THE ELECTRIC CITY VALUE FUND
(the "Fund")
A SERIES OF ELECTRIC CITY FUNDS, INC.
(THE "COMPANY")
One North Church Street
Schenectady, NY 12305
518-370-0289
Or toll-free at
1-800-453-6556
PROSPECTUS
DECEMBER 30, 1999
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AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
THE FUND
What is the Fund's Primary Investment Objective?.........
What are the Fund's Primary Investment Strategies?.......
What are the Principal Risks of Investing in the Fund?...
How has the Fund Performed in the Past?..................
What are the Fund's Fees and Expenses?...................
Shareholder Fees.........................................
Annual Operating Expenses................................
An Example of Fund Expenses Over Time....................
THE FUND'S INVESTMENT ADVISER
The Fund's Adviser.......................................
The Fund's Portfolio Manager.............................
Investment Advisory Agreement............................
Operating Services Agreement.............................
HOW TO BUY AND SELL SHARES
Investing In The Fund....................................
Determination of Share Price.............................
Distribution Fees........................................
Minimum Investment Amounts...............................
Opening and Adding To Your Account.......................
Purchase By Mail.........................................
Wire Transfer Purchases..................................
Purchases through Financial Service Organizations........
Automatic Investment Plan................................
Telephone Purchases......................................
Miscellaneous Purchase Information.......................
Redeeming Your Shares....................................
By Mail..................................................
Signature Guarantees.....................................
By Telephone.............................................
By Wire..................................................
Redemption At The Option Of The Fund.....................
DIVIDENDS AND DISTRIBUTIONS.......................................
TAX CONSIDERATIONS................................................
GENERAL INFORMATION...............................................
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THE FUND
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund seeks to build shareholder wealth by maximizing the TOTAL RETURN
of the Fund's portfolio.
Total Return is derived by combining the total changes in the principal
value of all the Fund's investments with the total dividends and interest
paid to the Fund.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
The Fund's Adviser believes that the Fund's objective is best achieved by
investing in companies that exhibit the potential for significant increases
in total return. The Fund will generally use a "buy and hold" investment
strategy. However, the Fund may occasionally invest on a short-term basis
when the Adviser believes that such an investment will benefit the Fund.
The Adviser will sell securities when a portfolio holding no longer
qualifies under the criteria set forth below.
The Fund's Adviser attempts to build shareholder wealth by:
o investing in common stocks without restrictions regarding market
capitalization;
o normally investing at least 65% of the Fund's total assets in common
stocks or securities convertible into common stocks;
o holding at least 80% of the total value of the common stocks owned by
the Fund in a core position of no more than 40 companies.
To choose the common stocks in which the Fund will invest, the Adviser
seeks to identify companies which exhibit some or all of the following
criteria:
o solid financial condition;
o consistent earnings and/or dividend history;
o company or industry group is temporarily out of favor;
o undervalued or overlooked assets;
o favorable insider ownership trends;
o not widely owned or followed by institutional investors;
o experienced or is likely to experience a triggering event that may
cause an increase in value.
Examples of a trigger for a possible increase in value include:
o a change in corporate structure;
o a change in a company's key management;
o initiating or increasing an authorized buy-back of a company's own
stock;
o apparent corporate efforts to take advantage of business
opportunities;
o increased following by securities analysts and institutional
investors;
o beneficiary of a long term demographic or economic trend;
o beneficiary of change in government policy or regulations.
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The Fund will normally invest its remaining assets, if any, in a variety of
other securities, such as US government debt instruments, corporate debt
securities, other unaffiliated mutual funds, commercial paper, bankers
acceptances and repurchase agreements.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
General Risks- Almost all investments are subject to inherent risks, and
the Fund is no exception. Accordingly, you may lose money by investing in
the Fund. When you sell your Fund shares, they may be worth more or less
than what you paid for them because the value of the Fund's investments
will vary from day-to-day, reflecting changes in market conditions,
interest rates and numerous other factors.
Stock Market Risk. The Fund invests primarily in common stock, so the Fund
will be subject to the risks associated with common stocks, including price
volatility and the creditworthiness of the issuing company. The stock
market trades in cyclical price patterns, with prices generally rising or
falling over time. These cyclical periods may last for a significant period
of time. Although individual securities may outperform the market, the
entire market may decline as a result of rising interest rates, regulatory
developments or deteriorating economic conditions.
Small To Medium-Cap Stock Risks- The Fund may invest in companies with
smaller market capitalizations (less than $6 billion in market
capitalization). Because these companies are relatively small compared to
large-cap companies, may be engaged in business mostly within their own
geographic region, and may be less well-known to the investment community,
they can have more volatile share prices. Also, small companies often have
less liquidity, less management depth, narrower market penetrations, less
diverse product lines, and fewer resources than larger companies. As a
result, their stock prices react more strongly to changes in the
marketplace.
Focused Portfolio Risk- The Fund has the ability to concentrate a
relatively high percentage of its investments in the securities of a small
number of companies. Under normal conditions, the Fund will invest at least
80% of the Fund's common stock holdings in not more than 40 companies.
Investing in this manner makes the Fund more susceptible to a single
economic, political or regulatory event than a more diversified fund might
be. Also, a change in the value of a single company will have a more
pronounced effect on the Fund than such a change would have on a more
diversified fund.
Management Risk- Acting as investment adviser to the Fund is a new position
for the Adviser, and the Fund has no operating history.
Year 2000 Risks: As with other mutual funds, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Adviser and the Fund's other
service providers don't properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known
as the "Year 2000" or "Y2K" problem. The Adviser is taken all steps
necessary to insure that its systems are fully Y2K compliant. The Adviser
has also obtained assurance from the Fund's other major service providers
that each are fully Y2K compliant as to the systems used by each such
service provider. The Adviser has also considered the effect of Y2K risk on
the Fund's
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portfolio, and is monitoring the companies in which the Fund invests for
evidence of Y2K preparedness and will not invest in any company unless such
company has first published evidence satisfactory to the Adviser that the
company anticipates negligible adverse Y2K effects on its business.
However, there can be no assurance that the Fund's portfolio will not be
adversely affected by the Y2K problem. Because the Fund is authorized to
invest in foreign securities, the Adviser is closely monitoring the Y2K
preparedness of other countries and will not invest in any foreign company
unless such company has first published evidence satisfactory to the
Adviser that the company anticipates negligible adverse Y2K effects on its
business. You should be aware that, although the Adviser and the Fund's
other service providers appear to be fully prepared for the change in
dates, each such provider depends, to varying degrees, on the services of
others, and there is no way to be sure that all such entities are prepared
for Y2K, or to accurately predict the level of risk remaining to the Fund
as a result of Y2K.
HOW HAS THE FUND PERFORMED IN THE PAST?
Because this is a new Fund that does not yet have an operating history, a
performance bar chart and table describing the Fund's annual performance
and comparing that performance to appropriate indices is not yet available.
WHAT ARE THE FUND'S FEES AND EXPENSES?
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
Shareholder Fees:
-----------------
(fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases NONE
Maximum Deferred Sales Charge (Load) NONE
Maximum Sales Charge (Load) NONE
Imposed on Reinvested Dividends
And other Distributions
Redemption Fees 0.75%*
Annual Fund Operating Expenses:
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(expenses that are deducted from Fund assets)
Management Fees1 1.65%
Distribution (12b-1) Fees2 0.00%
Other Expenses3 0.00%
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Total Annual Fund Operating Expenses 1.65%
* This fee is charged against your redemption proceeds if you redeem shares
within thirteen months of purchase.
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1. Management fees include a fee of 0.95% for investment advisory services and
0.70% for administrative and other services. Both fees are paid to the
Fund's Adviser.
2. Although the Fund's Board of Director's has adopted a Plan of Distribution
under Rule 12b-1 of the Investment Company Act of 1940, the Plan has not
been implemented and the Fund has no intention of implementing the Plan
during the Fund's first fiscal year.
3. The Fund's Adviser is responsible for paying all the Fund's expenses except
taxes, interest, litigation expenses and other extraordinary expenses.
Because the Fund believes in good faith that it will not incur any of these
expenses during its first fiscal year, expenses in this category are not
included.
AN EXAMPLE OF EXPENSES OVER TIME:
This Example below is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated, reinvest all dividends and distributions, and then redeem all your
shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
ONE YEAR THREE YEARS
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$ 173 $ 536
THE FUND'S INVESTMENT ADVISER
The Fund's Adviser
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The Company has entered into an Investment Advisory Agreement with Mohawk Asset
Management, Inc. (the "Adviser"), One North Church Street, Schenectady, New York
12305. The Adviser is an investment advisory company founded as a sole
proprietorship in 1994 and incorporated in Delaware in 1999. The Adviser'
principal business and occupation is the provision of financial management
services to individuals, corporations, fraternal and non-profit organizations
and other institutions in New York and throughout the United States. The Adviser
has been investment adviser to the Fund since its inception.
Under the terms of the Advisory Agreement, the Adviser manages the investment
operations of the Fund in accordance with the Fund's investment policies and
restrictions. The Adviser furnishes an investment program for the Fund,
determines what investments should be purchased, sold and held, and makes
changes on behalf of the Company in the investments of the Fund.
The Fund's Portfolio Manager
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Mr. James W. Denney is President of the Adviser and acts as the portfolio
manager for the Fund. Mr. Denney is also President of Electric City Funds, Inc.
(the "Company"). Mr. Denney has been managing investment portfolios for
individuals, corporations, trusts and retirement accounts since 1990. Mr. Denney
holds licenses as a Registered Principal (NASD Series 24), General Securities
Representative (NASD Series 7), and New York State Life, Accident & Health
Insurance Agent. He has also completed the CFP Professional Education Program
through the College for Financial
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Planning. You should be aware that, although Mr. Denney has extensive experience
in managing investment portfolios for clients of the Adviser, neither he nor
Mohawk Asset Management, Inc. has any prior experience in managing a portfolio
for an investment company, and this may result in additional risks for the Fund.
For its investment advisory services to the Fund, the Company pays to the
Adviser, on the last day of each month, a fee equal to an annual rate of 0.95%
of average net asset value of the Fund, such fee to be computed daily based upon
the net asset value of the Fund.
HOW TO BUY & SELL SHARES OF THE FUND
INVESTING IN THE FUND
Determination of Share Price
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Shares of the Fund are offered at each share's net asset value ("NAV"). NAV per
share is calculated by adding the value of Fund investments, cash and other
assets, subtracting Fund liabilities, and then dividing the result by the number
of shares outstanding. The Fund generally determines the total value of its
shares by using market prices for the securities comprising its portfolio.
Securities for which quotations are not available and any other assets are
valued at fair market value as determined in good faith by the Adviser, subject
to the review and supervision of the Board of Directors. The Fund's per share
NAV is computed on all days on which the New York Stock Exchange is open for
business at the close of regular trading hours on the Exchange, currently 4:00
p.m. Eastern Standard time.
Distribution Fees
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The Fund has adopted a Plan of Distribution Pursuant to Rule 12b-1 under the
1940 Act (the "12b-1 Plan") for its shares, pursuant to which the Fund pays the
Adviser a monthly fee for shareholder servicing expenses of 0.25% per annum of
the Fund's average daily net assets. The Adviser may, in turn, pay such fees to
third parties for eligible services provided by those parties to the Fund.
The Fund has not implemented the 12b-1 Plan and does not foresee doing so during
its first fiscal year. The Board adopted the Plan so that, if and when
necessary, the Fund would have available to it sufficient resources to pay third
parties who provide eligible services to the Fund.
If the 12b-1 Plan is implemented in the future, you should be aware that if you
hold your shares for a substantial period of time afterwards, you may indirectly
pay more than the economic equivalent of the maximum front-end sales charge
allowed by the National Association of Securities Dealers due to the recurring
nature of Distribution (12b-1) fees.
Minimum Investment Amounts
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Payments for Fund shares should be in U.S. dollars, and in order to avoid fees
and delays, should be drawn on a U.S. bank. Fund management may reject any
purchase order for Fund shares and may waive the minimum investment amounts in
its sole discretion.
Your purchase of Fund shares is subject to the following minimum investment
amounts:
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MINIMUM MINIMUM
INVESTMENT SUBSEQUENT
TO OPEN ACCOUNT INVESTMENTS
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$500 $50
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Opening and Adding To Your Account
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You can invest in the Fund by mail, wire transfer and through participating
financial service professionals. After you have established your account, you
may also make subsequent purchases by telephone. You may also invest in the Fund
through an automatic payment plan. Any questions you may have can be answered by
calling 1-800-453-6556.
Purchasing Shares By Mail
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Complete an Account Registration Form, make a check payable to The Electric City
Value Fund, and mail the Form and check to:
Electric City Funds, Inc.
c/o Mutual Shareholder Services, LLC
1301 East Ninth Street, Suite 1005
Cleveland, Ohio 44114-1800
Your purchase order, if accompanied by payment, will be processed upon receipt
by Mutual Shareholder Services, the Fund's Transfer Agent. If the Transfer Agent
receives your order and payment by the close of regular trading on the Exchange
(currently 4:00 p.m. East Coast time), your shares will be purchased at the
Fund's public offering price calculated at the close of regular trading on that
day. Otherwise, your shares will be purchased at the public offering price
determined as of the close of regular trading on the next business day.
Wire Transfer Purchases
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To purchase shares by wire transfer, ask your bank to wire funds to account of:
Firstar Bank, NA, ABA #: ---------
Credit: Electric City Funds, Inc., Acct. # --------
Further credit: The Electric City Value Fund.
Include your name(s), address and taxpayer identification number or Social
Security number. The wire should state that you are opening a new Fund account.
When you make subsequent purchases by wire, include your account number on the
wire transfer instructions.
Call 1-800-453-6556 to inform us that a wire is being sent.
If you purchase Fund shares by wire, you must complete and file an Account
Registration Form with the Transfer Agent before any of the shares purchased can
be redeemed. You should contact your bank (which will need to be a commercial
bank that is a member of the Federal Reserve System) for information on sending
funds by wire, including any charges that your bank may make for these services.
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Purchases through Financial Service Organizations
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You may purchase shares of the Fund through participating brokers, dealers, and
other financial professionals. Simply call your investment professional to make
your purchase. If you are a client of a securities broker or other financial
organization, you should note that such organizations may charge a separate fee
for administrative services in connection with investments in Fund shares and
may impose account minimums and other requirements. These fees and requirements
would be in addition to those imposed by the Fund. If you are investing through
a securities broker or other financial organization, please refer to its program
materials for any additional special provisions or conditions that may be
different from those described in this Prospectus (for example, some or all of
the services and privileges described may not be available to you). Securities
brokers and other financial organizations have the responsibility of
transmitting purchase orders and funds, and of crediting their customers'
accounts following redemptions, in a timely manner in accordance with their
customer agreements and this Prospectus.
Automatic Investment Plan
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You may purchase shares of the Fund through an Automatic Investment Plan. The
Plan provides a convenient way for you to have money deducted directly from your
checking, savings, or other accounts for investment in shares of the Fund. You
can take advantage of the plan by filling out the Automatic Investment Plan
application included with this prospectus. You may only select this option if
you have an account maintained at a domestic financial institution which is an
Automated Clearing House ("ACH") member for automatic withdrawals under the
plan. The Fund may alter, modify, amend or terminate the Plan at any time, but
will notify you if it does so. For more information, call the Transfer Agent at
1-800-453-6556.
Telephone Purchases
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In order to be able to purchase shares by telephone, your account authorizing
such purchases must have been established prior to your call. Your initial
purchase of shares may not be made by telephone. Shares purchased by telephone
will be purchased at the per share net asset value determined at the close of
business on the day that the transfer agent receives payment through the ACH.
Call the Transfer Agent for details.
You may make purchases by telephone only if you have an account at a bank that
is a member of the ACH. Most transfers are completed within three business days
of your call. To preserve flexibility, the Company may revise or eliminate the
ability to purchase Fund shares by phone, or may charge a fee for such service,
although the Company does not currently expect to charge such a fee.
Mutual Shareholder Services, LLC, the Fund's transfer agent, employs certain
procedures designed to confirm that instructions communicated by telephone are
genuine. Such procedures may include, but are not limited to, requiring some
form of personal identification prior to acting upon telephonic instructions,
providing written confirmations of all such transactions, and/or tape recording
all telephonic instructions. Assuming reasonable procedures such as the above
have been followed, neither the Transfer Agent nor the Fund will be liable for
any loss, cost, or expense for acting upon telephone instructions that are
believed to be genuine. The Company shall have authority, as your agent, to
redeem shares in your account to cover any such loss. As a result of this
policy, you will bear the risk of any loss unless the Fund and/or the Transfer
Agent has failed
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to follow procedures reasonably designed to prevent losses. However, if the Fund
and/or the Transfer Agent fails to follow such procedures, it may be liable for
such losses.
Miscellaneous Purchase Information
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The Fund reserves the right to reject applications for shares under
circumstances or in amounts considered disadvantageous to shareholders.
Applications will not be accepted unless they are accompanied by payment in U.S.
funds. Payment must be made by wire transfer, check or money order drawn on a
U.S. bank, savings & loan or credit union. The Fund's custodian will charge a
$20.00 fee against your account, in addition to any loss sustained by the Fund,
for any payment check returned to the custodian for insufficient funds.
If you place an order for Fund shares through a securities broker, and you place
your order in proper form before 4:00 p.m. East Coast time on any business day
in accordance with their procedures, your purchase will be processed at the
public offering price calculated at 4:00 p.m. on that day, if the securities
broker then transmits your order to the Transfer Agent before the end of its
business day (which is usually 5:00 p.m. East Coast time). The securities broker
must send to the Transfer Agent immediately available funds in the amount of the
purchase price within three business days for the order.
Federal regulations require that you provide a certified taxpayer identification
number whenever you open or reopen an account. Congress has mandated that if any
shareholder fails to provide and certify to the accuracy of the shareholder's
social security number or other taxpayer identification number, the Company will
be required to withhold a percentage, currently 31%, of all dividends,
distributions and payments, including redemption proceeds, to such shareholder
as a backup withholding procedure.
HOW TO SELL (REDEEM) YOUR SHARES
You may sell (redeem) your shares at any time. You may request the sale of your
shares either by mail, by telephone or by wire.
By Mail
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Sale requests should be mailed via U.S. mail or overnight courier service to:
Mutual Shareholder Services, LLC
1301 East Ninth Street, Suite 1005
Cleveland, Ohio 44114-1800
The selling price of the shares being redeemed will be the Fund's per share net
asset value next calculated after receipt of all required documents in "Good
Order".
"Good Order" means that the request must include:
1. Your account number.
2. The number of shares to be sold (redeemed) or the dollar value of the
amount to be redeemed.
3. The signatures of all account owners exactly as they are registered on the
account.
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4. Any required signature guarantees.
5. Any supporting legal documentation that is required in the case of estates,
trusts, corporations or partnerships and certain other types of accounts.
Payment of redemption proceeds will be made no later than the third business day
after the valuation date unless otherwise expressly agreed by the parties at the
time of the transaction. The Fund will charge you a fee equal to 0.75% of the
value of your shares redeemed if you redeem shares within thirteen months of
purchasing them. This fee is charged to offset the cost the Fund of maintaining
an account. No affiliated person of the Fund receives any benefit from these
fees.
Signature Guarantees --
- --------------------
A signature guarantee of each owner is required to redeem shares in the
following situations, for all size transactions:
(i) if you change the ownership on your account;
(ii) when you want the redemption proceeds sent to a different address than is
registered on the account;
(iii) if the proceeds are to be made payable to someone other than the account's
owner(s);
(iv) any redemption transmitted by federal wire transfer to your bank; and
(v) if a change of address request has been received by the Company or
[Transfer Agent] within 15 days previous to the request for redemption.
In addition, signature guarantees are required for all redemptions of $25,000 or
more from any Fund shareholder account. A redemption will not be processed until
the signature guarantee, if required, is received in "Good Order".
Signature guarantees are designed to protect both you and the Fund from fraud.
To obtain a signature guarantee, you should visit a bank, trust company, member
of a national securities exchange or other broker-dealer, or other eligible
guarantor institution. (Notaries public cannot provide signature guarantees.)
Guarantees must be signed by an authorized person at one of these institutions,
and be accompanied by the words "Signature Guarantee."
By Telephone
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You may redeem your shares in the Fund by calling the Transfer Agent at
1-800-453-6556 if you elected to use telephone redemption on your account
application when you initially purchased shares. Redemption proceeds must be
transmitted directly to you or to your pre-designated account at a domestic
bank. You may not redeem by telephone if a change of address request has been
received by the Company or the Transfer Agent within 15 days previous to the
request for redemption. During periods of substantial economic or market
changes, telephone redemptions may be difficult to implement. If you are unable
to contact the Transfer Agent by telephone, shares may be redeemed by delivering
the redemption request in person or by mail. You should understand that with the
telephone redemption option, you may be giving up a measure of security that you
might otherwise have had were you to redeem your shares in writing. In addition,
interruptions in telephone service may mean that you will be unable to effect a
redemption by telephone if desired.
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If you purchase your shares by check and then redeem your shares before your
check has cleared, the Fund may hold your redemption proceeds until your check
clears, or for 15 days, whichever comes first.
By Wire
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You may request the redemption proceeds be wired to your designated bank if it
is a member bank or a correspondent of a member bank of the Federal Reserve
System. The Custodian charges a $10 fee for outgoing wires.
Redemption At The Option Of The Fund
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If the value of the shares in your account falls to less than $500, the Company
may notify you that, unless your account is increased to $500 in value, it will
redeem all your shares and close the account by paying you the redemption
proceeds and any dividends and distributions declared and unpaid at the date of
redemption. You will have thirty days after notice to bring the account up to
$500 before any action is taken. This minimum balance requirement does not apply
to IRAs and other tax-sheltered investment accounts. This right of redemption
shall not apply if the value of your account drops below $500 as the result of
market action. The Company reserves this right because of the expense to the
Fund of maintaining very small accounts.
DIVIDENDS AND DISTRIBUTIONS
Dividends paid by the Fund are derived from its net investment income. Net
investment income will be distributed at least annually. The Fund's net
investment income is made up of dividends received from the stocks it holds, as
well as interest accrued and paid on any other obligations that might be held in
its portfolio.
The Fund realizes capital gains when it sells a security for more than it paid
for it. The Fund may make distributions of its net realized capital gains (after
any reductions for capital loss carry forwards), generally, once a year.
Unless you elect to have your distributions paid in cash, your distributions
will be reinvested in additional shares of the Fund. You may change the manner
in which your dividends are paid at any time by writing to the Transfer Agent at
the address shown above.
TAX CONSIDERATIONS
The Fund intends to qualify as a regulated investment company under Sub Chapter
M of the Internal Revenue Code so as to be relieved of federal income tax on its
capital gains and net investment income currently distributed to its
shareholders. To qualify as a regulated investment company, the Fund must, among
other things, derive at least 90% of its gross income from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock, securities, or other income derived with respect to its
business of investing in such stock or securities, and distribute substantially
all of such income to its shareholders at least annually.
The Fund intends to distribute to shareholders, at least annually, usually in
December, substantially all net investment income and any net capital gains
realized from sales of the Fund's portfolio
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securities. Dividends from net investment income and distributions from any net
realized capital gains are reinvested in additional shares of the Fund unless
the shareholder has requested in writing to have them paid by check.
Dividends from investment income and net short-term capital gains are generally
taxable to you as ordinary income. Distributions of long-term capital gains are
taxable as long-term capital gains regardless of the length of time shares in
the Fund have been held. Distributions are taxable, whether received in cash or
reinvested in shares of the Fund.
You will be advised annually of the source of distributions for federal income
tax purposes.
If you fail to furnish your social security or other tax identification number
or to certify properly that it is correct, the Fund may be required to withhold
federal income tax at the rate of 31% (backup withholding) from your dividend,
capital gain and redemption payments. Dividend and capital gain payments may
also be subject to backup withholding if you fail to certify properly that you
are not subject to backup withholding due to the under-reporting of certain
income.
Taxable distributions generally are included in your gross income for the
taxable year in which they are received. However, dividends declared in October,
November and December and made payable to shareholders of record in such month
will be deemed to have been received on December 31st if paid by the Fund during
the following January.
Distributions by the Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below your
cost basis, such distribution would be taxable to you as ordinary income or as a
long-term capital gain, even though, from an investment standpoint, it may
constitute a partial return of capital. In particular, you should be careful to
consider the tax implications of buying shares of the Fund just prior to a
distribution. The price of such shares include the amount of any forthcoming
distribution so that you may receive a return of investment upon distribution
which will, nevertheless, be taxable.
A redemption of shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. You should consult a tax adviser regarding the effect of
federal, state, local, and foreign taxes on an investment in the Fund.
GENERAL INFORMATION
The Fund will not issue stock certificates evidencing shares. Instead, your
account will be credited with the number of shares purchased, relieving you of
responsibility for safekeeping of certificates and the need to deliver them upon
redemption. Written confirmations are issued for all purchases of shares.
In reports or other communications to investors, or in advertising material, the
Fund may describe general economic and market conditions affecting the Fund and
may compare its performance with other mutual funds as listed in the rankings
prepared by Lipper Analytical Services, Inc. or similar nationally recognized
rating services and financial publications that monitor mutual fund performance.
The Fund may also, from time to time, compare its performance to the one or more
appropriate indices.
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According to the law of Maryland under which the Company is incorporated, and
the Company's bylaws, the Company is not required to hold an annual meeting of
shareholders unless required to do so under the Investment Company Act of 1940.
Accordingly, the Company will not hold annual shareholder meetings unless
required to do so under the Act. Shareholders do have the right to call a
meeting of shareholders for the purpose of voting to remove directors. The Fund
will render assistance to shareholders in connection with their efforts to
arrange a shareholder meeting as required under Section 16(c) of the Investment
Company Act of 1940, as amended. Please see the SAI for further information on
your rights as a shareholder.
14
<PAGE>
FOR MORE INFORMATION
Additional information about the Fund is available in the Fund's Statement of
Additional Information (SAI). The SAI contains more detailed information on all
aspects of the Fund. A current SAI, dated December 30, 1999, has been filed with
the SEC and is incorporated by reference into this prospectus.
To receive information concerning the Fund, or to request a copy of the SAI or
other documents relating to the Fund, please contact the Fund at:
Electric City Funds, Inc.
c/o Mutual Shareholder Services, Inc.
1301 East Ninth Street, Suite 1005
Cleveland, Ohio 44114-1800
1-800-453-6556
A copy of your requested document(s) will be sent to you within three days of
your request.
You may also receive information concerning the Fund, or request a copy of the
SAI or other documents relating to the Fund, by contacting the Securities and
Exchange Commission:
IN PERSON: at the SEC's Public Reference Room in Washington, D.C.(call
1-800-SEC-0330 to obtain information on how to use the Public Reference Room)
BY PHONE: 1-800-SEC-0330
BY MAIL: Public Reference Section, Securities and Exchange Commission,
Washington, D.C. 20549-6009 (duplicating fee required)
ON THE INTERNET: www.sec.gov
The Fund's Investment Company Act File No. is:
811-9523
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Dated December 30, 1999
ELECTRIC CITY FUNDS, INC.
One North Church Street
Schenectady, New York 12305
1-800-453-6556
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of The Electric City Value Fund, dated
December 30, 1999. You may obtain a copy of the Prospectus, free of charge, by
writing to Electric City Funds, Inc. c/o Mutual Shareholder Services, 1301 East
Ninth Street, Suite 1005, Cleveland, Ohio 44114-1800 or by calling
1-800-453-6556.
TABLE OF CONTENTS
Management of the Fund
Investment Policies and Restrictions
Investment Adviser
Directors and Officers
Performance Information
Purchasing and Redeeming Shares
Tax Information
Portfolio Transactions
Custodian
Transfer Agent
Administration
Distributor
Legal Counsel
Distribution Plan
Financial Statements
<PAGE>
MANAGEMENT OF THE FUND
Electric City Funds, Inc. (the "Company"), an open-end diversified management
investment company, was incorporated in Maryland on August 6, 1999. The Affairs
of the Company are managed by a Board of Directors which approves all
significant agreements between the Company and the persons and companies that
furnish services to the Fund, including agreements with the Fund's custodian,
transfer agent, investment adviser and administrator. All such agreements are
subject to limitations imposed by state and/or federal securities laws, and to
the extent that any such contract may contradict such statutes, the contract
would be unenforceable. The day-to-day operations of the Fund are delegated to
the Adviser.
The Company's Articles of Incorporation permit the Board of Directors to issue
100,000,000 shares of common stock. The Board of Directors has the power to
designate one or more classes of shares of common stock (each a "series" or
"Fund") and to classify or reclassify any unissued shares with respect to such
series. Currently, the Fund is the only series of shares being offered by the
Company.
Shareholders are entitled:
(i) to one vote per full share;
(ii) to such distributions as may be declared by the Company's Board of
Directors out of funds legally available; and
(iii) upon liquidation, to participate ratably in the assets available for
distribution.
There are no conversion or sinking fund provisions applicable to the shares, and
shareholders have no preemptive rights and may not cumulate their votes in the
election of directors. The shares are redeemable and are fully transferable. All
shares issued and sold by the Fund will be fully paid and nonassessable.
INVESTMENT POLICIES AND RESTRICTIONS
The Fund's investment objectives and the manner in which the Fund pursues its
investment objectives are generally discussed in the prospectus. This Section
provides additional information concerning the Fund's investments and its
investment restrictions.
The Fund is a diversified Fund, meaning that as to 75% of the Fund's assets
(valued at the time of investment), the Fund will not invest more than 5% of its
assets in securities of any one issuer, except in obligations of the United
States Government and its agencies and instrumentalities, thereby reducing the
risk of loss. The Fund normally will invest at least 65% of total assets in
common stock and securities convertible into common stock. The Fund may also
invest in a variety of other securities. The complete list of securities in
which the Fund may ordinarily invest is listed below, along with any
restrictions on such investments, and, where necessary, a brief discussion of
any risks unique to the particular security.
COMMON STOCKS. The Fund will ordinarily invest at least 65% of its total assets
in common stock or securities convertible into common stock. The market value of
common stock can
2
<PAGE>
fluctuate significantly, reflecting the business performance of the issuing
company, investor perceptions and general economic or financial market
movements. Smaller companies are especially sensitive to these factors. Despite
the risk of price volatility, however, common stocks historically have offered
the greatest potential for gain on investment, compared to other classes of
financial assets.
FOREIGN SECURITIES. The Fund may invest in the common stock of foreign issuers,
whether traded on U.S. exchanges or foreign exchanges. The Fund may also invest
in foreign securities in the form of American Depository Receipts (ADRs). The
Fund will only invest in ADRs that are issuer sponsored. Sponsored ADRs
typically are issued by a U.S. bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation. The Fund will not invest
in "emerging market" countries, and investing in foreign securities is not a
principal strategy for the Fund.
PREFERRED STOCK. The Fund may invest, without limitation, in preferred stock.
Preferred stock generally pays dividends at a specified rate and generally has
preference over common stock in the payments of dividends and the liquidation of
the issuer's assets. Dividends on preferred stock are generally payable at the
discretion of the issuer's board of directors. Accordingly, Shareholders may
suffer a loss of value if dividends are not paid. The market prices of preferred
stocks are also sensitive to changes in interest rates and in the issuer's
creditworthiness. Accordingly, shareholders may experience a loss of value due
to adverse interest rate movements or a decline in the issuer's credit rating.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real estate investment
trusts (REITs). Equity REITs invest directly in real property while mortgage
REITs invest in mortgages on real property. REITs may be subject to certain
risks associated with the direct ownership of real estate, including declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, and variations in rental income. REITs pay dividends to
their shareholders based upon available funds from operations. It is quite
common for these dividends to exceed the REITs taxable earnings and profits
resulting in the excess portion of such dividends being designated as a return
of capital. The Fund intends to include the gross dividends from such REITs in
its distribution to its shareholders and, accordingly, a portion of the Fund's
distributions may also be designated as a return of capital. A return of capital
means that assets of the Fund have been returned to the Fund as cash and must be
re-invested in other securities. There is a risk that the re-invested asset may
be invested at lower rates of return than were previously invested. However, a
return of capital is not a distribution for tax purposes. The Fund will not
invest more than 10% of its assets in REITS. Fund shareholders will be subject
to management and other fees charged by the REITS in which the Fund invests.
OPTIONS ON EQUITIES. The Fund may occasionally invest in options contracts to
decrease its exposure to the effects of changes in security prices, to hedge
securities held, to maintain cash reserves while remaining fully invested, to
facilitate trading, to reduce transaction costs, or to seek higher investment
returns when an options contract is priced more attractively than the underlying
security or index.
3
<PAGE>
The Fund may write (i.e. sell) puts and covered call options, and may purchase
put and call options, on equity securities traded on a United States exchange or
over-the-counter market. The Fund may also enter into such transactions on
Indexes. Options contracts can include long-term options with durations of up to
three years.
The Fund may enter into these transactions so long as the value of the
underlying securities on which options contracts may be written at any one time
does not exceed 100% of the net assets of the Fund, and so long as the initial
margin required to purchase options contracts does not exceed five percent (5%)
of the Fund's total net assets. When writing covered call options or selling
puts, to minimize the risks of entering into these transactions, the Fund will
maintain a segregated account with its Custodian consisting of the underlying
securities upon which the option was written, cash, cash equivalents, U.S.
Government Securities or other high-grade liquid debt securities, denominated in
U.S. dollars or non-U.S. currencies, in an amount equal to the aggregate fair
market value of its commitments to such transactions. Over-the counter options
and the assets used to cover such options are considered to be illiquid.
Risk Factors. The primary risks associated with the use of options are; (1)
imperfect correlation between a change in the value of the underlying security
or index and a change in the price of the option or futures contract, and (2)
the possible lack of a liquid secondary market for an options or futures
contract and the resulting inability of the Fund to close out the position prior
to the maturity date. Investing only in those contracts whose price fluctuations
are expected to resemble those of the Fund's underlying securities will minimize
the risk of imperfect correlation.
DEBT SECURITIES. The Fund may invest in corporate or U.S. Government debt
securities including zero coupon bonds. Corporate debt securities may be
convertible into preferred or common stock. In selecting corporate debt
securities for the Fund, the Adviser reviews and monitors the creditworthiness
of each issuer and issue. U.S. Government securities include direct obligations
of the U.S. Government and obligations issued by U.S. Government agencies and
instrumentalities. The market value of such securities fluctuates in response to
interest rates and the creditworthiness of the issuer. In the case of securities
backed by the full faith and credit of the United States Government,
shareholders are only exposed to interest rate risk.
Zero coupon bonds do not provide for cash interest payments but instead are
issued at a discount from face value. Each year, a holder of such bonds must
accrue a portion of the discount as income. Because issuers of zero coupon bonds
do not make periodic interest payments, their prices tend to be more volatile
than other types of debt securities when market interest rates change.
Credit Risk- A debt instrument's credit quality depends on the issuer's
ability to pay interest on the security and repay the debt: the lower the
credit rating, the greater the risk that the security's issuer will
default. The credit risk of a security may also depend on the credit
quality of any bank or financial institution that provides credit
enhancement for the security. The Fund may invest in securities that carry
a wide range of credit risk, from US Government debt instruments that carry
almost no credit risk to high-yield corporate securities that carry
considerable credit risk. However, the Fund may not invest more than 35% of
its total assets in such securities
4
<PAGE>
Interest Rate Risk- All debt securities face the risk that their principal
value will decline because of a change in interest rates. Generally,
investments subject to interest rate risk will decrease in value when
interest rates rise and will rise in value when interest rates decline.
Also, the longer a security has until it matures, the more pronounced will
be a change in its value when interest rates change.
UNAFFILIATED MUTUAL FUNDS. The Fund may invest in securities issued by other
registered investment companies (mutual funds). As a shareholder of another
registered investment company, the Fund would bear its pro rata portion of that
company's advisory fees and other expenses. Such fees and expenses will be borne
indirectly by the Fund's shareholders. The Fund may invest in such instruments
to the extent that such investments do not exceed 3% of any investment company's
outstanding securities.
REPURCHASE AGREEMENTS. The Fund may invest a portion of its assets in repurchase
agreements ("Repos") with broker-dealers, banks and other financial
institutions, provided that the Fund's custodian always has possession of the
securities serving as collateral for the Repos or has proper evidence of book
entry receipt of said securities. In a Repo, the Fund purchases securities
subject to the seller's simultaneous agreement to repurchase those securities
from the Fund at a specified time (usually one day) and price. The repurchase
price reflects an agreed-upon interest rate during the time of investment. All
Repos entered into by the Fund must be collateralized by U.S. Government
Securities, the market values of which equal or exceed 102% of the principal
amount of the money invested by the Fund. If an institution with whom the Fund
has entered into a Repo enters insolvency proceedings, the resulting delay, if
any, in the Fund's ability to liquidate the securities serving as collateral
could cause the Fund some loss if the securities declined in value prior to
liquidation. To minimize the risk of such loss, the Fund will enter into Repos
only with institutions and dealers considered creditworthy. You should be aware
that these types of investments are considered "loans" under the Investment
Company Act of 1940, as amended.
Repurchase Agreement Risk- A repurchase agreement is an agreement where one
party sells securities to a buyer with a simultaneous agreement to repurchase
those securities at a future date at a set price. The difference between the
original sales price and the future repurchase price represents an interest
payment to the original buyer. A repurchase agreement exposes the Fund to the
risk that the party that sells the security will default on its obligation to
repurchase those securities. If that happens the Fund can lose money because:
o it may not be able to sell the securities at the agreed-upon time and
price;
o the securities may lose value before they can be sold.
CASH RESERVES. The Fund may hold up to 10% of its net assets in cash to maintain
liquidity.
Restricted and Illiquid Securities.
- ----------------------------------
The Fund will not invest more than 15% of its net assets in securities that the
Adviser determines, under the supervision of the Board of Directors, to be
illiquid and/or restricted.
5
<PAGE>
Illiquid securities are securities that may be difficult to sell promptly at an
acceptable price because of lack of available market and other factors. The sale
of some illiquid and other types of securities may be subject to legal
restrictions. Because illiquid and restricted securities may present a greater
risk of loss than other types of securities, the Fund will not invest in such
securities in excess of the limits set forth above.
When-Issued Securities and Delayed-Delivery Transactions.
- ---------------------------------------------------------
The Fund may purchase securities on a when-issued basis, and it may purchase or
sell securities for delayed-delivery. These transactions occur when securities
are purchased or sold by the Fund with payment and delivery taking place at some
future date. The Fund may enter into such transactions when, in the Adviser's
opinion, doing so may secure an advantageous yield and/or price to the Fund that
might otherwise be unavailable. The Fund has not established any limit on the
percentage of assets it may commit to such transactions, but to minimize the
risks of entering into these transactions, the Fund will maintain a segregated
account with its Custodian consisting of cash, cash equivalents, U.S. Government
Securities or other high-grade liquid debt securities, denominated in U.S.
dollars, in an amount equal to the aggregate fair market value of its
commitments to such transactions.
Portfolio Turnover.
- ------------------
The Fund has no operating history and therefore has no annual reportable
portfolio turnover. Higher portfolio turnover rates may result in higher rates
of net realized capital gains to the Fund, thus the portion of the Fund's
distributions constituting taxable gains may increase. In addition, higher
portfolio turnover activity can result in higher brokerage costs to the Fund.
The Fund anticipates that its annual portfolio turnover will be not greater than
100%.
The complete list of the Fund's investment restrictions is as follows:
The Fund will not:
1. To the extent of 75% of its assets (valued at time of investment), invest
more than 5% of its assets in securities of any one issuer, except in
obligations of the United States Government and its agencies and
instrumentalities;
2. Acquire securities of any one issuer that at the time of investment (a)
represent more than 10% of the voting securities of the issuer or (b) have
a value greater than 10% of the value of the outstanding securities of the
issuer;
3. Invest more than 25% of its assets (valued at time of investment) in
securities of companies in any one industry;
4. Borrow money, except from banks for temporary or emergency purposes in
amounts not exceeding 20% of the value of the Fund's assets at the time of
borrowing;
5. Underwrite the distribution of securities of other issuers, or acquire
"restricted" securities that, in the event of a resale, might be required
to be registered under the Securities Act of 1933;
6
<PAGE>
6. Make margin purchases;
7. Invest in companies for the purpose of management or the exercise of
control;
8. Lend money (but this restriction shall not prevent the Fund from investing
in debt securities or repurchase agreements, or lend its portfolio
securities).
9. Invest in oil, gas or other mineral exploration or development programs,
although it may invest in marketable securities of companies engaged in
oil, gas or mineral exploration;
10. Purchase or sell real estate or real estate loans or real estate limited
partnerships, although it may invest in marketable securities of companies
that invest in real estate or interests in real estate.
11. Issue senior securities.
12. Invest in commodities, or invest in futures or options on commodities.
Restrictions 1 through 12 listed above are fundamental policies, and may be
changed only with the approval of a "majority of the outstanding voting
securities" of the Fund as defined in the Investment Company Act of 1940.
The Fund has also adopted the following restrictions that may be changed by the
Board of Directors without shareholder approval:
The Fund may not:
a. Invest more than 25% of its assets (valued at time of investment) in
securities of issuers with less than three years' operation (including
predecessors);
b. Invest more than 15% of its net assets in securities that are not readily
marketable;
c. Acquire securities of other investment companies except (a) by purchase in
the open market, where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission and
(b) where acquisition results from a dividend or merger, consolidation or
other reorganization.
d. purchase more than 3% of the voting securities of any one investment
company;
e. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 20% of its total
assets at cost;
f. Invest more than 5% of the Fund's assets (valued at time of investment) in
initial margin deposits for options contracts;
INVESTMENT ADVISER
Information on the Fund's Investment Adviser, Mohawk Asset Management, Inc., is
set forth in the prospectus. This Section contains additional information
concerning the Adviser.
7
<PAGE>
Mohawk Asset Management was organized as a sole proprietorship in 1994. Mohawk
Asset Management, Inc. (the "Adviser"), its successor, was organized under the
laws of the State of Delaware as an investment advisory corporation in
September1999. The Adviser registered as an Investment Adviser with the
Securities and Exchange Commission in December, 1999. The Adviser's principal
occupation and business is to provide financial management services to
individuals, corporations, non-profit organizations and other institutions
throughout the United States.
The Adviser manages the investment portfolio and the general business affairs of
the Fund pursuant to an investment services agreement with the Fund dated
December 15,1999 (the "Agreement"). Messrs. James W. Denney and Bill R. Werner
are officers of the Adviser and Directors of the Company. Accordingly, each of
those persons is considered an "affiliated person", as that term is defined in
the Investment Company Act of 1940, as amended (the 1940 Act). Mr. James W.
Denney is portfolio manager for the Fund.
The Agreement provides that the Adviser shall not be liable for any loss
suffered by the Fund or its shareholders as a consequence of any act or omission
in connection with services under the Agreement, except by reason of the
Adviser's willful misfeasance, bad faith, gross negligence, or reckless
disregard of its obligations and duties under the Advisory Agreement.
The Agreement has a term of two years, but may be continued from year to year so
long as its continuance is approved at least annually:
(a) by the vote of a majority of the Directors of the Fund who are not
"interested persons" of the Fund or the adviser cast in person at a meeting
called for the purpose of voting on such approval, and
(b) by the Board of Directors as a whole or by the vote of a majority (as
defined in the 1940 Act) of the outstanding shares of the Fund.
The Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
DIRECTORS AND OFFICERS
The Board Of Directors has overall responsibility for conduct of the Company's
affairs. The day-to-day operations of the Fund are managed by the Adviser,
subject to the bylaws of the Company and review by the Board of Directors. The
directors of the Company, including those directors who are also officers, are
listed below. The business address of each director is:
One North Church Street
Schenectady, New York 12305
8
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupation for
Name, Age with Fund The Last Five Years
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
James W. Denney*; President President of Mohawk Asset Management, Inc., a
(Age 34) Director Registered Investment Adviser Corporation.
Registered Principal of Milestone Financial
Services, Inc., a broker/dealer firm, from
July 1998 to present. Registered Principal,
Linsco/Private Ledger, from 8/92 - 7/98.
Investment Executive, Paine Webber, Inc.,
from 12/89 - 7/92. Series 7 Registered
Representative License (1990). General
Securities Principal (1992). New York State
Insurance License.
Bill W. Werner* Secretary Partner, General Manager, Dillinger
(Age 36) Director Stairbuilding Company, Fairview, NJ, a
contracting firm, since 1985. Also Vice
President of Mohawk Asset Management since
September, 1999. Formerly an air traffic
controller in the United States Marine Corps.
Michael J. Massey Director Owner and President of AdMania, an
(Age 35) advertising firm.
Joseph D. Condon Director Public Affairs Director, Albany Broadcasting
(Age 53) Company. Employed with Albany Broadcasting
Company since 1969. Bachelor of Arts degree
from Siena College, Loudenville, NY in 1969.
Honorable Albert P. Jurczynski Director Mayor, City of Schenectady, NY since 1996.
(Age 43) City Council member, City of Schenectady,
from 1984 through 1995.
</TABLE>
* Indicates an "interested person" as defined in the Investment Company Act of
1940.
The table below sets forth the compensation anticipated to be paid by the
Corporation to each of the directors of the Corporation during the fiscal year
ending August 31, 2000.
9
<PAGE>
Name of Director Compensation Pension Annual Total Compensation
from Corp Benefits Benefits Paid to Director
- --------------------------------------------------------------------------------
James W. Denney $0.00 $0.00 $0.00 $0.00
Bill R. Werner $0.00 $0.00 $0.00 $0.00
Michael J. Massey $600.00 $0.00 $0.00 $600.00
Joseph D. Condon $600.00 $0.00 $0.00 $600.00
Albert P. Jurczynski $600.00 $0.00 $0.00 $600.00
Control Persons and Shareholders Owning in Excess of 5% of Fund Shares
- ----------------------------------------------------------------------
The Adviser intends to purchase all of the outstanding shares of the Fund prior
to the Fund's effective date, and will accordingly be deemed to control the
Fund.
The Company will call a meeting of shareholders for the purpose of voting upon
the question of removal of a director or directors when requested in writing to
do so by record holders of at least 10% of the Fund's outstanding common shares.
The Corporation's bylaws contain procedures for the removal of directors by its
stockholders. At any meeting of stockholders, duly called and at which a quorum
is present, the stockholders may by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any director or
directors from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of the removed directors.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return" for a
period is the percentage change in value during the period of an investment in
Fund shares, including the value of shares acquired through reinvestment of all
dividends and capital gains distributions. "Average Annual Total Return" is the
average annual compounded rate of change in value represented by the Total
Return Percentage for the period.
[n]
Average Annual Total Return is computed as follows: P(1+T) = ERV
Where: P = a hypothetical initial investment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of shares at the end of the period
Yield. The Fund may advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
10
<PAGE>
6
Yield = 2[(a-b/cd + 1) - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that they were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
The Fund's performance is a function of conditions in the securities markets,
portfolio management, and operating expenses. Although information such as that
shown above is useful in reviewing the Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
In sales literature, the Fund's performance may be compared with that of market
indices and other mutual funds. In addition to the above computations, the Fund
might use comparative performance as computed in a ranking determined by Lipper
Analytical Services, Morningstar, Inc., or that of another service.
PURCHASING AND REDEEMING SHARES
Redemptions will be made at net asset value. The Fund's net asset value is
determined on days on which the New York Stock Exchange is open for trading. For
purposes of computing the net asset value of a share of the Fund, securities
traded on security exchanges, or in the over-the-counter market in which
transaction prices are reported, are valued at the last sales price at the time
of valuation or, lacking any reported sales on that day, at the most recent bid
quotations. Securities for which quotations are not available and any other
assets are valued at a fair market value as determined in good faith by the
Adviser, subject to the review and supervision of the board of directors. The
price per share for a purchase order or redemption request is the net asset
value next determined after receipt of the order.
The Fund is open for business on each day that the New York Stock Exchange
("NYSE") is open. The Fund's share price or net asset value per share ("NAV") is
normally determined as of 4:00 p.m., New York time. The Fund's share price is
calculated by subtracting its liabilities from the closing fair market value of
its total assets and dividing the result by the total number of shares
outstanding on that day. Fund liabilities include accrued expenses and dividends
payable, and its total assets include the market value of the portfolio
securities as well as income accrued but not yet received. Since the Fund does
not charge sales, the NAV is the offering price for shares of the Fund.
TAX INFORMATION
The Fund intends to qualify as a regulated investment company under SubChapter M
of the Internal Revenue Code so as to be relieved of federal income tax on its
capital gains and net investment income currently distributed to its
shareholders. To qualify as a regulated investment
11
<PAGE>
company, the Fund must, among other things, derive at least 90% of its gross
income from dividends, interest, payments with respect to securities loans,
gains from the sale or other disposition of stock, securities, or other income
derived with respect to its business of investing in such stock or securities.
If the Fund qualifies as a regulated investment company and distributes at least
90% of its net investment income, the Fund will not be subject to Federal income
tax on the income so distributed. However, the Fund would be subject to
corporate income tax on any undistributed income other than tax-exempt income
from municipal securities.
The Fund intends to distribute to shareholders, at least annually, substantially
all net investment income and any net capital gains realized from sales of the
Fund's portfolio securities. Dividends from net investment income and
distributions from any net realized capital gains are reinvested in additional
shares of the Fund unless the shareholder has requested in writing to have them
paid by check.
Dividends from investment income and net short-term capital gains are generally
taxable to the shareholder as ordinary income. Distributions of long-term
capital gains are taxable as long-term capital gains regardless of the length of
time shares in the Fund have been held. Distributions are taxable, whether
received in cash or reinvested in shares of the Fund.
Each shareholder is advised annually of the source of distributions for federal
income tax purposes. A shareholder who is not subject to federal income tax will
not be required to pay tax on distributions received.
If shares are purchased shortly before a record date for a distribution, the
shareholder will, in effect, receive a return of a portion of his investment,
but the distribution will be taxable to him even if the net asset value of the
shares is reduced below the shareholder's cost. However, for federal income tax
purposes the original cost would continue as the tax basis.
If a shareholder fails to furnish his social security or other tax
identification number or to certify properly that it is correct, the Fund may be
required to withhold federal income tax at the rate of 31% (backup withholding)
from dividend, capital gain and redemption payments to him. Dividend and capital
gain payments may also be subject to backup withholding if the shareholder fails
to certify properly that he is not subject to backup withholding due to the
under-reporting of certain income.
Taxation of the Shareholder. Taxable distributions generally are included in a
shareholder's gross income for the taxable year in which they are received.
However, dividends declared in October, November and December and made payable
to shareholders of record in such month will be deemed to have been received on
December 31st if paid by the Fund during the following January.
Distributions by the Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution would be taxable to the shareholder
as ordinary income or as a long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
12
<PAGE>
particular, investors should be careful to consider the tax implications of
buying shares of the Fund just prior to a distribution. The price of such shares
include the amount of any forthcoming distribution so that those investors may
receive a return of investment upon distribution which will, nevertheless, be
taxable to them.
A redemption of shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. Each investor should consult a tax Adviser regarding the
effect of federal, state, local, and foreign taxes on an investment in the Fund.
Dividends. A portion of the Fund's income may qualify for the dividends-received
deduction available to corporate shareholders to the extent that the Fund's
income is derived from qualifying dividends. Because the Fund may earn other
types of income, such as interest, income from securities loans, non-qualifying
dividends, and short-term capital gains, the percentage of dividends from the
Fund that qualifies for the deduction generally will be less than 100%. The Fund
will notify corporate shareholders annually of the percentage of Fund dividends
that qualifies for the dividend received deductions.
A portion of the Fund's dividends derived from certain U.S. Government
obligations may be exempt from state and local taxation. Short-term capital
gains are distributed as dividend income. The Fund will send each shareholder a
notice in January describing the tax status of dividends and capital gain
distributions for the prior year.
Capital Gain Distribution. Long-term capital gains earned by the Fund from the
sale of securities and distributed to shareholders are federally taxable as
long-term capital gains, regardless of the length of time shareholders have held
their shares. If a shareholder receives a long-term capital gain distribution on
shares of the Fund, and such shares are held six months or less and are sold at
a loss, the portion of the loss equal to the amount of the long-term capital
gain distribution will be considered a long-term loss for tax purposes.
Short-term capital gains distributed by the Fund are taxable to shareholders as
dividends, not as capital gains.
PORTFOLIO TRANSACTIONS
The Fund will generally purchase and sell securities without regard to the
length of time the security has been held. Accordingly, it can be expected that
the rate of portfolio turnover may be substantial. The Fund expects that its
annual portfolio turnover rate will not exceed 50% under normal conditions.
However, there can be no assurance that the Fund will not exceed this rate, and
the portfolio turnover rate may vary from year to year.
High portfolio turnover in any year will result in the payment by the Fund of
above-average transaction costs and could result in the payment by shareholders
of above-average amounts of taxes on realized investment gains. Distributions to
shareholders of such investment gains, to the extent they consist of short-term
capital gains, will be considered ordinary income for federal income tax
purposes.
Decisions to buy and sell securities for the Fund are made by the Adviser
subject to review by the Corporation's Board of Directors. In placing purchase
and sale orders for portfolio securities
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for the Fund, it is the policy of the Adviser to seek the best execution of
orders at the most favorable price. In selecting brokers to effect portfolio
transactions, the determination of what is expected to result in the best
execution at the most favorable price involves a number of largely judgmental
considerations. Among these are the Adviser's evaluation of the broker's
efficiency in executing and clearing transactions. Over-the-counter securities
are generally purchased and sold directly with principal market makers who
retain the difference in their cost in the security and its selling price. In
some instances, the Adviser feels that better prices are available from
non-principal market makers who are paid commissions directly.
The Fund may borrow up to 20% of its net assets for emergency purposes.
Borrowing money can result in an opportunity for leveraging of the Fund's
assets. This means that the Fund could, in theory, invest in more securities
than the Fund had in investable cash by using borrowed money for investing. If
the Fund employed such a strategy, the Fund would incur significantly greater
risks. The Fund will not borrow to leverage. It will only borrow to meet
extraordinary redemption requests.
CUSTODIAN
FirstStar Bank, N.A., Cincinnati, Ohio, acts as custodian for the Fund. As such,
FirstStar holds all securities and cash of the Fund, delivers and receives
payment for securities sold, receives and pays for securities purchased,
collects income from investments and performs other duties, all as directed by
officers of the Company. FirsStar does not exercise any supervisory function
over management of the Fund, the purchase and sale of securities or the payment
of distributions to shareholders.
TRANSFER AGENT
Mutual Shareholder Services, LLC, 1301 East Ninth Street, Suite 1005, Cleveland,
Ohio 44114-1800 ("MSS") acts as transfer, dividend disbursing, and shareholder
servicing agent for the Fund pursuant to a written agreement with the Company
and the Adviser. Under the agreement, MSS is responsible for administering and
performing transfer agent functions, dividend distribution, shareholder
administration, and maintaining necessary records in accordance with applicable
rules and regulations.
For the services to be rendered as transfer agent, The Adviser shall pay MSS an
annual fee, paid monthly, based on the average net assets of the Fund, as
determined by valuations made as of the close of each business day of the month.
ADMINISTRATION
MSS also acts as Administrator to the Fund pursuant to a written agreement with
the Company and Adviser. The Administrator supervises all aspects of the
operations of the Fund except those performed by the Fund's investment adviser
under the Fund's investment advisory agreement. The Administrator is responsible
for:
(a) calculating the Fund's net asset value
(b) preparing and maintaining the books and accounts specified in Rule 31a-1
and 31a-2 of the Investment Company Act of 1940
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<PAGE>
(c) preparing financial statements contained in reports to stockholders of the
Fund
(d) preparing the Fund's federal and state tax returns
(e) preparing reports and filings with the Securities and Exchange Commission
(f) preparing filings with state Blue Sky authorities
(g) maintaining the Fund's financial accounts and records
For the services to be rendered as Administrator, The Adviser shall pay TA an
annual fee, paid monthly, based on the average net assets of the Fund, as
determined by valuations made as of the close of each business day of the month.
DISTRIBUTOR
B/D Holdings, Inc, 1301 East Ninth Street, Suite 100, Cleveland, Ohio
44114-1800, acts as the principal underwriter of the Fund's shares pursuant to a
written agreement with the Fund and the Adviser.
INDEPENDENT ACCOUNTANTS
McCurdy & Associates, CPA's, Inc., 27995 Clemens Road, Westlake, Ohio 44145 will
serve as the Company's independent auditors for its first fiscal year.
LEGAL COUNSEL
David Jones & Assoc., P.C., 4747 Research Forest Drive, Suite 180, # 303, The
Woodlands, TX 77381, has passed on certain matters relating to this Registration
Statement and acts as counsel to the Company.
DISTRIBUTION PLAN
As noted in the Fund's Prospectus, the Fund has adopted a plan pursuant to Rule
12b-1 under the 1940 Act (collectively, the "Plan") whereby the Fund may pay a
fee of 0.25% per annum of the Fund's average daily net assets to the Adviser and
others for providing personal service and/or maintaining shareholder accounts
relating to the distribution of the Fund's shares. The fees are paid on a
monthly basis, based on the Fund's average daily net assets.
Pursuant to the Plan, the Adviser receives from the Fund a fee each month equal
to 0.25% per annum of average net assets. The Adviser uses such fees to pay for
expenses incurred in the distribution and promotion of the Fund's shares,
including but not limited to, printing of prospectuses and reports used for
sales purposes, preparation and printing of sales literature and related
expenses, advertisements, and other distribution-related expenses as well as any
distribution or service fees paid to securities dealers or others who have
executed a dealer agreement with the distributor. Any expense of distribution in
excess of 0.25% per annum will be borne by the Adviser without any additional
payments by the Fund. You should be aware that it is possible that Plan accruals
will exceed the actual expenditures by the Adviser for eligible services.
Accordingly, such fees are not strictly tied to the provision of such services.
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<PAGE>
The Plan also provides that to the extent that the Fund, the Adviser, or other
parties on behalf of the Fund, or the Adviser make payments that are deemed to
be payments for the financing of any activity primarily intended to result in
the sale of shares issued by the Fund within the context of Rule 12b-1, such
payments shall be deemed to be made pursuant to the Plans. In no event shall the
payments made under the Plan, plus any other payments deemed to be made pursuant
to the Plan, exceed the amount permitted to be paid pursuant to the Conduct
Rules of the National Association of Securities Dealers, Inc.
The Board of Directors has determined that a consistent cash flow resulting from
the sale of new shares is necessary and appropriate to meet redemptions and to
take advantage of buying opportunities without having to make unwarranted
liquidations of portfolio securities. The Board therefore believes that it will
likely benefit the Fund to have monies available for the direct distribution
activities of the Adviser in promoting the sale of the Fund's shares, and to
avoid any uncertainties as to whether other payments constitute distribution
expenses on behalf of the Fund. The Board of Directors, including the non-
interested Directors, has concluded that in the exercise of their reasonable
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that the Plan will benefit the Fund and its shareholders.
The Plan has been approved by the Funds' Board of Directors, including all of
the Directors who are non-interested persons as defined in the 1940 Act. The
Plan must be renewed annually by the Board of Directors, including a majority of
the Directors who are non-interested persons of the Fund and who have no direct
or indirect financial interest in the operation of the Plan. The votes must be
cast in person at a meeting called for that purpose. It is also required that,
during the period in which the Plan is in effect, the selection and nomination
of non-interested Directors be done only by the non-interested Directors. The
Plan and any related agreements may be terminated at any time, without any
penalty:
(1) by vote of a majority of the non-interested Directors on not more than 60
days' written notice,
(2) by the Adviser on not more than 60 days' written notice,
(3) by vote of a majority of the Fund's outstanding shares, on 60 days' written
notice, and
(4) automatically by any act that terminates the Advisory Agreement with the
Adviser.
The Adviser or any dealer or other firm may also terminate their respective
agreements at any time upon written notice.
The Plan and any related agreement may not be amended to increase materially the
amounts to be spent for distribution expenses without approval by a majority of
the Fund's outstanding shares, and all material amendments to the Plan or any
related agreements shall be approved by a vote of the non-interested Directors,
cast in person at a meeting called for the purpose of voting on any such
amendment.
The Adviser is required to report in writing to the Board of Directors of the
Fund, at least quarterly, on the amounts and purposes of any payment made under
the Plans, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plans should be continued.
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<PAGE>
Although the Plan has been adopted by the Board of Directors, the Board has
decided not to implement the Plan for at least the Fund's first fiscal year, in
order to minimize the ongoing expenses of the Fund during the Fund's start-up
phase. The Board will implement the Plan when and if circumstances so warrant.
FINANCIAL STATEMENTS
ELECTRIC CITY FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 27, 1999
Electric City
Value Fund
ASSETS:
Cash in Bank $100,000
--------
Total Assets $100,000
--------
LIABILITIES: $ 0
--------
Total Liabilities $ 0
--------
NET ASSETS $100,000
--------
NET ASSETS CONSIST OF:
Capital Paid In $100,000
--------
OUTSTANDING SHARES
100 Million Authorized at .0001 par 10,000
NET ASSET VALUE PER SHARE $ 10.00
OFFERING PRICE PER SHARE $ 10.00
MAXIMUM REDEMPTION PRICE PER SHARE $ 9.925
See Accountants' Audit Report
17
<PAGE>
ELECTRIC CITY FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
December 27, 1999
1. ORGANIZATION
Electric City Funds, Inc. (the "Trust") is an open-end management
investment company organized as a corporation under the laws of the State
of Maryland on August 6, 1999. The corporation provides for 100 million
authorized shares at .0001 par value, which may, without shareholder
approval, be divided into an unlimited number of series of such shares, and
which presently consist of one series of shares for the Electric City Value
Fund (the "Fund").
The primary investment objective of the Fund is maximizing total return.
The Fund uses an independent custodian and transfer agent. No transactions
other than those relating to organizational matters and the sale of 10,000
shares of the Electric City Value Fund have taken place to date.
2. RELATED PARTY TRANSACTIONS
As of December 27, 1999, all of the outstanding shares of the Fund were
owned by Bill R. Werner IRA, Ernerose B. Werner, and James R. Denney Jr.
403B. A shareholder who beneficially owns, directly or indirectly, more
than 25% of the Fund's voting securities may be deemed a "control person"
(as defined in the 1940 Act) of the Fund.
Mohawk Asset Management, Inc., the Fund's investment adviser and
administrator, is registered as an investment adviser under the Investment
Advisers Act of 1940. Certain directors and officers of Electric City
Funds, Inc. are also directors and officers of Mohawk Asset Management,
Inc.
As adviser, Mohawk Asset Management, Inc. receives from the Fund as
compensation for its services to the Fund an annual fee of 1.65% of the
Fund's net assets. This fee is higher than that paid by most other
investment companies. The fee is paid monthly and calculated on the average
daily closing net asset value of the Fund.
The adviser pays all expenses incident to the Fund's operations and
business except litigation expenses, brokerage fees, taxes, interest, and
other extraordinary charges.
3. DISTRIBUTION PLAN
The Fund has adopted a distribution plan in accordance with Rule 12b-1
under the 1940 Act. The plan has not been implemented and the Fund has no
intention of implementing the plan during the Fund's first fiscal year.
- --------------------------------------------------------------------------------
4. REDEMPTION FEES
The shares carry a 0.75% redemption fee if sold within thirteen months of
purchase. The redemption fee is calculated at 0.75% of the net asset value
of such shares at the time of redemption.
5. CAPITAL STOCK AND DISTRIBUTION
At December 27, 1999, 100 million shares were authorized and paid in
capital amounted to $100,000 for the Electric City Value Fund. Transactions
in capital stock were as follows:
Shares Sold:
Electric City Value Fund 10,000
Shares Redeemed:
Electric City Value Fund 0
------
Net Increase:
Electric City Value Fund 10,000
------
Shares Outstanding:
Electric City Value Fund 10,000
------
