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Prospectus
These securities have not been approved or disapproved by the Securities and
Exchange Commission ("SEC"), nor has the SEC passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Allied Owners Action Fund
Prospectus
ALLIED OWNERS ACTION FUND INC.
March 9, 2000
OBJECTIVE The Fund seeks to maximize capital appreciation and will
accept high risk.
STRATEGIES The Fund's main investment strategies are to purchase
relatively large stakes in small capitalization public
companies and hold them long-term. The Fund will
select companies it believes will benefit from
shareholder scrutiny and debate.
SUITABILITY The Fund is intended for experienced investors with
long investment horizons and high risk tolerance.
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TABLE OF CONTENTS
ALLIED OWNERS ACTION FUND INC............................................2
SUMMARY OF INVESTMENTS AND RISKS.........................................5
Fund Objective...........................................................5
Principal Investment Strategies..........................................5
PRINCIPAL RISKS..........................................................5
Non-Diversification......................................................6
Suitability..............................................................6
Risks of Common Stock Investments........................................6
Small Company Risk.......................................................6
Manager Risk.............................................................6
Historical Performance of Funds..........................................7
Viability Risk ..........................................................7
Start-up Risk............................................................7
Risks of Message Board...................................................7
Risks of Market Manipulation and Other Misuse............................8
PERFORMANCE..............................................................8
FEES AND EXPENSES........................................................8
Annual Fund Operating Expenses as a % of Net Assets......................9
FUND OBJECTIVE AND STRATEGIES............................................10
Objective................................................................10
Strategies - Steps to Reach Objective....................................10
Non-Principal Investment Strategies......................................12
Board of Directors Pledge to Fund Shareholders...........................13
RISKS....................................................................13
Historical Performance of Funds..........................................13
Small Company Risk.......................................................14
Start-up.................................................................14
Risks of Message Board...................................................14
Risks of Market Manipulation and Other Misuse............................15
Y2K......................................................................16
DISTRIBUTION PLAN........................................................16
MANAGEMENT...............................................................16
Investment Adviser.......................................................17
Selection and Portfolio Managers.........................................17
Selection Manager........................................................18
Portfolio Manager........................................................18
Board of Directors.......................................................19
Duties of the Board......................................................21
Compensation of the Board..................................................22
Fund Officers..............................................................22
Code of Ethics.............................................................22
ADMINISTRATION.............................................................23
Portfolio Transactions and Brokerage Commissions...........................23
Administrator..............................................................23
Custodian..................................................................24
Transfer Agent and Dividend Agent .........................................24
Counsel and Independent Auditors...........................................24
ERAIDER....................................................................24
VALUATION OF SHARES .......................................................25
HOW TO PURCHASE SHARES.....................................................26
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General Purchase Information...............................................26
Purchase by Telephone or E-mail............................................26
Wiring Funds...............................................................26
Purchase by Mail...........................................................27
Additional Investments.....................................................27
Other Purchase Information.................................................27
HOW TO REDEEM SHARES.......................................................28
General Redemption Information.............................................28
Redemption by Mail.........................................................28
Good Order.................................................................29
Signature Guarantees.......................................................29
Redemption by Telephone....................................................29
Payment of Redemption Proceeds.............................................30
Involuntary Redemption.....................................................30
SHAREHOLDER SERVICES.......................................................31
Automatic Investment Program...............................................31
Telephone Transaction Privileges...........................................31
Tax-Qualified Retirement Plans.............................................31
Confirmation of Transactions and Reporting of Other Information............32
DIVIDENDS AND DISTRIBUTIONS................................................32
TAXES......................................................................33
Status.....................................................................33
Tax-Deferred Accounts......................................................33
Taxable Accounts: Income and Capital Gains.................................33
Long-Term Versus Short-Term................................................33
Disclaimer.................................................................34
GENERAL INFORMATION........................................................34
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SUMMARY OF INVESTMENTS AND RISKS
This section summarizes the goals, policies and risks of the Fund. Details can
be found in the sections "Fund Objective and Strategies" and "Risks."
FUND OBJECTIVE
The Fund seeks to maximize capital appreciation and will accept high risk.
PRINCIPAL INVESTMENT STRATEGIES
The Fund's primary investment strategy is to accumulate relatively large stakes
in publicly traded U.S. corporations that the Fund's selection manager believes
will benefit from improved analyst coverage as well as shareholder scrutiny and
debate. The Fund's managers intend to promote shareholder debate through an
affiliated website called "eRaider." The Fund's board intends for the Fund to
acquire generally up to, but less than, 5% of the outstanding voting stock of
each portfolio company.
Although the Fund does not have size limits on the companies whose stocks it
will buy, it will primarily invest in smaller companies having market
capitalizations below $500 million. The manager believes companies with larger
capitalizations already have adequate shareholder scrutiny. The manager believes
stable, well-managed companies are more likely than others to attract
institutional investment, which often leads to institutional shareholder
scrutiny and therefore are of less interest to the Fund. The manager believes
institutions tend to side with management, frustrating effective scrutiny from
individual shareholders. These factors encourage the Fund to look for targets
among smaller, less-stable companies. Other factors considered by the Fund in
determining a target company's appropriateness for the Fund's portfolio include
under-utilized assets, unresponsive management that can use assistance, passive
boards of directors and companies overlooked by income and growth funds.
The Fund will be non-diversified; however it will invest among several
companies.
PRINCIPAL RISKS
Investment in the Fund carries substantial risks. A significant risk of
investing in the Fund is that you may lose your investment. An investment in the
Fund is not a deposit in the bank and is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency.
NON-DIVERSIFICATION
The Fund will be non-diversified and therefore will be subject to greater
volatility than a diversified fund.
SUITABILITY
- - The Fund is intended for experienced investors with long investment
horizons and high risk tolerance.
- - It is not prudent for an investor to put more than 5% of his or her liquid
security investments in the Fund.
- - The Fund will invest in risky securities, it is a new fund, its strategies
may prevent diversification and it is attempting new mutual fund management
strategies.
- - Inexperienced and risk-averse investors should find a more suitable fund.
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RISKS OF COMMON STOCK INVESTMENTS
As a general rule, growth stocks are less safe than income stocks. Therefore
funds, such as the Fund, that invest in growth stocks are generally more
volatile than funds that do not invest in growth stocks.
Common stocks can have sudden, unpredictable market movements and can be
sensitive to economic factors, legislation and world affairs. The Fund's value
will change daily based on changes in the market prices of the Fund's
investments.
SMALL COMPANY RISK
Smaller capitalization companies in which the Fund's board intends for the Fund
to invest tend to have more risks than those of larger companies. They may be
more susceptible to market downturns and their prices may be more volatile.
MANAGER RISK
All mutual funds are exposed to manager risk. The selection manager may not
choose profitable companies for investment and the portfolio manager may not
execute the Fund's strategies effectively. The Fund is expected to hold most
investments long term, and security selection decisions (made by the selection
manager) will be separated from the daily buying and selling decisions (made by
the portfolio manager). The Fund's board believes these factors will reduce
manager risk.
HISTORICAL PERFORMANCE OF FUNDS
Historically, actively managed funds have consistently underperformed main
indices such as the S&P 500. The Fund hopes to beat the Russell 2000 index but
it may fail to do so.
VIABILITY RISK
While the Fund's investment adviser has committed to pay all out-of-pocket
expenses including brokerage commissions of the Fund, there can be no assurance
that the investment adviser will be successful in keeping such expenses below
its 1% flat advisory fee. If the adviser fails to attract sufficient investments
to bring Fund assets to approximately $40 million, Fund expenses to be paid by
the adviser could exceed the 1% fee the Fund will pay to the adviser. In that
event, there can be no assurance that the Investment Adviser will continue
subsidizing the Fund's expenses beyond its one year commitment. Accordingly, if
Fund expenses (including brokerage fees) exceed and remain above 1% of net asset
value, this may have an adverse impact on the Fund and its shareholders.
START-UP RISK
Since the Fund is a new fund, it is exposed to start-up risk. While the
investment adviser has managers with certain experience in the mutual fund
industry, management of investor assets and institutional trading (see
"Management" section), the investment adviser's managers have not managed a
public mutual fund. Further, since the Fund is not part of an established fund
family and is pursuing untested investment strategies, it has additional
start-up risks.
Although Privateer is bound to pay all the Fund's expenses during the Fund's
first year of effectiveness, if Privateer fails the Fund may be subject to the
payment of such expenses.
RISKS OF MESSAGE BOARD
Fund acquisitions, and news, data and analysis of the Fund relating to such
acquisitions will be posted at
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the eRaider website. Fund shareholders and purchased company shareholders will
be invited to post their thoughts on eRaider's public Internet message board.
While the Fund's board intends for the Fund to improve communication of ideas
and strategies between company management and shareholders as a result of the
message board, resulting in increased value of the purchased company's stock,
this cannot be assured even if the message board is well-organized and well-run.
The eRaider message board may anger company management and thereby disrupt
rather than foster shareholder communication with management.
RISKS OF MARKET MANIPULATION AND OTHER MISUSE
Some Internet message boards have attracted misinformation. Others have revealed
confidential, insider or stolen information. Persons accessing the eRaider
website could misuse eRaider to manipulate prices, disseminate misleading or
false information or conduct improper proxy solicitations. Such misuse could be
detrimental to the Fund. The Fund could be subject to suit or potential
liability for stock manipulation or other alleged misconduct.
The Fund has furnished eRaider with a "No Market Manipulation" warning for
message board users. Misuse is often difficult to spot. The Fund will take all
reasonable measures through its affiliate eRaider to detect and remove promptly
all messages that appear to violate laws regarding manipulation or that raise
reasonable suspicion that the user is attempting to run up or down the price of
a particular stock. The Fund will also arrange with eRaider to warn users that
public Internet financial sites can easily be used for misinformation and
manipulation, and that viewers should consider all postings with a degree of
skepticism.
PERFORMANCE
The Fund has not commenced operations as of the date of this Prospectus and,
therefore, has no performance information to report.
FEES AND EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. While the Fund has no sales charge (load), redemption
fees or exchange fees, other institutions may charge you a fee for shares you
buy through them. Shareholder fees are paid directly from your investment.
Annual fund operating expenses are paid from Fund assets.
ANNUAL FUND OPERATING EXPENSES AS A % OF NET ASSETS
Management Fee(1): 1%
Distribution (12b-1) Fees(2): 0%
Other Expenses: None
Total Operating Expenses: 1%
(1) Privateer Asset Management Inc. ("Privateer"), the investment adviser for
the Fund, will be paid this fee. Privateer has contracted with the Fund to be
the Fund's investment adviser for a period of two years. This contract is
subject to annual approval by the Fund board for one-year periods after such
two-year term. Pursuant to such contract, during the contract term Privateer has
volunteered and agreed to pay all Fund expenses. The Fund may cancel this
contract at any time on 60 days' written notice to Privateer, and after the
first anniversary of the date the Fund is declared effective, Privateer may
terminate the contract on 60 days' written notice to the Fund.
(2) All Fund distribution expenses will be paid by Privateer during the term of
the Fund's contract with Privateer (see previous footnote). The Fund has a 12b-1
plan allowing the adviser to spend up to 1% of
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the Fund's net assets on distribution activities.
Example
This example is intended to help investors compare the cost of investing in the
Fund to the cost of investing in other mutual funds. The example assumes that an
investor invests $10,000 in the Fund for the time periods indicated and then
redeems all his or her shares at the end of those periods. The example also
assumes that the investment has a 5% return each year and the Fund's operating
expenses remain the same as shown in the table above. Although an investor's
actual costs and return on investment may be higher or lower, based on these
assumptions the costs would be:
Year
1 $102
3 $323
FUND OBJECTIVE AND STRATEGIES
OBJECTIVE
The Fund seeks to maximize capital appreciation and will accept high risk. This
Fund objective may be changed by the Fund board without shareholder approval.
STRATEGIES - STEPS TO REACH OBJECTIVE
The Fund's principal investment strategy is to buy and hold publicly-traded
common stock of carefully-selected U.S. corporations, ones the Fund believes
will appreciate as a result of shareholder scrutiny and debate. The investment
and management strategies adopted by the Fund to carry out its objective involve
four steps.
First, the selection manager will select companies that he believes will
benefit from increased public analysis and shareholder scrutiny and debate.
The selection manager will also determine the desired aggregate position to
be held by the Fund in such companies. The selection manager has wide
discretion because the criteria require subjective judgment about business
and company management. However, the following list gives some of the
characteristics that the selection manager may consider:
- Under-utilized assets. This would include unused fixed assets or
excessive inventory.
- Unresponsive management. This is often reflected in low stock
ownership by institutions, uninformative public announcements or
dismissive responses to shareholders' inquiries.
- Management that can use help. Organized shareholders can provide
expertise, contacts, capital raising and marketing help, especially
for smaller companies. The Fund believes that this can make a
significant difference in a company's performance without interfering
with day-to-day operations.
- Passive board of directors. For example, companies that have few or no
independent directors with the knowledge and experience to
double-check management, and have low stock ownership by directors.
- Companies Overlooked by Other Funds. If funds buy stocks with expected
above-average dividend yields or above-average capital gains,
potential portfolio companies that are below-average in both
categories may be overlooked. In fact, these companies tend to have
low institutional ownership. The Fund's board intends for the Fund to
select mostly from this group of companies, looking for smaller
capitalization companies with problems that may be resolved with
increased public analysis and shareholder input.
Second, the portfolio manager will acquire stock in the selected companies.
This is generally
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expected to be a slow process (several months) in order
to acquire a large stake (typically up to, but less than, 5%) without
pushing up the price. If the portfolio manager determines that, for
whatever reason, including price sensitivity or inadequate float, it
appears impracticable to acquire the desired position, she will abstain
from entering the market or continuing to add to the position. Instead, the
portfolio manager will seek revised instructions from the selection manager
if no portion of the intended position has been acquired or hold or dispose
of the existing position as the portfolio manager determines. The portfolio
manager is responsible for monitoring news about the stock and deciding at
which prices to buy.
Although the plan is to acquire a large stake in target stock(s), it is
possible that news, price movements or other market conditions will cause
the portfolio manager to stop acquiring the stock(s) or sell the existing
position(s).
Third, when the portfolio manager has acquired the desired stake, the stock
will be announced at the eRaider Internet website, www.eRaider.com. eRaider
will encourage Fund shareholders and all other holders of the stock to
participate in a message board to discuss the Fund companies. The Fund's
board intends for the Fund to post on eRaider extensive information and
analysis about the Fund's portfolio companies. eRaider will encourage a
thoughtful interchange of informed opinion through the use of expert
moderators. Moderators are expected from time to time to voice their
opinions, and their opinions will be clearly labeled as such. Neither the
portfolio manager, the selection manager nor the Fund will take part in
message board discussions relating to specific portfolio companies. The
portfolio manager will monitor news about the stock, vote the shares in the
best interests of Fund shareholders, even if that opposes the consensus if
any on the eRaider message board, and buy or sell the stock only in
exceptional situations. eRaider has hired Martin Stoller, Ph.D. to oversee
communications at the site. Information about Dr. Stoller can be found in
the section "eRAIDER."
Fourth, the Fund's board intends that active, insightful participation on
the eRaider site will unlock the value of the companies in which the Fund
invests. At that point a more aggressive fund might sell the investment.
The Fund's board, however, intends for the Fund to hold the position on the
theory that continuing oversight will produce continuing good performance.
The Fund's board expects for the Fund to invest substantial time and energy
in understanding its portfolio companies and does not consider it efficient
to devote that expenditure for a possible gain from short term trading.
Finally, the Fund wishes to maintain a low turnover ratio to minimize
taxes. If, however, the portfolio manager determines that the Fund has
achieved its objective, or that contrary to its hopes continuing
shareholder oversight is not likely to lead to significant improvement in
performance, or that liquidation of the accumulated position is indicated
for other reasons such as poor company performance or to acquire superior
investment opportunities, the selling process will be pursued in the best
manner to protect Fund performance. The Fund's board intends for eRaider to
stimulate an informed and thoughtful discussion of the purchased company.
The Fund's board expects to attract a significant fraction of that
company's shareholders to the message board. The Fund's board intends
thereby to improve communication of ideas and strategies between company
management and shareholders resulting in increased value of the purchased
company's stock.
NON-PRINCIPAL INVESTMENT STRATEGIES
The Fund may pursue other strategies in the following or like circumstances, but
intends to do so only occasionally as follows:
First, the Fund's board intends for the Fund to be unleveraged, but
unexpected redemptions might cause the Fund to borrow money. The portfolio
manager will weigh the risk of leveraged investments against the loss from
selling stocks too quickly. Borrowed funds will be repaid as quickly as the
portfolio manager deems prudent.
Second, the Fund's board intends for the Fund to be fully invested, but it
may hold relatively minor
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cash or cash equivalent balances in anticipation of redemptions. The minor
cash positions for this purpose would likely be comprised of money market
instruments, time deposits, Treasury bills or commercial paper, or
combinations thereof. The Fund will attempt to minimize cash balances.
Third, the Fund's investment acquisition strategies include researching a
company and then allowing months to build up a significant equity stake
without moving the market. If shareholder purchases come in faster than the
Fund can accommodate in its main strategies, it will make short-term, high
quality investments identical to those used for minor cash positions. If
these balances become too large in the judgment of the portfolio manager,
the Fund will consider declining new shareholder investments temporarily.
Fourth, the types of companies the Fund invests in may be or become
attractive as takeover targets and merger partners. Moreover, the Fund's
investments may contribute to putting its portfolio companies "in play,"
which could trigger legal and corporate finance maneuvers by other
investors or company management. In some cases, the portfolio manager may
decide that it is in the Fund shareholders' interests to accept a tender
offer for shares in a portfolio company, and in other cases to increase the
Fund's investment. The selection manager will act in the best interests of
Fund shareholders, increasing or decreasing the Fund's position as
appropriate.
BOARD OF DIRECTORS PLEDGE TO FUND SHAREHOLDERS
The Fund will not:
- Alter its fundamental investment policies without prior shareholder
approval.
- Lend the Fund's securities to short-sellers or anyone else. Solicit or
accept any hard-dollar or soft-dollar payments from any firm or
individual to execute trades or provide professional services.
- Offer or pay any hard-dollar or soft-dollar payments to any firm or
individual to distribute the Fund.
- Sell our shareholder list to third party marketers.
- "Window-dress" the Fund's portfolio, manipulate performance or
categorization to gain better fund ratings, use "ask" or "average of
bid and ask" prices to inflate net asset value and Fund performance,
or attempt to communicate with Fund shareholders in any other
misleading way.
RISKS
HISTORICAL PERFORMANCE OF FUNDS
Historically, managed equity funds have consistently underperformed main indices
such as the S&P 500. According to Morningstar the average U.S. equity fund
underperformed the S&P 500 by 4.8% per year during the ten years ended May 31,
1999. The Fund hopes to beat the Russell 2000 index but it may fail.
SMALL COMPANY RISK
Another risk relates to the type of company the Fund selects. The Fund's board
intends for the Fund to invest in small and medium capitalization companies.
Although the Fund does not have size limits on the companies it will buy, it
will invest primarily in companies with market capitalizations below $500
million. Such companies may be more susceptible to market downturns and more
volatile than larger companies due to inexperienced management, lack of a
successful track record or limited financial backing.
START-UP
All new funds are exposed to start-up risk. A new organization has more chance
of making mistakes than
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an established one. Plus, inflows and outflows as a percentage of total fund
assets are more volatile in new funds. The Fund has more start-up risk than many
new funds since it is not part of an established fund family and is pursuing
untested investment strategies.
RISKS OF MESSAGE BOARD
Once the Fund has acquired its stake in a target company, it will arrange with
affiliate eRaider to announce the purchased company at eRaider's website,
www.eRaider.com. eRaider will post news, data and analysis of the Fund position
and invite shareholders, both Fund shareholders and purchased company
shareholders, to post their thoughts on eRaider's public Internet message board.
The Fund's board intends for eRaider to stimulate informed and thoughtful
discussions of the Fund's portfolio companies. The Fund's board expects for the
Fund to attract a significant fraction of its portfolio companies' shareholders
to the message board.
Although companies have been arranging Internet message boards to discuss their
stocks for several years, the effect of a large shareholder arranging for a
board and inviting -- and overseeing -- participation is a new and untested
concept. While the eRaider message board is intended to improve communication of
ideas and strategies between company management and shareholders resulting in
increased value of the purchased company's stock, this cannot be assured even if
the message board is well organized and well run. This is true because, among
other reasons, even worthy comments may not be viewed as constructive by company
management and may only serve to stiffen resolve not to change policies, thereby
validating the criticism. The eRaider message board may anger company management
and disrupt rather than foster shareholder communication with management.
Another possibility is that too much attention to the opinions of small
shareholders could cause company management to disregard their greater expertise
and choose a popular decision over sound long-term strategies. There is also a
risk that publishing the Fund's purchases and sales on the eRaider website could
drive prices up or down to the detriment of the Fund. While the Fund's board
believes these risks exist in any event for all companies and that establishing
a responsible forum reduces them, the Fund's board may be wrong.
RISKS OF MARKET MANIPULATION AND OTHER MISUSE
Some Internet message boards have attracted misinformation. Others have revealed
confidential, insider or stolen information. These types of posts could damage a
company's investment standing and business prospects, which could adversely
affect the Fund's value. Persons accessing the eRaider website could seek to
influence market prices or otherwise misuse eRaider to the detriment of the Fund
and the Fund could thereby be subject to suit or potential liability for stock
manipulation or other alleged misconduct.
The Fund's board of directors has considered the eRaider relationship to the
Fund and the investment adviser, and the Fund's method for picking stocks, and
has determined that the use of the eRaider website is nonetheless in the best
interests of the Fund and its shareholders. The board will monitor the Fund's
connection with the eRaider website to determine that eRaider continues to be in
the best interests of the Fund and its shareholders.
The Fund has furnished eRaider with a "No Market Manipulation" warning for
message board users. Users will be warned that U.S. securities laws make it
unlawful, among other things, for anyone to engage in any act that would be
considered market manipulation pursuant to such securities laws. Misuse is often
difficult to spot. The Fund will take all reasonable measures through its
affiliate eRaider to detect and remove promptly all messages that appear to
violate U.S. securities laws or that raise reasonable suspicion that the user is
attempting to run up or down the price of a particular stock. The Fund will also
arrange with eRaider to warn users that public Internet financial sites can
easily be used for misinformation and manipulation, and that viewers should
consider all postings with a degree of skepticism.
<PAGE> 11
Y2K
Many computer systems are unable to distinguish the year 2000 from the year
1900. This is popularly referred to as the "Y2K" problem. The Fund believes that
its internal management systems are not subject to this problem and has received
assurances from Privateer and eRaider that they have complied with industry
standards designed to prevent breakdown. However, failure of computer systems
used for securities trading, such as the New York Stock Exchange ("NYSE")
systems, could prevent the Fund from making transactions, cast into doubt
transactions that were made and cause overall securities prices to fall. Also
the companies owned by the Fund may incur losses from Y2K problems.
This could reduce their market value and hence the market value of the Fund.
DISTRIBUTION PLAN
Although the Fund will not directly pay any fees, it has adopted a plan (called
a 12b-1 plan) whereby it will distribute its own securities without retaining an
outside underwriter. This is expected to generate substantial savings since
Privateer will absorb out of its 1% management fee all distribution costs. The
maximum amount payable by the Fund under the 12b-1 plan is .75% toward
distribution and .25% toward service fees. The distribution activities
contemplated by the plan are expected to include public relations and, as the
need arises, print and radio media, although no direct marketing efforts along
such lines are intended initially. No special sales force is contemplated. No
brokers/dealers will be paid to place Fund shares. Because 12b-1 fees are paid
out of the Fund's assets on an ongoing basis, over time these fees will increase
the cost of your investment and may cost you more than paying other types of
sales charges.
MANAGEMENT
Fund management considers this the most important part of the prospectus.
Throughout this document, you will find many statements and promises. But who
will implement and carry out these promises?
The issue of honesty and trust should be addressed squarely. Before making an
investment in the Fund an investor should accept its approach to investing as
described in this prospectus and trust that the Fund's board of directors and
investment adviser will carry out those strategies in the shareholders' best
interests. An investor should have good reason to believe that Fund management
and its board members are honest and capable, and that they take their duties to
shareholders seriously.
While the Fund will not have shareholder meetings, its shareholder participation
program is intended to ensure an adequate opportunity for presentation of
shareholder views.
The board of directors of the Fund is the group charged with ultimate
responsibility for making sure the Fund acts in the best interests of Fund
shareholders.
INVESTMENT ADVISER
The Fund has retained Privateer to act as investment adviser and manager.
Privateer will furnish all investment, compliance and administrative services to
the Fund for a 1% management fee. This contract will remain in effect for two
years from the date of its initial approval, and is subject to annual approval
of the Fund board for one-year periods thereafter. Pursuant to such contract,
during the contract term Privateer has agreed to pay all Fund expenses. The Fund
may cancel this contract at any time on 60 days' written notice to Privateer,
and after the first anniversary of the date the Fund is declared effective,
Privateer may terminate the contract on 60 days' written notice to the Fund.
Privateer is permitted to subcontract such services as necessary. It currently
has contracts with American Data Systems, Inc. ("ADS"), to provide
administrative, stock transfer and accounting services. It has a contract with
Union Bank of California, N. A. ("Union Bank") to act as custodian.
<PAGE> 12
Initially, Privateer's only business will be providing services to the Fund.
However, Privateer intends to engage in other investment management businesses
yet to be developed. The Privateer advisory contract is not assignable and
terminates if an assignment is made.
SELECTION AND PORTFOLIO MANAGERS
The respective duties of the selection and portfolio managers are set forth
under "Fund Objective and Strategies, Strategies - Steps to Reach Objective."
Deborah Pastor and Aaron Brown will each receive salaries of $125,000 per year
from Privateer, Ms. Pastor as portfolio manager and Mr. Brown as selection
manager. Mr. Brown and Dr. Stoller each own 50% of Privateer and 50% of eRaider,
businesses whose value depends in part on the success of the Fund.
SELECTION MANAGER
This prospectus was written by Aaron Brown (43) who will be employed by
Privateer to serve as the selection manager for the Fund. Mr. Brown is
Instructor of Finance at Yeshiva University in New York and writes a weekly
mutual fund advice column for Sage Online, where he also answers questions about
mutual fund investing on a message board. He has an M.B.A. in Finance from the
University of Chicago and a S.B. in Applied Mathematics from Harvard College.
For the last ten years his only full-time employment has been with Yeshiva
University, but he has done consulting work for J. P. Morgan & Co., Rabobank
Nederland and other large banks, Prudential Insurance Company of America and
American Management Systems Incorporated. Prior to Yeshiva University, Mr. Brown
taught finance at Fordham School of Business in New York and was a director of
Lepercq de Neuflize Inc. For the past 12 years, until recently, when he stepped
out of the business to devote full time to the Fund and his teaching
responsibilities, Mr. Brown managed private money, and had approximately $24
million under management. He has worked strictly on a performance compensation
basis for his private asset management. As the strategies carried out by Mr.
Brown in private asset management differ from those intended for the Fund, no
meaningful comparison with respect to prospective Fund results can be made. Mr.
Brown is in the process of reorganizing his former investment management
business to permit him to devote more time to the Fund.
Mr. Brown has been active in the design of every aspect of the Fund. He and
Martin Stoller, funded all start-up expenses.
PORTFOLIO MANAGER
Mr. Brown is married to Deborah Pastor (42), who will be employed by Privateer
to serve as portfolio manager. Ms. Pastor has an M.B.A. in Finance from the
University of Chicago and a B.A. from Yale University. From May 1997, Ms. Pastor
has worked with Mr. Brown managing approximately $24 million for private clients
and developing (but not practicing) the Internet mutual fund idea that has
become the Fund. Prior thereto, over the preceding ten years she worked for the
Bank of Montreal where she was a director (Senior Foreign Exchange Advisor) from
August 1993 to May 1997, and for J. P. Morgan & Co. where she was Vice President
of the foreign exchange department for nearly seven years until August 1993. At
both banks she gave advice to corporate treasury departments of large companies
and coordinated implementation with bank traders. She has also worked as the
Foreign Exchange Manager of United Brands, Incorporated and for European
American Bank in commodity finance. In her bank careers she has marketed foreign
exchange options, advised corporations on their foreign exchange exposure and,
working with bank traders, facilitated the execution of foreign exchange and
option trades for bank clients.
The chief distinction between the selection manager (Mr. Brown) and the
portfolio manager (Ms. Pastor)
<PAGE> 13
is that the former is responsible for stock selection and the latter for
acquisition and disposition of selected stocks.
BOARD OF DIRECTORS
The next step in organizing the Fund is appointing the initial board of
directors. Being a director is a lot of work and carries substantial liability
risk. So the only persons who will agree to serve are those who like and trust
the Fund's founders (the "sponsors") (the sponsors of the Fund are Aaron Brown
and Martin Stoller). The sponsors considered several competing interests in
choosing the directors. First, even if under the Investment Company Act of 1940,
as amended (the "1940 Act"), the board or directors are not classified as
interested persons with respect to the Fund, they may nonetheless not truly be
independent, and may be disposed to care more about getting the sponsors' money
back than defending interests of Fund shareholders. The sponsors have tried to
avoid appointing board members who might be prone to favor sponsor interests
over shareholder interests.
Second, the Fund requires directors with top professional credentials, who
generally expect to be paid well. If the pay is too low, only friends of the
sponsors will serve. If the pay is too high, directors will quickly become
friendly with the sponsors. Also, high pay for directors can add significantly
to the expense ratio of a small fund.
Finally, there is the issue of management consensus. It makes no sense to design
a fund one way, then appoint directors who will immediately change it. Investors
have a right to expect that directors agree with the ideas in the prospectus.
But a board of like-minded people may find it difficult to act independently of
management.
The Fund's sponsors did not solve all these problems but they balanced each
issue and made what they consider good compromises. When the Fund is declared
effective it will have five directors. Mr. Brown will serve on the board because
he knows the most about the overall concept of the Fund and will be able, as
Fund president, to carry out the board's decisions efficiently. The other four
directors were selected so that collectively they could efficiently and
effectively oversee all aspects of the Fund themselves. They possess the
expertise to evaluate management's performance and, if necessary, change the
management company. They could even take over management of the Fund.
Except as detailed in the section "Compensation of the Board" (below), none of
the four independent directors will receive any direct or indirect financial
compensation from the Fund, Privateer, the sponsors or eRaider. They will meet
monthly, and were all selected from the New York area. All are friends of Mr.
Brown's, but they did not know each other prior to being selected as directors
and the Fund believes all have the character to place duty above friendship.
None of them has had prior business dealings with any sponsor.
Rita Robbins (42) will serve as director and board chair. She has over 20 years'
experience in mutual fund operations and distribution. For the last five years
she has been Sales & Marketing Manager for Washington Square Securities Inc.
Prior to that she was a Regional Manager for Lord Abbett & Co. for ten years,
Director of Mutual Fund Marketing for Nathan & Lewis Securities, Inc. for three
years and Assistant Operations Manager for PaineWebber Group Inc. for three
years. Until recently she had served for seven years as a member of the
Securities Industry Institute of the Securities Industry Association.
Paul Zarowin (43) is Assistant Professor of Accounting at the Stern School of
Business, New York University. He has a B.A. from the University of Pennsylvania
and an M.B.A. in Finance and a Ph.D. in Business Economics from the University
of Chicago. For the last ten years he has been a full-time professor at Stern.
He is a leading expert in the use of financial statements to predict securities
prices. He is the author of two classic studies in the field, "Does the Stock
Market Overreact to Corporate Earnings Information?" (Journal of Finance,
December 1989, vol. XLIV, no. 5, pp. 1385-99) and "Size, Seasonality and Market
Overreaction" (Journal of Financial and Quantitative Analysis, March 1990, vol.
25, no. 1, pp. 113-125).
<PAGE> 14
Anne Miller (39) holds a B.S. in Computer Science from Duke University and an
M.B.A. from Harvard Business School. For the last five years she has been
president of the Oryx Group, Inc. a consulting company specializing in
evaluating business opportunities and acquisitions for pharmaceutical companies.
Prior to that she worked in strategic planning for Bristol-Myers Squibb Company
and automated measurement and manufacturing for General Electric Company.
John Capela (51) holds B.A. and M.B.A. degrees from Long Island University. He
has over 30 years' experience in management, mostly outside the U.S. For the
last ten years he has devoted himself to teaching including at Yeshiva
University Sy Syms School of Business where he is an instructor in management
and at the New York Institute of Technology School of Management. He serves as
President of Cade International, which provides consulting and training
services. Through Cade his consulting clients have included the learning Annex
of New York, Inc., Nassau Community College, New York Institute of Technology,
St. John's University, YWCA, Fehrmann Industries and Hy-Tech Industries.
DUTIES OF THE BOARD
The board generally will meet monthly in face-to-face meetings to review all
matters materially pertaining to the Fund. Between meetings, board members will
keep in touch with their particular areas of responsibility. If they feel it
appropriate, they will communicate with other board members to discuss events
and take action.
All board members will maintain up-to-date information pages at the eRaider
Internet site. These pages will broadcast analyses of the Fund's performance.
Topics will include fund operations, shareholder services and fees (Ms.
Robbins), fund accounting (Mr. Zarowin), business prospects of the fund's stocks
(Ms. Miller) and management and oversight issues at the Fund's portfolio
companies (Mr. Capela). Topics including stock selection that do not fit into
these categories will be addressed by Mr. Brown. Each director will be
responsible for her or his own Internet pages. Each set of pages will be
associated with a message board for Fund shareholders and the public to ask
questions and make comments or suggestions. Directors will read these messages
and, if they feel it appropriate, respond.
In keeping with eRaider philosophy, the Fund's board hopes that each board
member's topic will attract thoughtful discussion by shareholders who will
provide collective Fund oversight. The Fund's board hopes to recruit future
directors from message board participants. The message boards will serve as an
important link between Fund management and Fund shareholders.
COMPENSATION OF THE BOARD
At this time the outside directors will be given $150 in Fund shares (as a
directed investment of their attendance honorarium), payable by Privateer, for
every monthly meeting they attend in person; however, outside directors may opt
instead at any time to receive such honorarium in cash.
These arrangements may remain in effect only for the first year of Fund
operation. By the end of the first year, the Fund's board hopes the Fund will
have active oversight by Fund shareholders. The Fund's board intends for the
Fund to encourage active discussion among such shareholders about who should
serve on the board and how they should be paid. The perfect solution would be to
find independent Fund shareholders with the necessary expertise who are willing
to serve as board members merely to protect their own investment and for
whatever honor it confers. This is a Fund goal.
FUND OFFICERS
The Fund has three officers, Mr. Brown, President, Ms. Pastor, Vice President
and Dr. Stoller, Secretary. The Fund business is managed by Privateer.
<PAGE> 15
CODE OF ETHICS
The Fund has adopted a code of ethics that restricts personal trading by Fund
officers and directors, and by Privateer officers and directors and persons
associated therewith, of stocks the Fund acquires or intends to acquire. The
officers, directors, the portfolio manager and selection manager are bound by
the code, as are all other persons with access to investment information. The
code allows individuals to invest in broad-based public mutual funds that may
purchase or own portfolio securities; investments in the Fund itself, although
this will represent an indirect purchase of such securities; and investment in
an account where individuals bound by the code have no control over Fund
investment selection.
These provisions are designed to ensure that the interests of the Fund and its
shareholders come before the interests of persons who manage the Fund or its
affiliates. The board will, from year to year, re-approve the code after
consideration of any appropriate revisions. The board may also waive provisions
in specific cases.
ADMINISTRATION
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Portfolio transactions for the Fund will generally be executed with
broker/dealers on an agency basis, but will be executed with principals if the
portfolio manager determines this will result in a better all-in price. The
portfolio manager will be responsible for placing all orders for purchases and
sales of the Fund's securities.
In selecting broker/dealers the portfolio manager will seek the most favorable
price and execution and may not consider research and brokerage services
furnished to the Fund or to Privateer or eRaider, or any of their affiliates.
The portfolio manager will not consider sales of the Fund's shares as a factor
in the selection of broker/dealers.
The portfolio manager will consider the total cost of acquiring the Fund's
desired stake, rather than the individual costs of each trade. Because the Fund
intends to acquire relatively large stakes -- up to but less than 5%-- the
portfolio manager may find it useful to use several small broker/dealers to
reduce price impact, even if this increases brokerage commissions and bid/ask
spreads. In other cases, the portfolio manager may elect to steer all orders to
a single large broker/dealer in return for reduced fees and spreads. If in the
judgment of the portfolio manager, a 4.9% stake in a prospective company
investment cannot be obtained, or obtained without moving the market
unacceptably, the portfolio manager will not proceed until acquisition
conditions are more favorable. This is a matter of delicate trading judgment and
is left to the discretion of the portfolio manager.
ADMINISTRATOR
Privateer will subcontract administrative services to ADS, which has its
principal office at The Hauppauge Corporate Center, 150 Motor Parkway,
Hauppauge, New York 11788. ADS is primarily in the business of providing
administrative, fund accounting, state securities law compliance and stock
transfer services to retail and institutional mutual funds with approximately $3
billion of total assets through its offices in New York, Denver, Tampa and Los
Angeles.
Pursuant to administrative service agreements with Privateer, ADS will provide
all administrative, accounting and transfer services necessary for the Fund for
a minimum annual fee of $60,000 or 0.15% of Fund assets, whichever is greater.
Privateer will also pay ADS the greater of $1,000 per month and $9 per year per
account, plus out-of-pocket expenses, for rendering such transfer and dividend
agency services. Assuming average net asset value of $40 million per year, and
average account investment of $10,000, estimated costs for ADS administrative
and transfer services are $108,000 per year.
<PAGE> 16
State securities law or Blue Sky compliance services if requested will be
handled by ADS and paid for by Privateer on a negotiated fee basis. In addition,
ADS will serve as the Fund's transfer agent and perform fund accounting services
for which it will be paid separately by Privateer. For additional information,
see section "Custodian, Transfer Agent and Dividend Agent."
CUSTODIAN
Union Bank will serve as custodian for the Fund's cash and securities. The
custodian does not assist in, and is not responsible for, investment decisions
involving assets of the Fund. For its services, Privateer will pay Union Bank
0.02% of net asset value per year. Assuming average net asset value of $40
million per year, estimated costs for Union Bank custodian services is $8,000
per year.
TRANSFER AGENT AND DIVIDEND AGENT
ADS will act as the Fund's transfer and dividend agent.
COUNSEL AND INDEPENDENT AUDITORS
Legal matters in connection with the issuance of shares of common stock of the
Fund will be passed upon by Friedman Siegelbaum LLP, 599 Lexington Avenue, New
York, NY 10022. Arthur Andersen, 1345 Avenue of the Americas, New York, NY 10105
has been selected as independent accountants for the Fund.
ERAIDER
eRaider has hired Martin Stoller, Ph.D. to oversee communications at the eRaider
website. Dr. Martin Stoller (43) is a Clinical Full Professor of Communication
at the Kellogg School of Management, Northwestern University. He holds a B.S.
and an M.A. in Communication Studies and a Ph.D. in Rhetoric from Northwestern
University. Dr. Stoller also has been a full-time college professor for the last
ten years but does extensive outside work in corporate communications and crisis
management. Clients have included a number of major companies including
Microsoft, Hyatt Hotels, Apple Computer, Kidder-Peabody, Bristol-Myers Squibb,
The Boston Consulting Group, Continental Bank, Kraft General Foods and Abbott
Laboratories. He currently serves as a Director of and Special Advisor to CyBear
Inc. and member of the advisory board and Special Communications Manager for
Andrx Pharmaceuticals. Aside from funding and general advice, Dr. Stoller has
not been directly involved with the Fund, but he is indirectly involved through
the eRaider Internet site.
VALUATION OF SHARES
The Fund will compute its net asset value, which, using the number of shares
outstanding, determines price per share on each day the NYSE is open for
business as of the regular close of trading. Additionally, shares will not be
priced on days on which the NYSE is closed for trading, including most U.S.
national holidays and Good Friday. Shareholders should also be aware that the
major stock exchanges are considering changing their trading hours. The Fund
reserves the right to modify its pricing procedures to reflect changes in stock
trading practices.
Portfolio securities for which market quotations are readily available are
valued at "bid" price. "Bid" price is the price at which dealers are willing to
pay and "ask" price is the price at which dealers are willing to sell. The bid
price is almost always lower. The Fund believes that bid prices are a better
indication of what the Fund assets would actually fetch if they were sold, and
therefore a fairer reference for computing net asset value.
Of course, shareholders should be aware that there is no guarantee the Fund
assets could be sold at the
<PAGE> 17
bid price. Since Fund shareholders will both buy and sell at net asset values
computed from bid prices, it will generally make no difference to them on
average that bid prices are used to compute net asset value.
Portfolio securities for which market quotations are not considered readily
available are valued at fair value on the basis of valuations furnished by a
pricing service approved by the board of directors, which determines valuations
for normal, institutional-size trading units of such securities using methods
based on market transactions for comparable securities and various relationships
between securities that are generally recognized by institutional traders.
Short-term investments held by the Fund that mature in 60 days or less will be
valued at amortized cost, which approximates market value. All other securities,
assets and liabilities will be valued at their fair value following procedures
approved by the board.
HOW TO PURCHASE SHARES
GENERAL PURCHASE INFORMATION
The minimum initial investment in the Fund is $2,500. The Fund may waive such
minimum initial investment from time to time. As a "no-load" mutual fund, the
Fund's shares may be purchased at its net asset value per share next determined.
If an order is placed with a broker/dealer, or other financial institution, the
broker/dealer or other financial institution is responsible for promptly
transmitting the order to the Fund. It may charge a fee for executing that
order, but the Fund will neither share in that fee nor pay any additional fee.
Shares of the Fund may be purchased directly by an investor opening an account
by mail or by phone using federal funds wire transfer or check. Shares are
deemed to be purchased as of the time of determination of the Fund's net asset
value on the day the Fund receives the purchase order for the purchase of its
shares and purchase funds are received. Investors may make systematic
investments in fixed amounts automatically on a monthly basis through the Fund's
automatic investment plan.
PURCHASE BY TELEPHONE OR E-MAIL
To open an account by telephone, investors may call toll free (877) 575-3137 or
e-mail [email protected] to obtain an account number and instructions.
Information including the appropriate federal tax identification number
concerning the account will be taken over the phone or internet. Funds may be
sent by check or wire.
WIRING FUNDS
After opening an account by telephone or e-mail, shares of the Fund may be
purchased by wiring funds to Union Bank. The sending bank may charge a fee for
doing so (see instructions below). The purchase wire transfer instructions
should be formulated as follows:
Union Bank of California, N.A.
ABA# 122000496
Acct No. 280021520
F/B/O Allied Owners Action Fund Inc.
_____________ F/F/C: ___________
Shareholder Acct. No. ___________
Shareholder Acct. Name: ______________________
Investors must mail a signed application to the transfer agent at the address
listed below in order to complete an initial wire purchase. Wire orders will be
accepted only on a day on which the Fund, the custodian and the transfer agent
are open for business. A wire purchase will not be considered made until the
wired money is received by the Fund, despite delays that may occur in bank
processing. There will
<PAGE> 18
be no fee for receipt of wired funds.
PURCHASE BY MAIL
Subject to acceptance by the Fund's transfer agent, an account may be opened by
completing and signing an account application and mailing it to the Fund at the
address noted below, together with wire transfer or a check payable to:
Allied Owners Action Fund Inc.
c/o American Data Services, Inc.
P.O. Box 5536
Hauppauge, N.Y. 11788-0132
Payment for the purchase of shares received by mail will be credited to the
shareholder's account at the net asset value per share next determined after
receipt by the Fund. Prospective investors will be assessed a $15 charge for
returned checks.
ADDITIONAL INVESTMENTS
Additional investments of $100 or more may be made at any time by mailing a
check to the Fund at the address noted above under "Purchase by Mail" or by
wiring funds to the custodian bank.
OTHER PURCHASE INFORMATION
Investors should be aware that the Fund's account application contains
provisions in favor of the Fund, the transfer agent and certain of their
affiliates, excluding such entities from certain liabilities (including losses
resulting from unauthorized shareholder transactions). The purchase price paid
for Fund shares is the net asset value of the shares next determined after the
Fund receives your order. The Fund reserves the right to reject any subscription
for shares.
The Fund must receive an order by the close of business on any business day for
the purchase price to be determined that day. If funds are received after the
close of business, the purchase price will be that determined on the next
business day. All purchases of the Fund's shares will be made in full and
fractional shares calculated to three decimal places.
Shares of the Fund may also be sold by the Fund at the current net asset value
to corporations or other institutions such as trusts, foundations or
broker/dealers purchasing for the accounts of others. Investors purchasing and
redeeming Fund shares through broker/dealers may be charged a transaction-based
fee or other fee for services. Each such entity-shareholder is responsible for
transmitting to its customers a schedule of any such fees and information
regarding any additional or different conditions regarding purchases and
redemptions. Customers of such entities should read this prospectus in light of
the terms governing accounts with their organization. The Fund does not pay
compensation to, or receive compensation from, broker/dealers for the sale of
its shares.
HOW TO REDEEM SHARES
GENERAL REDEMPTION INFORMATION
A Fund shareholder may redeem all or a portion of his or her shares on any day
that the Fund values its shares (please refer to section "Valuation of Shares"
above for more information). Shares will be redeemed at the net asset value next
determined after receipt of instructions in "good order" as explained below. The
Fund's net asset value is likely to fluctuate on a daily basis.
To redeem shares, a shareholder may either contact a broker/dealer or financial
institution with an oral request or send a written request directly to the
transfer agent. This request should contain the dollar
<PAGE> 19
amount or number of shares to be redeemed, Fund account number and either a
social security or tax identification number. A redeeming shareholder should
sign the redemption request in exactly the same way the account is registered.
If there is more than one owner of Fund shares, all owners must sign. A
signature guarantee is required for redemptions over $5,000. Shareholders should
contact the transfer agent for more details. The value of shares redeemed may be
more or less than the purchase price, depending on the market value of the
investment securities held by the Fund.
REDEMPTION BY MAIL
The Fund will redeem its shares at the net asset value next determined after the
request is received in "good order." Requests should be addressed to Allied
Owners Action Fund Inc., c/o American Data Services, Inc., P.O. Box 5536,
Hauppauge, N.Y. 11788-0132.
GOOD ORDER
Requests in "good order" must include the following documentation: a letter of
instruction specifying the number of shares or dollar amount to be redeemed,
signed by all registered owners of the shares in the exact names in which they
are registered and any required signature guarantees (see "Signature Guarantees"
below).
SIGNATURE GUARANTEES
To protect shareholder accounts, signature guarantees are required to enable the
Fund to verify the identity of any shareholder who authorizes a redemption of
$5,000 or more from an account. Signature guarantees are also required for
redemptions where the proceeds are to be sent to someone other than the
registered shareholder at the registered address and for share transfer
requests. Signature guarantees may be obtained from eligible financial
institutions, including banks, trust companies, credit unions, brokers/dealers,
savings and loan associations and participants in the Securities Transfer
Association Medallion Program ("STAMP"), the Stock Exchange Medallion Program
("SEMP") or the New York Stock Exchange Medallion Signature Program ("MSP").
Shareholders may contact the Fund toll free at (877) 575-3137 or e-mail
[email protected] for further details.
REDEMPTION BY TELEPHONE
If a shareholder elects to allow telephone redemptions, subject to the signature
guarantee requirement set forth above shares may be redeemed by calling the Fund
toll free at (877) 575-3137 and requesting that the redemption proceeds be
mailed to the primary registration address or wired per the authorized
instructions. Requests for redemption that are subject to signature guarantees
will only be effective once proper signature guarantees are received.
If a shareholder authorizes telephone redemption, the Fund and the transfer
agent may act on telephone instructions from the shareholder subject to
appropriate verification. The transfer agent's records of such instructions are
binding and each shareholder bears the risk of loss in the event of unauthorized
instructions reasonably believed by the Fund or its transfer agent to be
genuine. The Fund will employ reasonable procedures to confirm that instructions
communicated are genuine. The procedures employed by the Fund in connection with
transactions initiated by telephone may include tape recording of telephone
instructions and requiring some evidence of personal identification prior to
acting upon instructions.
The investment adviser will be responsible for losses that result from
unauthorized access if the investment adviser does not follow reasonable
procedures designed to verify the shareholder's identity.
<PAGE> 20
PAYMENT OF REDEMPTION PROCEEDS
After investor shares have been redeemed, proceeds will normally be mailed
within three days but in any event not later than seven days after receipt of
the redemption order, except that payment may be postponed or the right of
redemption suspended for more than seven days under unusual circumstances, such
as when NYSE trading is suspended. Payment of redemption proceeds may also be
delayed if the shares to be redeemed were purchased by a check drawn on a bank
that is not a member of the Federal Reserve System, until such check has cleared
the banking system, which may take up to 15 calendar days from the purchase
date.
If the board determines that it would be detrimental to the best interests of
the remaining shareholders of the Fund to make a payment wholly or partly in
cash, the Fund may pay the redemption proceeds in whole or in part by a
distribution in-kind of readily marketable securities held by the Fund.
Investors generally will incur brokerage charges on the sale of portfolio
securities so received in payment of redemptions.
INVOLUNTARY REDEMPTION
The Fund reserves the right to redeem a shareholder account at any time the net
asset value of the account falls below $2,500 as the result of a redemption
request.
SHAREHOLDER SERVICES
The Fund offers several shareholder service options to make shareholder accounts
easier to manage, which are listed on the account application. Investors should
make note of these options and select the ones appropriate for them.
AUTOMATIC INVESTMENT PROGRAM
Investors may arrange to make additional automated purchases of Fund shares by
completing the required section of the account application included with this
prospectus. Investors can automatically transfer $100 or more per month from
their bank, savings and loan or other financial institution to purchase
additional shares.
TELEPHONE TRANSACTION PRIVILEGES
If a shareholder holds shares in an account with the transfer agent, he or she
may secure telephone privileges by completing the required section of the
account application included in the prospectus. The transfer agent can furnish
an additional application. It may be difficult to reach the Fund by telephone
during periods when market or economic conditions lead to an unusually large
volume of telephone activity. Shareholders who cannot reach the Fund by
telephone should contact their broker/dealer or financial institution or issue
written instructions to the transfer agent at the address set forth herein. See
sections "Management" and "Custodian, Transfer Agent and Dividend Agent." The
Fund reserves the right to modify, suspend or terminate telephone services at
any time without notice.
TAX-QUALIFIED RETIREMENT PLANS
The Fund is available for tax-deferred retirement plans. If interested,
shareholders should communicate with the Fund and request the appropriate forms
for:
- Individual Retirement Accounts ("IRAs") and Roth IRAs;
- 403(b) plans for employees of public school systems and non-profit
organizations;
- 401(k) plans;
- or profit-sharing plans and pension plans.
<PAGE> 21
Shareholders may also transfer their tax-deferred plan balance to the Fund from
another company or custodian. Call toll free, (877) 575-3137, e-mail at
[email protected] or write the Fund for an account transfer form.
CONFIRMATION OF TRANSACTIONS AND REPORTING OF OTHER INFORMATION
The Fund will mail confirmations of all shareholder purchases or redemptions of
Fund shares. Shareholders will also receive account statements on a quarterly
basis. This information will be provided from the broker/dealer or financial
institution. Shareholders will also receive various IRS forms after the first of
each year detailing important tax information. The Fund will supply annual and
semi-annual reports that list securities held by the Fund and include its
current financial statements.
DIVIDENDS AND DISTRIBUTIONS
The Fund will distribute (or reinvest as directed) its net investment income and
net realized capital gains annually. Distributions from capital gains will be
made after applying any available capital loss carryovers.
As a shareholder, you can choose from three distribution options:
- reinvest all distributions in additional Fund shares;
- receive distributions from net investment income in cash while
reinvesting capital gains distributions in additional shares; or
- receive all distributions in cash.
Shareholders can change their distribution option by notifying the Fund in
writing. If an option is not selected when the account is opened, all
distributions will be reinvested in additional shares of the Fund at net asset
value. Shareholders will receive a statement confirming reinvestment of
distributions in additional shares promptly following the end of each calendar
year.
If a check representing a distribution is not cashed within a specified period,
the transfer agent will notify shareholders that they have the option of
requesting another check or reinvesting the distribution in the Fund. If the
transfer agent does not receive notice of election, the distribution will be
reinvested in the Fund at the current net asset value per share. Similarly, if
correspondence sent by the Fund or the transfer agent is returned as
"undeliverable," all Fund distributions will automatically be reinvested in the
Fund.
TAXES
STATUS
The Fund is a corporation for federal income tax purposes under the Internal
Revenue Code of 1986, as amended. However, the Fund's board intends for the Fund
to qualify and to elect to be treated as a regulated investment company. If so
qualified, the Fund will not be liable for federal income taxes to the extent it
annually distributes substantially all its investment company taxable income to
shareholders. State income taxes on mutual funds differ, but most states follow
the federal rules, except with regard to government-issued bonds.
TAX-DEFERRED ACCOUNTS
Shareholders that hold Fund shares in a tax qualified account, such as an IRA or
a 401(k), may owe
<PAGE> 22
federal taxes and possibly penalties if they withdraw the money and fail to
reinvest it during the permitted period. Those taxes will depend on the type of
IRA account, age of the shareholder and other factors.
TAXABLE ACCOUNTS: INCOME AND CAPITAL GAINS
When a shareholder invests in any mutual fund in a taxable account, he or she
pays two kinds of taxes.
1. Annually the Fund may make or credit the shareholder with a distribution.
Shareholders must pay tax on this amount even if they have the distribution
automatically reinvested in the Fund.
2. When shareholders sell their Fund shares they will owe tax on the profit,
if any. If a shareholder has a loss on sale of Fund shares, the loss will
be a capital loss that, subject to important restrictions, can be used to
reduce the shareholder's income taxes. The calculation of profit or loss
can be complicated if shareholders buy at more than one time, or reinvest
distributions. The Fund's board intends for the Fund to offer on-line
support at eRaider.com for tax questions about the Fund.
Distributions from the Fund will be taxable as ordinary income or as capital
gains or losses. Dividends from stocks and interest payments from bonds or CDs
will be taxed as ordinary income. Capital gains represent profits from selling
securities, either Fund shares sold by Fund investors or Fund positions sold by
the Fund itself, at a gain or loss. The computation of the gain or loss and the
distinction between ordinary income and capital gains and losses are subject
sometimes to complicated IRS rules and tax precedent.
LONG-TERM VERSUS SHORT-TERM
A capital gain can either be long-term (more than one year) or short-term. For
most investors, short-term capital gains are taxed like ordinary income, but
there are important exceptions. Investors in federal tax brackets of 28% or
above will pay only 20% tax on long-term capital gains. Therefore, many
investors prefer to receive as much of their return as possible in the form of
long-term capital gains.
The distribution from the Fund will be accompanied by a statement that shows how
much is income, how much is short-term capital gain and how much is long-term
capital gain. These numbers will impact a shareholder's federal tax return as if
he or she had received them through direct purchases of stocks or bonds. Whether
a gain is long-term or short-term depends on how long the Fund held the
investment, so short-term Fund shareholders can receive long-term gain
distributions and long-term Fund shareholders can receive short-term gain
distributions.
The capital gain or loss when shareholders sell Fund shares will be short-term,
if held for less than one year, or long-term if held for more than one year.
There are special rules impacting taxation if a shareholder inherits Fund shares
or receives the shares through certain types of gift transactions.
DISCLAIMER
All the above applies to federal income tax for most U.S. citizens but there are
many exceptions. Most state and local income taxes are consistent with federal
rules but impose additional taxes on top of the federal. Shareholders should
consult their tax advisor, but also feel free to post questions at eRaider.com,
which will have links to Internet tax sites including those maintained by the
IRS.
GENERAL INFORMATION
The Fund is a non-diversified, open-end investment company incorporated under
the laws of Maryland on July 12, 1999. The Fund's business and affairs are
managed by its officers under the direction of its board. The Fund offers its
shares in one series, which is being offered for sale in this prospectus. All
shares of the Fund, when issued, will be fully paid and nonassessable and will
be redeemable. They can
<PAGE> 23
be issued as full or fractional shares. A fractional share has, pro rata, the
same rights and privileges as a full share. The shares possess no preemptive or
conversion rights. The shares of the Fund will share ratably in the dividends of
the Fund, if any, as may be declared by the board, and in the distribution of
any net assets in liquidation of the Fund, after the payment of all debts and
liabilities of the Fund.
Each share of the Fund has one vote (with proportionate voting for fractional
shares) irrespective of purchase price. Cumulative voting is not authorized.
This means that the holders of more than 50% of the shares voting for the
election of the board can elect all the directors if they choose to do so and,
in such event, the holders of the remaining shares will be unable to elect any
director.
Except as may be required under the 1940 Act the Fund will not hold annual
meetings of shareholders. As a result, shareholders may not vote each year on
the election of members of the board of directors or the appointment of
auditors. However, pursuant to the Fund's by-laws, the holders of shares
representing at least 10% of the Fund's total outstanding shares may request
that the Fund hold a special meeting of shareholders. In such event the Fund
will assist in the communication with other shareholders. In addition, the 1940
Act requires a shareholder vote for all amendments to the Fund's fundamental
investment objective and policies and investment restrictions and for certain
amendments to investment advisory contracts.
The Fund reserves the right to amend any of its non-fundamental policies,
practices and procedures described in this prospectus, including the SAI,
without shareholder approval.
<PAGE> 24
Prospectus
Allied Owners Action Fund
The information on this back cover is required by the SEC.
A Statement of Additional Information ("SAI") is available that provides
additional detail. Prospective investors can obtain the SAI by writing Privateer
at 372 Central Park West, Suite 9M, New York, New York 10025, calling toll free
(877) 575-3137, sending an email to [email protected] or visiting
http://www.eRaider.com. Once it is operational, additional information about the
Fund's investments will be available in the Fund's annual and semi-annual
reports to shareholders. In the Fund's annual report prospective investors will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year. The
SAI and the Fund's annual and semi-annual reports are available, without charge,
upon request by contacting Privateer, and other inquiries may also be directed
to Privateer.
Information about the Fund (including the SAI) can also be reviewed and
copied at the Securities and Exchange Commission's Public Reference Room in
Washington, DC. Information on the operation of the Public Reference Room may be
obtained by calling (202) 942-8090. Reports and other information about the Fund
are available on the EDGAR Database on the SEC's Internet site,
http://www.sec.gov. Copies of this information may be obtained upon payment of a
duplicating fee, by electronic request to [email protected] or by writing the
Public Reference Section of the Commission, Washington, DC 20549-6009.
Allied Owners Action Fund Inc. Investment Company Act File
Number: 811-09551
372 Central Park West
New York, NY 10025
(212) 865-7034
<PAGE> 25
STATEMENT OF ADDITIONAL INFORMATION
These securities have not been approved or disapproved by the Securities and
Exchange Commission ("SEC"), nor has the SEC passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
Allied Owners Action Fund
THE ALLIED OWNERS ACTION FUND INC.
March 1, 2000
This document describes The Allied Owners Action Fund Inc. (the
"Fund"). It is not a prospectus. It contains additional
information not found in the Fund's prospectus dated March 1,
2000, and should be read in conjunction with that document. You
can request the Fund's prospectus by calling toll free (877)
575-3137 or sending an email to [email protected]. You can
also read the prospectus and this statement of additional
information ("SAI") on, or e-mail questions to the Fund's
directors and officers at, http://www.eRaider.com.
The purpose of the SAI is to shorten theprospectus by moving some
of the more detailed andtechnical information to a separate
document.
The common practice of printing a drab prospectus and
embellishing it with full-color, expensive marketing materials
has not been followed by the Fund. Investors should consider the
Fund soberly and without distraction. All the reader will find in
this package are the SAI, an account application and an investor
questionnaire. If reading the prospectus and SAI does not
persuade an investor, he or she should not proceed. If after
reading it interest is captured, such additional material should
also be reviewed.
<PAGE> 26
THE ALLIED OWNERS ACTION FUND INC.
March 1,2000
TABLE OF CONTENTS
HISTORY....................................................................2
DESCRIPTION OF FUND AND ITS INVESTMENTS AND RISKS..........................6
Classification.............................................................6
Investments................................................................6
Positions for Liquidity....................................................7
Depository Receipts; Indexes; and Futures..................................7
RISKS......................................................................7
Potential Illiquidity......................................................7
Inflation..................................................................7
Taxes......................................................................8
Interest Rates.............................................................8
Unknown Future Factors ....................................................8
Risk of Message Board .....................................................8
POLICIES...................................................................9
Discussion of Fees ........................................................9
Investment Advisor Fee.....................................................9
Transaction Costs .........................................................10
Tax Inefficiency Costs ....................................................10
MANAGEMENT.................................................................10
Board of Directors ........................................................11
Management Information.....................................................11
Management Compensation....................................................11
Control Persons............................................................13
Investment Adviser.........................................................14
DISTRIBUTION...............................................................15
Portfolio Transactions and Brokerage Commissions...........................15
Capital Stock..............................................................15
GENERAL PURCHASE INFORMATION...............................................15
TAXATION...................................................................15
<PAGE> 27
HISTORY
The Fund is a Maryland corporation created on July 12, 1999. It was created to
be an investment company and has never engaged in any other business, used any
other name or been involved in any reorganization or bankruptcy.
The Fund has contracted all management services to affiliate Privateer Asset
Management Inc. ("Privateer"), a Delaware corporation. It has arranged for
shareholder communications through affiliate eRaider.com Inc. ("eRaider"), a
Delaware corporation.
DESCRIPTION OF FUND AND ITS INVESTMENTS AND RISKS
CLASSIFICATION
The Fund is an open-end, non-diversified management investment company. By the
Investment Company Act of 1940, as amended (the "1940 Act"), definitions, it is
non-diversified since it may hold positions in a single issuer amounting to over
5% of its total assets. The Fund's board intends for the Fund to meet the IRS
diversification rules necessary to avoid corporate income tax.
INVESTMENTS
The principal and some non-principal strategies of the Fund have been described
in the prospectus. Below are some non-principal strategies of the Fund.
POSITIONS FOR LIQUIDITY
While not part of its principal strategies, the Fund may acquire, when
appropriate, high-quality, short-term or floating-rate instruments either to
maintain liquidity for forecasted redemptions or to hold cash inflows in money
market positions while permanent positions are being acquired. These securities
are subject to credit risk, that the issuer will not make the promised payments,
as well as interest rate risk, that increases in market interest rates will
cause the value of the securities to decline. However, because the securities
will be high quality and short-term or floating-rate, these risks are smaller
than those for lower quality and longer-term fixed-rate securities. Also, small
cash positions (less than 5% of total assets) may result from day-to-day trading
activity.
DEPOSITORY RECEIPTS; INDEXES; AND FUTURES.
Also, as non-principal strategies, the Fund may buy stocks in large corporations
or diversified securities such as depository receipts or enter into futures
contracts on diversified stock indices such as the S&P 500. These investments
are subject to the risks of all common stock investments, as described in the
Fund's prospectus. In acquiring such positions the Fund will attempt to match
the performance of the overall U.S. stock market, and it will rely on published
research and historical statistics to attain this goal.
Futures contracts are subject to the additional risk that they will not be
honored. This could occur through problems with the clearing corporation or
market disruption. To minimize these risks, the Fund will only enter into
futures contracts that are traded actively on major national exchanges. It is
also possible that the Fund will be unable to close out a futures position. The
Fund will attempt to mitigate this risk by avoiding futures contracts with
delivery dates more than one month later than the expected time needed to
acquire more permanent positions. Futures contracts are subject to margin calls.
As the Fund's board intends for the Fund to hold high-quality, short-term
investments in the full nominal value of the futures contract, it should not be
exposed to material risk from margin calls. However, if the Fund is unable to
meet a margin call, despite this precaution, the futures contract could be
closed out on disadvantageous terms.
<PAGE> 28
RISKS
POTENTIAL ILLIQUIDITY
The Fund's board intends for the Fund to acquire relatively large stakes in its
portfolio companies. Such stocks when purchased will be liquid according to the
normal meaning of that term, namely, that buyers and sellers are easily found
for normal transaction sizes at a normal spread between bid and ask prices.
However, the Fund's overall position may be or become illiquid in total because
of its size relative to the average transaction volume in the security. It is
also possible for liquidity in one of the Fund's stocks to decline as a result
of issuer problems, de-listings or other events. The maximum percentage of the
Fund that will be invested in illiquid securities at the time of investment is
15%. In the event the percentage of the Fund's investment in illiquid securities
exceeds 15%, it will promptly take prudent measures to bring its illiquid
portion under 15% by disposition of portions or all of one or more positions.
INFLATION
Inflation can destroy the value of stock market returns. Over the 18-1/4 years
from July 1964 to September 1982 a stock market investor would have tripled her
money, but even though the stock market increase helped protect against
inflation she would have been able to purchase less with the $3 she had in 1982
than the $1 she had in 1964.
TAXES
While taxes vary among individual investors, they can take a significant part of
the return. For example, suppose a long-term investor earns 10% per year over a
40-year period during which inflation is 4% per year. A tax-free investor would
have $45 for each $1 invested but inflation would take some 80% of that gain so
he would have adjusted purchasing power of only $9. An investor paying 39.6%
federal income tax every year on total returns would end up with only $10 for
each $1 invested instead of $45. Inflation would reduce the value of that down
to $2. Doubling your purchasing power in 40 years is not the kind of return most
persons have come to expect from the stock market.
The trouble is that under current laws, taxes and inflation combine
mathematically to more than the sum of their parts. The Fund hopes to select
companies whose value will rise faster than inflation, and hold them in a way
that minimizes taxes, but it may not succeed.
INTEREST RATES
The Fund will be exposed to interest rate changes, inflation, stock market
fluctuations and other economic factors as well as company-specific events like
layoffs, sales reductions or inventions. All factors are interrelated so that,
for example, a rise in interest rates could reduce the credit sales of one of
the Fund's companies. It is important to recognize that while the stock market
may be performing well, company-specific risks, may still be significant.
UNKNOWN FUTURE FACTORS
The Fund will also be subject to unknown future factors. There can be no
assurance that the Fund's investment strategies will address or address
effectively these or other risk factors.
RISK OF MESSAGE BOARD
While the Fund itself intends to be a passive investor, it will supply the name
of the stock to affiliate eRaider, which intends to invite company and Fund
shareholders to participate on an Internet message board organized by eRaider to
discuss the company.
<PAGE> 29
The message board will be open to the public. eRaider will not attempt to limit
participation in any way and will not take responsibility for the information
posted. Individual authors will retain full responsibility. It is possible that
message board participants will organize to attempt to influence company
management. It is also possible that facts and analysis provided at the eRaider
site will influence company shareholders as well as company management.
The result of the message board is unpredictable since not yet tested in
practice. eRaider's role is to provide a forum to encourage informed and
thoughtful discussion among shareholders. The results of those discussions and
the actions taken by individual participants or third parties are largely beyond
eRaider's control.
On the other hand, it would be disingenuous to assert -- and the Fund does not
- -- that eRaider will be entirely passive. eRaider will organize the message
board in the belief that improved shareholder communication will increase
shareholder value. eRaider will post analyses and opinions. Those opinions may
be accepted by company management or, despite management's initial dismissal,
may attract enough support among shareholders to end up being forced upon
company management. While eRaider itself will not own stock in the company, it
may communicate directly with company directors and officers as an unofficial
shareholder representative. As a registered investment company the Fund is
exempt from SEC Regulation 13 D-G filings if its position exceeds 5% in a
portfolio company but this exemption is lost for an investment company that
acquires such a position intending to change or influence the control of the
portfolio company or in connection with or as a participant in such purpose.
Thus, the Fund may on occasion consider it necessary to file such a disclosure
if its holdings exceed 5% even if its ownership was not obtained with such
intent in mind.
The Fund's only responsibility is to its shareholders. If eRaider triggers
unfavorable regulatory action or threatens to involve the Fund in litigation the
Fund is prepared to sever all connection, which is intended to be informal in
any event. Although the Fund and eRaider are affiliates who share key personnel,
the Fund will strive to act in the best interest of its shareholders at all
times. The goal of eRaider, and of the Fund in associating with eRaider, is
improved shareholder value through improved shareholder communication. The Fund
believes this is a two-way street. Management may do a better job with the
advice and active support of shareholders. Shareholders may perceive more value
in shares when they understand management's strategies and know that their
interests are respected.
The Fund believes that better shareholder value can lead to lower cost of
capital, which in turn can lead to further increase in shareholder value.
However noble this goal, the Fund recognizes that company management and
regulators may separately be at odds regarding eRaider's conduct. Company
management may view eRaider as an organizer of takeover activities or as
meddlesome in day-to-day corporate affairs. Regulators may determine that
bulletin board organizers assume some responsibility for board content and, if
affiliated with a mutual fund, attribute such content or portions to the fund
itself. The Fund's board intends for the Fund at all times to remain separate
from eRaider's activities. However, since eRaider is a relatively new concept,
Fund shareholders cannot be given any assurance that it will work.
POLICIES
The Fund is subject to the investment limitations enumerated in this section,
which may be changed only by a vote of the holders of a majority of the Fund's
outstanding shares. As used in this SAI and in the Prospectus, a "majority of
the outstanding shares" of the Fund means the lesser of (a) 67% of the shares of
the Fund represented at a meeting at which the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (b) more
than 50% of the outstanding shares of the Fund.
The following are Fund fundamental policies:
- The Fund may not issue senior securities or borrow money (as defined
in the 1940 Act) except
<PAGE> 30
the Fund may borrow money on a temporary basis to fund redemptions if
the portfolio manager deems the risk of leverage to be preferable to
the loss of selling investments too quickly. Borrowings will be
limited to 5% of the Fund's total assets not to exceed if a lesser
figure, 33 1/3% of net assets (total assets less all liabilities and
indebtedness other than this borrowing).
- Not more than 25% of the value of the Fund's total assets will be
invested in the securities of any one issuer. The Fund will not invest
25% or more of its total assets in any one industry (securities issued
or guaranteed by the United States Government, its agencies or
instrumentalities are not considered to represent industries).
- The Fund may not purchase or sell real estate or any interest therein,
including interests in real estate limited partnerships, except
securities issued by companies (including real estate investment
trusts) that invest in real estate or interests therein.
- The Fund may not pledge, mortgage or hypothecate its assets other than
to secure borrowings permitted by investment limitation as set forth
in the first bullet above (collateral arrangements with respect to
margin requirements for options and futures transactions are not
deemed to be pledges or hypothecations for this purpose).
- The Fund may not make loans of securities to other persons. The Fund,
however, may make margin deposits in connection with transactions in
options, futures and options on futures, pursuant to which certain of
the Fund's securities may be pledged to secure margin calls.
- The Fund may not underwrite securities of other issuers, except
insofar as the Fund may be deemed an underwriter under the Securities
Act of 1933, as amended, in selling portfolio securities.
- The Fund may not invest in commodities or commodity futures contracts.
Futures on the S&P 500 indexes will not be deemed to be commodities or
commodities future contracts for the purpose of this fundamental
policy.
The following are Fund non-fundamental policies that may be changed by
the board of directors. The Fund may not:
- Invest more than 15% of its net assets (taken at market value at the
time of purchase) in securities that cannot be readily sold or
disposed of within the ordinary course of business within seven days
at approximately the value at which the Fund has valued the
investment;
- Purchase securities when borrowings exceed 5% of the Fund's total
assets or when the amount by which the Fund is leveraged is more than
5% of the Fund's total assets; or,
- Invest in other investment companies except as permitted under the
1940 Act.
With regard to both fundamental and non-fundamental policies, if a percentage
limitation is satisfied at the time of investment, a later increase or decrease
in such percentage resulting from a change in the value of the Fund's
investments will not constitute a violation of such limitation, except that
levels of investments in illiquid securities and any borrowing by the Fund that
exceeds the investment limitations stated above must be reduced to meet such
limitations within the period required by applicable laws and regulations. The
investment adviser will act in the best interests of the Fund to decrease the
amount of illiquid securities held by the Fund as soon as reasonably
practicable. Otherwise, the Fund may continue to hold a security even though it
causes the Fund to exceed a percentage limitation because of fluctuation in the
value of the Fund's assets. Because the Fund is new and innovative, the board of
directors reserves the right, subject to shareholder approval where required, to
change any of these policies, or the Fund's objectives and strategies.
DISCUSSION OF FEES
The Fund will pay a 1% annual fee (computed based upon net asset value and
payable 1/12th monthly in arrears) to Privateer for all management services.
This fee includes all out-of-pocket Fund expenses including brokerage.
TRANSACTION COSTS
<PAGE> 31
The Fund will attempt to minimize transaction costs in three ways, although
there is no guarantee it will be successful. First, it will attempt to maintain
a low turnover ratio. It intends to buy and hold. Second, it intends to
accumulate positions over several months, thereby minimizing risk of price
run-up. Third, the Fund's board intends for the Fund to buy relatively few
stocks at any one time, which gives the portfolio manager the opportunity to pay
especially careful attention to the trading characteristics of each stock. Since
she is not responsible for stock selection, she can concentrate exclusively on
trading. The Fund hopes that this will allow her to reduce significantly the
costs of acquiring positions.
Although it cannot promise it will be successful, the Fund will make diligent
efforts to reduce transaction costs such as bid/ask spreads and market movement
costs.
TAX INEFFICIENCY COSTS
Taxes are hard to measure but studies show that in many instances taxes can add
substantially to the true cost to a fund investor. The Fund will undertake to
minimize taxes to the extent consistent with overall Fund investment goals. The
Fund undertakes to do the following: It will consider the tax consequences of
all transactions and only execute them if, in the opinion of the portfolio
manager, the benefits outweigh the tax costs to taxable shareholders. This may
mean holding positions for over one year even though they could have been sold
earlier at higher short-term profits.
MANAGEMENT
BOARD OF DIRECTORS
The board of directors will hold monthly meetings to review all matters
pertaining to the Fund. Each board member will be assigned an area of
responsibility. Initially these will be operations, shareholder services and
fees, fund accounting, stock selection, business prospects of the Fund's stocks
and management and oversight issues at the companies in which the Fund invests.
Each board member will maintain up-to-date information pages at the eRaider
Internet site relating to his or her area of responsibility, which will be
associated with a message board for Fund shareholders and public questions and
comments.
The Fund's board hopes that each board member's information pages will attract
thoughtful discussion by both Fund and company shareholders. The Fund's board
hopes to recruit future directors from message board participants. The Fund's
board believes that the message boards will also serve as an important link
between Fund management and Fund shareholders.
<PAGE> 32
MANAGEMENT INFORMATION
- --------------------------------------------------------------------------------
NAME, AGE AND ADDRESS POSITION HELD WITH FUND PRINCIPAL OCCUPATION
DURING PAST FIVE YEARS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aaron Brown (43) Director, President, Instructor of Finance at
215 West 91st Street Selection Manager for Yeshiva University
New York, NY 10024*,** Fund; employed by Consultant to J.P. Morgan
Privateer & Co. and Rabobank
Nederland
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
John Capela (51) Director Professor of Management
39 Ashwood CT at Sy Syms School of
East Northport, NY 11731 Business, Yeshiva
University
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Anne Miller (39) Director President of the Oryx
114 West Franklin Avenue Group, consulting firm
Pennington, NJ 08534 that evaluates business
opportunities and
acquisitions for
pharmaceutical companies
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Deborah Pastor (42) Vice President, Portfolio Portfolio Manager,
215 West 91st Street Manager for Fund; employed Corporate Sales Bank of
New York, NY 10024*,** by Privateer Montreal, J.P. Morgan &
Co.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Rita Robbins (42) Director Sales & Marketing Manager
1600 Broadway # 706 for Washington Square
New York, NY 10019 Securities, Inc., a
securities distribution
firm
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Martin Stoller (43) Secretary Clinical Full Professor
147 Robsart Place of Communication at
Kenilworth, IL 60043** Kellogg School of
Management, Northwestern
University
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Paul Zarowin (43) Director Assistant Professor of
40 West 4th Street Accounting at Stern
New York, NY 10012 School of Business, New
York University
- --------------------------------------------------------------------------------
* Mr. Brown is married to Ms. Pastor.
** Interested persons. Mr. Brown and Dr. Stoller collectively own 100% at
present of affiliate Privateer and 100% of affiliate eRaider.
MANAGEMENT COMPENSATION
At this time the Fund has no pension or retirement benefits for directors or
officers. All salaries are paid
<PAGE> 33
by Privateer.
- --------------------------------------------------------------------------------
NAME AND POSITION SHARES HELD IN PRIVATEER ESTIMATED AGGREGATE
COMPENSATION FROM
PRIVATEER OR FUND FOR
SERVICES RENDERED TO THE
FUND
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Aaron Brown 18,000 $125,000 (as Selection
Director, President, Manager).
Selection Manager
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
John Capela, 0 $1,800
Director
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Anne Miller 0 $1,800
Director
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Deborah Pastor 0 $125,000 (as Portfolio
Portfolio Manager, Vice Manager)
President
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Rita Robbins 0 $1,800
Director
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Martin Stoller* 18,000 $0
Secretary
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Paul Zarowin 0 $1,800
Director
- --------------------------------------------------------------------------------
+ Subject to revenue Dr. Stoller is expected to receive a salary of $125,000
from affiliate eRaider.
CONTROL PERSONS
Initially the Fund will be controlled by its initial investors, Mr. Brown and
Dr. Stoller. However, their control position is expected to be quickly
eliminated once additional Fund shares are sold. They will also control
affiliates Privateer and eRaider.
INVESTMENT ADVISER
The Fund has retained Privateer, a newly-created Delaware corporation, to act as
investment adviser. Mr. Brown and Dr. Stoller control Privateer and such control
is expected to continue.
The Fund will have a management contract with Privateer as described in the
prospectus. The Fund, Privateer and eRaider will share office space. Privateer
trading operations will be segregated from the Fund and eRaider. Mr. Brown is an
officer and director of all three entities. His wife Ms Pastor is an officer of
the Fund and Privateer. Dr. Stoller is an officer (but not a director) of the
Fund and a director and officer of eRaider. Certain employees may share duties
for the three companies.
There is no contractual relationship between eRaider and either Privateer or the
Fund. The Fund's board intends for the Fund to pass the names of its stocks to
eRaider for public announcement, but on an uncompensated, voluntary basis.
eRaider will, gratis, make Fund information available at the site. Mr. Brown and
Dr. Stoller each own 50% of eRaider. They will each own up to 50% of Privateer
when the Fund is declared effective.
<PAGE> 34
Privateer will furnish all investment, compliance and administrative services to
the Fund in exchange for a 1% management fee. This contract will remain in
effect for two years from the date of its initial approval, and subject to
annual approval of the board of directors for one-year periods thereafter. It
can be cancelled upon 60 days' written notice by the Fund to Privateer, and
after the first anniversary of the date the Fund is declared effective,
Privateer may terminate the contract on 60 days' written notice to the Fund.
Privateer is allowed to subcontract all compliance and administrative services.
Privateer has subcontracted these services to American Data Services, Inc.
("ADS"), which has its principal office at The Hauppauge Corporate Center, 150
Motor Parkway, Hauppauge, New York 11788. ADS is primarily in the business of
providing administrative, fund accounting and stock transfer services to retail
and institutional mutual funds with approximately $3 billion of total assets
through its offices in New York, Denver, Tampa and Los Angeles.
Union Bank will serve as custodian for the Fund's cash and securities. The
custodian does not assist in, and is not responsible for, investment decisions
involving assets of the Fund. For its services, Privateer will pay Union Bank
0.02% of net asset value per year. Assuming average net asset value of $40
million per year, estimated costs for Union Bank custodian services is $8,000
per year.
Pursuant to the ADS agreements, ADS will provide all administrative, accounting
and transfer services necessary for the Fund. Privateer will pay ADS a minimum
annual fee of $60,000 or 0.15% of Fund assets, whichever is greater. Privateer
will also reimburse ADS for any out-of-pocket expenses. In addition, ADS will
serve as the Fund's transfer agent and perform fund accounting and Blue Sky
services for which it will be paid separately. Privateer will also pay ADS the
greater of $1,000 per month and $9 per year per account, plus out-of-pocket
expenses, for rendering such transfer and dividend agency services. Assuming
average net asset value of $40 million per year, and average account investment
of $10,000, estimated costs for ADS administrative and transfer services are
$108,000 per year, and estimated costs for Union Bank custodian services are
$8,000 per year.
The Fund will use Arthur Andersen to audit its financial statements.
DISTRIBUTION
Although the Fund will not directly pay any fees, it has adopted a plan (called
a 12b-1 plan) whereby it will distribute its own securities without retaining an
outside underwriter. This is expected to generate substantial savings since
Privateer will absorb out of its 1% management fee all distribution costs. The
distribution activities contemplated by the plan are expected to include public
relations and, as the need arises, print and radio media, although no direct
marketing efforts along such lines are intended initially. No special sales
force is contemplated. No brokers/dealers will be paid to place Fund shares.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Portfolio transactions for the Fund will generally be executed with
broker/dealers on an agency basis but will be executed with principals if the
portfolio manager determines this will result in a better all-in price. The
portfolio manager, or a designated subordinate, will be responsible for placing
all orders for purchases and sales of the Fund's securities.
<PAGE> 35
In selecting broker/dealers, the portfolio manager will seek the most favorable
price and execution. She may not consider research and brokerage services
furnished to the Fund, Privateer or eRaider, or any of their affiliates or
consider sales of the Fund's shares or any other fund's shares as a factor in
the selection of broker/dealers.
The portfolio manager will consider the total cost of acquiring the Fund's
desired stake, rather than the individual costs of each trade. Because the Fund
intends to acquire relatively large stakes, the portfolio manager may find it
useful to use several small broker/dealers to reduce price impact, even if this
increases brokerage commissions and bid/ask spreads. In other cases, the
portfolio manager may direct orders to a single large broker/dealer in return
for reduced fees and spreads. This is a matter of delicate trading judgment and
is left entirely to the discretion of the portfolio manager.
CAPITAL STOCK
The Fund is authorized to issue one million shares of common stock, $.001 par
value. Holders of common stock are entitled to dividends and distributions in
the amount and at the times determined by the board of directors. Each
shareholder is entitled to one vote per share. Upon a liquidation or dissolution
of the Fund shareholders will share ratably in any remaining assets after
payment of liabilities.
GENERAL PURCHASE INFORMATION
The minimum initial investment in the Fund is $2,500. The Fund may waive or
reduce such minimum initial investments from time to time. As a "no-load" fund
the Fund's shares may be purchased at its net asset value.
Prior to investment by the Fund shares will be offered at $100 per share.
Thereafter, the purchase price will be based on the net asset value per share as
determined following placement of an order. Purchase and redemption inform ation
is set forth in the Fund's prospectus.
TAXATION
The Fund is treated as a corporation for federal income tax purposes under the
Internal Revenue Code of 1986, as amended. The Fund's board intends for the Fund
to qualify and to elect to be treated as a regulated investment company under
Subchapter M of the Internal Revenue Code. If so qualified, the Fund will not be
liable for federal income taxes to the extent it annually distributes
substantially all its investment company taxable income to shareholders. State
income taxes on mutual funds differ, but most states follow the general federal
rules, except with regard to government-issued bonds, and add additional taxes.
If the Fund fails to qualify as a regulated investment company it would owe
corporate income tax on most income and all realized capital gains. This could
significantly reduce return to Fund shareholders.
<PAGE> 36
Statement of Additional Information
Allied Owners Action Fund
S.A.I.
372 Central Park West
New York, NY 10025
(212) 865-7034
