Rule 497(c)
SEC File No. 333-93443
SEARAY FINANCIAL FUNDS
THE STURGEON FUND
PROSPECTUS
March 2, 2000
The Searay Financial Funds consist of a contrarian equity mutual fund, The
Sturgeon Fund.
This Prospectus gives you important information about the fund that you
should know before you invest. Please read this Prospectus carefully and keep it
handy for future reference.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy or accuracy of this Prospectus. Any
representation to the contrary is a criminal offense.
The Searay Financial Funds
321 S. Bromfield Road
Dayton, OH 45429
1-800-445-8327
Internet: WWW.THESTURGEONFUND.COM
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
FUND OVERVIEW
A look at investment goals, Investment Goal 3
strategies, risks, performance Main Strategies 3
and expenses Main Risk Factors 4
Performance 4
Fees and Expenses of the Fund 5
WHO MAY WANT TO INVEST 6
Information on who may want to
invest and who may not want to invest
MORE INFORMATION ABOUT THE FUND 7
More information about the fund
you should know before investing Who Manages the Fund? 8
How is the Trust Organized? 9
How Does Taxation Affect the
Fund and Its Shareholders? 10
SHAREHOLDER MANUAL
Information about account How to Buy Shares 12
transactions and services Distribution Fees 15
How to Make Withdrawals
(Redemptions) 15
Transaction Policies 16
Other Shareholder Services 17
MORE ABOUT RISK
Investment Practices, Securities
and Related Risks 18
Glossary of Risks 19
FOR MORE INFORMATION
Where to learn more about the fund 21
Page 2
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
THE STURGEON FUND
INVESTMENT GOAL
The fund seeks long-term capital appreciation.
MAIN STRATEGIES
The fund invests primarily in equity securities that its investment adviser
considers to be undervalued. An equity security represents an ownership interest
in a company or business. Equity securities include exchange traded and
over-the-counter common stocks and preferred shares, debt securities convertible
into equity securities, and warrants and rights relating to equity securities.
The adviser primarily uses a "contrarian" approach to selecting investments,
which means that the adviser seeks securities of companies whose value the
adviser believes is not fully recognized by the public. The adviser believes
that the stock market will adjust to reflect the intrinsic value of these
securities.
The types of companies in which the fund may invest include: companies with
disappointing financial results which the adviser considers to be short-term,
companies that are undervalued relative to other companies in the same industry,
companies that have enjoyed recent market popularity but which have temporarily
fallen out of favor for reasons that are short-term, and companies whose
earnings potential is expected to increase more than is perceived by the public.
Companies in which the fund invests may have small, mid or large market
capitalizations and may operate in any market sector. Market capitalization is
the total current market value of a company's outstanding stock. Although the
adviser will search for investments across a number of sectors, normally it
expects to have a significant position in the technology sector (including
computers and telecommunications).
The adviser is not restricted by any specific investment style. At any point in
time, the adviser may tend to buy "value" stocks or "growth" stocks. In buying
and selling securities for the fund, the adviser relies on fundamental analysis
of each company. The adviser considers many factors including earnings and sales
estimates, cash flow and anticipated cash flow, growth potential, management,
competitive advantages and effective research, product development and
marketing.
One of the option strategies that the adviser may use is writing (selling)
covered call options ("calls"). When the adviser believes that stocks held by
the fund are approaching the top of the adviser's growth and price expectations,
calls may be written (sold) against such stocks.
The fund's investment goal is not fundamental; therefore, it may be changed
without shareholder approval.
Page 3
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
MAIN RISK FACTORS
The value of an investment in the fund will fluctuate over time and, as with any
mutual fund, it is possible to lose money invested in the fund.
STOCK MARKET. The value of your investment in the fund will fluctuate in
response to stock market movements. Stock market movements will affect the
fund's share price on a daily basis. Declines are possible both in the overall
stock market or in the types of securities held by the fund.
COMPANY-SPECIFIC CHANGES. An investment in the common stock of a company
represents a proportionate ownership interest in that company. Therefore, the
fund takes part in the success or failure of any company in which it holds
stock. The market value of common stocks can fluctuate dramatically in response
to such things as the business performance of the company, investors perceptions
of the company, the overall stock market, and general economic and political
developments. For example, you may lose money if investors continue to disfavor
stocks purchased by the fund, causing their prices to remain depressed. The
value of securities of smaller, less well known, companies can be more volatile
than that of larger companies.
VALUE STOCK INVESTING. The determination that a stock is undervalued is
subjective; the market may not agree, and the stock's price may not increase to
what the adviser believes is its full value. It may even decrease in value. If
the adviser's judgment about the attractiveness, value or potential appreciation
of a particular stock proves to be incorrect, the stock's price may decrease in
value.
TECHNOLOGY COMPANIES. The technology sector has historically been volatile due
to the rapid pace of product change and development within the sector. The stock
prices of companies operating within this sector may be subject to abrupt or
erratic movements.
SECURITIES OF SMALLER COMPANIES. The fund may invest in securities of companies
with small or mid-sized market capitalizations in addition to companies with
large market capitalizations. Investments in companies with smaller market
capitalizations may involve greater risks and price volatility (that is, more
abrupt or erratic price movements) than investments in larger, more mature
companies since smaller companies may be at an earlier stage of development and
may have limited product lines, reduced market liquidity for their shares,
limited financial resources or less depth in management than larger or more
established companies. Smaller companies also may be less significant factors
within their industries and may have difficulty withstanding competition from
larger companies. Information about smaller companies may not be available,
complete, accurate or comparable.
PERFORMANCE
Performance history will be available for the fund after it has been in
operation for one calendar year.
Page 4
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
FEES AND EXPENSES OF THE FUND
The following table describes the fees and expenses that you may pay if you buy
and hold shares of the fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 4.00%1
Maximum Deferred Sales Charge (Load) (as a
percentage of offering price or redemption
proceeds, as applicable) None
Exchange fee None
ANNUAL FUND OPERATING EXPENSES (EXPENSES THAT ARE DEDUCTED FROM FUND
ASSETS)
Management Fees 1.00%
Distribution and Service (12b-1) Fees 0.50%
Other Expenses2 0.82%
-----
Total Annual Fund Operating Expenses 2.32%
Expense Reimbursement3 - 0.07%
-------
Net Expenses 2.25%
1 The sales charge declines as the amount invested increases. See "How to
Buy Shares."
2 "Other Expenses" are based upon estimated amounts for the current fiscal
year.
3 The adviser has contractually agreed to waive its fees and/or absorb
expenses to limit the fund's total annual operating expenses to 2.25%. The
adviser may terminate this agreement after June 30, 2001.
EXAMPLE
The example in the table below is intended to help you compare the cost of
investing in the fund with the cost of investing in other mutual funds.
Assuming you
o invest $10,000 in the fund
o redeem your shares at the end of the periods shown below
o earn a 5% return each year and
o incur the same fund operating expenses shown above,
your cost of investing in the fund would be:
1 YEAR 3 YEARS
------ -------
$619 $1,089
Of course, your actual costs may be higher or lower.
Page 5
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
WHO MAY WANT TO INVEST
The fund may be appropriate for you, if you:
o are seeking to participate in the long-term growth potential of the
stock market through a contrarian approach to investing
o are willing to accept higher short-term risk along with potentially
higher long-term returns
o are willing to accept the risks of investing in the stock market,
including the risks of investing in stocks that may be price
depressed, undervalued or out of favor
o are seeking to diversify your growth-equity investments
The fund may not be appropriate for you, if you:
o are unwilling to accept an investment that will go up and down in
value
o are investing to meet short-term financial goals
o need regular income
Page 6
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
MORE INFORMATION ABOUT THE FUND
ADDITIONAL INFORMATION ABOUT THE FUND'S INVESTMENTS
OPTIONS. Generally, the fund may invest in options on securities or securities
indexes. See "Options" under "MORE ABOUT RISK - Investment Practices, Securities
and Related Risks" below. One of the option strategies that the adviser may use
is writing (selling) covered call options ("Calls").
When the fund writes a call on a security, it receives a premium and agrees to
sell the underlying security to a purchaser of a corresponding call at a
specified price ("strike price") by a future date ("exercise date"). To
terminate its obligation on a call the fund has written, it may purchase a
corresponding call in a "closing purchase transaction". A profit or loss will be
realized, depending upon whether the price of the closing purchase transaction
is more or less than the premium (net of transaction costs) previously received
on the call written. The fund may realize a profit if the call it has written
lapses unexercised, in which case the fund keeps the premium and retains the
underlying security as well. If a call written by the fund is exercised, the
fund forgoes any possible profit from an increase in the market price of the
underlying security over the exercise price plus the premium received. If the
adviser is incorrect in its expectations and the market price of a stock subject
to a call option rises above the exercise price of the option, the fund will
lose the opportunity of further appreciation in that security.
Call writing affects the fund's portfolio turnover rate and the brokerage
commissions paid. Commissions for options, which are normally higher than for
general securities transactions, are payable when writing calls and when
purchasing closing purchase transactions. See "Options" under "MORE ABOUT RISK -
Investment Practices, Securities and Related Risks" below.
SECURITIES OF COMPANIES WITH LIMITED OPERATING HISTORIES. The fund may invest in
securities of companies with limited operating histories. The fund considers
these to be securities of companies with a record of less than three years'
continuous operation, even including the operations of any predecessors and
parents. (These are sometimes referred to as "unseasoned issuers.") These
companies by their nature have only a limited operating history which can be
used for evaluating the company's growth prospects. As a result, investment
decisions for these securities may place a greater emphasis on current or
planned product lines and the reputation and experience of the company's
management and less emphasis on fundamental valuation factors than would be the
case for more mature companies. In addition, many of these companies may also be
small companies and involve the risks, price volatility and reduced market
liquidity associated with smaller companies.
INITIAL PUBLIC OFFERINGS. Although it is not a principal investment strategy of
the fund, the fund may invest a company's securities at the time the company
first offers securities to the public, that is, at the time of the company's
initial public offering or IPO. Although companies can be any age or size at the
time of their IPOs, they are often smaller and have a limited operating history,
which involve a greater potential for the value of their securities to be
impaired following the IPO. See "Securities of Smaller Companies" and
"Securities of Companies with Limited Operating Histories" above. In addition,
market psychology prevailing at the time of an IPO can have a substantial and
unpredictable effect on the price of an IPO security, causing the price of a
company's securities to be particularly volatile at the time of its IPO and for
a period thereafter. As a result, the adviser might decide to sell an IPO
security more quickly than it would otherwise, which may result in a significant
gain or loss to the fund.
Page 7
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
A portion of the fund's returns may be attributable to its investment in IPO's,
which have a magnified impact due to the fund's small asset base. If the fund's
assets grow, it is probable that the effect of the fund's investment in IPOs on
its total returns will decline, which may reduce the fund's total returns.
SECURITIES OF PRIVATELY HELD BUSINESSES. The fund may invest in securities of
businesses that are privately held. There is no public market for these
securities. These securities are illiquid, which means they cannot be sold
readily. See "Illiquid and Restricted Securities" under "MORE ABOUT RISK" below.
Consequently, the fund may have to accept a less than desirable price to
complete the sale of these securities or may not be able to sell these
securities at all. These privately held businesses may have small
capitalizations and thus, may involve greater risks and price volatility than
investments in larger businesses. Information about these privately held
businesses may not be available, complete, accurate or comparable. See
"Securities of Smaller Companies" under "MAIN RISK FACTORS" above. In addition,
these privately held businesses may have limited operating histories. As a
result, a decision by the fund to invest in these privately held businesses may
rely more heavily on current or planned product lines and the reputation and
experience of their management rather than fundamental valuation factors. See
"Securities of Companies with Limited Operating Histories" above.
DEFENSIVE INVESTING. During periods when the adviser deems it necessary for
temporary defensive purposes, the fund may invest up to 100% of its assets in
high quality money market instruments and short-term debt securities, and up to
10% of its assets in money market funds. These money market instruments and
short-term debt securities consist of commercial paper, certificates of deposit,
banker's acceptances and other bank obligations, obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, high grade
corporate obligations and repurchase agreements. If the fund takes a temporary
defensive position, it may be unable to achieve its investment goal and it may
miss out on investment opportunities that are more advantageous. If the fund
invests in a money market fund, you will not only bear your proportionate share
of the expenses of the fund, but also you will bear indirectly similar expenses
of the underlying money market fund.
WHO MANAGES THE FUND?
THE BOARD. The board of trustees oversees the management of the fund and elects
its officers. The officers are responsible for the fund's day-to-day operations.
Information concerning the trustees and officers of the fund appears in the
Statement of Additional Information.
INVESTMENT ADVISER. The Sturgeon Financial Group Ltd. ("SFG" or the "Adviser")
serves as investment adviser to the fund. SFG has had no prior experience in
managing a mutual fund. SFG serves the fund pursuant to an Investment Advisory
Contract under the terms of which it has agreed to provide an investment program
within the limitations of the fund's investment policies and restrictions. SFG
maintains its principal offices at 321 S. Bromfield Road, Dayton, OH 45429.
FUND MANAGER. Richard W. Bradford is the individual primarily responsible for
the day-to-day management of the fund. Mr. Bradford has managed the fund since
its inception in March, 2000.
Mr. Bradford is a Trustee and Vice President of the Trust and has been a
director and Chief Executive Officer of the adviser since its incorporation in
December, 1998. Mr. Bradford has been a portfolio manager for Creative Capital
Page 8
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
Management Corp., distributor of the fund and an affiliate of the adviser, since
March, 1999 and has been primarily involved in managing equity accounts. From
January 1996 to March, 1999, Mr. Bradford was a registered representative of
Dean Securities, a broker-dealer. From August, 1993 to December, 1995, Mr.
Bradford attended South Puget Sound College where he earned an Associates degree
in business.
MANAGEMENT FEES. The fund will pay management fees totaling 1.00% of the fund's
average daily net assets.
DISTRIBUTOR. Creative Capital Management Corp. (the "Distributor"), 595 Route
25A, Suite 1C, Miller Place, NY 11764, an affiliate of SFG, serves as the
distributor of the shares of the fund.
HOW IS THE TRUST ORGANIZED?
The fund is an open-end management investment company that is a series of The
Searay Financial Funds trust (the "Trust").
The Trust is supervised by a board of trustees, an independent body that has
ultimate responsibility for the fund's activities. The board retains various
companies to carry out the fund's operations, including the investment adviser,
custodian, transfer agent and others. The board has the right, and the
obligation, to terminate the fund's relationship with any of these companies and
to retain a different company if the board believes it is in the shareholders'
best interests. At a mutual fund's inception, the initial shareholder (typically
the adviser) appoints the fund's board. Thereafter, the board and the
shareholders determine the board's membership. The board of the Trust may
include individuals who are affiliated with the investment adviser.
The fund does not hold annual shareholder meetings, but may hold special
meetings for such purposes as electing or removing board members, changing
fundamental policies, approving a management contract or approving a 12b-1 plan
(12b-1 fees are explained in "Distribution Fees"). Shareholders may remove a
trustee at a shareholder meeting by an affirmative vote of two-thirds of the
outstanding shares of the fund.
The Trust may, in the future, seek to achieve the fund's investment goal by
investing all of the fund's assets in an open-end management investment company
having substantially the same investment goal as the fund. The fund's investment
policies permit such an investment. You will receive 30 days prior written
notice with respect to any such investment.
PORTFOLIO TRADES
In placing portfolio trades, the fund's adviser may use brokerage firms that
market the fund's shares, but only when the advisers believe no other firm
offers a better combination of quality execution (i.e., timeliness and
completeness) and favorable price. As long as the adviser believes a brokerage
firm can provide this combination, it may consider research services when
choosing a brokerage firm. Brokerage firms may use a portion of the commissions
paid by the fund to reduce its expenses.
DIVERSIFICATION
The fund is diversified, which means the fund may not, with respect to at least
75% of its assets, invest more than 5% of its assets in the securities of one
company.
Page 9
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
HOW DOES TAXATION AFFECT THE FUND AND ITS SHAREHOLDERS?
HOW DOES THE FUND EARN INCOME AND GAINS?
The fund may earn dividends and interest (the "income") on its investments. When
the fund sells a security for a price that is higher than it paid, it has a
gain. When the fund sells a security for a price that is lower than it paid, it
has a loss. If the fund has held the security for more than one year, the gain
or loss will be a long-term capital gain or loss. If the fund has held the
security for one year or less, the gain or loss will be a short-term capital
gain or loss. The fund's gains and losses are netted together, and, if the fund
has a net gain (the fund's "gains"), that gain will generally be distributed to
you.
TAXATION OF THE FUND'S INVESTMENTS
The fund invests your money in the securities that are described in the sections
"Main Strategies" and "Additional Information about the Fund's Investments."
Special tax rules may apply in determining the income and gains that the fund
earns on its investments. These rules may, in turn, affect the amount of
distributions that the fund pays to you. These special tax rules are discussed
in the SAI.
TAXATION OF A FUND. As a regulated investment company, the fund generally pays
no federal income tax on the income and gains that it distributes to you.
FOREIGN TAXES. Foreign governments may impose taxes on the income and gains from
the fund's investments in foreign securities. These taxes will reduce the amount
of the fund's distributions to you.
TAXATION OF SHAREHOLDERS
WHAT IS A DISTRIBUTION?
As a shareholder, you will receive your share of the fund's income and gains on
the fund's investments. The fund's income and short-term capital gains are paid
to you as ordinary dividends. The fund's long-term capital gains are paid to you
as capital gain distributions. If the fund pays you an amount in excess of its
income and gains, this excess will generally be treated as a non-taxable return
of principal. These amounts, taken together, are what we call the fund's
distributions to you. The fund distributes capital gains, if any, annually.
DISTRIBUTIONS. Distributions from the fund, whether you receive them in cash or
in additional shares, are generally subject to income tax. The fund will send
you a statement in January of the current year that reflects the amount of
ordinary dividends, capital gain distributions and non-taxable distributions you
received from the fund in the prior year. This statement will include
distributions declared in December and paid to you in January of the current
year, but which are taxable as if paid on December 31 of the prior year. The IRS
requires you to report these amounts on your income tax return for the prior
year.
DISTRIBUTIONS TO RETIREMENT PLANS. Fund distributions received by your qualified
retirement plan, such as a 401(k) plan or IRA, are generally tax-deferred; this
means that you are not required to report fund distributions on your income tax
return when paid to your plan, but, rather, when your plan makes payments to
you. Special rules apply to payouts from Roth and Education IRAs.
Page 10
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
DIVIDENDS-RECEIVED DEDUCTION. Corporate investors may be entitled to a
dividends-received deduction on a portion of the ordinary dividends they receive
from the funds.
BUYING A DIVIDEND. Purchasing fund shares in a taxable account shortly before a
distribution is known as "buying a dividend." In taxable accounts, you must pay
income taxes on the distribution whether you take the distribution in cash or
reinvest it. In addition, you will have to pay taxes on the distribution whether
the value of your investment decreased, increased or remained the same after you
bought the fund shares. The risk in buying a dividend is that the portfolios may
build up taxable gains throughout the period covered by a distribution, as
securities are sold at a profit. We distribute those gains to you, after
subtracting any losses, even if you did not own the shares when the gains
occurred.
DIVIDEND REINVESTMENTS. Most investors have their dividends reinvested in
additional shares of the same fund. If you choose this option, or if you do not
indicate any choice, your dividends will be reinvested on the dividend payable
date. Alternatively, you can choose to have a check for your dividends mailed to
you. However, if the check is not deliverable, your dividends will be
reinvested.
TAXATION OF REDEMPTIONS
WHAT IS A REDEMPTION?
A redemption is a sale by you to the fund of some or all of your shares in the
fund. The price per share you receive when you redeem fund shares may be more or
less than the price at which you purchased those shares. When you redeem your
shares, you will generally have a gain or loss, depending upon whether the
amount you receive for your shares is more or less than your cost or other basis
in the shares.
If you redeem your shares, you will generally have a gain or loss that the IRS
requires you to report on your income tax return. All or a portion of any loss
on the redemption or exchange of your shares will be disallowed by the IRS if
you purchase other shares in the fund within 30 days before or after your
redemption or exchange.
U.S. GOVERNMENT INTEREST. Many states grant tax-free status to dividends paid
from interest earned on direct obligations of the U.S. Government, subject to
certain restrictions. The fund will provide you with information at the end of
each calendar year on the amount of any such dividends that may qualify for
exemption from reporting on your individual income tax returns.
NON-U.S. INVESTORS. Ordinary dividends generally will be subject to U.S. income
tax withholding. Your home country may also tax ordinary dividends, capital gain
distributions and gains arising from redemptions or exchanges of your fund
shares. Fund shares held by the estate of a non-U.S. investor may be subject to
U.S. estate tax. You may wish to contact your tax advisor to determine the U.S.
and non-U.S. tax consequences of your investment in the fund.
STATE TAXES. Ordinary dividends and capital gain distributions that you receive
from the fund, and gains arising from redemptions or exchanges of your fund
shares will generally by subject to state and local income tax. The holding of
fund shares may also be subject to state and local intangibles taxes. You may
wish to contact your tax advisor to determine the state and local tax
consequences of your investment in the fund.
Page 11
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
SHAREHOLDER MANUAL
HOW TO BUY SHARES
MINIMUM INVESTMENT -- The minimum investment to open an account is $2,500,
except for an Individual Retirement Account (IRA), which has a $500 minimum. You
may make subsequent investments in any account in amounts of at least $100.
OPENING AN ACCOUNT -- You may open an account and make an investment by
purchasing shares through brokerage firms having sales agreements with the
Distributor. You may also purchase shares directly from the fund by submitting a
check. In the case of a new account, fill out the New Account Application
accompanying this Prospectus. A check payable to the Sturgeon Fund must
accompany your New Account Application. You may make payments by check or
Federal Reserve Draft payable to the fund. Please send your completed
application and payment to the following address: THE SEARAY FINANCIAL FUNDS,
C/O MUTUAL FUNDS SERVICE CO., P. O. BOX 7177, DUBLIN, OHIO 43017.
If your order to purchase shares is canceled because your check does not clear,
you will be responsible for any resulting losses or fees incurred in the
transaction. The fund or the distributor may reject any order. Direct purchase
orders received by Mutual Funds Service Company (the "Transfer Agent"), the
fund's transfer agent, by 4:00 p.m., Eastern time, are confirmed at that day's
public offering price. Direct purchase orders received by the Transfer Agent
after 4:00 p.m. and orders received by brokerage firms after 5:00 p.m. are
confirmed at the public offering price on the following business day.
Wire orders for shares of the fund received by dealers prior to 4:00 p.m.,
Eastern time, and received by the Transfer Agent before 5:00 p.m., Eastern time
on the same day, are confirmed at that day's public offering price. Orders
received by dealers after 4:00 p.m., Eastern time, are confirmed at the public
offering price on the following business day. It is the dealer's obligation to
place the order with the Transfer Agent before 5:00 p.m., Eastern time, and to
forward payment to Firstar, N.A., the Custodian for the fund.
If the wire order is for a new account, you must telephone the fund prior to
making your initial investment. Call 1-800-445-8327. Tell the fund the amount
you wish to invest and obtain an account number and instructions. Have your bank
wire federal funds to:
FIRSTAR, N.A. CINTI/TRUST
ABA #: 042-00001-3
ATTENTION: SEARAY FINANCIAL FUNDS
THE STURGEON FUND
Account Number 821637956
ACCOUNT NAME (your name)
YOUR SEARAY FINANCIAL FUNDS ACCOUNT NUMBER
Page 12
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
SUBSEQUENT INVESTMENTS - You may make subsequent investments in the fund by
mailing a check payable to The Sturgeon Fund. Please include your account number
and mail as follows:
SEARAY FINANCIAL FUNDS
C/O MUTUAL FUNDS SERVICE CO.
P. O. BOX 7177
DUBLIN, OHIO 43017
You may also make subsequent investments by bank wire as described above. You
must notify the fund prior to each wire purchase. Wires sent without notifying
the fund will result in a delay of the effective date of your purchase.
SALES CHARGES - Maximum sales charges and fees are set forth in the table below,
and quantity discounts for the fund's initial sales charge are set forth below.
o Initial Sales Charge of 4.00% or less
o No deferred sales charge
SHARE PRICE - The fund's shares are sold at net asset value plus the
applicable sales charge as shown in the table below. The sales charge on the
fund's shares is allocated between your brokerage firm and Creative Capital
Management Corp. as shown below:
THE SALES CHARGE WHICH EQUALS YOUR DEALER
WHEN YOU INVEST MAKES UP THIS % OF THIS % OF YOUR RECEIVES THIS % OF
THIS AMOUNT THE OFFERING PRICE INVESTMENT THE OFFERING PRICE
- ----------- ------------------ ---------- ------------------
Up to $50,000 4.00% 4.16% 3.50%
$50,001 to $150,000 3.00% 3.09% 2.50%
$150,001 to $250,000 2.00% 2.04% 1.50%
$250,001 or more none none none
The offering price of The Sturgeon Fund shares includes the applicable sales
charge.
QUANTITY DISCOUNTS
CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in the fund
for purposes of calculating the sales charge. Therefore, the quantity discounts
shown in the table above will apply if the dollar amount of your purchase, plus
the net asset value of fund shares you already own, is more than $50,000. The
sales charge on the shares being purchased will then be at the rate applicable
to the aggregate value of such shares then owned, plus the amount of the
purchase.
Page 13
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
To receive the cumulative quantity discount, either you or your brokerage firm
must request the discount at the time of placing your purchase order. In
addition, you must give the Transfer Agent sufficient information to determine
and confirm that your purchase will qualify for the discount. The cumulative
quantity discount may be amended or terminated at any time as to all purchases
occurring thereafter.
LETTER OF INTENTION (LOI) - expresses your intent to buy a stated dollar amount
of shares over a 13-month period and lets you receive the same sales charge as
if all shares had been purchased at one time. To take advantage of this
discount, simply sign and complete the LOI on the New Account Application,
indicating the amount you wish to invest. The LOI may include purchases made
within 90 days prior to the signing of the LOI. The LOI will not be a binding
obligation on either the purchaser or the fund.
Purchases made under the LOI receive the sales charge applicable to the
aggregate amount you have indicated in the LOI, as if all shares were purchased
in a single transaction. During the period covered by the LOI, the Transfer
Agent will escrow shares representing 5% of your intended purchase. If you do
not purchase the amount stated in your LOI, your sales charge will be adjusted
to reflect the actual amount you invested during the period covered by your LOI,
and any additional sales charge will be recovered from your escrowed shares.
Your LOI can be amended: (a) during the 13-month period, if you file an amended
LOI with the same expiration date as the original, and (b) automatically after
the end of the period, if the total purchases credited to your LOI qualify for
an additional reduction in sales charge.
SALES CHARGE WAIVERS: Directors, trustees, officers and full-time employees of
the Searay Financial Funds trust, the adviser or the Distributor, including
members of the immediate families of such individuals and employee benefit plans
established by such entities, may purchase shares of the fund at net asset
value.
Fund shares may also be sold at net asset value without an initial sales charge
to:
o clients of the adviser or the Distributor, registered investment
advisers, broker-dealers and financial planners, who are purchasing on
behalf of their clients or on behalf of clients in wrap accounts, by
making arrangements to do so with the Fund and the Transfer Agent
o participants in certain retirement and deferred compensation plans,
including qualified or non-qualified plans under the Internal Revenue
Code and certain affinity group and group savings plans, provided that
such plans have at least 100 eligible employees or members and
o broker-dealers who have a sales agreement with the Distributor and by
their registered personnel and employees, including members of the
immediate families of such registered personnel and employees (i.e.,
spouse and minor children only)
See the Statement of Additional Information.
No sales charge will be charged on accounts that are opened for you by your
brokerage firm where the amount invested represents redemption proceeds from
mutual funds distributed other than by the Distributor, and where you have paid
a sales charge in connection with the purchase of such other fund's shares;
provided that (i) shares of the fund are purchased within 60 days after
Page 14
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
redemption of such other fund's shares; and (ii) sufficient documentation of
such redemption as the Transfer Agent may require shall be provided at the time
fund shares are purchased.
DISTRIBUTION FEES
Rule 12b-1 of the Investment Company Act permits mutual funds that adopt a
written plan to pay out of fund assets certain expenses relating to the sale and
distribution of their shares. The fund has adopted a distribution and service
plan. Under its plan, the fund pays the distributor an annual distribution
(12b-1) fee of up to 0.25% of fund assets and an annual service fee of up to
0.25% of fund assets.
Distribution fees are used primarily to offset initial and ongoing commissions
paid to brokerage firms for selling shares of the fund. The distributor may use
distribution fees that are not allocated to brokerage firms to reduce its own
sales and marketing expenses. Service fees are used primarily to reimburse
brokerage firms for providing personal services to fund shareholders and
maintaining shareholder accounts. The distributor may use service fees that are
not allocated to brokerage firms to reduce its own expenses for providing
personal services and maintaining shareholder accounts.
Because these fees are paid out of the fund's assets on an on-going basis, over
time these fees will increase the cost of your investment and may cost you more
than paying other types of charges.
HOW TO MAKE WITHDRAWALS (REDEMPTIONS)
You may redeem shares and withdraw funds at net asset value. There are no
redemption fees. (See "Valuation of Shares.")
BY MAIL -- You may redeem shares by mailing a written request to Searay
Financial Funds, c/o Mutual Funds Service Co., P. O. Box 7177, Dublin, OH 43017.
Amounts withdrawn are mailed without charge to your address of record.
BY TELEPHONE - You may redeem by telephone by calling 1-800-445-8327. If you
wish to redeem by telephone you must elect the telephone redemption feature on
the new account application. Amounts withdrawn from your account by telephone
are mailed to you without charge to your address of record.
BY BANK WIRE -- You may redeem by telephone by placing a wire redemption through
a securities dealer. Wire redemption requests received by dealers prior to 4:00
p.m., Eastern time, and received by the transfer agent before 5:00 p.m., Eastern
time on the same day, are confirmed at that day's net asset value per share.
Direct wire redemption requests must be received by 4:00 p.m. to be confirmed at
that day's net asset value.
SIGNATURE GUARANTEE - Certain requests by mail must include a signature
guarantee. It is designed to protect you and the fund from fraud. Your request
must be made in writing and include a signature guarantee if any of the
following situations apply:
Page 15
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
o You wish to sell more than $50,000 worth of shares;
o Your account registration has changed within the last 30 days;
o The check is being mailed to a different address than the one on your
account (record address);
o The check is being made payable to someone other than the account
owner; or
o The redemption proceeds are being transferred to a fund account with a
different registration.
You should be able to obtain a signature guarantee from a bank, broker, dealer,
credit union (if authorized under state law), securities exchange or
association, clearing agency, or savings association. A notary public cannot
provide a signature guarantee.
WHEN REDEMPTIONS ARE EFFECTIVE -- Redemptions are made at the net asset value
per share next determined after receipt of a redemption request in good order.
(See "Valuation of Shares.")
WHEN PAYMENTS ARE MADE -- Shares are redeemed at their net asset value per share
next determined after receipt by the Transfer Agent of the redemption request in
the form described above. Payment is normally made within seven days after the
redemption request.
TRANSACTION POLICIES
VALUATION OF SHARES. The net asset value per share (NAV) for the fund will be
calculated on each business day at the close of regular trading on the New York
Stock Exchange (typically 4:00 p.m. Eastern time) by dividing the fund's net
assets by the number of its shares outstanding. The New York Stock Exchange is
closed on certain holidays listed in the Statement of Additional Information.
The assets of the fund are generally valued on the basis of market quotations
or, where market quotations are not readily available, on the basis of fair
value as determined by the adviser under procedures adopted by the Board of
Trustees. The fund may own securities that are traded primarily on foreign
exchanges that trade on weekends or other days the fund does not price its
shares. As a result, the NAV of the fund may change on days when you will not be
able to purchase or redeem shares of the fund.
EXECUTION OF REQUESTS. The fund is open on those days when the New York Stock
Exchange is open, typically Monday through Friday. Buy and sell requests are
executed at the next NAV to be calculated after your request is received by the
transfer agent.
At times of peak activity, it may be difficult to place requests by phone.
During these times, consider sending your request in writing.
In unusual circumstances, the fund may temporarily suspend the processing of
sell requests, or may postpone payment of proceeds for up to seven days, as
allowed by federal securities laws.
TELEPHONE TRANSACTIONS. For your protection, telephone requests may be recorded
in order to verify their accuracy. In addition, the transfer agent will take
measures to verify the identity of the caller, such as asking for name, account
Page 16
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
number, Social Security or other taxpayer ID number and other relevant
information. If appropriate measures are taken, the transfer agent is not
responsible for any losses that may occur to any account due to an unauthorized
telephone call. Proceeds from telephone transactions can only be mailed to the
address of record.
SALES IN ADVANCE OF PURCHASE PAYMENTS. When you place a request to sell
shares for which the purchase money has not yet been collected, the request will
be executed in a timely fashion, but the fund will not release the proceeds to
you until your purchase payment clears. This may take up to fifteen days after
the purchase.
OTHER SHAREHOLDER SERVICES
AUTOMATIC ACCOUNT BUILDER: This program offers you a convenient way for you to
invest in the fund by automatically transferring money from your checking or
savings account each month to buy shares. Under the program, regular investments
in the fund of $100 or more will be deducted from your checking or savings
account and invested in shares of the fund. Your bank must be a member of the
Automated Clearing House (ACH). To sign up, complete the Automatic Account
Builder section of your New Account Application. There is no additional charge
for this service.
You may make additional investments and may change or stop the program at any
time. There is no charge for this program.
SHAREHOLDER ACCOUNTS
The fund maintains an account for each shareholder in full and fractional
shares. The fund may reject any purchase order and may waive minimum purchase
requirements.
CONFIRMATION STATEMENT -- All purchases and sales, and dividend reinvestments,
are confirmed promptly after they become effective.
ACCOUNTS WITH LOW BALANCES. The fund may redeem shares in your account for its
then current net asset value and pay the proceeds to you if at any time your
account has shares valued at less than $2,500 ($500 for an IRA) as a result of
redemptions you have made. The fund may redeem the shares in your account if you
have opened your account for less than the minimum purchase amount and you do
not purchase additional shares to meet the minimum. Before any shares are
redeemed for these purposes, you will be notified in writing 30 days before any
such redemption to bring the value of shares in your account to $2,500 ($500 for
an IRA).
Page 17
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
MORE ABOUT RISK
The fund's risk profile is largely defined by the fund's principal securities
and investment practices. You may find the most concise description of the
fund's risk profile under "MAIN RISK FACTORS" near the beginning of this
Prospectus.
The fund is permitted to use - within limits established by the trustees -
certain other securities and investment practices that have higher risks and
opportunities associated with them. To the extent that the fund uses these
securities or practices, its overall performance may be affected, either
positively or negatively. On the following pages are brief descriptions of these
securities and investment practices, along with the risks associated with them,
which risks are also defined below. The fund follows certain policies that may
reduce these risks.
As with any mutual fund, there is no guarantee that the fund will earn income or
show a positive total return over any period of time - days, months or years.
INVESTMENT PRACTICES, SECURITIES AND RELATED RISKS
Percentages below show allowable usage only; for actual usage, consult the
fund's annual/semiannual reports.
AMERICAN DEPOSITARY RECEIPT ("ADR") is a receipt for the shares of a foreign
corporation held by a United States bank. Instead of the fund buying shares of
foreign companies in overseas markets, it may buy shares in the United States in
the form of an ADR. The political, economic, legal and social structure
affecting foreign companies underlying the ADR's may be less stable and more
volatile than those in the United States. The risks of investing in foreign
companies through ADR's includes the imposition of exchange controls, foreign
ownership limitations, expropriation, nationalization of assets and punitive
taxes. ADR's include MARKET, INFORMATION, CURRENCY AND POLITICAL RISKS (see risk
definitions below).
BORROWING AND REVERSE REPURCHASE AGREEMENTS refer to a loan of money from a bank
or other financial institution undertaken by the fund. A reverse repurchase
agreement means the sale of a security by the fund that must later be
repurchased by the fund at the same price plus interest. The fund may borrow up
to 33-1/3% of its assets. Borrowing and reverse repurchase agreements include
LEVERAGE AND CREDIT RISKS (see risk definitions below).
CONVERTIBLE SECURITIES are debt or equity securities which may be converted on
specified terms into stock of the issuer. Convertible securities include MARKET,
INTEREST RATE, PREPAYMENT AND CREDIT RISKS (see risk definitions below).
ILLIQUID AND RESTRICTED SECURITIES are securities which, by rules of their issue
or by their nature, cannot be sold readily. These include illiquid Rule 144A
securities and may include options which are not issued by the Options Clearing
Corporation or listed on a national securities exchange. The fund may invest up
to 15% of its assets in illiquid and restricted securities. Illiquid and
restricted securities include MARKET, LIQUIDITY AND TRANSACTION RISKS (see risk
definitions below).
Page 18
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
OPTIONS are contracts giving the holder the right but not the obligation to
purchase or sell a security on or before a predetermined future date for a fixed
price. Options on securities indexes are similar, but settle in cash. The fund
may purchase or write options which are not issued by the Options Clearing
Corporation or listed on a national securities exchange. Options include
HEDGING, CORRELATION, OPPORTUNITY, LEVERAGE, INTEREST RATE, MARKET, AND
LIQUIDITY RISKS (see risk definitions below).
REPURCHASE AGREEMENTS means the purchase of a security that must later be sold
back to the issuer at the same price plus interest. The fund may invest up to
20% of its assets in repurchase agreements. Repurchase agreements include CREDIT
RISK (see risk definitions below).
SECURITIES LENDING means the lending of securities to financial institutions,
which provide cash or government securities as collateral. The fund may lend up
to 33-1/3% of assets. Securities lending includes CREDIT RISK (see risk
definitions below).
SHORT SALES AGAINST THE BOX occurs when the fund sells short securities it owns.
The fund will incur transaction costs, including interest expenses, in
connection with opening, maintaining and closing short sales against the box,
which results in a "constructive sale" requiring the fund to recognize any
taxable gain from the transaction.
SHORT-TERM TRADING means selling a security soon after purchase. The fund may
engage in short-term trading. If the fund engages in short-term trading, the
fund will have higher turnover and transaction expenses. Short-term trading may
also result in short-term capital gains. Upon the distribution to you of any net
short-term capital gains from the fund, you will be taxed at ordinary tax rates.
Short-term trading includes MARKET RISK (see risk definitions below).
WHEN ISSUED SECURITIES AND FORWARD COMMITMENTS involve the purchase and sale of
securities for delivery at a future date, market value may change before
delivery. When issued securities and forward commitments include MARKET,
OPPORTUNITY AND LEVERAGE RISK (see risk definitions below).
GLOSSARY OF RISKS
CORRELATION RISK occurs when the fund "hedges" - uses one investment to offset
the fund's position in another. If the two investments do not behave in relation
to one another the way the fund managers expect them to, then unexpected results
may occur.
CREDIT RISK means that the issuer of a security or the counterparty to an
investment contract may default or become unable to pay its obligations when
due.
CURRENCY RISK happens when the fund buys or sells a security denominated in
foreign currency. Foreign currencies "float" in value against the U.S. dollar.
Adverse changes in foreign currency value can cause investment losses when the
fund's investments are converted to U.S. dollars.
HEDGING RISK comes into play when the fund uses a security whose value is based
on an underlying security or index to "offset" the fund's position in another
security or currency. The objective of hedging is to offset potential losses in
one security with gains in the hedge. But a hedge can eliminate or reduce gains
as well as offset losses. (Also see "Correlation Risk.")
Page 19
<PAGE>
THE STURGEON FUND PROSPECTUS MARCH 2, 2OOO
- --------------------------------------------------------------------------------
INFORMATION RISK means that information about a security or issuer may not be
available, complete, accurate or comparable.
INTEREST RATE RISK is the risk that changes in interest rates will adversely
affect the value of an investor's securities. When interest rates rise, the
value of fixed-income securities will generally fall. Conversely, a drop in
interest rates will generally cause an increase in the value of fixed-income
securities. Longer-term securities are subject to greater interest rate risk.
LEVERAGE RISK occurs in some securities or techniques that tend to magnify the
effect of small changes in an index or a market. This can result in a loss that
exceeds the account that was invested in the contract.
LIQUIDITY RISK occurs when investments cannot be sold readily. The fund may have
to accept a less-than-desirable price to complete the sale of an illiquid
security or may not be able to sell it at all.
MARKET RISK exists in all mutual funds and means the risk that the prices of
securities in a market, a sector, or an industry will fluctuate, and that such
movements might reduce an investment's value.
OPPORTUNITY RISK means missing out on an investment opportunity because the
assets necessary to take advantage of it are committed to less advantageous
investments or strategies.
POLITICAL RISK comes into play with investments, particularly foreign
investments, which may be adversely affected by nationalization, taxation, war,
government instability or other economic or political actions or factors.
PREPAYMENT RISK is the risk that, as interest rates fall, borrowers are more
likely to refinance their debts. As a result, the principal on certain fixed
income securities may be paid earlier than expected, which could cause
investment losses and cause prepaid amounts to have to be reinvested at a
relatively lower interest rate.
TRANSACTION RISK means that the fund may be delayed or unable to settle a
transaction or that commissions and settlement expenses may be higher than
usual.
Page 20
<PAGE>
FOR MORE INFORMATION:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the fund. The SAI has been
filed with the Securities and Exchange Commission and is incorporated by
reference in this Prospectus (is legally a part of this Prospectus).
ANNUAL AND SEMIANNUAL REPORTS
These reports include portfolio holdings, financial statements, performance
information, the auditor's report (in the case of the annual report), and a
discussion of the market conditions and investment strategies that significantly
affected the fund's performance during its last fiscal year.
Information about the fund (including the SAI) can be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C., and information on the
operation of the Public Reference Room may be obtained by calling the Commission
at 1-202-942-8090. Reports and other information about the fund are available on
the EDGAR Database on the Commission's Internet site at http://www.sec.gov, and
copies of this information may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: [email protected], or by
writing the Commission's Public Reference Section, Washington, D.C. 20549-0102.
To request a free copy of the current annual/semi-annual report or SAI, request
other information about the fund, or make shareholder inquiries, please write,
call or E-mail us at:
The Searay Financial Funds
321 S. Bromfield Road
Dayton, OH 45429
1-800-445-8327
Internet: WWW.THESTURGEONFUND.COM
SEC File No.: 811-9743
<PAGE>
THE STURGEON FUND
A FUND OF THE SEARAY FINANCIAL FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
March 2, 2000
This Statement is not a prospectus but should be read in conjunction with
the Prospectus of The Sturgeon Fund (dated March 2, 2000). Please retain this
document for future reference. A copy of the Prospectus may be obtained from The
Searay Financial Funds c/o Mutual Funds Service Co., 6000 Memorial Drive,
Dublin, Ohio 43017 or by calling 1-800-445-8327. Capitalized terms used and not
otherwise defined herein have the same meanings as defined in the Prospectus.
TABLE OF CONTENTS PAGE
Description of the Trust 2
Investment Policies and Related Matters 3
Risk Considerations 16
Portfolio Transactions 17
Valuation of Portfolio Securities 18
Performance 19
Additional Purchase and Redemption Information 21
Distributions and Taxes 24
Investment Adviser and Manager 25
Trustees and Officers 26
The Distributor 28
Additional Information 29
Principal Holders of Outstanding Shares 30
Financial Statements 30
INVESTMENT ADVISER DISTRIBUTOR
The Sturgeon Financial Group, Ltd. Creative Capital Management Corp.
TRANSFER AGENT
Mutual Funds Service Co.
<PAGE>
DESCRIPTION OF THE TRUST
BACKGROUND. The Searay Financial Funds (the "Trust") were organized as a
Massachusetts business trust on December 20, 1999. The Sturgeon Fund is a series
of the Trust. The Trust's offices are at 321 S. Bromfield Road, Dayton, OH
45429. The business and affairs of the Trust are under the direction of its
Board of Trustees.
The Trust has retained the services of The Sturgeon Financial Group, Ltd.
as investment adviser of the Sturgeon Fund.
As stated in "Investment Policies and Limitations," except as otherwise
expressly provided herein, the Fund's investment objectives and policies are not
fundamental and may be changed by Trustees without shareholder approval.
For descriptions of the investment objectives and policies of the Fund, see
"Investment Policies and Related Matters." For descriptions of the management
and expenses of the Fund, see "Investment Adviser and Manager" and "Trustees and
Officers."
SHARES OF BENEFICIAL INTEREST. The Trust's Declaration of Trust permits the
Trust to offer and sell an unlimited number of full and fractional shares of
beneficial interest in each of the Trust's existing funds and to create
additional funds. All shares have a par value of $.10 per share, are fully paid,
non-assessable and fully transferable when issued. All shares are issued as full
or fractional shares.
A fraction of a share has the same rights and privileges as a full share.
Each fund of the Trust will issue its own series of shares of beneficial
interest. The shares of each fund represent an interest only in that fund's
assets (and profits or losses) and in the event of liquidation, each share of a
particular fund would have the same rights to dividends and assets as every
other share of that fund.
Each full or fractional share has a proportionate vote. On some issues,
such as the election of Trustees, all shares of the Trust vote together as one
series. On an issue affecting a particular fund, only its shares vote as a
separate series. An example of such an issue would be a fundamental investment
restriction pertaining to only one fund. In voting on a Distribution Plan,
approval of the Plan by the shareholders of a particular fund would make the
Plan effective as to that fund, whether or not it had been approved by the
shareholders of the other funds.
Shares are fully paid and nonassessable. Shares have no preemptive or
conversion rights. The Trust or any fund may be terminated upon the sale of its
assets to another open-end management investment company, if approved by vote of
the holders of a majority of the Trust or the fund, as determined by the current
value of each shareholder's investment in the fund or Trust, or upon liquidation
and distribution of its assets, if approved by a majority of the Trustees of the
Trust. If not so terminated, the Trust and the fund will continue indefinitely.
2
<PAGE>
TRUSTEE LIABILITY. The Declaration of Trust provides that the Trustees, if
they have exercised reasonable care, will not be liable for any neglect or
wrongdoing, but nothing in the Declaration of Trust protects Trustees against
any liability to which they would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of their office.
VOTING RIGHTS. When matters are submitted for shareholder vote,
shareholders of each fund will have one vote for each full share held and
proportionate, fractional votes for fractional shares held. A separate vote of a
fund is required on any matter affecting the fund on which shareholders are
entitled to vote. Shareholders of one fund are not entitled to vote on a matter
that does not affect that fund but that does require a separate vote of any
other fund. There normally will be no meetings of shareholders for the purpose
of electing Trustees unless and until such time as less than a majority of
Trustees holding office have been elected by shareholders, at which time the
Trustees then in office will call a shareholders' meeting for the election of
Trustees. Any Trustee may be removed from office upon the vote of shareholders
holding at least two-thirds of the Trust's outstanding shares at a meeting
called for that purpose. The Trustees are required to call such a meeting upon
the written request of shareholders holding at least 10% of the Trust's
outstanding shares. Shareholders have under certain circumstances (e.g., upon
application and submission of certain specified documents to the Trustees of a
fund by a specified number of shareholders) the right to communicate with other
shareholders in connection with requesting a meeting of shareholders for the
purpose of removing one or more Trustees.
INVESTMENT POLICIES AND RELATED MATTERS
INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted whenever an investment policy or limitation
states a maximum percentage of the Fund's assets that may be invested in any
security or other asset, or sets forth a policy regarding quality standards,
such standard or percentage limitation will be determined immediately after and
as a result of the Fund's acquisition of such security or other asset.
Accordingly any subsequent change in net asset values or other circumstances
will not be considered when determining whether the investment complies with the
Fund's investment policies and limitations.
The Fund's fundamental investment limitations cannot be changed without
approval by a majority of the outstanding voting securities (as defined in the
Investment Company Act of 1940) of the Fund. However, except for the fundamental
investment limitations set forth below, the investment policies and limitations
described in this Statement of Additional Information are not fundamental and
may be changed by the Trustees without shareholder approval. THE FOLLOWING ARE
THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN THEIR ENTIRETY;
PROVIDED THAT NOTHING IN THE FOLLOWING INVESTMENT RESTRICTIONS WILL PREVENT THE
FUND FROM INVESTING ALL OR PART OF THE FUND'S ASSETS IN AN OPEN-END MANAGEMENT
INVESTMENT COMPANY WITH THE SAME INVESTMENT OBJECTIVE AS THE FUND. THE FUND MAY
NOT
3
<PAGE>
(1) with respect to 75% of the Fund's total assets, purchase the securities
of any issuer (other than obligations issued or guaranteed by the government of
the United States or any of its agencies or instrumentalities or the securities
of other investment companies if otherwise permitted) if, as a result thereof,
(a) more than 5% of the Fund's total assets would be invested in the securities
of such issuer or (b) the Fund would hold more than 10% of the voting securities
of such issuer;
(2) issue senior securities except as permitted under the Investment
Company Act of 1940;
(3) borrow money except that the Fund may borrow money from banks,
broker-dealers and other institutions in an amount not exceeding 33-1/3% of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). The Fund will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding;
(4) underwrite securities issued by others (except to the extent that the
Fund may be deemed to be an underwriter within the meaning of the Securities Act
of 1933 in the disposition of restricted securities);
(5) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
(6) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options or from investing in securities or other
instruments backed by physical commodities);
(7) lend any security or make any other loan if as a result more than
33-1/3% of its total assets would be lent to other parties but this limitation
does not apply to purchases of debt securities or to repurchase agreements; or
(8) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities)
if, as a result 25% or more of the Fund's total assets would be invested in the
securities of companies whose principal business activities are in the same
industry.
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE CHANGED
WITHOUT SHAREHOLDER APPROVAL.
(i) The Fund does not currently intend to sell securities short unless it
owns or has the right to obtain securities equivalent in kind and amount to the
securities sold short and provided that transactions in options are not deemed
to constitute selling securities short.
4
<PAGE>
(ii) The Fund does not currently intend to purchase any security if as a
result more than 15% of its net assets would be invested in securities that are
deemed to be illiquid because they are subject to legal or contractual
restrictions on resale or because they cannot be sold or disposed of in the
ordinary course of business at approximately the prices at which they are valued
including repurchase agreements with remaining maturities in excess of seven
days or securities without readily available market quotes.
(iii) The Fund does not currently intend to purchase the securities of any
issuer (other than securities issued or guaranteed by domestic or foreign
governments or political subdivisions thereof) if, as a result, more than 25% of
its total assets would be invested in the securities of business enterprises
that, including predecessors, have a record of less than three years of
continuous operation.
(iv) The Fund does not currently intend to purchase warrants, valued at the
lower of cost or market, in excess of 5% of the Fund's net assets. Included in
that amount, but not to exceed 2% of the Fund's net assets, may be warrants that
are not listed on the New York Stock Exchange or the American Stock Exchange.
Warrants acquired by the Fund in units or attached to securities are not subject
to these restrictions.
(v) The Fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
(vi) The Fund does not currently intend to purchase the securities of any
issuer if those officers and Trustees of the Trust and those officers and
directors of the Manager who individually own more than 1/2 of 1% of the
securities of such issuer, together own more than 5% of such issuer's
securities.
For the Fund's limitations on options transactions, see the section
entitled "Limitations on Options Transactions" herein. For the Fund's
limitations on short sales, see the section entitled "Short Sales" herein.
MONEY MARKET INSTRUMENTS. When investing in U.S. money market instruments,
the Fund will limit its purchases, denominated in U.S. dollars, to the following
securities.
* U.S. Government Securities and Securities of its Agencies and
Instrumentalities - obligations issued or guaranteed as to principal
or interest by the United States or its agencies (such as the Export
Import Bank of the United States, Federal Housing Administration, and
Government National Mortgage Association) or its instrumentalities
(such as the Federal Home Loan Bank, Federal Intermediate Credit Banks
and Federal Land Bank), including Treasury bills, notes and bonds.
* Bank Obligations and Instruments Secured Thereby - obligations
including certificates of deposit, time deposits and bankers'
acceptances) of domestic banks having total assets of $1,000,000,000
or more, instruments secured by such obligations and obligations of
5
<PAGE>
foreign branches of such banks, if the domestic parent bank is
unconditionally liable to make payment on the instrument if the
foreign branch fails to make payment for any reason. The Fund may also
invest in obligations (including certificates of deposit and bankers
acceptances) of domestic branches of foreign banks having assets of
$1,000,000,000 or more if the domestic branch is subject to the same
regulation as United States banks. The Fund will not invest at time of
purchase more than 25% of its assets in obligations of banks nor will
the Fund invest more than 10% of its assets in time deposits. * High
Quality Commercial Paper - The Fund may invest in commercial paper
rated no lower than A-2 by Standard & Poor's Corporation or Prime-2 by
Moody's Investors Services Inc. or if not rated issued by a company
having an outstanding debt issue rated at least A by Standard & Poor's
or Moody's.
* Private Placement Commercial Paper - Private placement commercial
paper consists of unregistered securities which are traded in public
markets to qualified institutional investors such as the Fund. The
Fund's risk is that the universe of potential buyers for the
securities should the Fund desire to liquidate a position is limited
to qualified dealers and institutions and therefore such securities
could have the effect of being illiquid.
* High Grade Corporate Obligations - obligations rated at least A by
Standard & Poor's or Moody's. See rating information below.
* Repurchase Agreements -- See Repurchase Agreements below.
The Adviser exercises due care in the selection of money market
instruments. However, there is a risk that the issuers of the securities may not
be able to meet their obligations to pay interest or principal when due. There
is also a risk that some of the Fund's securities might have to be liquidated
prior to maturity at a price less than original amortized cost or value face
amount or maturity value to meet larger than expected redemptions. Any of these
risks if encountered could cause a reduction in net income or in the net asset
value of the Fund.
RATINGS
1. Moody's Investors Services Inc.'s Corporate Bond Rating:
Aaa - Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
6
<PAGE>
Aa - Bonds which are rated Aa are judged to be high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins or
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A - Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa - Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length or time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
2. Standard and Poor s Corporation's Corporate Bond Rating:
AAA- Bonds rated AAA are highest grade obligations. They possess the
ultimate degree of protection as to principal and interest. Marketwise they move
with interest rates and hence provide the maximum safety on all counts.
AA - Bonds rated AA also qualify as high grade obligations and in the
majority of instances differ from AAA issues only in small degree. Here too
prices move with the long-term money market.
A - Bonds rated A are regarded as upper medium grade. They have
considerable investment strength but are not entirely free from the adverse
effect of changes in economic and trade conditions. Interest and principal are
regarded as safe. They predominantly reflect money rates in their market
behavior but to some extent also economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
3. A-1 and P-1 Commercial Paper Ratings:
Commercial paper rated A-1 by Standard & Poor's Corporation ("S&P") has the
following characteristics: Liquidity ratios are adequate to meet cash
requirements. Long-term senior debt is rated A or better. The issuer has access
to at least two additional channels of borrowing. Basic earnings and cash flow
have an upward trend. Typically the issuer's industry is well established and
the issuer has a strong position within the industry. The reliability and
quality of management are unquestioned. Relative strength or weakness of the
above factors determines whether the issuer's commercial paper is A-1 A-2 or
A-3.
7
<PAGE>
The rating P-1 is the highest commercial paper rating assigned by Moody's
Investors Service Inc. ("Moody's"). Among the factors considered by Moody's in
assigning ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in certain areas; (3)
evaluation of the issuer's products in relation to competition and customer
acceptance; (4) liquidity; (5) amount and quality of long-term debt; (6) trend
of earnings over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8) recognition
by the management of obligations which may be present or may arise as a result
of public interest questions and preparations to meet such obligations.
4. Description of Permitted Money Market Investments:
Commercial Paper - refers to promissory notes issued by corporations in
order to finance their short term credit needs.
U.S. Government Obligations - are bills, certificates of indebtedness,
notes and bonds issued by the U.S. Treasury and agencies, authorities and
instrumentalities of the U.S. Government established under the authority of an
act of Congress. Some obligations of U.S. Government agencies, authorities and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury, as for example, the Government National Mortgage Association; others
by the right of the issuer to borrow from the Treasury, as in the case of
Federal Farm Credit Banks and Federal National Mortgage Association; and others
only by the credit of the agency authority or instrumentality; as for example,
Federal Home Loan Mortgage and Federal Home Loan Bank.
Repurchase Agreements - See Repurchase Agreements below.
Certificates of Deposit - are certificates issued against funds deposited
in a bank are for a definite period of time earn a specified or variable rate of
return and are normally negotiable.
Banker's Acceptances - are short-term credit instruments used to finance
the import, export, transfer or storage of goods. They are termed accepted when
a bank guarantees their payment at maturity.
Corporate Obligations - include bonds and notes issued by corporations in
order to finance longer term credit needs.
COMMON AND PREFERRED STOCKS. Stocks represent shares of ownership in a
company. Generally, preferred stock has a specified dividend and ranks after
bonds and before common stock in its claim on income for dividend payments and
on assets if the company is liquidated. After other claims are satisfied, common
stockholders participate in company profits on a pro rata basis; profits may be
paid out in dividends or reinvested in the company to help it grow. Increases
8
<PAGE>
and decreases in earnings are usually reflected in a company's stock price, so
common stocks generally have the greatest appreciation and depreciation
potential of all corporate securities. While most preferred stocks pay a
dividend, the Fund may purchase preferred stock where the issuer has omitted, or
is in danger of omitting, payment of its dividend. Such investments would be
made primarily for their capital appreciation potential.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in debt or
preferred equity securities convertible into or exchangeable for equity
securities. Traditionally, convertible securities have paid dividends or
interest at rates higher than common stocks but lower than non-convertible
securities. They generally participate in the appreciation or depreciation of
the underlying stock into which they are convertible, but to a lesser degree. In
recent years, convertibles have been developed which combine higher or lower
current income with options and other features. Warrants are options to buy a
stated number of shares of common stock at a specified price any time during the
life of the warrants (generally, two or more years).
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed of in
the ordinary course of business at approximately the prices at which they are
valued. Under the supervision of the Board of Trustees, the Adviser determines
the liquidity of the Fund's investments and through reports from the Adviser,
the Board monitors investments in illiquid instruments. In determining the
liquidity of the Fund's investments the Adviser may consider various factors
including (1) the frequency of trades and quotations, (2) the number of dealers
and prospective purchasers in the marketplace, (3) dealer undertakings to make a
market, (4) the nature of the security (including any demand or tender
features), and (5) the nature of the marketplace for trades (including the
ability to assign or offset the Fund's rights and obligations relating to the
investment). Investments currently considered by the Fund to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days and over-the-counter options. However, with respect
to over-the-counter options the Fund writes, all or a portion of the value of
the underlying instrument may be illiquid depending on the assets held to cover
the option and the nature and terms of any agreement the Fund may have to close
out the option before expiration. In the absence of market quotations, illiquid
investments are priced at fair value as determined in good faith by the Board of
Trustees. If through a change in values, net assets or other circumstances, the
Fund were in a position where more than 15% of its net assets were invested in
illiquid securities, it would seek to take appropriate steps to protect
liquidity.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions pursuant to an exemption from registration under the Securities Act
of 1933 or in a registered public offering. Where registration is required, the
Fund may be obligated to pay all or part of the registration expense and a
considerable period may elapse between the time it decides to seek registration
and the time the Fund may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Fund might obtain a less favorable price than prevailed when it
decided to seek registration of the security.
9
<PAGE>
REPURCHASE AGREEMENTS. For temporary defensive purposes and for cash
management purposes, the Fund may enter into repurchase agreements with U.S.
banks and broker-dealers. A repurchase agreement involves the obligation of the
seller to pay the agreed upon price which obligation is in effect secured by the
value (at least equal to the amount of the agreed upon resale price and marked
to market daily) of the underlying security. Under a repurchase agreement, the
Fund acquires a security from a U.S. bank or a registered broker-dealer who
simultaneously agrees to repurchase the security at a specified time and price.
The repurchase price is in excess of the purchase price by an amount which
reflects an agreed-upon rate of return, which is not tied to the coupon rate on
the underlying security. Under the 1940 Act, repurchase agreements are
considered to be loans collateralized by the underlying security and therefore
will be fully collateralized. However, if the seller should default on its
obligation to repurchase the underlying security, the Fund may experience delay
or difficulty in exercising its rights to realize upon the security and might
incur a loss if the value of the security declines, as well as incur disposition
costs in liquidating the security.
The Fund may engage in repurchase agreements with respect to any security
in which it is authorized to invest.
While it does not presently appear possible to eliminate all risks from
these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delays and costs to the Fund in
connection with bankruptcy proceedings), it is the Fund's current policy to
limit repurchase agreement transactions to parties whose creditworthiness has
been reviewed and found satisfactory by the Adviser.
BORROWING. As a fundamental policy, the Fund may borrow up to one-third of
the value of its total assets from banks, broker dealers or other institutions
to increase its holdings of portfolio securities. Under the Investment Company
Act of 1940, the Fund is required to maintain continuous asset coverage of 300%
with respect to such borrowings and to sell (within three days) sufficient
portfolio holdings to restore such coverage if it should decline to less than
300% due to market fluctuations or otherwise, even if such liquidations of the
Fund's holdings may be disadvantageous from an investment standpoint. Leveraging
by means of borrowing may exaggerate the effect of any increase or decrease in
the value of portfolio securities on the Fund's net asset value, and money
borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances), which
may or may not exceed the income or gains received from the securities purchased
with borrowed funds.
SECURITIES LENDING. The Fund may lend to broker-dealers portfolio
securities with an aggregate market value of up to one-third of its total assets
to generate income. Such loans must be secured by collateral (consisting of any
combination of cash, U.S. government securities or irrevocable letters of
credit) in an amount at least equal (on a daily market-to-market basis) to the
current market value of the securities loaned. The Fund may terminate the loans
at any time and obtain the return of the securities loaned within five business
days. The Fund will continue to receive any interest or dividends paid on the
loaned securities and will continue to retain any voting rights with respect to
the securities. In the event that the borrower defaults on its obligation to
return borrowed securities, because of insolvency or otherwise, the Fund could
10
<PAGE>
experience delays and costs in gaining access to the collateral and could suffer
a loss to the extent that the value of the collateral falls below the market
value of the borrowed securities.
Securities lending allows the Fund to retain ownership of the securities
loaned and, at the same time, to earn additional income. Since there may be
delays in the recovery of loaned securities or even a loss of rights in
collateral supplied should the borrower fail financially, loans will be made
only to parties deemed by the Adviser to be of good standing. Furthermore, they
will only be made if in the Adviser's judgment the consideration to be earned
from such loans would justify the risk.
The Adviser understands that it is the current view of the SEC Staff that
the Fund may engage in loan transactions only under the following conditions:
(1) the Fund must receive 100% collateral in the form of cash or cash
equivalents (e.g. U.S. Treasury bills or notes) from the borrower; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the value of the
collateral; (3) after giving notice, the Fund must be able to terminate the loan
at any time; (4) the Fund must receive reasonable interest on the loan or a flat
fee from the borrower, as well as amounts equivalent to any dividends, interest
or other distributions on the securities loaned and to any increase in market
value; (5) the Fund may pay only reasonable custodian fees in connection with
the loan; and (6) the Board of Trustees must be able to vote proxies on the
securities loaned, either by terminating the loan or by entering into an
alternative arrangement with the borrower.
Cash received through loan transactions may be invested in any security in
which the Fund is authorized to invest. Investing this cash subjects that
investment as well as the security loaned to market forces (i.e. capital
appreciation or depreciation).
ADR'S. ADR's are depositary receipts typically issued by a U.S. bank or
trust company which evidence ownership of underlying securities issued by a
foreign corporation. Generally, depositary receipts in registered form are
designed for use in the U.S. securities market and depositary receipts in bearer
form are designed for use in securities markets outside the U.S. Depositary
receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. Depositary receipts may
be issued pursuant to sponsored or unsponsored programs. In sponsored programs,
an issuer has made arrangements to have its securities traded in the form of
depositary receipts. In unsponsored programs, the issuer may not be directly
involved in the creation of the program. Although regulatory requirements with
respect to sponsored and unsponsored programs are generally similar, in some
cases it may be easier to obtain financial information from an issuer that has
participated in the creation of a sponsored program. Accordingly, there may be
less information available regarding issuers of securities underlying
unsponsored programs and there may not be a correlation between such information
and the market value of the depositary receipts. Depositary receipts also
involve the risks of other investments in foreign securities, as discussed
herein. For purposes of the Fund's investment policies, the Fund's investments
in depositary receipts will be deemed to be investments in the underlying
securities.
11
<PAGE>
Foreign investments can involve significant risks in addition to the risks
inherent in U.S. investments. The value of securities denominated in or indexed
to foreign currencies and of dividends and interest from such securities can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. Foreign securities markets generally have less trading volume
and less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those applicable to U.S. companies, and it may be more difficult
to obtain reliable information regarding an issuer's financial condition and
operations.
In addition, the costs of foreign investing, including withholding taxes,
brokerage commissions, and custodial costs, are generally higher than for U.S.
investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad through ADR's also involves different political and
economic risks. Foreign investments may be affected by actions of foreign
governments adverse to the interests of U.S. investors, including the
possibility of expropriation or nationalization of assets, confiscatory
taxation, restrictions on U.S. investment or on the ability to repatriate assets
or convert currency into U.S. dollars, or other government intervention. There
may be a greater possibility of default by foreign governments or foreign
government-sponsored enterprises. Investments in foreign countries also involve
a risk of local political, economic, or social instability, military action or
unrest, or adverse diplomatic developments. There is no assurance that the
Adviser will be able to anticipate or counter these potential events.
The considerations noted above generally are intensified for investments in
developing countries. Developing countries may have relatively unstable
governments, economies based on only a few industries, and securities markets
that trade a small number of securities.
The Fund may invest in ADR's whose underlying foreign securities impose
restrictions on transfer within the U.S. or to U.S. persons. Although securities
subject to transfer restrictions may be marketable abroad, they may be less
liquid than foreign securities of the same class that are not subject to such
restrictions.
OPTIONS ON SECURITIES OR INDICES. The Fund may write (i.e., sell) covered
put and call options and purchase put and call options on securities or
securities indices that are traded on U.S. exchanges or in the over-the-counter
markets. An option on a security is a contract that permits the purchaser of the
option, in return for the premium paid, the right to buy a specified security
12
<PAGE>
(in the case of a call option) or to sell a specified security (in the case of a
put option) from or to the writer of the option at a designated price during the
term of the option. An option on a securities index permits the purchaser of the
option, in return for the premium paid, the right to receive from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option. The Fund may write a call or put option to
generate income, and will do so only if the option is "covered." This means that
so long as the Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the call, or hold a call at the same or lower
exercise price, for the same exercise period, and on the same securities as the
written call. A put is covered if the Fund maintains liquid assets with a value
at least equal to the exercise price in a segregated account, or holds a put on
the same underlying securities at an equal or greater exercise price.
LIMITATIONS ON OPTIONS TRANSACTIONS. The Fund will not: (a) purchase put
options or write call options if, as a result, more than 50% of the Fund's total
assets would be hedged with options under normal conditions; (b) write put
options if, as a result, the Fund's total obligations upon settlement or
exercise of written put options would exceed 25% of its total assets; or (c)
purchase call options if, as a result, the current value of option premiums for
call options purchased by the Fund would exceed 5% of the Fund's total assets.
The value of the underlying securities on which options may be written at any
one time will not exceed 15% of the total assets of the Fund. These limitations
do not apply to options attached to or acquired or traded together with their
underlying securities, and do not apply to securities that incorporate features
similar to options. The above limitations on the Fund's investments in options
and the Fund's policies regarding options discussed elsewhere in this Statement
of Additional Information may be changed as regulatory agencies permit.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund
obtains the right (but not the obligation) to sell the option's underlying
instrument at a fixed strike price. In return for this right, the Fund pays the
current market price for the option (known as the option premium). Options have
various types of underlying instruments, including specific securities, indices
of securities prices and futures contracts. The Fund may terminate its position
in a put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. The Fund may also terminate a put
option position by closing it out in the secondary market at its current price,
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option s strike
price.
13
<PAGE>
A call buyer typically attempts to participate in potential price increases
of the underlying instrument with risk limited to the cost of the option if
security prices fall. At the same time, the buyer can expect to suffer a loss if
security prices do not rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. When the Fund writes a put option, it takes
the opposite side of the transaction from the option's purchaser. In return for
receipt of the premium the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party to the option chooses
to exercise it. The Fund may seek to terminate its position in a put option it
writes before exercise by closing out the option in the secondary market at its
current price. If the secondary market is not liquid for a put option the Fund
has written, however, the Fund must continue to be prepared to pay the strike
price while the option is outstanding, regardless of price changes and must
continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it received. If
security prices remain the same over time, it is likely that the writer will
also profit because it should be able to close out the option at a lower price.
If security prices fall, the put writer would expect to suffer a loss. This loss
should be less than the loss from purchasing the underlying instrument directly,
however, because the premium received for writing the option should mitigate the
effects of the decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price, even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. The Fund may purchase and write options in combination
with each other, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write a call
option on the same underlying instrument, in order to construct a combined
position whose risk and return characteristics are similar to selling a futures
contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types
of exchange-traded options, it is likely that the standardized contracts
available will not match the Fund's current or anticipated investments exactly.
The Fund may invest in options based on securities with different issuers,
maturities or other characteristics from the securities in which it typically
14
<PAGE>
invests, which involves a risk that the options will not track the performance
of the Fund's other investments.
Options prices can also diverge from the prices of their underlying
instruments even if the underlying instruments match the Fund's investments
well. Options prices are affected by such factors as current and anticipated
short-term interest rates, changes in volatility of the underlying instrument,
and the time remaining until expiration of the contract, which may not affect
security prices the same way. Imperfect correlation may also result from
differing levels of demand in the options and futures markets and the securities
markets, from structural differences in how options and securities are traded,
or from imposition of daily price fluctuation limits or trading halts.
The Fund may purchase or sell options with a greater or lesser value than
the securities it wishes to hedge or intends to purchase in order to attempt to
compensate for differences in volatility between the contract and the
securities, although this may not be successful in all cases. If price changes
in the Fund's options are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that are not
offset by gains in other investments.
LIQUIDITY OF OPTIONS. There is no assurance a liquid secondary market will
exist for any particular options at any particular time. Options may have
relatively low trading volume and liquidity if their strike prices are not close
to the underlying instrument's current price. In addition, exchanges may
establish daily price fluctuation limits for options. On volatile trading days
when a trading halt is imposed, it may be impossible for the Fund to enter into
new positions or close out existing positions. If the secondary market for a
contract is not liquid because of price fluctuation limits or otherwise, it
could prevent prompt liquidation of unfavorable positions, and potentially could
require the Fund to continue to hold a position until delivery or expiration
regardless of changes in its value. As a result, the Fund's access to other
assets held to cover its options could also be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with
respect to the underlying instrument, expiration date, contract size, and strike
price, the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund greater flexibility to
tailor an option to its needs, OTC options generally involve greater credit risk
than exchange-traded options, which are guaranteed by the clearing organization
of the exchanges where they are traded.
ASSET COVERAGE FOR OPTIONS POSITIONS. The Fund will comply with guidelines
established by the SEC with respect to coverage of options by mutual funds, and
if the guidelines so require, will set aside appropriate liquid assets in a
segregated custodial account in the amount prescribed. Securities held in a
segregated account cannot be sold while the option strategy is outstanding,
unless they are replaced with other suitable assets. As a result, there is a
possibility that segregation of a large percentage of the Fund's assets could
impede portfolio management or the Fund's ability to meet redemption requests or
other current obligations.
15
<PAGE>
SHORT SALES. The Fund may enter into short sales "against the box" with
respect to stocks it owns or has the right to obtain. For example, if the
Adviser anticipates a decline in the price of a stock it owns or has the right
to obtain, it may sell the stock short "against the box" by borrowing the stock
from a broker and then selling the borrowed stock. The Fund is then obligated to
replace the borrowed stock, but is able to close the open short position by
making delivery of the stock it owns or has the right to obtain. If the stock
price subsequently declines, the proceeds of the short sale could be expected to
offset all or a portion of the effect of the stock's decline. The Fund currently
intends to hedge no more than [15%] of its total assets with short sales on
equity securities under normal circumstances.
When the Fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to
continue to hold them while the short sale is outstanding. The Fund will incur
transaction costs, including interest expense, in connection with opening,
maintaining, and closing short sales.
PORTFOLIO TURNOVER. The portfolio turnover rate is calculated by dividing
the lesser of sales or purchases of portfolio securities by the average monthly
value of the Fund's securities, excluding securities having a maturity at the
date of purchase of one year or less.
High transaction costs could result when compared with other funds. High
portfolio turnover may involve correspondingly greater brokerage commissions and
other transaction costs which will be borne directly by the Fund. Trading may
also result in realization of net short-term capital gains upon which
shareholders may be taxed at ordinary tax rates when distributed from the Fund.
RISK CONSIDERATIONS
As with any investment in securities, the value of, and income from, an
investment in the Fund can decrease as well as increase, depending on a variety
of factors which may affect the values and income generated by the Fund's
portfolio securities, including general economic conditions and market factors.
In addition to the factors which affect the value of individual securities, you
may anticipate that the value of the shares of the Fund will fluctuate with
movements in the broader equity markets. History reflects both decreases and
increases in the stock market and these may occur unpredictably in the future.
Additionally, investment decisions made by the Adviser will not always be
profitable or prove to have been correct. The Fund is not intended as a complete
investment program.
Leveraging by means of borrowing may exaggerate the effect of any increase
or decrease in the value of portfolio securities on the Fund's net asset value,
and money borrowed will be subject to interest and other costs (which may
include commitment fees and/or the cost of maintaining minimum average balances)
which may or may not exceed the income or gains received from the securities
purchased with borrowed funds.
16
<PAGE>
Use of options is subject to special risk considerations. A liquid
secondary market for any options contract may not be available when an options
position is sought to be closed. In addition, there may be an imperfect
correlation between movements in the securities on which the options contract is
based and movements in the securities currency in the Fund's portfolio. Use of
options contracts is further dependent on the Adviser's ability to correctly
predict movements in the securities markets and no assurance can be given that
its judgment will be correct. Successful use of options on securities or
securities indices is subject to similar risk considerations. In addition, by
writing covered call options, the Fund gives up the opportunity, while the
option is in effect, to profit from any price increase in the underlying
security above the option exercise price.
There are further risk factors, including possible losses through the
holding of securities in domestic custodian banks and depositories, described
elsewhere in this Statement of Additional Information.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of the Fund by the Adviser pursuant to authority contained in the
investment advisory agreement. The Adviser is also responsible for the placement
of transaction orders for accounts for which it or its affiliates act as
investment adviser. In selecting broker-dealers, subject to applicable
limitations of the federal securities laws, the Adviser considers various
relevant factors, including, but not limited to, the size and type of the
transaction; the nature and character of the markets for the security to be
purchased or sold; the execution efficiency, settlement capability, and
financial condition of the broker-dealer firm; the broker-dealer's execution
services rendered on a continuing basis; the reasonableness of any commissions;
and arrangements for payment of Fund expenses.
The Fund may execute portfolio transactions with broker-dealers who provide
research and execution services to the Fund or other accounts over which the
Adviser or its affiliates exercise investment discretion. Such services may
include advice concerning the value of securities; the advisability of investing
in purchasing or selling securities; the availability of securities or the
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio
strategy, and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement). The
selection of such broker-dealers generally is made by the Adviser (to the extent
possible consistent with execution considerations) in accordance with a ranking
of broker-dealers determined periodically by the Adviser's investment staff
based upon the quality of research and execution services provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the Fund may be useful to the Adviser in rendering investment
management services to the Fund or the Adviser's other clients, and conversely,
such research provided by broker-dealers who have executed transaction orders on
behalf of other Adviser clients may be useful to the Adviser in carrying out its
obligations to the Fund. The receipt of such research is not expected to reduce
17
<PAGE>
the Adviser's normal independent research activities; however, it enables the
Adviser to avoid the additional expenses that could be incurred if the Adviser
tried to develop comparable information through its own efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and execution services. In order to cause the Fund
to pay such higher commissions, the Adviser must determine in good faith that
such commissions are reasonable in relation to the value of the brokerage and
research services provided by such executing broker-dealers, viewed in terms of
a particular transaction or the Adviser's overall responsibilities to the Fund
and its other clients. In reaching this determination, the Adviser will not
attempt to place a specific dollar value on the brokerage and research services
provided or to determine what portion of the compensation should be related to
those services.
The Adviser is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided assistance in the
distribution of shares of the Fund to the extent permitted by law.
The Adviser may allocate brokerage transactions to broker-dealers who have
entered into arrangements with the Adviser under which the broker-dealer
allocates a portion of the commissions paid by the Fund toward payment of the
Fund's expenses, such as transfer agent fees of Mutual Funds Service Co. or
custodian fees. The transaction quality must, however, be comparable to those of
other qualified broker-dealers.
The Trustees periodically review the Adviser's performance of its
responsibilities in connection with the placement of portfolio transactions on
behalf of the Fund and review the commissions paid by the Fund over
representative periods of time to determine if they are reasonable in relation
to the benefits to the Fund.
The Fund may effect transactions in its portfolio securities on a
non-exclusive basis through Creative Capital Management Corp., the distributor
of the Fund's shares and an affiliate of the Adviser (the "Distributor"), in its
capacity as a broker-dealer.
VALUATION OF PORTFOLIO SECURITIES
Portfolio securities are valued by various methods depending on the primary
market or exchange on which they trade. Equity securities are valued at last
sale price or, if no sale has occurred, at the closing bid price. If the last
sale price (on the local exchange) is unavailable, the last evaluated quote or
last bid price is normally used. Short-term fixed income securities are valued
either at amortized cost or at original cost plus accrued interest, both of
which approximate current value.
Securities and other assets for which there is no readily available market
are valued in good faith by the Board of Trustees. The procedures set forth
above need not be used to determine the value of the securities owned by the
Fund if, in the opinion of the Board of Trustees, some other method (e.g.,
18
<PAGE>
closing over-the-counter bid prices in the case of debt instruments traded on an
exchange) would more accurately reflect the fair market value of such
securities.
Generally, the valuation of domestic equity securities, as well as
corporate bonds, U.S. government securities, money market instruments, and
repurchase agreements, is substantially completed each day at the close of the
New York Stock Exchange (NYSE).
The values of any such securities held by the Fund are determined as of
such time for the purpose of computing the Fund's net asset value. If an
extraordinary event that is expected to materially affect the value of a
portfolio security occurs after the close of an exchange on which that security
is traded, then the security will be valued as determined in good faith by the
Board of Trustees.
PERFORMANCE
The Fund's performance may be used from time to time in advertisements,
shareholder reports or other communications to shareholders or prospective
shareholders. Performance information may include the Fund's investment results
and/or comparisons of its investment results to various unmanaged indices or
results of other mutual funds or investment or savings vehicles. All performance
information supplied by the Fund in advertising is historical and is not
intended to indicate future returns. The Fund's share price and total returns
fluctuate in response to market conditions and other factors, and the value of
Fund shares when redeemed may be more or less than their original cost.
TOTAL RETURN CALCULATIONS. The Fund may provide period and average
annualized "total return" quotations. The Fund's "total return" refers to the
change in the value of an investment in the Fund over a stated period based on
any change in net asset value per share and including the value of any shares
purchasable with any dividends or capital gains distributed during such period.
Period total return may be annualized. Average annual total return smoothes out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges.
Total returns quoted in advertising reflect all aspects of the Fund's
return, including the effect of reinvesting dividends and capital gain
distributions, and any change in the Fund's net asset value over the period.
Average annual returns will be calculated by determining the growth or decline
in value of a hypothetical historical investment in the Fund over a stated
period, and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant over the period. While average annual returns are a convenient means of
comparing investment alternatives, investors should realize that the Fund's
performance is not constant over time but changes from year to year and that
average annual returns represent averaged figures as opposed to the actual
year-to-year performance of the Fund.
In addition to average annual returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
19
<PAGE>
as a percentage or as a dollar amount, and may be calculated for a single
investment, a series of investments or series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns may be quoted on a before-tax or after-tax basis. Total
returns yields and other performance information may be quoted numerically, or
in a table graph, or similar illustration.
Total return is computed by finding the average annual compounded rates of
return over the length of the base periods that would equate the initial amount
invested to the ending redeemable value according to the following formula:
P(1+T)(to the nth power) = ERV
P = initial investment of $1,000
T = average annual total return
n = Number of years
ERV = ending redeemable value at the end of the base period
NET ASSET VALUE. Charts and graphs using the Fund's net asset values,
adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted net asset value includes any distributions paid by the
Fund and reflects all elements of its return. Unless otherwise indicated, the
Fund's adjusted net asset values are not adjusted for sales charges, if any.
MOVING AVERAGES. The Fund may illustrate performance using moving averages.
A long-term moving average is the average of each week's adjusted closing net
asset value for a specified period. A short-term moving average is the average
of each day's adjusted closing net asset value for a specified period. Moving
Average Activity Indicators combine adjusted closing net asset values from the
last business day of each week with moving averages for a specified period to
produce indicators showing when a net asset value has crossed, stayed above, or
stayed below its moving average.
HISTORICAL FUND RESULTS. The Fund's performance may be compared to the
performance of other mutual funds in general, or to the performance of
particular types of mutual funds. These comparisons may be expressed as mutual
fund rankings prepared by Lipper Analytical Services, Inc. (Lipper), an
independent service located in Summit, New Jersey that monitors the performance
of mutual funds. Lipper generally ranks funds on the basis of total return,
assuming reinvestment of distributions, but does not take sales charges or
redemption fees into consideration, and total return is prepared without regard
to tax consequences. In addition to the mutual fund rankings, the Fund's
performance may be compared to mutual fund performance indices prepared by
Lipper.
From time to time, the Fund's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals. For
example, the Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance.
20
<PAGE>
In advertising materials, the Trust may reference or discuss its products
and services, which may include: retirement investing; the effects of periodic
investment plans and dollar cost averaging; saving for college; and charitable
giving. In addition, the Fund may quote financial or business publications and
periodicals, including model portfolios or allocations, as they relate to Fund
management, investment philosophy, and investment techniques.
VOLATILITY. The Fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the Fund may compare these measures to
those of other funds. Measures of volatility seek to compare the Fund's
historical share price fluctuations or total returns to those of a benchmark.
Measures of benchmark correlation indicate how valid a comparative benchmark may
be. All measures of volatility and correlation are calculated using averages of
historical data.
MOMENTUM INDICATORS indicate the Fund's price movements over specific
periods of time. Each point on the momentum indicator represents the Fund's
percentage change in price movements over that period.
The Fund may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
The Fund may be available for purchase through retirement plans or other
programs offering deferral of, or exemption from, income taxes, which may
produce superior after-tax returns over time. For example, a $1,000 investment
earning a taxable return of 10% annually would have an after-tax value of $1,949
after ten years, assuming tax was deducted from the return each year at a 31%
rate. An equivalent tax-deferred investment would have an after-tax value of
$2,100 after ten years, assuming tax was deducted at a 31% rate from the
tax-deferred earnings at the end of the ten-year period.
NON-STANDARDIZED PERFORMANCE. The Fund may also advertise performance
information (a "non-standardized quotation") which is calculated differently
from average annual total return. A non-standardized quotation of total return
may be a cumulative return which measures the percentage change in the value of
an account between the beginning and end of a period, assuming no activity in
the account other than reinvestment of dividends and capital gains
distributions. A non-standarized quotation may also be an average annual
compounded rate of return over a specified period, which may be a period
different from those specified for average annual total return. In addition, a
non-standardized quotation may be an indication of the value of a $10,000
investment (made on the date of the initial public offering of the Fund's
shares) as of the end of a specified period. These non-standardized quotations
21
<PAGE>
do not include the effect of the applicable sales load which, if included, would
reduce the quoted performance. A non-standardized quotation of total return will
always be accompanied by the Fund's average annual total return as described
above.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund is open for business and its net asset value per share (NAV) is
calculated each day the NYSE is open for trading. The NYSE has designated the
following holiday closings: New Year's Day, Martin Luther King Day (observed),
Washington's Birthday (observed), Good Friday, Memorial Day (observed),
Independence Day (observed), Labor Day, Thanksgiving Day, and Christmas Day
(observed). The NYSE may modify its holiday schedule at any time.
The Fund's net asset value is determined as of 4:00 p.m. Eastern time.
If the Trustees determine that existing conditions make cash payment
undesirable, redemption payments may be made in whole or in part in securities
or other property, valued for this purpose as they are valued in computing the
Fund's NAV. Shareholders receiving securities or other property on redemption
may realize a gain or loss for tax purposes, and will incur any costs of sale,
as well as the associated inconveniences.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described below, may aggregate the value of their existing
holdings of shares of the Fund to determine the reduced sales charge. The value
of existing holdings for purposes of determining the reduced sales charge is
calculated using the maximum offering price (net asset value plus maximum sales
charge) as of the previous business day. See "How Net Asset Value is Determined"
in the Prospectus. The Transfer Agent must be notified at the time of purchase
that the investor is entitled to a reduced sales charge. The reduced sales
charges will be granted subject to confirmation of the investor's holdings.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
corporation will be deemed to control the corporation, and a
partnership will be deemed to be controlled by each of its general
partners);
22
<PAGE>
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
LETTERS OF INTENT. Reduced sales charges are also available to investors
(or an eligible group of related investors) who enter into a written Letter of
Intent providing for the purchase, within a thirteen-month period, of shares of
the Fund. All shares of the Fund which were previously purchased and are still
owned are also included in determining the applicable reduction. The Transfer
Agent must be notified at the time of purchase that the investor is entitled to
a reduced sales charge. The reduced sales charges will be granted subject to
confirmation of the investor's holdings.
A Letter of Intent permits a purchase to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Shares totaling 5% of the dollar amount of the Letter of Intent will
be held by the Transfer Agent in escrow in the name of the purchaser. The
effective date of a Letter of Intent may be back-dated up to 90 days, in order
that any investments made during this 90-day period, valued at the purchaser's
cost, can be applied to the fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Transfer Agent or, if not paid, the Transfer Agent will
liquidate sufficient escrowed shares to obtain such difference. If the goal is
exceeded in an amount which qualifies for a lower sales charge, a price
adjustment is made by refunding to the purchaser the amount of excess sales
charge, if any, paid during the thirteen-month period. Investors electing to
purchase shares of the Fund pursuant to a Letter of Intent should carefully read
such Letter of Intent.
AUTOMATIC ACCOUNT BUILDER. An investor may arrange to have a fixed amount
of $100 or more automatically invested in shares of the Fund monthly by
authorizing his or her bank account to be debited to invest specified dollar
amounts in shares of the Fund. The investor's bank must be a member of the
Automatic Clearing House System.
Further information about these programs and an application form can be
obtained from the Fund's Transfer Agent.
23
<PAGE>
NO CERTIFICATES. No stock certificates will be issued. Instead, the
transfer agent will establish an account for each investor, and all shares
purchased or received, including those acquired through the reinvestment of
dividends and distributions, are registered on the books of the Fund and
credited to such account.
DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. The Fund's dividends, if any,
will be declared payable to shareholders on at least an annual basis. In
December, the Fund may distribute an additional ordinary income dividend
(consisting of net short-term capital gains and undistributed income) in order
to preserve its status as a registered investment company (mutual fund) under
the Internal Revenue Code. Net long-term capital gains, if any, also are
declared and distributed in December.
A portion of the Fund's dividends derived from certain U.S. government
obligations may be exempt from state and local taxation. Gains (losses)
attributable to foreign currency fluctuations are generally taxable as ordinary
income and therefore will increase (decrease) dividend distributions. The Fund
will send each shareholder a notice in January describing the tax status of
dividends and capital gain distributions for the prior year.
Long-term capital gains earned by the Fund on the sale of securities and
distributed to shareholders of the Fund 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. Distributions from short-term
capital gains do not qualify for the dividends-received deduction.
If you request to have distributions mailed to you and the U.S. Postal
Service cannot deliver your checks, or if your checks remain uncashed for six
months, the Adviser may reinvest your distributions at the then-current NAV. All
subsequent distributions will then be reinvested until you provide the Adviser
with alternate instructions.
TAX STATUS OF THE FUND. The Trust files federal income tax returns for the
Fund.
The Fund intends to qualify each year as a "regulated investment company"
for tax purposes so that it will not be liable for federal tax on income and
capital gains distributed to shareholders. In order to qualify as a regulated
investment company and avoid being subject to federal income or excise taxes at
the Fund level, the Fund intends to distribute substantially all of its net
investment income and net realized capital gains within each calendar year as
well as on a fiscal year basis. The Fund might deviate from this policy, and
incur a tax liability, if this were necessary to fully protect shareholder
values. The Fund intends to comply with other tax rules applicable to regulated
investment companies.
24
<PAGE>
OTHER TAX INFORMATION. The information above is only a summary of some of
the tax consequences generally affecting the Fund and its shareholders, and no
attempt has been made to discuss individual tax consequences. In addition to
federal income taxes, shareholders may be subject to state and local taxes on
Fund distributions. Investors should consult their tax advisers to determine
whether the Fund is suitable to their particular tax situation.
INVESTMENT ADVISER AND MANAGER
The Sturgeon Financial Group, Ltd. (the "Adviser") is the investment
adviser and manager for, and has an Investment Advisory Contract with, the Fund.
Pursuant to the Investment Advisory Contract with the Fund, the Manager,
subject to the supervision of the Fund's Board of Trustees and in conformity
with the stated objective and policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. In connection
therewith, the Manager is obligated to keep certain books and records of the
Fund. The Manager also administers the Fund's corporate affairs, and in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by Firstar Bank, N.A., the Fund's custodian and Mutual Funds Service Co., the
Fund's transfer and disbursing agent. The management services of the Manager are
not exclusive under the terms of the Investment Advisory Agreement and the
Manager is free to render management services to others.
The Investment Advisory Contract for the Fund was separately approved by a
vote of a majority of the Trustees, including a majority of those Trustees who
are not "interested persons" (as defined in the Investment Company Act of 1940)
of the Trust. The Investment Advisory Contract is to remain in force so long as
renewal thereof is specifically approved at least annually by a majority of the
Trustees or by vote of a majority of the outstanding voting securities of the
Fund, and in either case by vote of a majority of the Trustees who are not
"interested persons" (as defined in the Investment Company Act of 1940) at a
meeting called for the purpose of voting on such renewal.
The Investment Advisory Contract provides that the Manager will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Fund in connection with the matters to which the Investment Advisory
Contract relates except for a loss resulting from willful misfeasance, bad
faith, gross negligence or reckless disregard of duty. The Investment Advisory
Contract will terminate automatically if assigned and may be terminated without
penalty at any time upon 60 days' prior written notice by Majority Vote of the
Fund, by the Trustees of the Trust, or by the Manager.
The Fund pays the fees of the Trust's independent auditors, legal counsel,
custodian, transfer agent and accountants; insurance premiums; the fees and
expenses of Trustees who do not receive compensation from The Sturgeon Financial
Group, Ltd.; association dues; the cost of printing and mailing confirmations,
prospectuses, proxies, proxy statements, notices and reports to existing
25
<PAGE>
shareholders; state registration fees; distribution expenses within the
percentage limitations of the distribution and service plan, including the cost
of printing and mailing of prospectuses and other materials incident to
soliciting new accounts; and other miscellaneous expenses.
Expenses of the Fund also include all fees under its Accounting and
Administrative Service Agreement; expenses of meetings of shareholders and
Trustees; the advisory fees payable to the Manager under the Investment Advisory
Contract and other miscellaneous expenses.
The Manager earns an annual fee at the rate of 1% of the average net assets
of the Fund, payable in monthly installments.
The Manager has agreed to reduce its fees and/or absorb expenses to limit
the fund's total annual operating expenses to 2.25%. The Manager may terminate
this agreement after June 30, 2001.
The Sturgeon Financial Group, Ltd. was formed as a Delaware corporation in
December 1998 and maintains its principal offices at 321 S. Bromfield Road,
Dayton, OH 45249.
The Manager's officers and directors are as set forth as follows: George
Doumanis, Chairman; Cameron M. Bernadsky, President, Chief Operating Officer and
Chief Financial Officer; Richard W. Bradford, Chief Executive Officer; Karin
Williamson, Vice President; and George Madsen, Secretary, Treasurer. Each of
Messrs. Bernadsky, Bradford and Doumanis is a Trustee and officer of the Trust.
The Manager and Adviser may use their resources to pay expenses associated
with the sale of the Fund's shares. This may include payments to third parties
such as banks or broker-dealers that provide shareholder support services or
engage in the sale of the Fund's shares. However, the Fund does not pay the
Manager any separate fees for this service.
TRUSTEES AND OFFICERS
The Trust is managed by its trustees and officers. Their names, positions
and principal occupations during the past five years are listed below. Except as
indicated, each individual has held the office shown or other offices in the
same company for the last five years. Unless otherwise noted, the business
address of each Trustee and officer is 321 South Bromfield Road, Dayton, OH
45429, which is also the address of the Manager. Those Trustees who are
"interested persons" (as defined in the Investment Company Act of 1940) by
virtue of their affiliation with the Trust or the Manager are indicated by an
asterisk (*).
The Trust is managed by its Trustees and officers. Their names, positions
and principal occupations during the past five years are listed below:
26
<PAGE>
NAME, ADDRESS AND AGE POSITION HELD PRINCIPAL OCCUPATION
GEORGE DOUMANIS*+, 41 Trustee/ Chairman of The Sturgeon Financial
President Group, Ltd; Registered Principal,
Creative Capital Management Corp.;
Registered Principal, Amerivet
Securities (January 1997 to August
1997), a broker-dealer; Registered
Principal, Brockington Securities
(October 1994 to January 1997),
a broker-dealer.
RICHARD W. BRADFORD*+, 35 Trustee/ Chief Executive Officer of The
Secretary Sturgeon Financial Group, Ltd.;
and Treasurer Registered Principal, Creative
Capital Management Corp.;
Registered Representative, Dean
Securities (January 1996 to
March 1999), a broker-dealer;
attended and obtained an
Associates degree from South Puget
Sound College (August 1993 to
December 1995).
CAMERON M. BERNADSKY*+, 33 Trustee/ President, Chief Operating Officer
Vice President and Chief Financial Officer, The
Sturgeon Financial Group, Ltd.;
Registered Representative,
Creative Capital Management Corp.;
Registered Representative, Sky
Investments (November 1995 to
June 1999), a broker-dealer;
Registered Representative,
Edward Jones, (January 1994 to
November 1995), a broker-dealer.
THOMAS E. BECK, JR., 52 Trustee President and Chief Executive
P. O. Box 789 Officer of Thomas Beck, Inc., a
Sausalito, CA 94966-0789 consultant to the electronics
industry since 1978.
27
<PAGE>
KENNETH L. SIMON, 50 Trustee Customer Partnership Manager, GTE
P. O. Box 12347 Northwest Incorporated, a
Olympia, WA 98508 telecommunications company (July
1998 to present); Senior Account
Manager (BDN), GTE California
(1993-July, 1998).
* Interested Person of the Trust (as defined in the Investment Company Act of
1940), The Searay Financial Funds.
+ 321 S. Bromfield Road, Dayton, OH 45429.
Each Trustee who is not an "interested person" is paid a meeting fee of
$250 per meeting. In addition, each such Trustee earns an annual fee, payable
quarterly, of $5,000. Members of the Audit Committee are paid $250 for each
Committee meeting attended.
The Trustees and officers of the Trust own, in the aggregate, less than 1%
of the Fund's total outstanding shares.
The Trust and the Manager have each adopted a Code of Ethics that permits
personnel subject to the Code to invest in securities, including, under certain
circumstances and subject to certain restrictions, securities that may be
purchased or held in the Fund's portfolio. However, each such Code restricts
personal investing practices by directors and officers of the Manager and its
affiliates (including the Distributor), and employees of the Manager with access
to information about the purchase or sale of securities in the Fund's portfolio.
The Code of Ethics for the Trust also restricts personal investing practices of
trustees of the Trust who have knowledge about recent Fund trades. Among other
provisions, each Code of Ethics requires that such directors and officers and
employees with access to information about the purchase or sale of securities in
the Fund's portfolio obtain preclearance before executing personal trades. Each
Code of Ethics prohibits acquisition of securities without preclearance in,
among other events, an initial public offering or a limited offering, as well as
profits derived from the purchase and sale of the same security within 60
calendar days. These provisions are designed to put the interests of Fund
shareholders before the interest of people who manage the Fund.
SALES CHARGE WAIVERS: Directors, Trustees, officers and full-time employees
of the Searay Financial Funds trust, the Manager, or the Distributor, including
members of the immediate families of such individuals and employee benefit plans
established by such entities, may purchase shares of the funds at net asset
value.
THE DISTRIBUTOR
Creative Capital Management Corp. (the "Distributor"), 595 Route 25A, Suite
1C, Miller Place, NY 11764, an affiliate of the Adviser, acts as the distributor
of the shares of the Fund.
Pursuant to a plan of distribution (the "Plan") adopted by the Fund under
Rule 12b-1 under the 1940 Act and an underwriting agreement (the Underwriting
Agreement) the Distributor incurs the expenses of distributing the Fund's
shares. See "Distribution Plans" in the Prospectus.
28
<PAGE>
Fund shares are sold at net asset value plus the applicable sales charge as
shown in the table below. Shares also bear a Rule 12b-1 fee of up to 0.25% per
year (paid to the Distributor, Creative Capital Management Corp.) of their
average net asset value. In addition, Fund shares bear an asset based service
fee of up to 0.25% per year. The sales charge on Fund shares is allocated
between the investment dealer and Creative Capital Management Corp. as shown
below:
AS A PERCENTAGE AS A PERCENTAGE
OF OFFERING OF NET ASSET
PRICE OF THE VALUE OF THE DEALER'S
SHARES SHARES SALES
AMOUNT INVESTED PURCHASED PURCHASED CONCESSION
- -------------------------------------------------------------------------------
Up to $50,000 4.00% 4.16% 3.50%
$50,001 to $150,000 3.00% 3.09% 2.50%
$150,001 to $250,000 2.00% 2.04% 1.50%
$250,001 or more none none none
The Board of Trustees, including a majority of the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan or in any agreement related to the Plan
(the Rule 12b-1 Trustees), at a meeting called for the purpose of voting on the
Plan, adopted a plan of distribution for the shares of the Fund. The Plan was
approved by shareholders of the Fund.
The Plan continues in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Trustees,
including a majority vote of the Rule 12b-1 Trustees, cast in person at a
meeting called for the purpose of voting on such continuance. The Plan may be
terminated at any time, without penalty, by the vote of a majority of the
Trustees who are not interested persons or by the vote of the holders of a
majority of the outstanding shares of the Fund. The Plan may be amended to
increase materially the amounts to be spent for the services described therein
without approval by shareholders and all material amendments are required to be
approved by the Board of Trustees in the manner described above. The Fund will
not be contractually obligated to pay expenses incurred under the Plan if it is
terminated or not continued.
Pursuant to the Plan, the Board of Trustees will review at least quarterly
a written report of the distribution expenses incurred on behalf of the shares
of the Fund by the Distributor. The report includes an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plan remains in effect, the selection and nomination of Trustees who
are not interested persons of the Fund shall be committed to the Trustees who
are not interested persons of the Fund.
Pursuant to the Underwriting Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under the Securities Act and the Investment Company Act of 1940. The
Underwriting Agreement was approved by the Board of Trustees, including a
majority of the Rule 12b-1 Trustees.
29
<PAGE>
ADDITIONAL INFORMATION
CUSTODIAN. Firstar Bank, N.A., 425 Walnut Street, Cincinnati, OH 45201, is
custodian of the assets of the Fund. The custodian is responsible for the
safekeeping of the Fund's assets and the appointment of subcustodian banks and
clearing agencies. The custodian takes no part in determining the investment
policies of the Fund or in deciding which securities are purchased or sold by
the Fund. The Fund may, however, invest in obligations of the custodian and may
purchase or sell securities from or to the custodian.
TRANSFER AGENT. Accounting, stock transfer, and dividend disbursing
services are provided to the Fund by Mutual Funds Service Company, 6000 Memorial
Drive, Dublin, Ohio 43017. Mutual Funds Service Company also serves as
Administrator to the Fund pursuant to an Administration Services Agreement.
Services provided to the Fund include coordinating and monitoring any third
party services to the Fund; providing the necessary personnel to perform
administrative functions for the Fund; assisting in the preparation, filing and
distribution of proxy materials, periodic reports to Trustees and shareholders,
registration statements and other necessary documents. The Fund incurs an annual
administrative fee, payable monthly, of .05% of the Fund's average net assets
subject to a minimum annual fee of $30,000.
AUDITORS. McCurdy & Associates CPA's, Inc., 27955 Clemens Road, Westlake,
Ohio 44145, serves as the trust's independent auditors. The auditors audit
financial statements for the Fund and provide other assurance, tax, and related
services.
PRINCIPAL HOLDERS OF OUTSTANDING SHARES
At the date shares of the Fund were first publicly offered for sale, March
2, 2000, Robert Michie owned beneficially and of record 100% of the issued and
outstanding shares of the Fund. As a result, Mr. Michie controls the Fund.
Because of this control, Mr. Michie could prevent a change in the investment
adviser of the Fund that is favored by other shareholders. Mr. Michie could also
cause a change in the investment adviser of the Fund that is opposed by other
shareholders.
FINANCIAL STATEMENTS
Financial statements for the Fund are presented on the following pages.
30
<PAGE>
SEARAY FINANCIAL FUNDS
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 29, 2000
STURGEON 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 10,000
NET ASSET VALUE PER SHARE $10.00
OFFERING PRICE PER SHARE $10.42
See Accountants' Audit Report
<PAGE>
SEARAY FINANCIAL FUNDS
NOTES TO FINANCIAL STATEMENTS
February 29, 2000
1. ORGANIZATION
Searay Financial Funds (the "Trust") is an open-end investment company
established under the laws of the State of Massachusetts on December 20,
1999. The Trust may issue an unlimited number of shares, and presently
consists of one series of shares for the Sturgeon Fund (the "Fund").
The primary investment objective of the Fund is long-term capital
appreciation.
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 Sturgeon Fund have taken place to date.
2. RELATED PARTY TRANSACTIONS
As of February 29, 2000, all of the outstanding shares of the Fund were
owned by Robert Michie. 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.
Sturgeon Financial Group, Ltd. ("SFG"), the Fund's investment adviser, is
registered as an investment adviser under the Investment Advisers Act of
1940. Certain shareholders and officers of SFG are also trustees or
officers of the Trust.
As adviser, SFG receives from the Fund as compensation for its services to
the Fund an annual fee of 1.00% of the Fund's net assets. The fee is paid
monthly and calculated on the average daily closing net asset value of the
Fund.
The Fund pays the fees of the Trust's independent auditors, legal counsel,
custodian, transfer agent and accountants; insurance premiums; the fees and
expenses of Trustees who do not receive compensation from The Sturgeon
Financial Group, Ltd; association dues; the cost of printing and mailing
confirmations, prospectuses, proxies, proxy statements, notices and reports
to existing shareholders; state registration fees; distribution expenses
within the percentage limitations of the distribution and service plan,
including the cost of printing and mailing of prospectuses and other
materials incident to soliciting new accounts; and other miscellaneous
expenses.
Expenses of the Fund also include all fees under its Accounting and
Administrative Service Agreement; expenses of meetings of shareholders and
Trustees; the advisory fees payable to SFG under the Investment Advisory
Contract and other miscellaneous expenses.
SFG has agreed to reduce its fees and/or absorb expenses to limit the
Fund's total annual operating expenses to 2.25%. SFG may terminate this
agreement after June 30, 2001.
Creative Capital Management Corp., an affiliate of SFG, serves as
distributor of the Fund.
<PAGE>
SEARAY FINANCIAL FUNDS
NOTES TO FINANCIAL STATEMENTS (CONT'D)
February 29, 2000
3. DISTRIBUTION PLAN
The Fund has adopted a distribution plan in accordance with Rule 12b-1
under the 1940 Act. The Fund will pay a distribution fee to the distributor
at a rate of 0.25% per annum of the average daily net assets.
4. CAPITAL STOCK AND DISTRIBUTION
At February 29, 2000, an unlimited number of shares were authorized and
paid in capital amounted to $100,000 for the Sturgeon Fund. Transactions in
capital stock were as follows:
Shares Sold:
Sturgeon Fund 10,000
Shares Redeemed:
Sturgeon Fund 0
Net Increase:
Sturgeon Fund 10,000
Shares Outstanding:
Sturgeon Fund 10,000
<PAGE>
To The Shareholders and Trustees
Searay Financial Funds:
We have audited the accompanying statement of assets and liabilities of Searay
Financial Funds (comprised of the Sturgeon Fund) as of February 29, 2000. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. Our procedures included
confirmation of cash held by the custodian as of February 29, 2000, by
correspondence with the custodian. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the
Sturgeon Fund as of February 29, 2000, in conformity with generally accepted
accounting principles.
/s/ McCurdy & Associates
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
February 29, 2000
