THE FAIRMONT FUND
A SERIES OF
THE CAMELOT FUNDS
1346 South Third Street
Louisville, Kentucky 40208
(502) 636-5633
(800) 262-9936
PROSPECTUS
May 1, 1999
The Fairmont Fund seeks capital appreciation by investing in equity
securities that its Adviser believes are undervalued.
Member of 100% No-Load(TM) Mutual Fund Council.
AS WITH OTHER MUTUAL FUNDS 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.
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TABLE OF CONTENTS
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RISK/RETURN SUMMARY 4
HOW THE FUND HAS PERFORMED 5
COSTS OF INVESTING IN THE FUND 6
HOW TO INVEST IN THE FUND 6
HOW TO SELL YOUR INVESTMENT 7
DETERMINATION OF NET ASSET VALUE 8
DIVIDENDS, DISTRIBUTIONS AND TAXES 9
MANAGEMENT OF THE FUND 9
ADDITIONAL INFORMATION ABOUT INVESTMENT
TECHNIQUES, RELATED RISKS AND THE FUND 10
100% NO-LOAD MUTUAL FUND COUNCIL 10
FINANCIAL HIGHLIGHTS 11
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RISK/RETURN SUMMARY
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OUR OBJECTIVE
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The investment objective of the Fund is capital appreciation.
PRINCIPAL STRATEGIES: HOW WE SELECT INVESTMENTS
- -----------------------------------------------
The Fund invests primarily in common stock of U.S. companies that we
believe are undervalued. We choose our investments by carefully selecting
securities that we believe are reasonably priced and represent basic investment
value. We seek special opportunities for capital appreciation in securities that
are selling at a discount from historical prices and/or at below average
price-earnings ratios. In choosing these stocks for long term investments and
for market timing purposes, we use not only subjective judgment but also
economic projections, technical analysis and earnings projections.
We use an aggressive trading strategy to achieve our objective and
actively trade to obtain short term profits. We believe that favorable changes
in market prices are more likely to begin when securities are out of favor,
price-earnings ratios are relatively low, investment expectations are limited,
and there is little investor interest in the particular security or industry
involved. We may invest primarily in common stock of small to medium-sized U.S.
companies, most of which are listed on a national exchange. We may also invest
up to 25% of the Fund's assets in foreign securities through the purchase of
American Depository Receipts (ADRs). An ADR is a certificate of ownership issued
by a U.S. bank as a convenience to investors instead of the underlying foreign
security which the bank holds in custody.
PRINCIPAL RISKS OF INVESTING IN THE FUND
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All investments carry risks to some degree. The principal risks of
investing in the Fund are the stock market risks common to all equity
investments and the company risks associated with each individual investment in
the Fund's portfolio. Stock market risk means that Fund shares might decrease in
value in response to such things as general economic conditions and political
stability. Company risk means that Fund shares might decrease in value in
response to the activities and financial prospects of an individual company in
the Fund's portfolio.
In addition, the stocks of small to medium sized companies are
subject to certain risks including:
- possible dependence on a limited product line, market,
financial resources or management group
- less frequent trading and trading with smaller volume than
exchange listed stocks, which may make it difficult for the
Fund to buy or sell the stocks
- greater fluctuation in value than larger, more established
company stocks
In general, foreign investments involve higher risks than U.S.
investments. Foreign markets tend to be more volatile than those of the U.S. and
bring increased exposure to foreign economic, political and other events that
can have a negative effect on the value of issuers in a particular foreign
country.
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We try to reduce risk by carefully selecting our investments and diversifying
our portfolio.
Before investing, you should understand that:
- The value of the Fund's shares will fluctuate over time.
- You could lose money if you sell when the Fund's share price
is lower than when you invested.
- There is no assurance that the Fund will meet its investment
objective.
- Future returns will not necessarily resemble past performance.
In addition, the Fund's investment strategy of active and frequent
trading will result in a significantly higher portfolio turnover rate. This
higher portfolio turnover will result in correspondingly greater brokerage
commission expenses (which will lower the Fund's total return) and may result in
the distribution to shareholders of additional capital gains for tax purposes.
HOW THE FUND HAS PERFORMED
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The chart and table below show the variability of the Fund's returns,
which is one indicator of the risks of investing in the Fund. The bar chart
shows changes in The Fund's returns from year to year over the past ten years.
The table shows how the Fund's average annual total returns over time (net of
fees and expenses) compare to those of the Russell 2000 Index. Of course, the
Fund's past performance is not necessarily an indication of its future
performance.
insert bar chart with the following plot points:
Annual Total Returns as of 12/31:
1988 3.12
1989 6.84
1990 -22.13
1991 40.56
1992 14.04
1993 15.56
1994 7.27
1995 27.92
1996 9.52
1997 15.27
1998 -4.88
The highest return for a quarter was 24.82% (Q1, 1991); and the lowest return
was -20.83% (Q3, 1998).
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AVERAGE ANNUAL TOTAL RETURN (FOR THE PERIODS ENDING 12/31/98):
1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION*
------ ------- -------- ----------------
The Fairmont Fund -4.88% 10.50% 9.77% 12.49%
Russell 2000 Index -2.54% 11.86% 12.91% 13.40%
* September 2, 1981
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COSTS OF INVESTING IN THE FUND
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The following table describes the expenses and fees that you may pay if
you buy and hold shares of the Fund.
Shareholder Fees (fees paid directly from your investment)
Sales Load Imposed on Purchases....................................None
Sales Load Imposed on Reinvested Dividends.........................None
Redemption Fees....................................................None
Annual Fund Operating Expenses (expenses that are deducted from fund assets)
Management Fees...................................................1.68%
12b-1 Fees.........................................................None
Other Expenses.....................................................None
Total Fund Operating Expenses.....................................1.68%
EXAMPLE:
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The example below is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. The example uses
the same assumptions as other mutual fund prospectuses: a $10,000 initial
investment for the time periods indicated, 5% annual total return, constant
operating expenses, and sale of all shares at the end of each time period.
Although your actual expenses may be different, based on these assumptions your
costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Your costs: $170 $528 $910 $1982
HOW TO INVEST IN THE FUND
- -------------------------
You can open a Fund account with a minimum initial investment of $1,000
and make additional purchases in any amount. We do not charge a commission or
sales fee on your purchases.
INVESTING BY MAIL. To open a Fund account by mail, send the attached
application, with a check made payable to The Fairmont Fund in the amount of the
purchase price, to the following address:
The Fairmont Fund
1346 South Third Street
Louisville, KY 40208
You can make additional purchases at any time by sending a check, with
your account number, to the above address.
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INVESTING BY WIRE. You may purchase shares of the Fund by wiring your investment
directly to the Fund's custodian. Before you invest by wire, you need to mail a
completed application to us at the address above. Then, call the Fund
(502-636-5633) to obtain an account number and instructions. There is currently
no fee for receipt of wired Funds, but the Fund or custodian may charge one in
the future.
OTHER PURCHASE INFORMATION. You may purchase shares on any day that the
New York Stock Exchange is open for trading. We may reject any purchase request
in whole or in part. No request will be binding until we accept it. We will mail
you a statement after every transaction and each quarter.
TAX SHELTERED RETIREMENT PLANS. Since the Fund seeks capital
appreciation, you may want to purchase shares of the Fund for your tax sheltered
retirement plans, including: (a) Keogh (HR-10) Plans (for self-employed
individuals); (b) qualified corporate pension and profit sharing plans (for
employees); (c) individual retirement accounts (IRAs); and (d) tax deferred
investment plans (for employees of public school systems and certain types of
charitable organizations). We recommend that you consult with an attorney or tax
adviser regarding these plans.
Call us for information on the procedure to open an IRA. Custodial fees
for an IRA will be paid by redemption of Fund shares from the IRA unless you pay
these fees directly to the IRA custodian.
HOW TO SELL YOUR INVESTMENT
- ---------------------------
You may sell all or part of your shares on any day that the New York
Stock Exchange is open for trading. The proceeds of your sale may be more or
less than the purchase price of your shares, depending on the market value of
the Fund's securities at the time of your sale.
BY MAIL. To sell all or part of your shares, send us a written request
(to the address above) with the following information:
- your account number;
- the amount of money or number of shares being redeemed;
- the name(s) on the account; and
- the signatures of all registered account owners, signed
as their names appear on the original application.
In certain instances, we may require additional documents to insure proper
authorization.
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<PAGE>
BY PHONE. Under certain circumstances, you may also sell your shares by
telephone. Call us for additional information.
OTHER REDEMPTION INFORMATION. We will typically pay you within seven
days after receiving a redemption request with the information described above.
However, we will not mail any proceeds unless your investment check has cleared
the bank, which normally takes seven days after receipt.
Because we must pay certain fixed costs to maintain your account, we
may require you to redeem all of your shares, after sixty day's notice, if
redemptions cause the value of your account to fall below $500. You may increase
the value of your account to $500 during that sixty day period to avoid
redemption.
DETERMINATION OF NET ASSET VALUE
The price you pay for your shares is based on the Fund's net asset
value per share (NAV). The NAV is calculated at the close of trading (normally
4:00 p.m. Eastern time) on each day the New York Stock Exchange is open for
business (the Stock Exchange is closed on weekends, Federal holidays and Good
Friday). The NAV is calculated by dividing the value of the Fund's total assets
(including interest and dividends accrued but not yet received) minus
liabilities (including accrued expenses) by the total number of shares
outstanding.
The Fund's assets are generally valued at their market value. If market
prices are not available, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value.
Requests to purchase and sell shares are processed at the NAV next
calculated after we receive your order in proper form.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
- ----------------------------------
DIVIDENDS AND DISTRIBUTIONS. The Fund typically distributes
substantially all of its net investment income in the form of dividends and
taxable capital gains to its shareholders every December. These distributions
are automatically reinvested in the Fund unless you request cash distributions
on your application or through a written request. Dividends paid by the Fund may
be eligible in part for the dividends received deduction for corporations.
TAXES. In general, selling shares of the Fund and receiving
distributions (whether reinvested or taken in cash) are taxable events.
Depending on the purchase price and the sale price, you may have a gain or a
loss on any shares sold. Any tax liabilities generated by your transactions or
by receiving distributions are your responsibility. Because distributions of
long term capital gains are subject to capital gains taxes, regardless of how
long you have owned your shares, you may want to avoid making a substantial
investment when the Fund is about to make a long term capital gains
distribution.
Early each year, the Fund will mail to you a statement setting forth
the federal income tax information for all distributions made during the
previous year. If you do not provide your taxpayer identification number, your
account will be subject to backup withholding.
The tax considerations described in this section do not apply to
tax-deferred accounts or other non-taxable entities. Because each investor's tax
circumstances are unique, please consult with your tax adviser about your Fund
investment.
MANAGEMENT OF THE FUND
- ----------------------
The Sachs Company, 1346 South Third Street, Louisville, Kentucky (the
Adviser), is the investment adviser to the Fund. In this capacity, the Adviser
manages the Fund's assets and makes its investment decisions. The Adviser has
provided investment advice to individuals, corporations, pension and profit
sharing plans, and trust accounts, since 1974. Morton H. Sachs, Trustee,
Chairman of the Board and Chief Executive Officer of the Fund, and President,
sole Director and Shareholder of the Adviser, has been responsible for the
day-to-day management of the Fund since its inception in 1981.
The Adviser pays all of the Fund's operating expenses (except brokerage
fees and commissions, taxes, interest and extraordinary expenses). During the
fiscal year ended December 31, 1998, the Fund paid the Adviser a fee equal to
1.68% of its average daily net assets. The Adviser is also a registered
broker-dealer and, in that capacity, receives brokerage commissions from the
Fund.
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ADDITIONAL INFORMATION ABOUT INVESTMENT TECHNIQUES, RELATED RISKS
- -----------------------------------------------------------------
AND THE FUND
- ------------
From time to time, the Fund may take temporary defensive positions that
are inconsistent with the Fund's principal strategies in attempting to respond
to adverse market, economic, political, or other conditions. For example, the
Fund may hold obligations of the U.S. Government, its agencies or
instrumentalities or may enter into repurchase agreements that are fully
collateralized by such obligations. As a result of engaging in these temporary
defensive measures, the Fund may not achieve its investment objective.
The investment objective of the Fund may be changed without shareholder
approval.
YEAR 2000 ISSUE. Like other mutual funds, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Adviser or the Fund's various
service providers do not properly process and calculate date-related information
and data from and after January 1, 2000.
This is commonly known as the "Year 2000 Issue."
The Adviser has taken steps that it believes are reasonably designed to
address the Year 2000 Issue with respect to computer systems that are used and
to obtain reasonable assurances that comparable steps are being taken by the
Fund's major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Fund. In
addition, the Adviser cannot make any assurances that the Year 2000 Issue will
not affect the companies in which the Fund invests or worldwide markets and
economies.
100% NO-LOAD MUTUAL FUND COUNCIL
- --------------------------------
The Fund is a member of the 100% No-Load Mutual Fund Council, a
non-profit industry association of pure no-load open-end investment companies.
All Council members are mutual funds marketed directly to the public and are
100% no-load, with no front-end or contingent deferred sales charges, 12b-1
fees, dividend re-investment charges, or long-term redemption fees.
Founded in New York in March 1989, the Council actively promotes to
investors the benefits and advantages of investing in 100% no-load mutual funds,
offers public relations and access to national news media, and provides
networking opportunities with other mutual fund companies and related
organizations.
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FINANCIAL HIGHLIGHTS
--------------------
The following table is intended to help you better understand the
Fund's financial performance for the past 5 years. Certain information reflects
financial results for a single Fund share. The total returns represent the rate
you would have earned (or lost) on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by McCurdy & Associates CPA's, Inc., whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
For a share outstanding throughout each period.
<TABLE>
<CAPTION>
YEARS ENDED
-----------
December December December December December
31 31 31 31 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............$ 27.68 26.45 27.02 24.06 22.43
INCOME FROM INVESTMENT OPERATIONS
Net Investment Loss........................... (0.27) ( .16) (.10) (.08) ( .16)
Net Gains or Losses on Securities
(both realized and unrealized)............ (1.08) 4.20 2.67 6.80 1.79
---- ----- ---- ---- -----
Total From Investment Operations............ (1.35) 4.04 2.57 6.72 1.63
LESS DISTRIBUTIONS
Dividends (from net investment income)........ .00 .00 .00 .00 .00
Distributions (from capital gains)............ .00 2.81 3.14 3.76 .00
Returns of Capital............................ .00 .00 .00 .00 .00
---- ----- ---- ---- -----
Total Distributions......................... .00 2.81 3.14 3.76 .00
Net Asset Value, End of Period..................$ 26.33 27.68 26.45 27.02 24.06
===== ===== ===== ===== =====
TOTAL RETURN..................................... (4.88)% 15.27% 9.52% 27.92% 7.27%
- ------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (in 000s).............$ 23,839 $ 31,856 $ 30,731 $ 28,191 $ 22,195
Ratio of Expenses to Average Net Assets.......... 1.68% 1.63% 1.66% 1.70% 1.74%
Ratio of Net Income to Average Net Assets. (0.18)% ( .57)% ( .59)% (.55)% ( .79)%
Portfolio Turnover Rate.......................... 3.42 1.83 2.37 2.47 2.75
</TABLE>
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[BACK COVER PAGE]
Several additional sources of information are available to you. The
Statement of Additional Information (SAI), incorporated by reference into this
Prospectus, contains detailed information on Fund policies and operation.
Shareholder reports contain management's discussion of market conditions,
investment strategies and performance results as of the Fund's latest
semi-annual or annual fiscal year end.
Call the Fund at 800-262-9936 to request free copies of the SAI and the
Fund's annual and semi-annual reports, to request other information about the
Fund and to make shareholder inquiries.
You may also obtain information about the Fund (including the SAI and
other reports) from the Securities and Exchange Commission on their Internet
site at http://www.sec.gov or at their Public Reference Room in Washington, D.C.
Call the SEC at 800-SEC-0330 for room hours and operation. You may also obtain
Fund information by sending a written request and duplicating fee to the Public
Reference Section of the SEC, Washington, D.C. 20549-6609.
Investment Company Act # 811-03139
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<PAGE>
THE FAIRMONT FUND
-----------------
A Series Of
THE CAMELOT FUNDS
-----------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
MAY 1, 1999
-----------
This Statement of Additional Information ("SAI") is not a Prospectus.
It should be read in conjunction with the Prospectus of The Fairmont Fund dated
May 1, 1999. This SAI incorporates by reference the financial statements and
independent auditor's report from The Trust's Annual Report to Shareholders for
the fiscal year ended December 31, 1998 ("Annual Report"). A free copy of the
Prospectus and Annual Report can be obtained by writing The Fund at 1346 South
Third Street, Louisville, Kentucky 40208 or by calling The Fund at (800)
262-9936.
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
DESCRIPTION OF THE TRUST.....................................................
INVESTMENT POLICIES..........................................................
OTHER RESTRICTIONS...........................................................
U.S. GOVERNMENT OBLIGATIONS..................................................
INVESTMENT ADVISORY AGREEMENT................................................
TRUSTEES AND EXECUTIVE OFFICERS..............................................
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................
DETERMINATION OF NET ASSET VALUE..............................................
TAXES .....................................................................
CUSTODIAN......................................................................
TRANSFER AGENT................................................................
AUDITORS .....................................................................
PERFORMANCE INFORMATION.......................................................
FINANCIAL STATEMENTS..........................................................
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<PAGE>
DESCRIPTION OF THE TRUST
------------------------
The Camelot Funds (The Trust) is an open-end investment company
established as a business trust under Kentucky law by Declaration of Trust dated
December 29, 1980. The Declaration of Trust permits the Trustees to issue an
unlimited number of full and fractional shares of separate series. This
Statement of Additional Information provides information relating to The
Fairmont Fund (The Fund), which is a no-load, diversified series of the Trust
established on December 29, 1980.
Each share of a series represents an equal proportional interest in the
assets and liabilities belonging to the series. Upon liquidation of a series,
shareholders are entitled to share pro rata in the net assets of the series
available for distribution to shareholders. Shares of each series are fully paid
and have no preemptive or conversion rights. Kentucky law provides that no
assessment shall be made against the interest of any shareholder and no
shareholder shall be personally liable for any debts or liabilities incurred by
the Trustees or by The Trust. The Trust may redeem your shares if the Board of
Trustees determines that failure to do so may have materially adverse
consequences to Fund shareholders.
Shareholders are entitled to one (1) vote for each full share held and
fractional votes for fractional shares held and may vote in the election of
Trustees and on other matters submitted to the vote of shareholders. Voting
rights are cumulative, which means that each shareholder has the right to
cumulate the voting power he possesses and to give one (1) nominee for Trustee
as many votes as the number of Trustees to be elected multiplied by the number
of his shares, or to distribute his votes on the same principle among two or
more candidates, as the shareholder desires. Shares are voted in the aggregate
and not by series, except when the matter to be voted upon affects only the
interest of a particular series.
As of February 24, 1999, no shareholder accounts exceeded 5%. As of
February 24, 1999, the Trustees and Officers of The Trust as a group owned of
record and beneficially 4.78% of the outstanding shares of The Fund.
INVESTMENT POLICIES
-------------------
The Fund has adopted the following investment policies, which may be
changed only with approval of a majority of the outstanding shares of The Fund.
As used in this Statement of Additional Information, the term "majority" of the
outstanding shares of The Fund means the lesser of (1) 67% or more of the
outstanding shares of The Fund present at a meeting, if the holders of more than
50% of the outstanding shares of The Fund are present or represented at such
meeting; or (2) more than 50% of the outstanding shares of The Fund.
1. BORROWING MONEY. The Fund may borrow money, if it borrows money (a)
from a bank, provided that immediately after such borrowing there is an asset
coverage of 300% for all borrowings of The Fund; or (b) from a bank or other
persons for temporary purposes only, provided that such temporary borrowings are
in an amount not exceeding 5% of The Fund's total assets at the time when the
borrowing is made. The Fund may enter into reverse repurchase transactions and
any other transactions which may be deemed to be borrowings, provided that The
Fund has an asset coverage of 300% for all borrowings and commitments of The
Fund pursuant to reverse repurchase and other such transactions.
2. PLEDGING. The Fund may mortgage, pledge, hypothecate or in any
manner transfer, as security for indebtedness, any assets of The Fund if it is
necessary in connection with borrowings described in policy (1) above. For
purposes of the Statement of Intention below, margin deposits, security
interests, liens and collateral arrangements with respect to permitted
investments and techniques are not deemed to be a mortgage, pledge or
hypothecation of assets.
3. UNDERWRITING. The Fund may act as underwriter of securities issued
by other persons if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of
issuers (other than investment companies) of which it owns more than 10% of the
outstanding voting securities, does not exceed 25% of its total assets. This
limitation and the Statement of Intention are not applicable to the extent that,
in connection with the disposition of portfolio securities (including restricted
securities), The Fund may be deemed an underwriter under certain federal
securities laws.
4. REAL ESTATE. The Fund may purchase, hold or deal in real estate, and
may invest in securities which are secured by or represent interests in real
estate, mortgage-related securities or directly in mortgages.
5. LOANS. The Fund may make loans to other persons, including (a)
loaning portfolio securities, (b) engaging in repurchase agreements, (c)
purchasing debt securities, and (d) making direct investments in mortgages. For
purposes of the Statement of Intention below, the term "loans" shall not include
the purchase of a portion of an issue of publicly distributed bonds, debentures
or other securities.
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<PAGE>
6. MARGIN PURCHASES. The Fund may not purchase securities or evidences
of interest thereon on "margin." For purposes of this limitation and the
Statement of Intention below, (a) short term credit obtained by The Fund for the
clearance of purchases and sales or redemption of securities and (b) margin
deposits and collateral arrangements with respect to permitted investments and
techniques are not considered to be purchases on "margin." This limitation is
not applicable to activities that may be deemed to involve purchases on "margin"
by The Fund, provided that The Fund's engagement in such activities is
consistent with or permitted by the Investment Company Act of 1940, the rules
and regulations promulgated thereunder or interpretations of the Securities and
Exchange Commission, its staff or other legal authority.
7. SENIOR SECURITIES. The Fund may not issue senior securities. This
limitation is not applicable to activities that may be deemed to involve the
issuance or sale of a senior security by The Fund, provided that The Fund's
engagement in such activities is consistent with or permitted by the Investment
Company Act of 1940, the rules and regulations promulgated thereunder or
interpretations of the Securities and Exchange Commission, its staff or other
legal authority.
8. SHORT SALES. The Fund may not effect short sales of securities.
9. OPTIONS. The Fund may not purchase or sell put or call options.
10. COMMODITIES. The Fund may not purchase, hold or deal in commodities
or commodities futures contracts.
11. CONCENTRATION. The Fund will not invest 25% or more of its total
assets in a particular industry. This limitation is not applicable to
investments in obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities or repurchase agreements with respect thereto.
12. DIVERSIFICATION. As a diversified series of The Trust, The Fund
will not purchase the securities of any issuer if such purchase at the time
thereof would cause less than 75% of the value of the total assets of The Fund
to be invested in cash and cash items (including receivables), securities issued
by the U.S. Government, its agencies or instrumentalities and repurchase
agreements with respect thereto, securities of other investment companies, and
other securities for the purposes of this calculation limited in respect of any
one issuer to an amount not greater in value than 5% of the value of the total
assets of The Fund and to not more than 10% of the outstanding voting securities
of such issuer.
STATEMENT OF INTENTION. It is The Fund's intention (which may be
changed by the Board of Trustees without shareholder approval) that it will not
engage in any of the investment practices permitted by (1)-(7) above in the
coming year, except borrowing and repurchase transactions for temporary
purposes. If the Board of Trustees determines that it would be appropriate for
The Fund to employ any of the other investment practices permitted by (1)-(7)
above as principal strategies, The Fund's Prospectus and Statement of Additional
Information will be amended prior to engaging in such practices. If such
practices are employed as non-principal strategies, the Prospectus and Statement
of Additional Information will be amended appropriately.
With respect to the percentages adopted by The Fund as maximum
limitations in its investment policies, an excess above the fixed percentage
(except for the percentage limitation relative to the borrowing of money) shall
not be a violation of the policy or limitation unless the excess results
immediately and directly from the acquisition of any security or the action
taken.
Notwithstanding any of the foregoing policies or limitations, any
investment company, whether organized as a trust, association or corporation, or
a personal holding company, may be merged or consolidated with or acquired by
The Fund, provided that if such merger, consolidation or acquisition results in
an investment in the securities of any issuer prohibited by said paragraphs, The
Fund shall, within ninety days after the consummation of such merger,
consolidation or acquisition, dispose of all of the securities of such issuer so
acquired or such portion thereof as shall bring the total investment therein
within the limitations imposed by said paragraphs above as of the date of
consummation.
OTHER RESTRICTIONS
------------------
ILLIQUID SECURITIES. It is the current position of the staff of the
Securities and Exchange Commission that The Fund may not invest more than 15% of
its net assets in illiquid securities, including restricted securities, real
estate, mortgages and nonpublicly offered debt securities. The Trust has made a
commitment, which may be changed by the Board of Trustees without shareholder
approval, to comply with the above restriction.
U.S. GOVERNMENT OBLIGATIONS
---------------------------
The Fund may invest in "U.S. Government obligations," which term refers
to a variety of securities which are issued or guaranteed by the United States
Treasury, by various agencies of the United States Government, and by various
instrumentalities which have been established or sponsored by the United States
-3-
<PAGE>
Government. The term is also deemed by The Fund to include participation
interests in U.S. Government obligations. Participation interests are pro-rata
interests in U.S. Government obligations held by others. Certificates of deposit
or safekeeping are documentary receipts for U.S. Government obligations held in
custody by others.
U.S. Treasury securities are backed by the "full faith and credit" of
the United States Government. Other U.S. Government obligations may or may not
be backed by the "full faith and credit" of the United States. In the case of
securities not backed by the "full faith and credit" of the United States, the
investor must look principally to the agency issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitments. Furthermore, there can be no assurance that the United
States Government will provide financial support if not obligated to do so by
law.
Treasury securities include Treasury bills, Treasury notes, and
Treasury bonds. Government agencies which issue or guarantee securities backed
by the "full faith and credit" of the United States include the Government
National Mortgage Association and the Small Business Administration. Government
agencies and instrumentalities which issue or guarantee securities not backed by
the "full faith and credit" of the United States include the Farm Credit System,
the Federal Home Loan Banks, the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation. The Fund may invest in securities issued
or guaranteed by any of the entities listed above or by any other agency or
instrumentality established or sponsored by the United States Government.
INVESTMENT ADVISORY AGREEMENT
-----------------------------
The Trust has entered into a Management Agreement (the Agreement) with
The Sachs Company, 1346 South Third Street, Louisville, Kentucky (the Adviser),
under which the Adviser manages The Trust's portfolios of investments subject to
the approval of the Board of Trustees.
The Adviser is an investment manager which has provided investment
advice to individuals, corporations, pension and profit sharing plans and trust
accounts since 1974, when it was formed as a Kentucky proprietorship. The
Adviser was incorporated in Kentucky in 1975, and its principal place of
business is in Louisville, Kentucky. The Adviser is a broker-dealer registered
under the Securities Exchange Act of 1934, and as a broker operates on a
fully-disclosed basis through Legg Mason Wood Walker, Inc., Conners & Co., Inc.,
or Maxus Securities Corporation.
Under the terms of the Agreement, The Fund pays the Adviser a fee
computed and accrued daily and paid monthly at an annual rate of 2% of the
average value of the daily net assets of The Fund up to and including
$10,000,000, 1-1/2% of such assets of The Fund from $10,000,000 to and including
$30,000,000 and 1% of such assets of The Fund in excess of $30,000,000;
provided, however, that the total fees paid during the first and second halves
of each fiscal year of The Trust shall not exceed the semiannual total of the
daily fee accruals requested by the Adviser during the applicable six month
period. Pursuant to the Agreement, the Adviser pays all operating expenses of
The Trust except brokerage fees and commissions, taxes, interest, expenses
incurred by The Trust in connection with the organization and registration of
shares of any series of The Trust established after May 7, 1987, and such
extraordinary or nonrecurring expenses as may arise, including litigation to
which The Trust may be a party and indemnification of The Trust's Trustees and
Officers with respect to the litigation.
For the fiscal years ended December 31, 1998, 1997 and 1996, the
Adviser received advisory fees of $449,641, $515,556 and $503,732, respectively.
The Trust pays no direct remuneration to any Officer of The Trust,
although Morton H. Sachs, by reason of his affiliation with the Adviser, will
receive benefits from the advisory fees and brokerage commissions paid to The
Trust's Adviser, The Sachs Company.
-4-
<PAGE>
TRUSTEES AND EXECUTIVE OFFICERS
-------------------------------
The Board of Trustees supervises the business activities of the Trust.
The Trustees and Executive Officers of The Trust and their principal occupations
during the last five years are set forth below. Each Trustee who is an
"interested person" of the Trust, as defined in the Investment Company Act of
1040, is indicated by an asterisk.
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE WITH TRUST DURING PAST FIVE YEARS
- --------------------- ---------- ----------------------
<S> <C> <C>
*Morton H. Sachs Trustee He is the President and sole Director and shareholder of
1346 South Third St. Chairman of the Board The Sachs Company, The Trust's Adviser.
Louisville, KY 40208 Chief Executive Officer
Age: 65
Jennifer S. Dobbins Vice President She is a Vice President and a Registered Principal of
1346 South Third St. Assistant Secretary The Trust's Adviser.
Louisville, KY 40208
Age:39
Inda M. Wangerin Secretary She is a Vice President and Accountant of The Trust's
1346 South Third St. Adviser.
Louisville, KY 40208
Age: 77
Louis T. Young Treasurer He is an employee of The Trust's Adviser.
1346 South Third St.
Louisville, KY 40208
Age: 50
Raphael O. Nystrand Trustee Since 1978, he has been a Professor and Dean of the
3015 Springcrest Drive School of Education, University of Louisville. He was
Louisville, KY 40241 on leave from this position to serve as Secretary of
Age: 61 Education and Humanities for the Commonwealth of
Kentucky
during calendar year 1984.
Boyce F. Martin, III Trustee Since June 1992, he has been a Director and Treasurer of
400 West Market Eli H. Brown & Sons, Inc., a real estate business; since
32nd Floor October 1995, he has been an attorney at Brown, Todd &
Louisville, KY 40202 Heyburn, PLLC; and since October 1997, he has been a
Age: 33 Director of Jamison Door Co., a manufacturing company.
</TABLE>
The compensation paid to the Trustees of The Trust for the year ended December
31, 1998 is set forth in the following table:
Total Compensation from Trust
(The Trust is not in a fund complex)**
Name
- ----
Raphael O. Nystrand $4,000
Morton H. Sachs $0
Boyce F. Martin, III $1,000
** Trustee fees are Trust expenses. However, the Adviser makes the
actual payment because the management agreement obligates the Adviser to pay
(with limited exceptions) all of the operating expenses of the Trust.
-5-
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
------------------------------------
Subject to policies established by the Board of Trustees of The Trust,
the Adviser is responsible for The Fund's portfolio decisions and the placing of
The Fund's portfolio's transactions. In placing portfolio transactions, the
Adviser seeks the best qualitative execution for The Fund, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), the execution capability, financial responsibility and responsiveness
of the broker or dealer and the brokerage and research services provided by the
broker or dealer. The Adviser generally seeks favorable prices and commission
rates that are reasonable in relation to the benefits received.
The Adviser is specifically authorized to select brokers or dealers who
also provide brokerage and research services to The Fund and/or the other
accounts over which the Adviser exercises investment discretion and to pay such
brokers or dealers a commission in excess of the commission another broker or
dealer would charge if the Adviser determines in good faith that the commission
is reasonable in relation to the value of the brokerage and research services
provided. The determination may be viewed in terms of a particular transaction
or the Adviser's overall responsibilities with respect to The Fund and to other
accounts over which it exercises investment discretion.
Research services include supplemental research, securities and
economic analysis, and statistical services and information with respect to the
availability of securities or purchasers or sellers of securities. Although this
information is useful to The Fund and the Adviser, it is not possible to place a
dollar value on it. It is the opinion of the Board of Trustees and the Adviser
that the review and study of this information will not reduce the overall cost
to the Adviser of performing its duties to The Fund under the Agreement.
Research services furnished by brokers or dealers through whom The Fund effects
securities transactions may be used by the Adviser in servicing all of its
accounts and not all such services may be used by the Adviser in connection with
The Fund. Due to research services provided by brokers, The Fund directed to
brokers $2,084,021 of brokerage transactions (on which commissions were $5,250)
during the fiscal year ended December 31, 1998.
While The Fund does not deem it practicable and in its best interests
to solicit competitive bids for commission rates on each transaction,
consideration is regularly given to posted commission rates as well as other
information concerning the level of commissions charged on comparable
transactions by qualified brokers.
The Fund has no obligation to deal with any broker or dealer in the
execution of its transactions. However, it is contemplated that the Adviser, in
its capacity as a registered broker-dealer, will effect substantially all
securities transactions which are executed on a national securities exchange and
over-the-counter transactions conducted on an agency basis. Such transactions
will be executed at competitive commission rates through Legg Mason Wood Walker,
Inc., Conners & Co., Inc., or Maxus Securities Corporation.
Transactions in the over-the-counter market can be placed directly with
market makers who act as principals for their own account and include mark-ups
in the prices charged for over-the-counter securities. Transactions in the
over-the-counter market can also be placed with broker-dealers who act as agents
and charge brokerage commissions for effecting over-the-counter transactions.
The Fund may place its over-the-counter transactions either directly with
principal market makers, or with broker-dealers if that is consistent with the
Adviser's obligation to obtain best qualitative execution. Under the Investment
Company Act of 1940, persons affiliated with The Fund such as the Adviser are
prohibited from dealing with The Fund as a principal in the purchase and sale of
securities. Therefore, The Sachs Company will not serve as The Fund's dealer in
connection with over-the-counter transactions. However, The Sachs Company may
serve as The Fund's broker in over-the-counter transactions conducted on an
agency basis and will receive brokerage commissions in connection with such
transactions. Such agency transactions will be executed through Legg Mason Wood
Walker, Inc., Conners & Co., Inc., or Maxus Securities Corporation.
The Fund will not effect any brokerage transactions in its portfolio
securities with the Adviser if such transactions would be unfair or unreasonable
to Fund shareholders, and the commissions will be paid solely for the execution
of trades and not for any other services. The Agreement provides that the
Adviser may receive brokerage commissions in connection with effecting such
transactions for The Fund. In determining the commissions to be paid to The
Sachs Company, it is the policy of The Fund that such commissions will, in the
judgment of The Trust's Board of Trustees, be (a) at least as favorable to The
Fund as those which would be charged by other qualified brokers having
comparable execution capability and (b) at least as favorable to The Fund as
commissions contemporaneously charged by The Sachs Company on comparable
transactions for its most favored unaffiliated customers, except for customers
of The Sachs Company considered by a majority of The Trust's disinterested
Trustees not to be comparable to The Fund. The disinterested Trustees from time
to time review, among other things, information relating to the commissions
charged by The Sachs Company to The Fund and its other customers, and
information concerning the commissions charged by other qualified brokers.
Any profits from brokerage commissions earned by The Sachs Company as a
result of portfolio transactions for The Fund will accrue to Morton H. Sachs who
-6-
<PAGE>
is the sole shareholder of The Sachs Company. The Agreement does not provide for
a reduction of the Adviser's fee by the amount of any profits earned by The
Sachs Company from brokerage commissions generated from portfolio transactions
of The Fund. For the fiscal years ended December 31, 1998, 1997 and 1996, The
Fund's portfolio transactions generated total brokerage commissions of $603,816,
$435,650 and $548,598, respectively. For the fiscal year ended December 31,
1998, The Sachs Company was paid $581,836 or 96% of the total brokerage
commissions for effecting (through Legg Mason, Conners & Co., or Maxus
Securities) 99% of The Fund's commission transactions. For the fiscal year ended
December 31, 1997, The Sachs Company was paid $372,542 or 86% of the total
brokerage commissions for effecting (through Legg Mason, Conners & Co. or Maxus
Securities) 98% of The Fund's commission transactions. For the fiscal year ended
December 31, 1996, The Sachs Company was paid $487,272 or 89% of the total
brokerage commissions for effecting (through Legg Mason or Conners & Co.) 98% of
The Fund's commission transactions.
While The Fund contemplates no ongoing arrangements with any other
brokerage firms, brokerage business may be given from time to time to other
firms. The Sachs Company will not receive reciprocal brokerage business as a
result of the brokerage business placed by The Fund with others.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to its objective of seeking best
qualitative execution of portfolio transactions, the Adviser may give
consideration to sale of shares of The Fund as a factor in the selection of
brokers and dealers to execute portfolio transaction for each series of The
Fund.
When The Fund and another of the Adviser's clients seek to purchase or
sell the same security at or about the same time, the Adviser may execute the
transaction on a combined ("blocked") basis. Blocked transactions can produce
better execution for The Fund because of the increased volume of the
transaction. If the entire order is not filled, The Fund may not be able to
acquire as large a position in such security as it desires or it may have to pay
a higher price for the security. Similarly, The Fund may not be able to obtain
as large an execution of an order to sell or as high a price for any particular
portfolio security if the other client desires to sell the same portfolio
security at the same time. In the event that the entire blocked order is not
filled, the purchase or sale will normally be allocated [on a pro rata basis].
Transactions of advisory clients (including The Fund) may also be blocked with
those of the Adviser or any of its affiliates. The Adviser and its affiliates
will be permitted to participate in a blocked transaction only after all orders
of advisory clients (including The Fund) are filled.
For the fiscal year ended December 31, 1997, The Fund's portfolio
turnover rate was 250%. For the fiscal year ended December 31, 1998, The Fund's
portfolio turnover rate was 350%. This increase was due to The Fund's investment
strategy of active and frequent trading.
DETERMINATION OF NET ASSET VALUE
--------------------------------
The net asset value of the shares of The Fund is determined as of 4:00
p.m. Eastern time on each day The Fund is open for business. The Fund is open
for business on every day except Saturdays, Sundays and the following holidays:
New Year's Day, Martin Luther King, Jr. Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas. For a
description of the methods used to determine the net asset value, see
"Determination of Net Asset Value" in the Prospectus.
TAXES
-----
The Fund has qualified, and intends to continue to qualify, under
Subchapter M of the Internal Revenue Code. By so qualifying, The Fund will not
be liable for federal income taxes to the extent its taxable net investment
income and net realized capital gains are distributed to shareholders. The Fund
is required by federal law to withhold and remit to the U.S. Treasury a portion
(31%) of the dividend income and capital gains distributions of any account
unless the shareholder provides a taxpayer identification number and certifies
that the taxpayer identification number is correct and that the shareholder is
not subject to backup withholding.
CUSTODIAN
---------
Firstar Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202 has been
retained to act as Custodian of The Trust's investments. The Custodian acts as
The Trust's depository, safekeeps its portfolio securities and investments,
collects all income and other payments with respect thereto, disburses funds at
The Fund's request and maintains records in connection with its duties. Certain
investments may be held by a depository in the United States.
-7-
<PAGE>
TRANSFER AGENT
--------------
The Trust has entered into agreements with Maxus Information Systems,
Inc. (d/b/a Mutual Shareholder Services), 1301 East Ninth Street, Suite 3600,
Cleveland, Ohio, 44114 ("Maxus"), for Maxus to act as The Fund's transfer agent,
effective upon conversion of all records, and to provide The Trust with
accounting services, record-keeping, administration and shareholder service
functions. The conversion is expected to be completed in February or March,
1999. Until the conversion, the Trust acted as its own transfer agent and
dividend paying agent. To enable The Trust to perform these functions, The
Adviser provided computer services and personnel to The Trust. For its services
as fund accountant, Maxus receives an annual fee from the Adviser based upon the
average value of The Fund, with a maximum annual fee of $59,250. At The Fund's
current asset value, the annual fee is $30,500. For all other services provided,
Maxus receives from the Adviser an annual fee of $9.25 per shareholder (with a
minimum charge of $775 per month) for shareholders services provided and a
monthly fee of $12 per state for state registration and qualification of Fund
shares provided.
AUDITORS
--------
The firm of McCurdy & Associates CPA's, Inc., 27955 Clemens Road,
Westlake, Ohio 44145 has been selected as independent auditors for The Trust for
the year ending December 31, 1999. McCurdy & Associates CPA's, Inc. performs an
annual audit of The Trust's financial statements and provides financial, tax and
accounting consulting services as requested.
PERFORMANCE INFORMATION
-----------------------
AVERAGE ANNUAL TOTAL RETURN.
----------------------------
From time to time, The Fund advertises its "average annual total
return" for one, five and ten year periods, and for the period since inception
(September 2, 1981). Average annual total return figures are based on
historical performance and are not intended to indicate future performance.
The "total return" of The Fund refers to the dividends and distributions
generated by an investment in The Fund plus the change in the value of the
investment from the beginning of the period to the end of the period. The
"average annual total return" of The Fund refers to the rate of total return
for each year of the period which, when compounded over the period, would be
equivalent to the cumulative total return for the period. The dividends and
distributions and the principal value of an investment in The Fund will
fluctuate so that a shareholder's shares, when redeemed, may be worth more or
less than the shareholder's original investment.
Average annual total return is computed by finding the average annual
compounded rates of return (over one, five and ten year periods, and since
inception) that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
P(1+T)n=ERV
Where: P = a hypothetical $1,000 initial investment
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
applicable period of the hypothetical $1,000
investment made at the beginning of the
applicable period
The computation assumes that all dividends and distributions are reinvested at
the net asset value on the reinvestment dates and that a complete redemption
occurs at the end of the applicable period.
OTHER PERFORMANCE INFORMATION.
- ------------------------------
From time to time, in advertisements, sales literature and information
furnished to present or prospective shareholders, the performance of The Fund
may be compared to indices of broad groups of unmanaged securities considered to
be representative of or similar to the portfolio holdings of The Fund or
considered to be representative of the stock market in general. For example, The
Fund's performance may be compared to that of the Standard & Poor's 500 Stock
Index, the Russell 2000 Index and the Dow Jones Industrial Average. The
investment performance figures for The Fund and the indices will include
reinvestment of dividends and capital gains distributions.
From time to time The Fund also advertises its rates of total return
and average annual total return for specified periods, including the period from
September 2, 1981 (date of initial public offering of shares), through a
specified month end. It also advertises the value of a $10,000 investment made
on September 2, 1981, as of a specified month end.
<TABLE>
<CAPTION>
YEAR END VALUE OF
NET ASSET DIVIDENDS $10,000 TOTAL RETURN
YEAR ENDED VALUE(A) PAID (A) INVESTMENT (B) ONE YEAR SINCE INCEPTION (C)
---------- -------- -------- -------------- -------- -------------------
<S> <C> <C> <C> <C> <C>
12/31/81(c) $ 8.74 $ .00 $10,484 4.84%(c) 4.84%
12/31/82 11.02 .60 14,072 34.23% 40.72%
12/31/83 14.07 .74 19,093 35.68% 90.93%
12/31/84 14.76 .74 21,148 10.76% 111.48%
12/31/85 18.08 1.18 27,940 32.12% 179.40%
12/31/86 16.50 4.05 31,865 14.05% 218.65%
12/31/87 14.96 .26 29,388 -7.77% 193.88%
12/31/88 15.19 .24 30,306 3.12% 203.06%
12/31/89 16.02 .21 32,379 6.84% 223.79%
12/31/90 12.17 .30 25,212 -22.13% 152.12%
12/31/91 17.02 .09 35,439 40.56% 254.39%
12/31/92 19.41 .00 40,415 14.04% 304.15%
12/31/93 22.43 .00 46,704 15.56% 367.04%
12/31/94 24.06 .00 50,098 7.27% 400.98%
12/31/95 27.02 3.76 64,085 27.92% 540.85%
12/31/96 25.45 3.14 70,183 9.52% 601.83%
12/31/97 27.68 2.81 80,901 15.27% 709.01%
12/31/98 26.33 .00 76,955 -4.88% 669.55%
<FN>
(a) Per share data has been restated to reflect a three-for-one share
split on February 15, 1990 and a four-for-one share split on
November 30, 1986.
(b) Value at end of calendar year of $10,000 investment made on
September 2, 1981.
(c) Not annualized and from the date of the initial offering of shares
(September 2, 1981).
</FN>
</TABLE>
The Fund's advertised rates of total return for specified periods and
the value of a $10,000 investment at the end of a specified period are based
on historical performance and are not intended to indicate future performance.
The rates of total return are calculated as indicated above for "total return"
and represent the cumulative total return for the specified period. For
example, for the one and two year periods, and for the period since inception,
the cumulative total returns through December 31, 1998 were, respectively:
-4.88%, 9.64% and 669.55%. The average annual total returns are calculated as
indicated above. The dividends and distributions and the principal value of an
investment in The Fund will fluctuate so that a shareholder's shares, when
redeemed, may be worth more or less than the shareholder's original
investment.
The Fund may include in advertisements data comparing performance with
other mutual funds as reported in non-related investment media, published
editorial comments and performance rankings compiled by independent
organizations and publications that monitor the performance of mutual funds
(such as Lipper Analytical Services, Inc., Morningstar, Inc., MONEY,
INVESTOR'S BUSINESS DAILY, BARRON'S, FORTUNE or BUSINESS WEEK). Performance
information may be quoted numerically or may be presented in a table, graph or
other illustration. The Fund may also list its portfolio holdings in
advertisements. The Trust's annual report contains additional performance
information that will be made available upon request and without charge.
FINANCIAL STATEMENTS
--------------------
The financial statements and independent auditor's report required to
be included in the Statement of Additional Information are incorporated herein
by reference to the Trust's Annual Report to Shareholders for the fiscal year
ended December 31, 1998. The Trust will provide the Annual Report without charge
at written or telephone request.
-9-
