is $50. Each
additional purchase request must contain the account name and number to permit
proper crediting.
PURCHASING SHARES THROUGH YOUR BROKER
Any order placed with a brokerage firm is treated as if it were placed directly
with the Trust. Your shares will be held in a pooled account in the broker's
name, and the broker will maintain your individual ownership information. In
addition, your brokerage firm may charge you a fee for handling your order. Your
brokerage firm is responsible for processing your order correctly and promptly,
keeping you advised of the status of your individual account, confirming your
transactions and ensuring that you receive copies of the Trust's Prospectus.
Purchase orders given to such agents must be received by the Transfer Agent
prior to 4:00 p.m., eastern time, on any business day to be confirmed at the net
asset value determined as of the close of the regular session of trading on the
New York Stock Exchange on that day. It is the responsibility of agents to
transmit properly completed orders promptly. Agents may charge a fee (separately
negotiated with their customer) for effecting purchase orders.
PURCHASING SHARES BY MAIL
You may also open an account and make an initial investment in the Fund by
sending a check and a completed account application form to:
BY REGULAR MAIL: BY OVERNIGHT MAIL:
Ingenuity Capital Trust Ingenuity Capital Trust
c/o Firstar Mutual Fund Services, LLC c/o Firstar Mutual Fund Services, LLC
P.O. Box 701 615 East Michigan Street
Milwaukee, Wisconsin 53201-0701. Milwaukee, Wisconsin 53202.
NOTE: THE FUND DOES NOT CONSIDER THE U.S. POSTAL SERVICE OR OTHER INDEPENDENT
DELIVERY SERVICES TO BE ITS AGENTS. THEREFORE, DEPOSITS IN THE MAIL OR WITH SUCH
SERVICES, OR RECEIPT AT FIRSTAR MUTUAL FUND SERVICES, LLC'S POST OFFICE BOX OF
PURCHASE APPLICATIONS OR REDEMPTION REQUESTS DO NOT CONSTITUTE RECEIPT BY
FIRSTAR MUTUAL FUND SERVICES, LLC OR THE FUND.
Checks should be made payable to "INGENUITY CAPITAL TRUST." Third party checks
will not be accepted.
PURCHASING SHARES BY WIRE
Provided the Trust has received a completed account application form, you may
also purchase shares of the Funds by bank wire. Please telephone the Transfer
Agent (Nationwide toll-free 1-888-884-8482) for instructions. You should be
prepared to give the name of the Fund in which you wish to purchase shares, the
name in which the account is to be established, the address, telephone number
and taxpayer identification number for the account, and the name of the bank
that will wire the money. Your investment will be made at the next determined
net asset value after your wire is received together with the account
information indicated above. If the Transfer Agent does not timely receive and
complete account information, there may be a delay in the investment of your
money and any accrual of dividends. To make your initial wire purchase, you must
mail a completed account application to the Transfer Agent. Your bank may impose
a charge for sending your wire. There is presently no fee for receipt of wired
funds, but the Transfer Agent reserves the right to charge shareholders for this
service upon thirty days' prior notice to shareholders. You may use the
following wire instructions:
Firstar Bank, N.A.
Milwaukee, WI 53202
ABA #: 075000022
Credit: Firstar Mutual Fund Services, LLC
Account #: 112-952-137
Further Credit: Ingenuity Capital Trust
The Medical Specialists Fund
(name/title on the account) (account #)
WHEN PURCHASE ORDERS ARE RECEIVED
Shares of the Fund are sold on a continuous basis at the net asset value next
determined after the Trust or an agent has received your purchase order.
Purchase orders received by the Transfer Agent prior to 4:00 p.m., eastern time,
on any business day are confirmed at the net asset value determined as of the
close of the regular session of trading on the New York Stock Exchange on that
day.
The Transfer Agent (or your broker) mails you confirmations of all purchases or
redemptions of Fund shares. Certificates representing shares are not issued. The
Trust reserves the rights to limit the amount of investments and to refuse to
sell to any person. If an order to purchase shares is cancelled because your
check does not clear, you will be responsible for any resulting losses or fees
incurred by the Trust or the Transfer Agent in the transaction.
HOW TO REDEEM SHARES
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You may redeem shares of the Fund on any day that the Trust is open for
business. You will receive the net asset value per share next determined after
receipt by the Transfer Agent of your redemption request in the form described
below. Payment is normally made within three business days after tender in such
form, provided that payment in redemption of shares purchased by check will be
effected only after the check has been collected, which may take up to fifteen
days from the purchase date. To eliminate this delay, you may purchase shares of
the Fund by certified check or wire.
REDEEMING BY TELEPHONE
You may redeem shares having a value of less than $50,000 by telephone. The
proceeds will be sent by mail to the address designated on your account or wired
directly to your existing account in any commercial bank or brokerage firm in
the United States as designated on your application. To redeem by telephone,
call the Transfer Agent (Nationwide toll-free 1-888-884-8482). The redemption
proceeds will normally be sent by mail or by wire within three business days
after receipt of your telephone instructions. IRA accounts are not redeemable by
telephone.
The telephone redemption privilege is automatically available to all new
accounts. If you do not want the telephone redemption privilege, you must
indicate this in the appropriate area on your account application or you must
write to the Transfer Agent and instruct them to remove this privilege from your
account.
You may change the bank or brokerage account which you have designated at any
time by writing to the Transfer Agent with your signature guaranteed by any
eligible guarantor institution (including banks, brokers and dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations) or by completing a supplemental
telephone redemption authorization form. Contact the Transfer Agent to obtain
this form. Further documentation will be required to change the designated
account if shares are held by a corporation, fiduciary or other organization.
The Transfer Agent reserves the right to suspend the telephone redemption
privilege with respect to any account if the name(s) or the address on the
account has been changed within the previous 30 days.
Neither the Trust, the Transfer Agent, nor their respective affiliates will be
liable for complying with telephone instructions they reasonably believe to be
genuine or for any loss, damage, cost or expenses in acting on such telephone
instructions. The affected shareholders will bear the risk of any such loss. The
Trust or the Transfer Agent, or both, will employ reasonable procedures to
determine that telephone instructions are genuine. If the Trust and/or the
Transfer Agent do not employ such procedures, they may be liable for losses due
to unauthorized or fraudulent instructions. These procedures may include, among
others, requiring forms of personal identification prior to acting upon
telephone instructions, providing written confirmation of the transactions
and/or tape recording telephone instructions.
REDEEMING BY MAIL
You may redeem any number of shares from your account by sending a written
request to the Transfer Agent. The request must state the number of shares or
the dollar amount to be redeemed and your account number. The request must be
signed exactly as your name appears on the Trust's account records. If the
shares to be redeemed have a value of $50,000 or more, your signature must be
guaranteed by any of the eligible guarantor institutions outlined above. If the
name(s) or the address on your account has been changed within 30 days of your
redemption request, you will be required to request the redemption in writing
with your signature guaranteed, regardless of the value of the shares being
redeemed. Written redemption requests may also direct that the proceeds be
deposited directly in a domestic bank or brokerage account designated on your
account application for telephone redemptions. Proceeds of redemptions requested
by mail are normally mailed within three business days following receipt of
instructions in proper form.
REDEEMING THROUGH BROKER-DEALERS
You may also redeem shares of the Fund by placing a wire redemption request
through a securities broker or dealer. Unaffiliated broker-dealers may charge
you a fee for this service. You will receive the net asset value per share next
determined after receipt by the Trust or its agent of your wire redemption
request. It is the responsibility of broker-dealers to promptly transmit wire
redemption orders.
ADDITIONAL REDEMPTION INFORMATION
If your instructions request a redemption by wire, the proceeds will be wired
directly to your existing account in any commercial bank or brokerage firm in
the United States as designated on your application and you will be charged a
$12 processing fee by the Fund's Transfer Agent. The Trust reserves the right,
upon thirty days' written notice, to change the processing fee. All charges will
be deducted from you account by redemption of shares in your account. Your bank
or brokerage firm may also impose a charge for processing the wire. In the event
that wire transfer of funds is impossible or impractical, the redemption
proceeds will be sent by mail to the designated account.
Redemption requests may direct that the proceeds be deposited directly in your
account with a commercial bank or other depository institution by way of an
Automated Clearing House (ACH) transaction. There is currently no charge for ACH
transactions. Contact the Transfer Agent for more information about ACH
transactions.
At the discretion of the Trust or the Transfer Agent, corporate investors and
other associations may be required to furnish an appropriate certification
authorizing redemptions to ensure proper authorization. The Trust reserves the
right to require you to close your account, other than an IRA account, if at any
time the value of your shares is less than $10,000 (based on actual amounts
invested, unaffected by market fluctuations), or such other minimum amount as
the Trust may determine from time to time. After notification to you of the
Trust's intention to close your account, you will be given sixty days to
increase the value of your account to the minimum amount.
The Trust reserves the right to suspend the right of redemption or to postpone
the date of payment for more than three business days under unusual
circumstances as determined by the Securities and Exchange Commission. Under
unusual circumstances, when the Board of Trustees deems it appropriate, the Fund
may make payment for shares redeemed in portfolio securities of the Fund taken
at current value.
SHAREHOLDER SERVICES
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Contact the Transfer Agent (nationwide toll-free 1-888-884-8482) for additional
information about the shareholder services described below.
RETIREMENT PLANS
You may purchase shares of the Fund for your individual retirement plans. Please
call the Transfer Agent at the above number for the most current listing and
appropriate disclosure documentation on how to open a retirement account.
DIRECT DEPOSIT PLANS
Shares of the Fund may be purchased through direct deposit plans offered by
certain employers and government agencies. These plans enable a shareholder to
have all or a portion of his or her payroll or Social Security checks
transferred automatically to purchase shares of the Fund.
AUTOMATIC INVESTMENT PLAN
By completing the Automatic Investment Plan section of the account application,
you may make automatic monthly investments in the Fund from your bank, savings
and loan or other depository institution account. The minimum investment must be
$50 under the plan. The Transfer Agent pays the costs associated with these
transfers, but reserves the right, upon thirty days' written notice, to make
reasonable charges for this service. Your depository institution may impose its
own charge for debiting your account, which would reduce your return from an
investment in the Fund. You may change the amount of the investment or
discontinue the plan at any time by writing to the Transfer Agent.
DIVIDENDS AND DISTRIBUTIONS
- --------------------------------------------------------------------------------
The Fund expects to distribute substantially all of its net investment income
and net realized gains, if any, at least annually. Unless you provide a written
request to receive payments in cash, your dividends and distributions will
automatically be reinvested in additional shares of the Fund. You may indicate
on your application whether or not you wish to have your dividends distributed
in cash payments. All distributions will be based on the net asset value in
effect on the payable date.
If you elect to receive dividends in cash and the U.S. Postal Service cannot
deliver your checks or if your checks remain uncashed for six months, your
dividends may be reinvested in your account at the then-current net asset value.
All future distributions will automatically be reinvested in shares of the Fund.
No interest will accrue on amounts represented by uncashed distribution checks.
TAXES
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The Fund intends to continue to qualify and to be treated as a "regulated
investment company" under Subchapter M of the Code by annually distributing
substantially all of its net investment company taxable income, net tax-exempt
income and net capital gains in dividends to its shareholders and by satisfying
certain other requirements related to the sources of its income and the
diversification of its assets. By so qualifying, the Fund will not be subject to
federal income tax or excise tax on that part of its investment company taxable
income and net realized short-term and long-term capital gains which it
distributes to its shareholders in accordance with the Code's timing
requirements.
Dividends and distributions paid to shareholders (whether received in cash or
reinvested in additional shares) are generally subject to federal income tax and
may be subject to state and local income tax. Dividends from net investment
income and distributions from any excess of net realized short-term capital
gains over net realized capital losses are taxable to shareholders (other than
tax-exempt entities that have not borrowed to purchase or carry their shares of
the Fund) as ordinary income.
Distributions of net capital gains (the excess of net long-term capital gains
over net short-term capital losses) by the Fund to its shareholders are taxable
to you as capital gains, without regard to the length of time you have held your
Fund shares. Capital gains distributions may be taxable at different rates
depending on the length of time the Fund holds its assets.
Redemptions of shares of the Fund are taxable events on which you may realize a
gain or loss.
An exchange is not a tax-free transaction. An exchange of shares pursuant to the
Fund's exchange privilege is treated the same as an ordinary sale and purchase
for federal income tax purposes and you will realize a capital gain or loss.
The Trust will mail a statement to you annually indicating the amount and
federal income tax status of all distributions made during the year. The Fund's
distributions may be subject to federal income tax whether received in cash or
reinvested in additional shares. In addition to federal taxes, you may be
subject to state and local taxes on distributions.
CALCULATION OF SHARE PRICE
- --------------------------------------------------------------------------------
The share price (net asset value) of the shares of the Fund is determined as of
the close of the regular session of trading on the New York Stock Exchange
(normally 4:00 p.m., Eastern Time) on each day the New York Stock Exchange is
open for business and may also be determined on any other day when there is
sufficient trading in a Fund's investments that its net asset value might be
materially affected. The net asset value per share of the Fund is calculated by
dividing the sum of the value of the securities held by the Fund plus cash or
other assets minus all liabilities (including estimated accrued expenses) by the
total number of shares outstanding of the Fund, rounded to the nearest cent. The
price at which a purchase or redemption of Fund shares is effected is based on
the next calculation of net asset value after the order is placed.
Portfolio securities are valued as follows: (1) securities which are traded on
stock exchanges or are quoted by NASDAQ are valued at the last reported sale
price as of the close of the regular session of trading on the New York Stock
Exchange on the day the securities are being valued, or, if not traded on a
particular day, at the most recent bid price, (2) securities traded in the
over-the-counter market, and which are not quoted by NASDAQ, are valued at the
last sale price (or, if the last sale price is not readily available, at the
most recent bid price as quoted by brokers that make markets in the securities)
as of the close of the regular session of trading on the New York Stock Exchange
on the day the securities are being valued, (3) securities which are traded both
in the over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market, and (4) securities (and other
assets) for which market quotations are not readily available are valued at
their fair value as determined in good faith in accordance with consistently
applied procedures established by and under the general supervision of the Board
of Trustees. The net asset value per share of the Fund will fluctuate with the
value of the securities it holds.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights table below is intended to help you understand
the Fund's financial performance. Certain information reflects financial results
for a single Fund share. The total returns in the table represent the rate that
you would have earned or lost on an investment in the Fund (assuming you
reinvested all dividends and distributions). This information has been audited
by Tait, Weller & Baker, whose report, along with the Fund's financial
statements, are included in the Statement of Additional Information, which is
available upon request.
<TABLE>
<S> <C> <C>
Year Period
Ended Ended
12/31/98 12/31/97(A)
Net asset value at beginning of period $10.12 $10.00
Income from investment operations:
Net investment income (loss) (0.10) 0.01
Net realized and unrealized gains (losses) on investments (0.36) 0.11
Total from investment operations (0.46) 0.12
Less distributions:
Dividends from net investment income -- --
Distributions from net realized gains -- --
Total distributions -- --
Net asset value at end of period $9.66 $10.12
Total return (4.55%) 1.20%(B)
Net assets at end of period (millions) $4.5 $2.4
Ratio of expenses to average net assets 1.95% 1.81%(C)
Ratio of net investment income (loss) (1.33%) 1.75%(C)
to average net assets
Portfolio turnover rate 160% 0%
</TABLE>
(A) Represents the period from the commencement of operations (December 10,
1997) through December 31, 1997.
(B) Not Annualized.
(C) Annualized.
Additional information about the Fund is included in the Statement of Additional
Information ("SAI") dated _____________, 1999, which is incorporated by
reference in its entirety. Additional information about the Fund's investments
will be available in the Fund's annual and semiannual reports to shareholders
once the Fund has been in existence for the appropriate time period. In the
Fund's annual report, you will find a discussion of the market conditions and
strategies that significantly affected the Fund's performance during the last
fiscal year.
To obtain a free copy of the SAI, the annual and semiannual reports or other
information about the Fund, or to make shareholder inquiries about the Fund,
please call 1-888-884-8482.
You may review and obtain copies of Fund information (including the SAI) at the
SEC Public Reference Room in Washington, D.C. Please call 1-202-942-8090 for
information relating to the operation of the Public Reference Room. Reports and
other information about the Fund are available on the EDGAR Database on the
SEC's Internet site at http://www.sec.gov. Copies of information may be obtained
after paying a duplicating fee, by electronic request at the following E-mail
address: [email protected], or by writing to the Securities and Exchange
Commission, Public Reference Section, Washington, D.C. 20549-0102.
Investment Act No. 811-09445
INGENUITY CAPTIAL TRUST
THE MEDICAL SPECIALISTS FUND
STATEMENT OF ADDITIONAL INFORMATION
_________________, 1999
This Statement of Additional Information is not a Prospectus. It should be read
in conjunction with the Prospectus of Ingenuity Capital Trust dated
_____________, 1999. A copy of the Prospectus can be obtained by writing the
Trust at 26888 Almaden Court, Los Altos, CA 94022, or by calling the Trust
toll-free at 1-888-884-8482.
TABLE OF CONTENTS
THE TRUST......................................................................3
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS..................................3
INVESTMENT RESTRICTIONS.......................................................10
TRUSTEES AND OFFICERS.........................................................11
INVESTMENT ADVISORY AND OTHER SERVICES........................................13
THE UNDERWRITER...............................................................14
SECURITIES TRANSACTIONS.......................................................14
PORTFOLIO TURNOVER............................................................15
PURCHASE, REDEMPTION AND PRICING OF SHARES....................................16
TAXES.........................................................................17
HISTORICAL PERFORMANCE INFORMATION............................................19
CUSTODIAN.....................................................................21
LEGAL COUNSEL AND AUDITORS....................................................21
FIRSTAR MUTUAL FUND SERVICES, LLC.............................................21
APPENDIX A....................................................................25
THE TRUST
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Ingenuity Capital Trust (the "Trust"), an open-end management investment
company, was organized as a Delaware business trust on July 20, 1999. The Trust
currently offers one series of shares to investors, The Medical Specialists
Fund. The Fund is a non-diversified series and has its own investment objective
and policies. The Trust may start another series and offer shares of a new fund
under the Trust at any time.
Shares of the Fund have equal voting rights and liquidation rights, and are
voted in the aggregate and not by Fund except in matters where a separate vote
is required by the Investment Company Act of 1940 (the "1940 Act") or when the
matter affects only the interest of a particular Fund. When matters are
submitted to shareholders for a vote, each shareholder is entitled to one vote
for each full share owned and fractional votes for fractional shares owned. The
Trust does not normally hold annual meetings of shareholders. The Trustees shall
promptly call and give notice of a meeting of shareholders for the purpose of
voting upon removal of any Trustee when requested to do so in writing by
shareholders holding 10% or more of the Trust's outstanding shares. The Trust
will comply with the provisions of Section 16(c) of the 1940 Act in order to
facilitate communications among shareholders.
Each share of the Fund represents an equal proportionate interest in the
assets and liabilities belonging to that Fund with each other share of that Fund
and is entitled to such dividends and distributions out of the income belonging
to the Fund as are declared by the Trustees. The shares do not have cumulative
voting rights or any preemptive or conversion rights, and the Trustees have the
authority from time to time to divide or combine the shares of any Fund into a
greater or lesser number of shares of that Fund so long as the proportionate
beneficial interests in the assets belonging to that Fund and the rights of
shares of any other Fund are in no way affected. In case of any liquidation of a
Fund, the holders of shares of the Fund being liquidated will be entitled to
receive as a class a distribution out of the assets, net of the liabilities,
belonging to that Fund. Expenses attributable to any Fund are borne by that
Fund. Any general expenses of the Trust not readily identifiable as belonging to
a particular Fund are allocated by or under the direction of the Trustees in
such manner as the Trustees allocate such expenses on the basis of relative net
assets or number of shareholders. No shareholder is liable to further calls or
to assessment by the Trust without his or her express consent.
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
- --------------------------------------------------------------------------------
A more detailed discussion of some of the terms used and investment
policies described in the Prospectus (see "Investment Objectives, Investment
Strategies and Risk Considerations") appears below:
MAJORITY. As used in the Prospectus and this Statement of Additional
Information, the term "majority" of the outstanding shares of the Trust (or of
the Fund) means the lesser of (1) two-thirds or more of the outstanding shares
of the Trust (or the Fund) present at a meeting, if the holders of more than 50%
of the outstanding shares of the Trust (or the Fund) are present or represented
at such meeting or (2) more than 50% of the outstanding shares of the Trust (or
the Fund).
DEBT SECURITIES. The Fund may invest in debt obligations of corporate
issuers, the U.S. Government, states, municipalities or state or municipal
government agencies that in the opinion of the Investment Adviser offer
long-term capital appreciation possibilities because of the timing of such
investments. The Fund intends that no more than 35% of its total assets will be
comprised of such debt securities. Investments in such debt obligations may
result in long-term capital appreciation because the value of debt obligations
varies inversely with prevailing interest rates. Thus, an investment in debt
obligations that is sold at a time when prevailing interest rates are lower than
they were at the time of investment will typically result in capital
appreciation. However, the reverse is also true, so that if an investment in
debt obligations is sold at a time when prevailing interest rates are higher
than they were at the time of investment, a capital loss will typically be
realized. Accordingly, if the Fund invests in the debt obligations described
above, such investments will generally be made when the Investment Adviser
expects that prevailing interest rates will be falling, and will generally be
sold when the Investment Adviser expects interest rates to rise.
The Fund's investments in this area will consist solely of investment grade
securities (rated BBB or higher by Standard & Poor's Ratings Group or Baa or
higher by Moody's Investors Service, Inc., or unrated securities determined by
the Investment Adviser to be of comparable quality). While securities in these
categories are generally accepted as being of investment grade, securities rated
BBB or Baa have speculative characteristics and changes in economic conditions
or other circumstances are more likely to lead to a weakened capacity to pay
principal and interest than is the case with higher grade securities. In the
event a security's rating is reduced below the Fund's minimum requirements, the
Fund will sell the security, subject to market conditions and the Investment
Adviser's assessment of the most opportune time for sale.
To the extent the Fund invests in bonds, it will be exposed to the risks
of bond investing. A bond's market value is affected significantly by changes in
interest rates. Generally, when interest rates rise, the bond's market value
declines and when interest rates decline, its market value rises. Also, the
longer a bond's maturity, the greater the risk and the higher its yield.
Conversely, the shorter a bond's maturity, the lower the risk and the lower its
yield. A bond's value can also be affected by changes in the bond's credit
quality rating or its issuer's financial condition. Because bond values
fluctuate, the fund's share price fluctuates.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from one
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. The Fund will only invest in commercial paper
rated A-1 by Standard & Poor's Ratings Group ("Standard & Poor's") or Prime-1 by
Moody's Investors Service, Inc. ("Moody's") or unrated paper of issuers who have
outstanding unsecured debt rated AA or better by Standard & Poor's or Aa or
better by Moody's. Certain notes may have floating or variable rates. Variable
and floating rate notes with a demand notice period exceeding seven days will be
subject to each Fund's policy with respect to illiquid investments unless, in
the judgment of the Investment Adviser, such note is liquid.
The rating of Prime-1 is the highest commercial paper rating assigned by
Moody's. Among the factors considered by Moody's in assigning ratings are the
following: valuation of the management of the issuer; economic evaluation of the
issuer's industry or industries and an appraisal of speculative-type risks which
may be inherent in certain areas; evaluation of the issuer's products in
relation to competition and customer acceptance; liquidity; amount and quality
of long-term debt; trend of earnings over a period of 10 years; financial
strength of the issuer's parent company and the relationships which exist with
the issuer; and recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparations
to meet such obligations. These factors are all considered in determining
whether the commercial paper is rated Prime-1. Issuers of commercial paper rated
A (highest quality) by Standard & Poor's have the following characteristics:
liquidity ratios are adequate to meet cash requirements; long-term senior debt
is rated "A" or better, although in some cases "BBB" credits may be allowed; the
issuer has access to at least two additional channels of borrowing; basic
earnings and cash flow have an upward trend with allowance made for unusual
circumstances; typically, the issuer's industry is well established and the
issuer has a strong position within the industry; and the reliability and
quality of management are unquestioned. The relative strength or weakness of the
above factors determines whether the issuer's commercial paper is rated A-1.
BANK DEBT INSTRUMENTS. Bank debt instruments in which the Fund may invest
consist of certificates of deposit, bankers' acceptances and time deposits
issued by national banks and state banks, trust companies and mutual savings
banks, or by banks or institutions the accounts of which are insured by the
Federal Deposit Insurance Corporation or the Federal Savings and Loan Insurance
Corporation. Certificates of deposit are negotiable certificates evidencing the
indebtedness of a commercial bank to repay funds deposited with it for a
definite period of time (usually from 14 days to one year) at a stated or
variable interest rate. Bankers' acceptances are credit instruments evidencing
the obligation of a bank to pay a draft which has been drawn on it by a
customer, which instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. The Fund will not invest in time
deposits maturing in more than seven days if, as a result thereof, more than 15%
of the value of its net assets would be invested in such securities and other
illiquid securities.
REPURCHASE AGREEMENTS. Repurchase agreements are transactions by which the
Fund purchases a security and simultaneously commits to resell that security to
the seller at an agreed upon time and price, thereby determining the yield
during the term of the agreement. In the event of a bankruptcy or other default
by the seller of a repurchase agreement, the Fund could experience both delays
in liquidating the underlying security and losses. To minimize these
possibilities, the Fund intends to enter into repurchase agreements only with
its Custodian, with banks having assets in excess of $10 billion and with
broker-dealers who are recognized as primary dealers in U.S. Government
obligations by the Federal Reserve Bank of New York. Collateral for repurchase
agreements is held in safekeeping in the customer-only account of the Funds'
Custodian at the Federal Reserve Bank. The Fund will not enter into a repurchase
agreement not terminable within seven days if, as a result thereof, more than
15% of the value of its net assets would be invested in such securities and
other illiquid securities.
Although the securities subject to a repurchase agreement might bear
maturities exceeding one year, settlement for the repurchase would never be more
than one year after the Fund's acquisition of the securities and normally would
be within a shorter period of time. The resale price will be in excess of the
purchase price, reflecting an agreed upon market rate effective for the period
of time the Fund's money will be invested in the securities, and will not be
related to the coupon rate of the purchased security. At the time the Fund
enters into a repurchase agreement, the value of the underlying security,
including accrued interest, will equal or exceed the value of the repurchase
agreement, and, in the case of a repurchase agreement exceeding one day, the
seller will agree that the value of the underlying security, including accrued
interest, will at all times equal or exceed the value of the repurchase
agreement. The collateral securing the seller's obligation must be of a credit
quality at least equal to the Fund's investment criteria for portfolio
securities and will be held by the Custodian or in the Federal Reserve Book
Entry System.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan
from the Fund to the seller subject to the repurchase agreement and is therefore
subject to the Fund's investment restriction applicable to loans. It is not
clear whether a court would consider the securities purchased by the Fund
subject to a repurchase agreement as being owned by that 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 securities before repurchase of the security under a repurchase
agreement, the Fund may encounter delay and incur costs before being able to
sell the security. Delays may involve loss of interest or decline in price of
the security. If a court characterized the transaction as a loan and the Fund
has not perfected a security interest in the security, that 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 obligation purchased for the Fund, the Investment
Adviser seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case, the seller. Apart
from the risk of bankruptcy or insolvency proceedings, there is also the risk
that the seller may fail to repurchase the security, in which case the Fund may
incur a loss if the proceeds to the Fund of the sale of the security to a third
party are less than the repurchase price. However, if the market value of the
securities subject to the repurchase agreement becomes less than the repurchase
price (including interest), the Fund will direct the seller of the 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 enforce the seller's
contractual obligation to deliver additional securities.
MONEY MARKET FUNDS. The Fund may under certain circumstances invest a
portion of its assets in money market investment companies. The 1940 Act
prohibits the Fund from investing more than 5% of the value of its total assets
in any one investment company, or more than 10% of the value of its total assets
in investment companies in the aggregate, and also restricts its investment in
any investment company to 3% of the voting securities of such investment
company. Investment in a money market investment company involves payment of
such company's pro rata share of advisory and administrative fees charged by
such company, in addition to those paid by the Fund.
WARRANTS. The Fund may invest a portion of its assets in warrants, but only
to the extent that such investments do not exceed 5% of the Fund's net assets at
the time of purchase. 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 coupon or 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).
INITIAL PUBLIC OFFERINGS. The Fund may purchase shares in initial public
offerings (IPOs). Because IPO shares frequently are volatile in price, the Fund
may hold IPO shares for a very short period of time. This may increase the
turnover of the Fund's portfolio and may lead to increased expenses to the Fund,
such as commissions and transaction costs. By selling shares, the Fund may
realize taxable capital gains that it will subsequently distribute to
shareholders. Investing in IPOs have added risks because their shares are
frequently volatile in price. As a result, their performance can be more
volatile and they face greater risk of business failure, which could increase
the volatility of the Fund's portfolio.
FOREIGN SECURITIES. Subject to the Fund's investment policies and quality
standards, the Fund may invest in the securities of foreign issuers listed on
foreign securities exchanges or over-the-counter markets, or which are
represented by American Depository Receipts and listed on domestic securities
exchange or traded in the United States on over-the-counter markets. Because the
Fund may invest in foreign securities, an investment in the Fund involves risks
that are different in some respects from an investment in a fund that invests
only in securities of U.S. domestic issuers. Foreign investments may be affected
favorably or unfavorably by changes in currency rates and exchange control
regulations. There may be less publicly available information about a foreign
company than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those applicable to U.S. companies. There may be less governmental
supervision of securities markets, brokers and issuers of securities. Securities
of some foreign companies are less liquid or more volatile than securities of
U.S. companies, and foreign brokerage commissions and custodian fees are
generally higher than in the United States. Settlement practices may include
delays and may differ from those customary in United States markets. Investments
in foreign securities may also be subject to other risks different from those
affecting U.S. investments, including local political or economic developments,
expropriation or nationalization of assets, restrictions on foreign investment
and repatriation of capital, imposition of withholding taxes on dividend or
interest payments, currency blockage (which would prevent cash from being
brought back to the United States), and difficulty in enforcing legal rights
outside the United States.
NON-DIVERSIFICATION OF INVESTMENTS. The Fund is operated as a
"non-diversified" portfolio. As a non-diversified investment company, the Fund
may be subject to greater risks than diversified companies because of the
possible fluctuation in the values of securities of fewer issuers. However, at
the close of each fiscal quarter at least 50% of the value of the Fund's total
assets will be represented by one or more of the following: (i) cash and cash
items, including receivables; (ii) U.S. Government securities; (iii) securities
of other regulated investment companies; and (iv) securities (other than U.S.
Government securities and securities of other regulated investment companies) of
any one or more issuers which meet the following limitations: (a) the Fund will
not invest more than 5% of its total assets in the securities of any such issuer
and (b) the entire amount of the securities of such issuer owned by the Fund
will not represent more than 10% of the outstanding voting securities of such
issuer. Additionally, not more than 25% of the value of a Fund's total assets
may be invested in the securities of any one issuer.
WRITING COVERED CALL OPTIONS The Fund may write covered call options on
equity securities or futures contracts to earn premium income, to assure a
definite price for a security that the Fund has considered selling, or to close
out options previously purchased. A call option gives the holder (buyer) the
right to purchase a security or futures contract at a specified price (the
exercise price) at any time until a certain date (the expiration date). A call
option is "covered" if the Fund owns the underlying security subject to the call
option at all times during the option period. A covered call writer is required
to deposit in escrow the underlying security in accordance with the rules of the
exchanges on which the option is traded and the appropriate clearing agency.
The writing of covered call options is a conservative investment technique
which the Investment Adviser believes involves relatively little risk. However,
there is no assurance that a closing transaction can be effected at a favorable
price. During the option period, the covered call writer has, in return for the
premium received, given up the opportunity for capital appreciation above the
exercise price should the market price of the underlying security increase, but
has retained the risk of loss should the price of the underlying security
decline.
WRITING COVERED PUT OPTIONS The Fund may write covered put options on
equity securities and futures contracts to assure a definite price for a
security if they are considering acquiring the security at a lower price than
the current market price or to close out options previously purchased. A put
option gives the holder of the option the right to sell, and the writer has the
obligation to buy, the underlying security at the exercise price at any time
during the option period. The operation of put options in other respects is
substantially identical to that of call options. When the Fund writes a covered
put option, it maintains in a segregated account with its Custodian cash or
liquid securities in an amount not less than the exercise price at all times
while the put option is outstanding.
The risks involved in writing put options include the risk that a closing
transaction cannot be effected at a favorable price and the possibility that the
price of the underlying security may fall below the exercise price, in which
case a Fund may be required to purchase the underlying security at a higher
price than the market price of the security at the time the option is exercised.
OPTIONS TRANSACTIONS GENERALLY. Option transactions in which the Fund may
engage involve the specific risks described above as well as the following
risks: the writer of an option may be assigned an exercise at any time during
the option period; disruptions in the markets for underlying instruments could
result in losses for options investors; imperfect or no correlation between the
option and the securities being hedged; the insolvency of a broker could present
risks for the broker's customers; and market imposed restrictions may prohibit
the exercise of certain options. In addition, the option activities of the Fund
may affect its portfolio turnover rate and the amount of brokerage commissions
paid by the Fund. The success of the Fund in using the option strategies
described above depends, among other things, on the Investment Adviser's ability
to predict the direction and volatility of price movements in the options,
futures contracts and securities markets and the Investment Adviser's ability to
select the proper time, type and duration of the options.
By writing options, the Fund forgoes the opportunity to profit from an
increase in the market price of the underlying security or stock index above the
exercise price except insofar as the premium represents such a profit. The Fund
may also seek to earn additional income through receipt of premiums by writing
covered put options. The risk involved in writing such options is that there
could be a decrease in the market value of the underlying security or stock
index. If this occurred, the option could be exercised and the underlying
security would then be sold to the Fund at a higher price than its then current
market value. The Fund may purchase put and call options to attempt to provide
protection against adverse price effects from anticipated changes in prevailing
prices of securities or stock indices. The purchase of a put option generally
protects the value of portfolio holdings in a falling market, while the purchase
of a call option generally protects cash reserves from a failure to participate
in a rising market. In purchasing a call option, the Fund would be in a position
to realize a gain if, during the option period, the price of the security or
stock index increased by an amount greater than the premium paid. The Fund would
realize a loss if the price of the security or stock index decreased or remained
the same or did not increase during the period by more than the amount of the
premium. If a put or call option purchased by the Fund were permitted to expire
without being sold or exercised, its premium would represent a realized loss to
the Fund. When writing put options the Fund will be required to segregate cash
and/or liquid securities to meet its obligations. When writing call options the
Fund will be required to own the underlying financial instrument or segregate
with its Custodian cash and/or liquid securities to meet its obligations under
written calls. By so doing, the Fund's ability to meet current obligations, to
honor redemptions or to achieve its investment objective may be impaired. The
staff of the Securities and Exchange Commission has taken the position that
over-the-counter options and the assets used as "cover" for over-the-counter
options are illiquid securities.
The imperfect correlation in price movement between an option and the
underlying financial instrument and/or the costs of implementing such an option
may limit the effectiveness of the strategy. The Fund's ability to establish and
close out options positions will be subject to the existence of a liquid
secondary market. Although the Fund generally will purchase or sell only those
options for which there appears to be an active secondary market, there is no
assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. If an option purchased by the Fund
expires unexercised, the Fund will lose the premium it paid. In addition, the
Fund could suffer a loss if the premium paid by the Fund in a closing
transaction exceeds the premium income it received. When the Fund writes a call
option, its ability to participate in the capital appreciation of the underlying
obligation is limited.
It is the present intention of the Adviser not to commit greater than 30%
of the Fund's net assets to option strategies.
BORROWING. The Fund may borrow from banks for temporary or emergency
purposes in an aggregate amount not to exceed 25% of its total assets. Borrowing
magnifies the potential for gain or loss on the portfolio securities of the Fund
and, therefore, if employed, increases the possibility of fluctuation in the
Fund's net asset value. This is the speculative factor known as leverage. To
reduce the risks of borrowing, the Fund will limit its borrowings as described
above. The Fund may pledge its assets in connection with borrowings. While the
Fund's borrowings exceed 5% of its total assets, it will not purchase additional
portfolio securities.
The use of borrowing by the Fund involves special risk considerations that
may not be associated with other funds having similar policies. Since
substantially all of the Fund's assets fluctuate in value, whereas the interest
obligation resulting from a borrowing will be fixed by the terms of the Fund's
agreement with their lender, the asset value per share of the Fund will tend to
increase more when its portfolio securities increase in value and decrease more
when its portfolio securities 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.
LOANS OF PORTFOLIO SECURITIES. The Fund may make short-term loans of its
portfolio securities to banks, brokers and dealers. Lending portfolio securities
exposes a Fund to the risk that the borrower may fail to return the loaned
securities or may not be able to provide additional collateral or that the Fund
may experience delays in recovery of the loaned securities or loss of rights in
the collateral if the borrower fails financially. To minimize these risks, the
borrower must agree to maintain collateral marked to market daily, in the form
of cash and/or U.S. Government obligations, with the Fund's Custodian in an
amount at least equal to the market value of the loaned securities. The Fund
will limit the amount of its loans of its portfolio securities to no more than
30% of its total assets.
Under applicable regulatory requirements (which are subject to change), the
loan collateral must, on each business day, at least equal the value of the
loaned securities. To be acceptable as collateral, letters of credit must
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 must be satisfactory to the
Fund. The Fund receive amounts equal to the dividends or interest on loaned
securities and also receive one or more of (a) negotiated loan fees, (b)
interest on securities used as collateral, or (c) interest on short-term debt
securities purchased with such collateral; either type of interest may be shared
with the borrower. The Fund may also pay fees to placing brokers as well as
custodian and administrative fees in connection with loans. Fees may only be
paid to a placing broker provided that the Trustees determine that the fee paid
to the placing broker is reasonable and based solely upon services rendered,
that the Trustees separately consider the propriety of any fee shared by the
placing broker with the borrower, and that the fees are not used to compensate
the Adviser or any affiliated person of the Trust or an affiliated person of the
Adviser or other affiliated person. The terms of the Fund's loans must meet
applicable tests under the Internal Revenue Code and permit the Fund to
reacquire loaned securities on five days' notice or in time to vote on any
important matter.
ILLIQUID SECURITIES. 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 securities such
as repurchase agreements having a maturity of longer than seven days. Securities
which have not been registered under the Securities Act are referred to as
private placements or restricted securities and are purchased directly from the
issuer or in the secondary market. 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 a mutual fund might be unable to dispose of restricted securities promptly
or at reasonable prices and might thereby experience difficulty satisfying
redemption requirements. A mutual fund might also have to register such
restricted securities in order to dispose of them, resulting in additional
expense and delay. Adverse market conditions could impede such a public offering
of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments. The Board of Trustees may determine that such securities are not
illiquid securities notwithstanding their legal or contractual restrictions on
resale. In all other cases, however, securities subject to restrictions on
resale will be deemed illiquid. The Fund will not invest more than 15% of the
value of its net assets in illiquid securities, including repurchase agreements
providing for settlement in more than seven days after notice, non negotiable
fixed time deposits with maturates over seven days, over-the-counter options and
certain restricted securities not determined by the Trustee to be liquid.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
The Trust has adopted certain fundamental investment restrictions designed
to reduce the risk of an investment in the Fund. These restrictions may not be
changed with respect to the Fund without the affirmative vote of a majority of
the outstanding voting securities of the Fund. The Fund may not:
1. Underwrite the securities of other issuers, except that the Fund
may, as indicated in the Prospectus, acquire restricted securities
under circumstances where, if such securities are sold, the Fund
might be deemed to be an underwriter for purposes of the
Securities Act of 1933.
2. Purchase or sell real estate or interests in real estate, but the
Fund may purchase marketable securities of companies holding real
estate or interests in real estate.
3. Purchase or sell commodities or commodity contracts, including
futures contracts, except that the Fund may purchase and sell
futures contracts to the extent authorized by the Board of
Trustees.
4. Make loans to other persons except (i) by the purchase of a
portion of an issue of publicly distributed bonds, debentures or
other debt securities or privately sold bonds, debentures or other
debt securities immediately convertible into equity securities,
such purchases of privately sold debt securities not to exceed 5%
of the Fund's total assets, and (ii) the entry into portfolio
lending agreements (i.e., loans of portfolio securities) provided
that the value of securities subject to such lending agreements
may not exceed 30% of the value of the Fund's total assets.
5. Purchase securities on margin, but the Fund may obtain such
short-term credits as may be necessary for the clearance of
purchases and sales of securities.
6. Borrow money from banks except for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
that might otherwise require the untimely disposition of
securities, in an aggregate amount not exceeding 25% of the value
of the Fund's total assets at the time any borrowing is made.
While the Fund's borrowings are in excess of 5% of its total
assets, the Fund will not purchase portfolio securities.
7. Purchase or sell puts and calls on securities, except that the
Fund may purchase and sell puts and calls on stocks and stock
indices.
8. Make short sales of securities.
9. Participate on a joint or joint and several basis in any securities
trading account.
10. Purchase the securities of any other investment company except in
compliance with the 1940 Act.
11. Invest in the securities of any one industry, with the exception of
securities of companies in the medical/healthcareindustry and securities
issued or guaranteed by the U.S. Government, its agencies, and
instrumentalities, if as a result, more than 20% of the Fund's total
assets would be invested in the securities of such industry. Except
during temporary defensive periods, not less than 65% of the Fund's
total assets will be invented in the securities of companies engaged in the
health and biotechnology industries.
12. Issue senior securities except that the Fund may borrow money in
amounts up to 25% of the value of its total assets.
With respect to the percentages adopted by the Trust as maximum limitations
on the Fund's investment policies and restrictions, an excess above the fixed
percentage (except for the percentage limitations relative to the borrowing of
money) will not be a violation of the policy or restriction unless the excess
results immediately and directly from the acquisition of any security or the
action taken.
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------
The business of the Trust is managed under the direction of the Board of
Trustees in accordance with the Declaration of Trust of the Trust, which
Declaration of Trust has been filed with the Securities and Exchange Commission
and is available upon request. Pursuant to the Declaration of Trust, the
Trustees shall elect officers including a president, secretary and treasurer.
The Board of Trustees retains the power to conduct, operate and carry on the
business of the Trust and has the power to incur and pay any expenses which, in
the opinion of the Board of Trustees, are necessary or incidental to carry out
any of the Trust's purposes. The Trustees, officers, employees and agents of the
Trust, when acting in such capacities, shall not be subject to any personal
liability except for his or her own bad faith, willful misfeasance, gross
negligence or reckless disregard of his or her duties. Following is a list of
the Trustees and executive officers of the Trust and their principal occupation
over the last five years.
<TABLE>
<S> <C> <C> <C>
PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
NAME AND ADDRESS AGE POSITION
- ---------------------------------- ------- ---------------------- ----------------------------------------------------
*Kendrick W. Kam 38 Trustee, President President, Ingenuity Capital Management LLC (July
26888 Almaden Court and Treasurer 1999 to Present); President, Interactive Research
Los Altos, CA 94022 Advisers, Inc. and co-portfolio manger (1993 to
1999).
- ---------------------------------- ------- ---------------------- ----------------------------------------------------
William J. Scilacci 76 Trustee Retired; President, Bank of Santa Clara
26888 Almaden Court (1982-1993).
Los Altos, CA 94022
- ---------------------------------- ------- ---------------------- ----------------------------------------------------
Arthur L. Roth 75 Trustee, Chairman of Retired; Director and CEO, Levi Strauss & Co., a
26888 Almaden Court Board clothing manufacturer, (1949 to 1973); CEO,
Los Altos, CA 94022 PharmChem Laboratories, a national drug testing
firm (1981 to 1987).
- ---------------------------------- ------- ---------------------- ----------------------------------------------------
Elaine E. Richards 31 Secretary Legal Compliance Administrator and Trust Officer,
615 East Michigan Street Firstar Mutual Fund Services, LLC, June 1998 to
Milwaukee, WI 53202 present; Associate Attorney, Reinhart, Boerner,
Van Deuren, Norris & Rieselbach, s.c.,
Milwaukee, Wisconsin, 1995 to 1998.
- ---------------------------------- ------- ---------------------- ----------------------------------------------------
</TABLE>
* Kendrick W. Kam, as an affiliated person of Ingenuity Capital Management LLC,
the Fund's investment adviser, is an "interested persons" of the Trust within
the meaning of Section 2(a)(19) of the 1940 Act.
COMPENSATION
For their service as Trustees, the independent Trustees will receive a fee
of $50 per meeting attended, as well as reimbursement for expenses incurred in
connection with attendance at such meetings. The interested Trustees of the
Trust receive no compensation for their service as Trustees. The table below
details the estimated amount of compensation the Trustees may receive from the
Trust for the next fiscal year. Presently, none of the executive officers
receive compensation from the Trust. The aggregate compensation is provided for
the Trust, which is comprised of eleven portfolios.
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
NAME AND POSITION ESTIMATED PENSION OR RETIREMENT ESTIMATED ANNUAL ESTIMATED TOTAL
AGGREGATE BENEFITS ACCRUED AS BENEFITS UPON COMPENSATION FROM
COMPENSATION PART OF TRUST EXPENSES RETIREMENT TRUST AND FUND COMPLEX
FROM TRUST PAID TO TRUSTEES
- ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
Kendrick W. Kam * None None None None
Arthur L. Roth $250 None None $250
William J. Scilacci $250 None None $250
- ---------------------------- ----------------- ----------------------- ---------------------- ------------------------
</TABLE>
*This trustee is deemed to be an interested person as defined in the 1940 Act.
MANAGEMENT OWNERSHIP
As of November 24, 1999, for organizational purposes only, the Trustees own 100%
of the outstanding shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
- --------------------------------------------------------------------------------
Ingenuity Capital Management LLC (the "Investment Adviser"), is registered
as an investment adviser with the Securities and Exchange Commission under the
Investment Advisers Act of 1940. Kendrick W. Kam is the President of the
Investment Adviser and the only portfolio manager. Prior to forming the
Investment Adviser and the Trust, Mr. Kam was President and co-founder of
Interactive Research Advisers, Inc. Mr. Kam was also co-portfolio manager of
three mutual funds managed by Interactive Research Advisers, Inc. Mr. Kam is the
sole shareholder of the Investment Adviser and there are no other affiliates to
the Fund.
Under the terms of the Investment Advisory and Management Agreement (the
"Advisory Agreement") between the Trust and the Investment Adviser, the
Investment Adviser (i) manages the investment operations of the Fund and the
composition of its portfolio, including the purchase, retention and disposition
of securities in accordance with the Fund's investment objective, (ii) provides
all statistical, economic and financial information reasonably required by the
Fund and reasonably available to the Investment Adviser, (iii) provides the
Custodian of the Fund's securities on each business day with a list of trades
for that day, and (iv) provides persons satisfactory to the Trust's Board of
Trustees to act as officers and employees of the Trust.
Pursuant to the Advisory Agreement, the Fund pays to the Investment
Adviser, on a monthly basis, an advisory fee at an annual rate of 1.50% of its
average daily net assets. The Advisory Agreement requires the Investment Adviser
to waive its management fees and, if necessary, reimburse expenses of the Fund
to the extent necessary to limit each Fund's total operating expenses to 1.95%
of its average net assets up to $200 million, 1.90% of such assets from $200
million to $500 million, 1.85% of such assets from $500 million to $1 billion,
and 1.80% of such assets in excess of $1 billion.
By its terms, the Advisory Agreement remains in force from year to year,
subject to annual approval by (a) the Board of Trustees or (b) a vote of the
majority of the Fund's outstanding voting securities; provided that in either
event continuance is also approved by a majority of the Trustees who are not
interested persons of the Trust, by a vote cast in person at a meeting called
for the purpose of voting such approval. The Advisory Agreement may be
terminated at any time, on 60 days' written notice, without the payment of any
penalty, by the Board of Trustees, by a vote of the majority of the Fund's
outstanding voting securities, or by the Investment Adviser. The Advisory
Agreement automatically terminates in the event of its assignment, as defined by
the 1940 Act and the rules thereunder.
The Board of Trustees of the Trust has approved an Administration Agreement
with the Investment Adviser wherein the Investment Adviser is responsible for
the provision of administrative and supervisory services to the Fund. The
Investment Adviser, at its expense, shall supply the Trustees and the officers
of the Trust with all statistical information and reports reasonably required by
it and reasonably available to the Investment Adviser. The Investment Adviser
shall oversee the maintenance of all books and records with respect to the
Fund's security transactions and the Fund's books of account in accordance with
all applicable federal and state laws and regulations. The Investment Adviser
will arrange for the preservation of the records required to be maintained by
the 1940 Act.
Pursuant to the Administration Agreement, the Fund will pay to the
Investment Adviser, on a monthly basis, a fee equal to .45% per annum of its
average daily net assets up to $200 million, .40% of such assets from $200
million to $500 million, .35% of such assets from $500 million to $1 billion,
and .30% of such assets in excess of $1 billion.
The Administration Agreement may be terminated by the Trust at any time, on
60 days' notice to the Investment Adviser, without penalty either (a) by vote of
the Board of Trustees of the Trust, or (b) by vote of a majority of the
outstanding voting securities of a Fund. It may be terminated at any time by the
Investment Adviser on 60 days' written notice to the Trust.
THE UNDERWRITER
- --------------------------------------------------------------------------------
Rafferty Capital Markets, Inc. (the "Underwriter"), 1311 Mamaroneck Ave,
White Plains, New York 10605, serves as principal underwriter for the Trust
pursuant to an Underwriting Agreement. No affiliated persons of the Fund are
affiliated persons of the Underwriter. Shares are sold on a continuous basis by
the Underwriter. The Underwriter has agreed to use its best efforts to solicit
orders for the sale of Trust shares, but it is not obliged to sell any
particular amount of shares. The Underwriting Agreement provides that, unless
sooner terminated, it will continue in effect from year to year, subject to
annual approval by (a) the Board of Trustees or a vote of a majority of the
outstanding shares, and (b) by a majority of the Trustees who are not interested
persons of the Trust or of the Underwriter by vote cast in person at a meeting
called for the purpose of voting on such approval.
The Underwriting Agreement may be terminated by the Trust at any time,
without the payment of any penalty, by vote of a majority of the entire Board of
Trustees of the Trust or by vote of a majority of the outstanding shares of the
Fund on 60 days' written notice to the Underwriter, or by the Underwriter at any
time, without the payment of any penalty, on 60 days' written notice to the
Trust. The Underwriting Agreement will automatically terminate in the event of
its assignment.
SECURITIES TRANSACTIONS
- --------------------------------------------------------------------------------
The Investment Adviser furnishes advice and recommendations with respect to
the Fund's portfolio decisions and, subject to the supervision of the Board of
Trustees of the Trust, determines the broker to be used in each specific
transaction. In executing the Fund's portfolio transactions, the Investment
Adviser seeks to obtain the best net results for the Fund, taking into account
such factors as the overall net economic result to the Fund (involving both
price paid or received and any commissions and other costs paid), the efficiency
with which the specific transaction is effected, the ability to effect the
transaction where a large block is involved, the known practices of brokers and
the availability to execute possibly difficult transactions in the future and
the financial strength and stability of the broker. While the Investment Adviser
generally seeks reasonably competitive commission rates, the Fund does not
necessarily pay the lowest commission or spread available.
The Investment Adviser may direct the Fund's portfolio transactions to
persons or firms because of research and investment services provided by such
persons or firms if the amount of commissions in effecting the transactions is
reasonable in relationship to the value of the investment information provided
by those persons or firms. Such research and investment services are those which
brokerage houses customarily provide to institutional investors and include
statistical and economic data and research reports on particular companies and
industries. These services may be used by the Investment Adviser in connection
with all of its investment activities, and some of the services obtained in
connection with the execution of transactions for the Fund may be used in
managing the Investment Adviser's other investment accounts.
The Fund may deal in some instances in securities which are not listed on a
national securities exchange but are traded in the over-the-counter market. The
Fund may also purchase listed securities through the "third market" (i.e.,
otherwise than on the exchanges on which the securities are listed). When
transactions are executed in the over-the-counter market or the third market,
the Investment Adviser will seek to deal with primary market makers and to
execute transactions on the Fund's own behalf, except in those circumstances
where, in the opinion of the Investment Adviser, better prices and executions
may be available elsewhere. The Fund does not allocate brokerage business in
return for sales of the Fund's shares.
Neither the Investment Adviser nor any affiliated person thereof will
participate in commissions paid by the Fund to brokers or dealers or will
receive any reciprocal business, directly or indirectly, as a result of such
commissions.
The Board of Trustees reviews periodically the allocation of brokerage
orders to monitor the operation of these policies.
PORTFOLIO TURNOVER
- --------------------------------------------------------------------------------
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. A 100% turnover rate would occur if all of the Fund's portfolio securities
were replaced once within a one year period.
Generally, the Fund intends to invest for long-term purposes. However, the
rate of portfolio turnover will depend upon market and other conditions, and it
will not be a limiting factor when the Adviser believes that portfolio changes
are appropriate.
If the Investment Adviser engages in active trading of its portfolio
securities to achieve its investment goals, it could result in the Fund
experiencing a high turnover rate (100% or more). High turnover rates lead to
increase loss, could cause you to pay higher taxes and could negatively affect
the Fund's performance.
PURCHASE, REDEMPTION AND PRICING OF SHARES
- --------------------------------------------------------------------------------
CALCULATION OF SHARE PRICE
The share price (net asset value) of the shares of the Fund is determined
as of the close of the regular session of trading on the New York Stock Exchange
(currently 4:00 p.m., eastern time), on each day the Trust is open for business.
The Trust is open for business on every day except Saturdays, Sundays and the
following holidays: New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. The Trust may also be open for business on other days in which there
is sufficient trading in the Fund's portfolio securities that its net asset
value might be materially affected. For a description of the methods used to
determine the share price, see "Calculation of Share Price" in the Prospectus.
In valuing the Fund's assets for the purpose of determining net asset
value, readily marketable portfolio securities listed on a national securities
exchange are valued at the last sale price on such exchange on the business day
as of which such value is being determined. If there has been no sale on such
exchange on such day, the security is valued at the closing bid price on such
day. If no bid price is quoted on such exchange on such day, then the security
is valued by such method as the Investment Adviser under the supervision of the
Board of Trustees determines in good faith to reflect its fair value. Readily
marketable securities traded only in the over-the-counter market are valued at
the last sale price, if available, otherwise at the most recent bid price. If no
bid price is quoted on such day, then the security is valued by such method as
the Investment Adviser under the supervision of the Board of Trustees determines
in good faith to reflect its fair value. All other assets of the Fund, including
restricted securities and securities that are not readily marketable, are valued
in such manner as the Investment Adviser under the supervision of the Board of
Trustees in good faith deems appropriate to reflect their fair value.
PURCHASE OF SHARES
Orders for shares received by the Trust in good order prior to the close of
business on the New York Stock Exchange (the "Exchange") on each day during such
periods that the Exchange is open for trading are priced at net asset value per
share computed as of the close of the regular session of trading on the
Exchange. Orders received in good order after the close of the Exchange, or on a
day it is not open for trading, are priced at the close of such Exchange on the
next day on which it is open for trading at the next determined net asset value
per share.
Good order means that your purchase request includes: (1) the name of the
fund, (2) the dollar amount of shares to be purchased, (3) your purchase
application or investment status, (4) your check payable to "Ingenuity Capital
Trust."
REDEMPTION OF SHARES
The right of redemption may not be suspended or the date of payment upon
redemption postponed for more than seven calendar days after a shareholder's
redemption request made in accordance with the procedures set forth in the
Prospectus, except for any period during which the Exchange is closed (other
than customary weekend and holiday closing) or during which the Securities and
Exchange Commission determines that trading thereon is restricted, or for any
period during which an emergency (as determined by the Securities and Exchange
Commission) exists as a result of which disposal by a Fund of securities owned
by it is not reasonably practicable or as a result of which it is not reasonably
practicable for the Fund to fairly determine the value of its net assets, or for
such other period as the Securities and Exchange Commission may by order permit
for the protection of security holders of the Fund.
The Trust will redeem all or any portion of a shareholder's shares of the
Fund when requested in accordance with the procedures set forth in the "How to
Redeem Shares" section of the Prospectus.
REDEMPTION IN KIND
Payment of the net redemption proceeds may be made either in cash or in
portfolio securities (selected in the discretion of the Investment Adviser under
supervision of the Board of Trustees and taken at their value used in
determining the net asset value), or partly in cash and partly in portfolio
securities. However, payments will be made wholly in cash unless the Board of
Trustees believes that economic conditions exist which would make such a
practice detrimental to the best interests of the Fund. If payment for shares
redeemed is made wholly or partly in portfolio securities, brokerage costs may
be incurred by the investor in converting the securities to cash. The Trust has
filed an election with the Securities and Exchange Commission pursuant to which
the Fund will effect a redemption in portfolio securities only if the particular
shareholder of record is redeeming more than $250,000 or 1% of net assets,
whichever is less, during any 90-day period. The Trust expects, however, that
the amount of a redemption request would have to be significantly greater than
$250,000 or 1% of net assets before a redemption wholly or partly in portfolio
securities would be made.
TAXES
- --------------------------------------------------------------------------------
The Fund has elected, and intends to qualify annually, for the special tax
treatment afforded regulated investment companies under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). To qualify as a
regulated investment company, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividend, interest,
payments with respect to securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income
(including gains from options, futures and forward contracts) derived with
respect to their business of investing in such stock, securities or currencies;
(b) diversify its holdings so that, at the end of each quarter of the taxable
year, (i) at least 50% of the market value of the Fund's assets are represented
by cash, U.S. Government securities, the securities of other regulated
investment companies, and other securities, with such other securities of any
one issuer limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Fund's total assets or 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of its total
assets are invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment companies)
or in two or more issuers which the Funds control and which are engaged in the
same or similar trades or businesses; and (c) distribute at least 90% of its
investment company taxable income (which includes dividends, interest and net
short-term capital gains in excess of any net long-term capital losses) each
taxable year.
As regulated investment companies, the Fund will not be subject to U.S.
Federal income tax on its investment company taxable income and net capital
gains (any long-term capital gains in excess of the sum of net short-term
capital losses and capital loss carryovers available from the eight prior
years), if any, that it distributes to shareholders. The Fund intends to
distribute annually to its shareholders substantially all of its investment
company taxable income and any net capital gains. In addition, amounts not
distributed by the Fund on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax. To avoid
the tax, the Fund must distribute during each calendar year an amount equal to
the sum of (1) at least 98% of its ordinary income (with adjustment) for the
calendar year and (2) at least 98% of its capital gains in excess of its capital
losses (and adjusted for certain ordinary losses) for the 12 month period ending
on October 31 of the calendar year, and (3) all ordinary income and capital
gains for previous years that were not distributed during such years. In order
to avoid application of the excise tax, the Fund intends to make distributions
in accordance with these distribution requirements.
In view of the Fund's investment policies, it is expected that dividends
received from domestic and certain foreign corporations will be part of the
Fund's gross income. Distributions by the Fund of such dividends to corporate
shareholders may be eligible for the "70% dividends received" deduction, subject
to the holding period and debt-financing limitations of the Code. However, the
portion of the Fund's gross income attributable to dividends received from
qualifying corporations is largely dependent on its investment activities for a
particular year and therefore cannot be predicted with certainty. In addition,
for purposes of the dividends received deduction available to corporations, a
capital gain dividend received from a regulated investment company is not
treated as a dividend. Corporate shareholders should be aware that availability
of the dividends received deduction is subject to certain restrictions. For
example, the deduction is not available if Fund shares are deemed to have been
held for less than 46 days (within the 90-day period that begins 45 days before
the ex-dividend date and ends 45 days after the ex-dividend date) and is reduced
to the extent such shares are treated as debt-financed under the Code.
Dividends, including the portions thereof qualifying for the dividends received
deduction, are includable in the tax base on which the federal alternative
minimum tax is computed. Dividends of sufficient aggregate amount received
during a prescribed period of time and qualifying for the dividends received
deduction may be treated as "extraordinary dividends" under the Code, resulting
in a reduction in a corporate shareholder's federal tax basis in its Fund
shares.
The Fund may invest as much as 15% of its net assets in securities of
foreign companies and may therefore be liable for foreign withholding and other
taxes, which will reduce the amount available for distribution to shareholders.
Tax conventions between the United States and various other countries may reduce
or eliminate such taxes. A foreign tax credit or deduction is generally allowed
for foreign taxes paid or deemed to be paid. A regulated investment company may
elect to have the foreign tax credit or deduction claimed by the shareholders
rather than the company if certain requirements are met, including the
requirement that more than 50% of the value of the company's total assets at the
end of the taxable year consist of securities in foreign corporations. Because
the Fund does not anticipate investment in securities of foreign corporations to
this extent, the Fund will likely not be able to make this election and foreign
tax credits will be allowed only to reduce the Fund's tax liability, if any.
Under the Code, upon disposition of certain securities denominated in a
foreign currency, gains or losses attributable to fluctuations in the value of
the foreign currency between the date of acquisition of the securities and the
date of disposition are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of the Fund's investment company taxable income.
Any dividend or distribution received shortly after a share purchase will
have the effect of reducing the net asset value of such shares by the amount of
such dividend or distribution. Such dividend or distribution is fully taxable.
Accordingly, prior to purchasing shares of the Fund, an investor should
carefully consider the amount of dividends or capital gains distributions which
are expected to be or have been announced.
Generally, the Code's rules regarding the determination and character of
gain or loss on the sale of a capital asset apply to a sale, redemption or
repurchase of shares of the Fund that are held by the shareholder as capital
assets. However, if a shareholder sells shares of the Fund which he has held for
less than six months and on which he has received distributions of capital
gains, any loss on the sale or exchange of such shares must be treated as
long-term capital loss to the extent of such distributions. Any loss realized on
the sale of shares of the Fund will be disallowed by the "wash sale" rules to
the extent the shares sold are replaced (including through the receipt of
additional shares through reinvested dividends) within a period of time
beginning 30 days before and ending 30 days after the shares are sold. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
The Trust is required to withhold and remit to the U.S. Treasury a portion
(31%) of dividend income on any account unless the shareholder provides a
taxpayer identification number and certifies that such number is correct and
that the shareholder is not subject to backup withholding.
Provided that the Fund qualifies as a regulated investment company under
the Code, it will not be liable for California corporate taxes, other than a
minimum franchise tax, if all of its income is distributed to shareholders for
each taxable year. Shareholders, however, may be liable for state and local
income taxes on distributions from the Fund.
The above discussion and the related discussion in the Prospectus are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Fund. The law has expressed no opinion in respect
thereof. Nonresident aliens and foreign persons are subject to different tax
rules, and may be subject to withholding of up to 30% on certain payments
received from the Fund. Shareholders are advised to consult with their own tax
advisors concerning the application of foreign, federal, state and local taxes
to an investment in the Fund.
HISTORICAL PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
The Fund's total returns are based on the overall dollar or percentage
change in value of a hypothetical investment in the Fund, assuming all dividends
and distributions are reinvested. Average annual total return reflects the
hypothetical annually compounded return that would have produced the same
cumulative total return if the Fund's performance had been constant over the
entire period presented. Because average annual total returns tend to smooth out
variations in the Fund's returns, investors should recognize that they are not
the same as actual year-by-year returns.
For the purposes of quoting and comparing the performance of the Fund to
that of other mutual funds and to other relevant market indices in
advertisements, performance will be stated in terms of average annual total
return. Under regulations adopted by the Securities and Exchange Commission,
funds that intend to advertise performance must include average annual total
return quotations calculated according to the following formula:
P(1+T)N = ERV
Where:
P = a hypothetical initial payment of $1,000 T = average annual total return n =
number of years (1, 5, or 10) ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the 1-, 5-, or 10- year period, at the
end of such period (or fractional portion thereof).
Under the foregoing formula, the time periods used in advertising will be
based on rolling calendar quarters, updated to the last day of the most recent
quarter prior to submission of the advertising for publication, and will cover
1, 5, and 10 year periods of the Fund's existence or shorter periods dating from
the commencement of the Fund's operations. In calculating the ending redeemable
value, all dividends and distributions by the Fund are assumed to have been
reinvested at net asset value as described in the Prospectus on the reinvestment
dates during the period. Additionally, redemption of shares is assumed to occur
at the end of each applicable time period.
The foregoing information should be considered in light of the Fund's
investment objectives and policies, as well as the risks incurred in the Fund's
investment practices. Future results will be affected by the future composition
of a Fund's portfolio, as well as by changes in the general level of interest
rates, and general economic and other market conditions.
The Fund may also advertise total return (a "nonstandardized quotation")
which is calculated differently from average annual total return. A
nonstandardized quotation of total return may be a cumulative return which
measures the percentage change in the value of an account between the beginning
and end of a period, assuming no activity in the account other than reinvestment
of dividends and capital gains distributions. A nonstandardized quotation may
also indicate average annual compounded rates of return over periods other than
those specified for average annual total return. A nonstandardized quotation of
total return will always be accompanied by the Fund's average annual total
return as described above.
The performance quotations described above are based on historical earnings
and are not intended to indicate future performance of the Fund.
To help investors better evaluate how an investment in the Fund might
satisfy their investment objective, advertisements regarding the Fund may
discuss various measures of Fund performance, including current performance
ratings and/or rankings appearing in financial magazines, newspapers and
publications which track mutual fund performance. Advertisements may also
compare performance (using the calculation methods set forth in the Prospectus)
to performance as reported by other investments, indices and averages. When
advertising current ratings or rankings, the Fund may use the following
publications or indices to discuss or compare Fund performance:
Lipper Mutual Fund Performance Analysis measures total return and average
current yield for the mutual fund industry and ranks individual mutual fund
performance over specified time periods assuming reinvestment of all
distributions, exclusive of sales loads. The Fund may provide comparative
performance information appearing in any appropriate category published by
Lipper Analytical Services, Inc. In addition, the Fund may use comparative
performance information of relevant indices, including the S&P 500 Index, the
Dow Jones Industrial Average, the Russell 2000 Index, the NASDAQ Composite Index
and the Value Line Composite Index. The S&P 500 Index is an unmanaged index of
500 stocks, the purpose of which is to portray the pattern of common stock price
movement. The Dow Jones Industrial Average is a measurement of general market
price movement for 30 widely held stocks listed on the New York Stock Exchange.
The Russell 2000 Index, representing approximately 11% of the U.S. equity
market, is an unmanaged index comprised of the 2,000 smallest U.S. domiciled
publicly-traded common stocks in the Russell 3000 Index (an unmanaged index of
the 3,000 largest U.S. domiciled publicly-traded common stocks by market
capitalization representing approximately 98% of the U.S. publicly-traded equity
market). The NASDAQ Composite Index is an unmanaged index which averages the
trading prices of more than 3,000 domestic over-the-counter companies. The Value
Line Composite Index is an unmanaged index comprised of approximately 1,700
stocks, the purpose of which is to portray the pattern of common stock price
movement.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the Fund's portfolios, that the averages are
generally unmanaged and that the items included in the calculations of such
averages may not be identical to the formula used by the Fund to calculate their
performance. In addition, there can be no assurance that the Funds will continue
this performance as compared to such other averages.
CUSTODIAN
- --------------------------------------------------------------------------------
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45201, has been
retained to act as Custodian for the Fund's investments. Firstar Bank, N.A. acts
as the Fund's depository, safekeeps its portfolio securities, collects all
income and other payments with respect thereto, disburses funds as instructed
and maintains records in connection with its duties.
LEGAL COUNSEL AND AUDITORS
- --------------------------------------------------------------------------------
The law offices of Roy W. Adams, Attorney At Law, 1024 Country Club Drive,
Suite 135, Moraga, California, 94556, act as legal counsel for the Trust.
The firm of Tait, Weller & Baker, Eight Penn Center Plaza, Philadelphia,
Pennsylvania, 19103, has been selected as independent auditors for the Trust.
FIRSTAR MUTUAL FUND SERVICES, LLC
- --------------------------------------------------------------------------------
Firstar Mutual Fund Services, LLC ("Firstar"), 615 East Michigan Street,
Milwaukee, Wisconsin 53202, is retained by the Investment Adviser to maintain
the records of each shareholder's account, process purchases and redemptions of
the Fund's shares and act as dividend and distribution disbursing agent. Firstar
also provides administrative services to the Fund, calculates daily net asset
value per share and maintains such books and records as are necessary to enable
Firstar to perform its duties. For the performance of these services, the
Investment Adviser (not the Fund) pays Firstar a fee for administrative
services. In addition, the Investment Adviser reimburses Firstar for
out-of-pocket expenses, including but not limited to, postage, stationery,
checks, drafts, forms, reports, record storage, communication lines and the
costs of external pricing services.
Firstar is an indirect wholly-owned subsidiary of Firstar Corporation
principally engaged in the business of commercial banking.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
INGENUITY CAPITAL TRUST
STATEMENTS OF ASSETS AND LIABILITIES
NOVEMBER 11, 1999
THE MEDICAL
SPECIALISTS
FUND
---------------------
ASSETS:
CASH $100,000
---------------------
TOTAL ASSETS $100,000
LIABILITIES: $0
NET ASSETS:
NET ASSETS APPLICABLE TO 10,000
ISSUED AND OUTSTANDING SHARES,
RESPECTIVELY, WITH NO PAR VALUE;
UNLIMITED SHARES AUTHORIZED. $100,000
=====================
NET ASSET VALUE:
NET ASSETS; REDEMPTION PRICE
AND MINIMUM OFFERING PRICE PER
SHARE (NET ASSETS/SHARES OUTSTANDING) $10.00
=====================
SEE NOTES TO FINANCIAL STATEMENTS
INGENUITY CAPITAL TRUST
NOTES TO FINANCIAL STATEMENT
NOVEMBER 11, 1999
1. Organization
Ingenuity Capital Trust ( the "Trust") is organized as a Delaware business
trust. The Trust has registered under the Investment Company Act of 1940 as
a non-diversified, open-end management investment company. The Trust
currently offers one series of shares to investors, The Medical Specialists
Fund ( the "Fund"). The Trust may start another series and offer shares of
a new fund under the Trust at any time.
2. Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of the financial statement. These
policies are in conformity with generally accepted accounting principles
("GAAP").
a. Investment Valuation
Portfolio securities which are traded on stock exchanges are valued at
the last sale price as of the close of business on the day the
securities are being valued, or, lacking any sales, at the latest bid
price. Each over-the-counter security for which the last sale price on
the day of valuation is available from NASDAQ and falls within the
latest bid and asked quotations is valued at that price. All other
securities traded in the over-the-counter market are valued at the most
recent bid prices as obtained from one or more dealers that make
markets in the securities. Securities that are traded in both the
over-the-counter market and on a stock exchange are valued according to
the broadest and most representative market. Securities for which
quotations are not readily available will be valued at their fair
market value as determined by the Board of Trustees.
b. Organization Costs
The Adviser has absorbed all costs incurred by the Fund in connection
with its organization and public offering of shares. The Fund will not
be required to reimburse the Adviser for these organization costs.
c. Federal Income and Excise Taxes
The Fund intends to comply with the requirements of the Internal
Revenue Code necessary to qualify as a regulated investment company and
to make the requisite distributions of taxable income to its
shareholders.
d. Distributions to Shareholders
The Funds will distribute any net investment income and any net
realized long or short-term capital gains at least annually.
Distributions to shareholders are recorded on the ex-dividend date.
Each Fund may also pay a special distribution at the end of the
calendar year to comply with federal tax requirements, which may differ
from generally accepted accounting principles.
e. Expenses
A shareholder may pay both transaction and operating fees and expenses
when buying and holding shares of the Funds. Shareholder transaction
expenses are fees paid directly from an investment in the Funds. Annual
fund operating expenses are expenses that are deducted from Fund
assets, such as advisory fees.
f. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported changes in net
assets during the reporting period. Actual results could differ from
those estimates.
3. Investment Adviser
The Trust has an Investment Advisory Agreement with the Adviser, to
furnish investment advisory services to the Funds. The Trust retains
Ingenuity Capital Management, LLC ( the "Adviser") to manage the
investments of the Fund. For the services provided by the Adviser under
the Advisory Agreement, the Adviser receives from the Fund a management
fee, computed and accrued daily and paid monthly, equal to 1.50% per
annum of the Fund's average daily net assets. The Advisory Agreement
requires the Adviser to waive its management fees and, if necessary,
reimburse expenses of the Fund to the extent necessary to limit the
Fund's total operating expenses to 1.95% of its average net assets up
to $200 million, 1.90% of such assets from $200 million to $500
million, 1.85% of such assets from $500 million to $1 billion, and
1.80% of such assets in excess of $1 billion.
4. Capital Stock
The Company is authorized to issue an unlimited amount of shares with
no par value.
5. The Underwriter
Rafferty Capital Markets, Inc. ( the "Underwriter"), serves as
principal underwriter for the Trust pursuant to an Underwriting
Agreement. Shares are sold on a continuous basis by the Underwriter.
The Underwriting Agreement provides that, unless sooner terminated, it
will continue in effect from year to year, subject to annual approval
by (a) the Board of Trustees or a vote of majority of the outstanding
shares, and (b) by a majority of the Trustees who are not interested
persons of the Trust or of the Underwriter by vote cast in person at a
meeting called for the purposes of voting on such approval.
6. Reorganization
A proposed reorganization of shares from Firsthand Medical Specialists
Fund to Ingenuity Trust Medical Specialists Fund will create a tax-free
reorganization of shares on the conversion date. The Medical
Specialists Fund of the Ingenuity Capital Trust will declare a reverse
stock split of the orginal 10,000 shares in the Trust to equal the NAV
per share of the Fund on that conversion date. The seed capital of
10,000 shares will be offered 1 current valued share for each original
share of $10. For example, if the NAV of the Fund is $12.50 on the
conversion date, the seed capital will be transferred to current shares
of 8,000 valued at $100,000.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE SHAREHOLDER OF
THE MEDICAL SPECIALISTS FUND
AND THE BOARD OF TRUSTEES OF
INGENUITY CAPITAL TRUST
SAN JOSE, CALIFORNIA
We have audited the accompanying statement of assets and liabilities of The
Medical Specialists Fund, (a series of Ingenuity Capital Trust). This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit of the statement of
assets and liabilities provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of The Medical
Specialists Fund as of November 11, 1999, in conformity with generally accepted
accounting principles.
TAIT, WELLER & BAKER
PHILADELPHIA, PENNSYLVANIA
NOVEMBER 12, 1999
APPENDIX A
- --------------------------------------------------------------------------------
QUALITY RATINGS OF CORPORATE BONDS AND PREFERRED STOCKS
THE RATINGS OF MOODY'S AND STANDARD & POOR'S FOR CORPORATE BONDS IN WHICH
THE FUNDS MAY INVEST ARE AS FOLLOWS:
MOODY'S
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa - Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S
AAA - Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA - Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A - Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories.
THE RATINGS OF MOODY'S AND STANDARD & POOR'S FOR PREFERRED STOCKS IN WHICH
THE FUNDS MAY INVEST ARE AS FOLLOWS:
MOODY'S
aaa - An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa - An issue which is rated aa is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings and asset
protection will remain relatively well maintained in the foreseeable future.
a - An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the aaa
and aa classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa - An issue which is rated baa is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
STANDARD & POOR'S
AAA - This is the highest rating that may be assigned by Standard & Poor's
to a preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA - A preferred stock issue rated AA also qualifies as a high-quality
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A - An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the diverse
effects of changes in circumstances and economic conditions.
BBB - An issue rated BBB is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
INGENUITY CAPITAL TRUST
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) DECLARATION OF TRUST
(i) Certificate of Trust (1)
(ii) Amended and Restated Agreement and Declaration of Trust (1)
(b) AMENDED AND RESTATED BYLAWS (1)
(c) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS -- Incorporated by
reference to the Amended and Restated Agreements and Declaration of
Trust and Amended and Restated Bylaws
(d) ADVISORY AGREEMENT -- Filed herewith
(e) UNDERWRITING AGREEMENT (1)
(f) BONUS OR PROFIT SHARING CONTRACTS - Not applicable
(g) CUSTODY AGREEMENT (1)
(h) OTHER MATERIAL CONTRACTS
(i) Administration Agreement (1)
(ii) Transfer Agent Servicing Agreement (1)
(iii) Fund Accounting Services Agreement (1)
(i) OPINION AND CONSENT OF COUNSEL (1)
(j) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS-- Filed herewith
(k) OMITTED FINANCIAL STATEMENTS - Not applicable
(l) AGREEMENT RELATING TO INITIAL CAPITAL (1)
(m) RULE 12B-1 PLAN - Not applicable
(n) FINANCIAL DATA SCHEDULES - Not applicable
(o) RULE 18F-3 PLAN - Not applicable
1 Incorporated by reference to Registrant's Pre-Effective Amendment No. 2 of
Form N-1A filed October 14, 1999.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
No person is directly or indirectly controlled by or under common
control with the Registrant.
ITEM 25. INDEMNIFICATION.
Reference is made to Article VII, Section 7.02 of the Registrant's
Agreement and Declaration of Trust.
Pursuant to Rule 484 under the Securities Act of 1933, as amended, the
Registrant furnishes the following undertaking: "Insofar as indemnification for
liability arising under the Securities Act of 1933 (the "Act") may be permitted
to trustees, officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a trustee,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such trustee, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue."
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(a) Inapplicable
(b) Inapplicable
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) Rafferty Capital Markets, Inc., 1311 Mamaroneck Avenue, White
Plains, New York 10605, serves as principal underwriter for the
Ingenuity Capital Trust, Potomac Funds, Badgley Funds, Homestate
Group, Texas Capital Value Funds, Brazos Mutual Funds, Bremer
Investment Funds, Inc., Bearguard Funds, Inc., Kirr Marbauch
Partners Funds, Inc., Golf Associated Fund and Leuthold Funds.
(b) The director and officers of Rafferty Capital Markets, Inc. are:
Positions and Offices Position and Offices
NAME WITH UNDERWRITER WITH REGISTRANT
Thomas A. Mulrooney President None
Lawrence C. Rafferty Director None
Stephen P. Sprague CFO/FINOP None
The principal business address of each of the persons listed above is
1311 Mamaroneck Avenue, White Plains, New York 10605.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
The books and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 are maintained in the physical possession of
the Ingenuity Capital Trust's investment adviser, administrator, custodian,
subcustodian, or transfer agent.
ITEM 29. MANAGEMENT SERVICES NOT DISCUSSED IN PARTS A AND B.
Inapplicable
ITEM 30. UNDERTAKINGS.
The Registrant hereby undertakes to furnish each person to whom a
Prospectus for one or more of the series of the Registrant is delivered with a
copy of the relevant latest annual report to shareholders, upon request and
without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this amendment to the Registration Statement to be signed below on its behalf by
the undersigned, thereunto duly authorized, in the City of Los Altos and the
State of California on the 24th day of November, 1999.
INGENUITY CAPITAL TRUST
BY: /S/ KENDRICK W. KAM*
Kendrick W. Kam, President
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 3 to the Registration Statement has been signed
below by the following persons in the capacities and on November 24, 1999.
SIGNATURE TITLE
/S/ KENDRICK W. KAM* President and Trustee
Kendrick W. Kam
/S/ ARTHUR L. ROTH* Trustee, Chairman of the Board
Arthur L. Roth
/S/ WILLIAM J. SCILACCI* Trustee
William J. Scilacci
* By /S/ ELAINE E. RICHARDS
Elaine E. Richards Signed as attorney-in-fact pursuant to a Power of
Attorney dated August 16, 1999 with Pre-Effective Amendment No. 2 on Form N-1A
filed October 14, 1999.
INVESTMENT ADVISORY AND MANAGEMENT AGREEMENT
This Investment Advisory and Management Agreement ("Agreement"), is made and
entered into as of November 24, 1999 by and between Ingenuity Capital Trust, a
Delaware business trust ("the Fund") having its principal place of business at
26888 Almaden Court, Los Altos, CA 94022 and Ingenuity Capital Management, LLC.
("Adviser"), having its principal place of business at 26888 Almaden Court, Los
Altos, CA 94022.
WHEREAS, the Fund, an open-end, non-diversified investment company
registered under the Investment Company Act of 1940 (the "1940 Act"), wishes to
retain the Adviser to provide investment advisory and management services to The
Medical Specialists Fund; and
WHERAS, the Adviser is willing to furnish such services on the terms
and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the promises and mutual covenants
herein contained, it is agreed as follows:
1. The Trust hereby appoints the Adviser to manage the investment and
reinvestment of assets of The Medical Specialists Fund (the "Fund") for the
period and on the terms set forth in this Agreement. The Adviser accepts such
appointment and agrees to render the services herein set forth, for the
compensation herein provided.
2. The Fund shall at all times inform the Adviser as to the securities
owned by it, the funds available or to become available for investment by it,
and generally as to the conditio of its affairs. It shall furnish the Adviser
with such other documents and information with regard to its affairs as the
Adviser may from time to time reasonably request.
3. Subject to the direction and control of the Fund's Board of
Trustees, the Adviser shall regularly provide the Fund with investment research,
advice, management and supervision and shall furnish a continuous investment
program for the Fund's portfolio of securities consistent with the Fund's
investment objective, policies, and limitations as stated in the Fund's current
Prospectus and Statement of Additional Information. The Adviser shall determine
from time to time what securities will be purchased, retained or sold by the
Fund, and shall implement those decisions, all subject to the provisions of the
Fund's Declaration of Trust, the 1940 Act, the applicable rules and regulations
of the Securities and Exchange Commission, and other applicable federal and
state laws, as well as the investment objectives, policies, and limitations of
the Fund. In placing orders for the Fund with brokers and dealers with respect
to the execution of the Fund's securities transactions, the Adviser shall
attempt to obtain the best net results. In doing so, the Adviser may consider
such factors which it deems relevant to the Fund's best interest, such as price,
the size of the transaction, the nature of the market for the security, the
amount of the commission, the timing of the transaction, the reputation,
experience and financial stability of the broker-dealer involved and the quality
of service rendered by the broker-dealer in other transactions. The Adviser
shall have the discretionary authority to utilize certain broker-dealers even
though it may result in the payment by the Fund of an amount of commission for
effecting a securities transaction in excess of the amount of commission another
broker-dealer would have charged for effecting that transaction, providing,
however, that the Adviser had determined that such amount of commission was
reasonable in relation to the value of the brokerage and research services
provided by the broker-dealer effecting the transaction. In no instance will
portfolio securities be purchased from or sold to the Adviser or any affiliated
person thereof except in accordance with the rules and regulations promulgated
by the Securities and Exchange Commission pursuant to the 1940 Act. The Adviser
shall also provide advice and recommendations with respect to other aspects of
the business and affairs of the Fund and shall perform such other functions of
management and supervision as may be directed by the Board of Trustees of the
Fund, provided that in no event shall the Adviser be responsible for any expense
occasioned by the performance of such functions.
4. The Adviser is responsible for (1) compensation of any of the Fund's
trustees, officers and employees who are interested persons of the Adviser and
(2) compensation of the Adviser's personnel and other expenses incurred in
connection with the provisions of portfolio management services under this
Agreement. Other than as herein specifically indicated, the Adviser shall not be
responsible for the Fund's expenses. Specifically, the Adviser will not be
responsible, except to the extent of the reasonable compensation of employees of
the Fund whose services may be used by the Adviser hereunder, for any of the
following expenses of the Fund, which expenses shall be borne by the Fund: legal
and audit expenses, organization expenses; interest; taxes; governmental fees;
fees, voluntary assessments and other expenses incurred in connection with
membership in investment company organizations; the cost (including brokerage
commissions or charges, if any) of securities purchased or sold by the Fund and
any losses incurred in connection therewith; fees of custodian, transfer agents,
registrars or other agents; distribution fees; expenses of preparing share
certificates; expenses relating to the redemption or purchase of the Fund's
shares; expenses of registering and qualifying Fund shares for sale under
applicable federal and state law and maintaining such registrations and
qualification; expenses of preparing, setting in print, printing and
distributing prospectuses, proxy statements, reports, notices and dividends to
Fund shareholders; cost of stationery; costs of shareholders and other meetings
of the Fund; compensation and expenses of the independent trustees of the Fund;
and the Fund's pro rata portion of premiums of any fidelity bond and other
insurance covering the Fund and its officers and trustees.
5. No trustee, officer or employee of the Fund shall receive from the
Fund any salary or other compensation as such trustee, officer or employee while
he is at the same time a director, officer or employee of the Adviser or any
affiliated company of the Adviser. This paragraph shall not apply to trustees,
executive committee members, consultants and other persons who are not regular
members of the Adviser's or any affiliated company's staff.
6. As compensation for the services performed by the Adviser, the Fund
shall pay the Adviser, as promptly as possible after the last day of each month,
a fee, accrued each calendar day (including weekends and holidays) at the rate
of 1.5% per annum of the daily net assets of the Fund. The Adviser shall reduce
such fee or, if necessary, make expense reimbursements to the Fund to the extent
required to limit the total annual operating expenses of the Fund to 1.95% of
its average daily net assets up to $200 million; 1.90% of such assets from $200
million to $500 million; 1.85% of such assets from $500 million to $1 billion;
and 1.80% of such assets in excess of $1 billion. The daily net assets of the
Funds shall be computed as of the time of the regular close of business of the
New York Stock Exchange, or such other time as may be determined by the Board of
Trustees of the Fund. Any of such payments as to which the Adviser may so
request shall be accompanied by a report of the Fund prepared either by the Fund
or by a reputable firm of independent accountants which shall show the amount
properly payable to the Adviser under this Agreement and the detailed
computation thereof.
7. The Adviser assumes no responsibility under this Agreement other
than to render the services called for hereunder in good faith, and shall not be
responsible for any action of the Board of Trustees of the Fund in the following
or declining to follow any advice or recommendation of the Adviser; provided
that nothing in this Agreement shall protect the Adviser against any liability
to the Fund or its stockholders to which it would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties
hereunder.
8. The Adviser shall be an independent contractor and shall have no
authority to act for or represent the Fund in its investment commitments unless
otherwise provided. No agreement, bid, offer, commitment, contract or other
engagement entered into by the Adviser whether on behalf of the Adviser or
whether purporting to have been entered unto on behalf of the Fund shall be
finding upon the Fund, and all acts authorized to be done by the Adviser under
this Agreement shall be done by it as an independent contractor and not as an
agent.
9. Nothing in this Agreement shall limit or restrict the right of any
director, officer, or employee of the Adviser who may also be a trustee,
officer, or employee of the Fund, to engage in any other business or to devote
his time and attention in part to the management or other aspects of any other
business, whether of a similar nature or a dissimilar nature, nor to limit or
restrict the right of the Adviser to engage in any other business or to render
services of any kind, including investment advisory and management services, to
any other corporation, firm, individual or association.
10. As used in this Agreement, the terms "assignment," "interested
person," and "majority of the outstanding voting securities" shall have the
meanings given to them by Section 2(a) of the 1940 Act, subject to such
exemptions as may be granted by the Securities and Exchange Commission by any
rule, regulation or order.
11. This Agreement shall terminate automatically in the event of its
assignment by the Adviser and shall not be assignable by the Fund without the
consent of the Adviser. This Agreement may also be terminated at any time,
without the payment of penalty, by the Fund or by the Adviser on sixty (60)
days' written notice addressed to the other party at its principal place of
business.
12. This Agreement shall become effective on the date hereof and shall
continue in effect for two years and from year to year thereafter only so long
as specifically approved annually, (1) by vote of a majority of the trustees of
the Fund who are not parties to this Agreement or interested persons of such
parties, cast in person at a meeting called for that purpose, and, (2) either by
vote of the holders of a majority of the outstanding voting securities of the
Fund or by a majority vote of the Fund's Board of Trustees.
13. No provision of this Agreement may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought, and no materials amendment of this Agreement shall be effective until
approved by vote of the holders of a majority of the Fund's outstanding voting
securities.
14. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and sealed by their officers thereunto duly authorized on the day and
year first above written. Attest:
INGENUITY CAPITAL TRUST
By: /S/ ARTHUR ROTH
- -------------------
Arthur Roth
Its: Chairman
INGENUITY CAPITAL MANAGEMENT, LLC
By: /S/ KENDRICK W. KAM
- -----------------------
Kendrick W. Kam
Its: President
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the references to our firm in the Pre-Effective Amendment to the
Registration Statement on Form N-1A of Ingenuity Capital Trust, and to the use
of our report dated November 12, 1999 on the statement of assets and liabilities
of The Medical Specialists Fund, a series of shares of the Ingenuity Capital
Trust. Such statement of assets and liabilities is incorporated by reference in
such Registration Statement.
TAIT, WELLER & BAKER
PHILADELPHIA, PENNSYLVANIA
NOVEMBER 12, 1999
