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APRIL 30, 1999
As Amended
October 21, 1999
PROSPECTUS
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THE WATER FUND
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(the "Fund")
A SERIES OF THE DECLARATION FUND
(the "Trust")
555 North Lane, Suite 6160
Conshohocken, PA 19428
1-800-318-8353
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
THE FUND
What is the Fund's Investment Objective?........................ 3
What are the Fund's Primary Investment Strategies?.............. 3
What are the Principal Risks of Investing in the Fund?.......... 4
How Has the Fund Performed in the Past?......................... 5
What are the Fund's Fees And Expenses?.......................... 6
An Example of Fund Expenses Over Time........................... 6
THE FUND'S INVESTMENT ADVISER
The Adviser..................................................... 7
The Portfolio Managers.......................................... 7
HOW TO BUY AND SELL SHARES
Investing In The Fund........................................... 7
Determining Share Prices........................................ 7
Distribution (12b-1) Fees....................................... 8
Minimum Investment Amounts...................................... 8
Opening and Adding To Your Account.............................. 8
Purchasing Shares By Mail....................................... 9
Purchasing Shares By Wire Transfer.............................. 9
Purchases through Financial Service Organizations............... 10
Purchasing Shares By Automatic Investment Plan.................. 10
Purchasing Shares By Telephone.................................. 10
Miscellaneous Purchase Information.............................. 11
How to Sell (Redeem) Your Shares................................ 11
By Mail......................................................... 11
Signature Guarantees............................................ 12
By Telephone.................................................... 12
By Wire......................................................... 12
Redemption At The Option Of The Fund............................ 12
DIVIDENDS AND DISTRIBUTIONS.............................................. 13
TAX CONSIDERATIONS....................................................... 13
GENERAL INFORMATION...................................................... 13
FOR MORE INFORMATION..................................................... 15
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THE FUND
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is long-term growth of capital.
WHAT ARE THE FUND'S PRINCIPAL INVESTMENT STRATEGIES?
The Adviser attempts to achieve the Fund's investment goals by:
o investing in common stocks without restrictions regarding market
capitalization;
o normally investing at least 85% of the Fund's total assets in US and
foreign common; and
o normally investing at least 85% of the Fund's total assets in "Water
Companies".
The Fund's Adviser defines "Water Companies" to be:
o publicly traded water utility and/or utility management companies;
o companies that produce equipment and supplies used for water
transport, cleansing, recycling, treatment and supply;
o companies that produce and/or supply quality bottled drinking water;
o companies that are primarily involved in the production,
transportation and/or serving of seafood products; and
o companies that derive a significant portion of their annual revenues
(at least 25%) from oceanic and other marine activities.
As everyone knows, fresh, clean water is essential to all life on this
planet. The Fund's Adviser believes that the continued availability of
water and recurring problems with its potability will become highly focused
issues in the 21st century. As water availability problems increase in
priority, companies whose business focus revolves around water may
experience dramatically increased growth and visibility among investors.
The Adviser believes that the Fund is the first US mutual fund to recognize
water as a principal investment opportunity.
The Fund's Adviser believes that the Fund's investment objective is best
achieved by investing in "Water Companies" that exhibit the potential for
significant growth over the long term. The Adviser defines long-term as a
time horizon of at least three years. To identify companies that have
significant growth potential, the Adviser employs a value-oriented approach
to stock selection. To choose the securities in which the Fund will invest,
the Adviser seeks to identify companies which exhibit some or all of the
following criteria:
o low price-to-earnings ratio ("P/E");
o low price-to-book value or tangible asset value;
o excellent prospects for growth;
o strong franchise;
o highly qualified management;
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o consistent free cash flow; and
o high returns on invested capital.
The Fund may invest up to 40% of its total assets in foreign "Water
Company" securities, either directly or in the form of American Depository
Receipts ("ADRs"). The Fund will only invest in ADRs that are issuer
sponsored. Sponsored ADRs typically are issued by a U.S. bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation.
Where profitable utility situations or technological developments occur in
countries without US listings or ADR opportunities, the Fund may directly
invest in such securities on foreign exchanges. The Fund will not invest
more than 25% of its total assets in foreign securities on foreign
exchanges.
The Fund will normally invest its remaining assets, if any, in cash
equivalents, such as U.S. government debt instruments, money market mutual
funds, and repurchase agreements.
WHAT ARE THE PRINCIPAL RISKS OF INVESTING IN THE FUND?
General Risks- All investments are subject to inherent risks, and the Fund
is no exception. Accordingly, you may lose money by investing in the Fund.
When you sell your Fund shares, they may be worth more or less than what
you paid for them because the value of the Fund's investments will vary
from day-to-day, reflecting changes in market conditions, interest rates
and numerous other factors.
Stock Market Risk- The stock market tends to trade in cyclical price
patterns, with prices generally rising or falling over sustained periods of
time. The Fund invests primarily in common stocks, so the Fund will be
subject to the risks associated with common stocks, including price
volatility and the creditworthiness of the issuing company.
Small To Medium-Cap Stock Risks- The Fund may invest in companies with
small to medium market capitalizations (generally less than $6 billion).
Because these companies are relatively small compared to large-cap
companies, may be engaged in business mostly within their own geographic
region, and may be less well-known to the investment community, they can
have more volatile share prices. Also, small companies often have less
liquidity, less management depth, narrower market penetrations, less
diverse product lines, and fewer resources than larger companies. As a
result, their stock prices often react more strongly to changes in the
marketplace.
Foreign Securities Risk- Investments in foreign securities involve greater
risks compared to domestic investments for the following reasons:
o Foreign companies are not subject to the regulatory requirements of
U.S. companies, so there may be less publicly available information
about foreign issuers than U.S. companies.
o Foreign companies generally are not subject to uniform accounting,
auditing and financial reporting standards.
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o Dividends and interest on foreign securities may be subject to foreign
withholding taxes. Such taxes may reduce the net return to Fund
shareholders.
o Foreign securities are often denominated in a currency other than the
U.S. dollar. Accordingly, the Fund will be subject to the risks
associated with fluctuations in currency values.
o Although the Fund will only invest in foreign issuers that are
domiciled in nations considered to have stable and friendly
governments, there is the possibility of expropriation, confiscation,
taxation, currency blockage or political or social instability which
could negatively affect the Fund.
Focused Portfolio Risk- The Fund is classified as "non-diversified" under
the federal securities laws. This means that the Fund has the ability to
concentrate a relatively high percentage of its investments in the
securities of a small number of companies. Investing in this manner makes
the Fund more susceptible to a single economic, political or regulatory
event than a more diversified fund might be. Also, a change in the value of
a single company will have a more pronounced effect on the Fund than such a
change would have on a more diversified fund.
Furthermore, the Fund is considered to be a sector fund, which means that
it will concentrate the majority of its investments in a single industry;
in this case, the water industry. Investing in a single industry makes the
Fund more susceptible to negative impacts on that industry than a more
diversified fund might be. Also, a change in the value of a single company
within that industry might have a pronounced effect on the other companies
in that industry, with the result that there would be a more pronounced
negative effect on the Fund than such a change would have on a more
diversified fund.
Temporary Defensive Positions- Ordinarily, the Fund's portfolio will be
invested primarily in common stocks. However, the Fund is not required to
be fully invested in common stocks and, in fact, usually maintains certain
cash reserves. Under certain extraordinary market conditions, cash reserves
may be a significant percentage of the Fund's total net assets. In the
event such conditions occur, the Fund will invest its cash reserves in U.S.
Government debt instruments, money market funds and repurchase agreements.
During times when the Fund holds a significant portion of its net assets in
cash, it will not be investing according to its investment objectives, and
the Fund's performance may be negatively affected as a result.
Management Risk- Acting as investment adviser to the Fund is a new position
for the Adviser, and the Fund has no operating history.
Year 2000 Risks- As with other mutual funds, financial and business
organizations and individuals around the world, the Fund could be adversely
affected if the computer systems used by the Adviser and the Fund's other
service providers don't properly process and calculate date-related
information and data from and after January 1, 2000. This is commonly known
as the "Year 2000" or "Y2K" problem. The Adviser is taking steps to address
the Y2K problem with respect to the computer systems that it uses and to
obtain assurances that comparable steps are being taken by the Fund's other
major service providers. The Adviser will monitor the companies in which
the Fund invests for evidence of Y2K preparedness. However, there can be no
assurance that the Fund's portfolio will not be adversely affected by the
Y2K problem. Further, foreign issuers may not be as well prepared for the
Y2K problem as U.S. issuers, and this may pose additional risk to the Fund.
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HOW HAS THE FUND PERFORMED IN THE PAST?
Because this is a new Fund that does not yet have an operating history, a
performance bar chart and table describing the Fund's annual performance
and comparing that performance to appropriate indices is not yet available.
Performance information will be included in the Fund's first semi-annual
and annual reports, which will be sent to you without charge at your
request. Simply contact the Fund at 1-800-318-8353.
WHAT ARE THE FUND'S FEES AND EXPENSES?
This table describes the fees and expenses you may pay if you buy and hold
shares of the Fund.
================================================
Shareholder Fees:
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(fees paid directly from your investment)
Maximum Sales Charge (Load)
Imposed on Purchases NONE
Maximum Deferred Sales NONE
Charge (Load)
Maximum Sales Charge (Load) NONE
Imposed on Reinvested Dividends
And other Distributions
Redemption Fees NONE
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Annual Fund Operating Expenses:
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(expenses that are deducted from Fund assets)
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Management Fees1 1.50%
Distribution (12b-1) Fees2 0.25%
Other Expenses3 0.00%
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Total Annual
Fund Operating Expenses 1.75%
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1. Management fees include a fee of 1.00% for investment advisory services and
0.50% for administrative and other services. Both fees are paid to the
Fund's Adviser pursuant to separate agreements for each service.
2. Because payments under the 12b-1Plan are paid out of the Fund's assets on
an ongoing basis, over time these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
3. The Fund's Adviser is responsible for paying all the Fund's expenses except
taxes, interest, litigation expenses and other extraordinary expenses.
Because the Fund believes that it will not incur any of these expenses
during its first fiscal year, no expenses are included in this category.
AN EXAMPLE OF EXPENSES OVER TIME:
This Example below is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated, reinvest all dividends and distributions, and then redeem all your
shares at the end of those periods (because the Fund does not charge redemption
fees, your costs would be the same even if you did not redeem your shares). The
Example also assumes that your investment has a 5% return each year
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and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
ONE YEAR THREE YEARS
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$ $
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THE FUND'S INVESTMENT ADVISER
The Adviser
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Avalon Trust Company (the "Adviser"), 125 Lincoln Avenue, Suite 100, Santa Fe,
New Mexico 87501, serves as investment adviser to the Fund. The Adviser is a
state-regulated independent trust company organized and incorporated under the
laws of the State of New Mexico.
The Adviser's principal business and occupation is to provide fiduciary trust
services, financial management services and investment advisory services to
individuals, foundations, and other institutions throughout the United States.
The Adviser has been investment adviser to the Fund since its inception. The
Adviser manages the investment portfolio and business affairs of the Fund under
an Investment Advisory Agreement with the Fund, and manages, or arranges to
manage, the daily operations of the Fund under an Operating Services Agreement.
For its investment advisory services to the Fund, the Trust pays to the Adviser,
on the last day of each month, an annualized fee equal to 1.00% of the average
net assets of the Fund, such fee to be computed daily based upon the daily
average net assets of the Fund.
The Portfolio Managers
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Mr. Roger Decort and Mr. Owen Quattlebaum are responsible for choosing the
securities in which the Fund will invest and for providing the day-to-day
investment management services for the Fund. Mr. Decort is President and Chief
Executive Officer of the Adviser. Mr. Quattlebaum is Senior Vice President and
Chief Investment Officer of the Adviser. Mr. Quattlebaum and Mr. Decort have
been executive officers of the Adviser since the firm's inception, and each has
over twenty years experience in the financial management field.
HOW TO BUY AND SELL SHARES OF THE FUND
INVESTING IN THE FUND
Determining Share Prices
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Shares of the Fund are offered at each share's net asset value ("NAV"). NAV per
share is calculated by adding the value of Fund investments, cash and other
assets, subtracting Fund liabilities, and then dividing the result by the number
of shares outstanding. The Fund generally determines the total value of its
shares by using market prices for the securities comprising its portfolio.
Securities for which quotations are not available and any other assets are
valued at fair market value as determined in good faith by the Adviser, subject
to the review and supervision of
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the Board of Trustees. The Fund's per share NAV is computed on all days on which
the New York Stock Exchange ("NYSE") is open for business at the close of
regular trading hours on the Exchange, currently 4:00 p.m. Eastern time. In the
event that the NYSE closes early, the share price will be determined as of the
time of closing.
Distribution (12b-1) Fees
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The Fund has adopted a distribution plan (the "Plan") pursuant to Rule 12b-1
under the 1940 Act. The Plan provides that the Fund is authorized to pay an
annualized fee of up to 0.25% of the Fund's average daily net assets to
compensate certain parties for expenses incurred in the distribution of the
Fund's shares and the servicing and maintenance of existing shareholder
accounts.
Because payments under the 12b-1Plan are paid out of the Fund's assets on an
ongoing basis, over time these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
Minimum Investment Amounts
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Payments for Fund shares should be in U.S. dollars, and in order to avoid fees
and delays, should be drawn on a U.S. bank. Fund management may reject any
purchase order for Fund shares and may waive the minimum investment amounts in
its sole discretion.
Your purchase of Fund shares is subject to the following minimum investment
amounts:
MINIMUM MINIMUM
TYPE OF INVESTMENT SUBSEQUENT
ACCOUNT TO OPEN ACCOUNT INVESTMENTS
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REGULAR $2,500 $1,000
IRAs $1,000 $ 100
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AUTOMATIC INVESTMENT PLAN MEMBERS
MINIMUM MINIMUM
TYPE OF INVESTMENT SUBSEQUENT
ACCOUNT TO OPEN ACCOUNT INVESTMENTS
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REGULAR $2,500 $100 per month minimum
IRAs $1,000 $100 per month minimum
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Opening and Adding To Your Account
- ----------------------------------
You can invest in the Fund by mail, wire transfer and through participating
financial service professionals. After you have established your account and
made your first purchase, you may also make subsequent purchases by telephone.
You may also invest in the Fund through an automatic payment plan. Any questions
you may have can be answered by calling 1-800-318-8353.
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Purchasing Shares By Mail
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To make your initial investment in the Fund, simply complete the Account
Registration Form included with this Prospectus, make a check payable to The
Water Fund, and mail the Form and check to:
The Water Fund
c/o Declaration Service Company
555 North Lane, Suite 6160
Conshohocken, PA 19460
To make subsequent purchases, simply make a check payable to The Water Fund and
mail the check to the above-mentioned address. Be sure to note your Fund account
number on the check.
Your purchase order, if accompanied by payment, will be processed upon receipt
by Declaration Service Company, the Fund's Transfer Agent. If the Transfer Agent
receives your order and payment by the close of regular trading on the NYSE
(currently 4:00 p.m. Eastern time), your shares will be purchased at the Fund's
NAV calculated at the close of regular trading on that day. Otherwise, your
shares will be purchased at the NAV determined as of the close of regular
trading on the next business day.
Purchasing Shares by Wire Transfer
- ----------------------------------
To make an initial purchase of shares by wire transfer, you need to take the
following steps:
1. Call 1-800-318-8353 to inform us that a wire is being sent.
2. Obtain an account number from the Transfer Agent.
3. Fill out and mail or fax an Account Application to the Transfer Agent
4. Ask your bank to wire funds to the account of:
First Union Bank, NA, ABA # 031201467
Credit: Declaration Fund, Acct. # 2000003245996
Further credit: Water Fund,
Acct # [Your Account number]
Include your name(s), address and taxpayer identification number or Social
Security number on the wire transfer instructions. The wire should state that
you are opening a new Fund account.
To make subsequent purchases by wire, ask your bank to wire funds using the
instructions listed above, and be sure to include your account number on the
wire transfer instructions.
If you purchase Fund shares by wire, you must complete and file an Account
Registration Form with the Transfer Agent before any of the shares purchased can
be redeemed. Either fill out and mail the Application Form included with this
prospectus, or call the transfer agent and they will send you an application.
You should contact your bank (which will need to be a commercial bank that is a
member of the Federal Reserve System) for information on sending funds by wire,
including any charges that your bank may make for these services.
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Purchases through Financial Service Organizations
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You may purchase shares of the Fund through participating brokers, dealers, and
other financial professionals. Simply call your investment professional to make
your purchase. If you are a client of a securities broker or other financial
organization, such organizations may charge a separate fee for administrative
services in connection with investments in Fund shares and may impose account
minimums and other requirements. These fees and requirements would be in
addition to those imposed by the Fund. If you are investing through a securities
broker or other financial organization, please refer to its program materials
for any additional special provisions or conditions that may be different from
those described in this Prospectus (for example, some or all of the services and
privileges described may not be available to you). Securities brokers and other
financial organizations have the responsibility of transmitting purchase orders
and funds, and of crediting their customers' accounts following redemptions, in
a timely manner in accordance with their customer agreements and this
Prospectus.
Purchasing Shares by Automatic Investment Plan
- ----------------------------------------------
You may purchase shares of the Fund through an Automatic Investment Plan
("Plan"). The Plan provides a convenient way for you to have money deducted
directly from your checking, savings, or other accounts for investment in shares
of the Fund. You can take advantage of the Plan by filling out the Automatic
Investment Plan application included with this Prospectus. You may only select
this option if you have an account maintained at a domestic financial
institution which is an Automatic Clearing House member for automatic
withdrawals under the Plan. The Fund may alter, modify, amend or terminate the
Plan at any time, and will notify you at least 30 days in advance if it does so.
For more information, call the Transfer Agent at 1-800-318-8353.
Purchasing Shares by Telephone
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In order to be able to purchase shares by telephone, your account authorizing
such purchases must have been established prior to your call. Your initial
purchase of shares may not be made by telephone. Shares purchased by telephone
will be purchased at the per share NAV determined at the close of business on
the day that the Transfer Agent receives payment through the Automated Clearing
House, which could be as many as two days after you place your order for shares.
Call the Transfer Agent for details.
You may make purchases by telephone only if you have an account at a bank that
is a member of the Automated Clearing House. Most transfers are completed within
three business days of your call. To preserve flexibility, the Trust may revise
or eliminate the ability to purchase Fund shares by phone, or may charge a fee
for such service, although the Trust does not currently expect to charge such a
fee.
The Fund's Transfer Agent employs certain procedures designed to confirm that
instructions communicated by telephone are genuine. Such procedures may include,
but are not limited to, requiring some form of personal identification prior to
acting upon telephonic instructions, providing written confirmations of all such
transactions, and/or tape recording all telephonic instructions. Assuming
procedures such as the above have been followed, neither the Transfer Agent nor
the Fund will be liable for any loss, cost, or expense for acting upon telephone
instructions that are believed to be genuine. The Trust shall have authority, as
your agent, to redeem shares in your account to cover any such loss. As a result
of this policy, you will bear the
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risk of any loss unless the Fund has failed to follow procedures such as the
above. However, if the Fund fails to follow such procedures, it may be liable
for such losses.
Miscellaneous Purchase Information
- ----------------------------------
All applications to purchase shares of the Fund may be rejected by authorized
officers of the Trust at their sole discretion. Applications will not be
accepted unless they are accompanied by payment in U.S. funds. Payment must be
made by check or money order drawn on a U.S. bank, savings and loan association
or credit union. The Fund's custodian will charge a $35.00 fee against your
account, in addition to any loss sustained by the Fund, for any payment check
returned to the custodian for insufficient funds. The Fund reserves the right to
refuse to accept applications under circumstances or in amounts considered
disadvantageous to shareholders. If you place an order for Fund shares through a
securities broker, and you place your order in proper form before 4:00 p.m.
Eastern time on any business day in accordance with their procedures, your
purchase will be processed at the NAV calculated at 4:00 p.m. on that day,
provided the securities broker transmits your order to the Transfer Agent before
5:00 p.m. Eastern time. The securities broker must send to the Transfer Agent
immediately available funds in the amount of the purchase price within three
business days for the order.
HOW TO SELL (REDEEM) YOUR SHARES
You may sell your shares at any time. You may request the sale of your shares
either by mail, by telephone or by wire.
By Mail
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Sale requests should be mailed via U.S. mail or overnight courier service to:
Declaration Service Company
555 North Lane, Suite 6160
Conshohocken, PA 19460
The redemption price you receive will be the Fund's per share NAV next
calculated after receipt of all required documents in good order. Payment of
redemption proceeds will be made no later than the third business day after the
valuation date unless otherwise expressly agreed by the parties at the time of
the transaction. If you purchase your shares by check and then redeem your
shares before your check has cleared, the Fund may hold your redemption proceeds
until your check clears, or for 15 days, whichever comes first.
"Good order" means that your redemption request must include:
1. Your account number.
2. The number of shares to be sold (redeemed) or the dollar value of the
amount to be redeemed.
3. The signatures of all account owners exactly as they are registered on the
account.
4. Any required signature guarantees.
5. Any supporting legal documentation that is required in the case of estates,
trusts, corporations or partnerships and certain other types of accounts.
Signature Guarantees --
- -----------------------
A signature guarantee of each owner is required to redeem shares in the
following situations, for all size transactions:
o if you change the ownership on your account;
o when you want the redemption proceeds sent to a different address than is
registered on the account;
o if the proceeds are to be made payable to someone other than the account's
owner(s);
o any redemption transmitted by federal wire transfer to your bank; and
o if a change of address request has been received by the Fund or the
Transfer Agent within 15 days previous to the request for redemption.
In addition, signature guarantees are required for all redemptions of $25,000 or
more from any Fund shareholder account. A redemption will not be processed until
the signature guarantee, if required, is received by the Transfer Agent.
Signature guarantees are designed to protect both you and the Fund from fraud.
To obtain a signature guarantee, you should visit a bank, trust company, member
of a national securities exchange, other broker-dealer, or other eligible
guarantor institution. (Notaries public cannot provide signature guarantees.)
Guarantees must be signed by an authorized person at one of these institutions
and be accompanied by the words, "Signature Guarantee."
By Telephone
- ------------
You may redeem your shares in the Fund by calling the Transfer Agent at
1-800-318-8353 if you elected to use telephone redemption on your account
application when you initially purchased shares. Redemption proceeds must be
transmitted directly to you or to your pre-designated account at a domestic
bank. You may not redeem by telephone if a change of address request has been
received by the Fund or the Transfer Agent within 15 days prior to the request
for redemption. During periods of substantial economic or market changes,
telephone redemptions may be difficult to implement. If you are unable to
contact the Transfer Agent by telephone, shares may be redeemed by delivering
your redemption request in person or by mail. In addition, interruptions in
telephone service may mean that you will be unable to effect a redemption by
telephone exactly when desired.
By Wire
- -------
You may request the redemption proceeds be wired to your designated bank if it
is a member bank or a correspondent of a member bank of the Federal Reserve
System. The Fund's Custodian and/or your bank may charge fees for processing
redemptions by wire transfer.
Redemption At The Option Of The Fund
- ------------------------------------
If the value of the shares in your account falls to less than $2000, the Fund
may notify you that, unless your account is increased to $2000 in value, it will
redeem all your shares and close the account by paying you the redemption
proceeds and any dividends and distributions declared and unpaid at the date of
redemption. You will have thirty days after notice to bring the account up to
$2000 before any action is taken. This right of redemption shall not apply if
the value of your account drops below $2000 as the result of market action or
for investments in IRA accounts. The Fund reserves this right because of the
expense to the Fund of maintaining relatively small accounts.
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DIVIDENDS AND DISTRIBUTIONS
Dividends paid by the Fund are derived from its net investment income. Net
investment income will be distributed at least annually. The Fund's net
investment income is made up of dividends received from the stocks it holds, as
well as interest accrued and paid on any other obligations that might be held in
its portfolio.
The Fund realizes capital gains when it sells a security for more than it paid
for it. The Fund may make distributions of its net realized capital gains (after
any reductions for capital loss carry forwards), generally, once a year.
Unless you elect to have your distributions paid in cash, your distributions
will be reinvested in additional shares of the Fund. You may change the manner
in which your dividends are paid at any time by writing to the Transfer Agent.
TAX CONSIDERATIONS
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, so as to be relieved of
federal income tax on its capital gains and net investment income currently
distributed to its shareholders.
Dividends from investment income and net short-term capital gains are generally
taxable to you as ordinary income. Distributions of long-term capital gains are
taxable as long-term capital gains regardless of the length of time shares in
the Fund have been held. Distributions are taxable, whether received in cash or
reinvested in shares of the Fund.
You will be advised annually of the source of distributions for federal income
tax purposes.
A redemption of shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. You should consult a tax adviser regarding the effect of
federal, state, local, and foreign taxes on an investment in the Fund.
GENERAL INFORMATION
The Fund will not issue stock certificates evidencing shares. Instead, your
account will be credited with the number of shares purchased, relieving you of
responsibility for safekeeping of certificates and the need to deliver them upon
redemption. Written confirmations are issued for all purchases of shares.
In reports or other communications to investors, or in advertising material, the
Fund may describe general economic and market conditions affecting the Fund and
may compare its performance with other mutual funds as listed in the rankings
prepared by Lipper Analytical Services, Inc. or similar nationally recognized
rating services and financial publications that monitor mutual fund performance.
The Fund may also, from time to time, compare its performance to the one or more
appropriate indices.
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FOR MORE INFORMATION
Additional information about the Fund is available in the Fund's Statement of
Additional Information (SAI). The SAI contains more detailed information on all
aspects of the Fund. A current SAI, dated April 30, 1999 as amended on October
21, 1999, has been filed with the SEC and is incorporated by reference into this
prospectus.
To receive information concerning the Fund, or to request a copy of the SAI or
other documents relating to the Fund, please contact the Fund at:
The Declaration Fund
c/o Declaration Service Company
555 North Lane, Suite 6160
Conshohocken, PA 19460
1-800-318-8353
A copy of your requested document(s) will be sent to you within three days of
your request.
You may also receive information concerning the Fund, or request a copy of the
SAI or other documents relating to the Fund, by contacting the Securities and
Exchange Commission:
IN PERSON: at the SEC's Public Reference Room in Washington, D.C.
BY PHONE: 1-800-SEC-0330
BY MAIL: Public Reference Section, Securities and Exchange Commission,
Washington, D.C. 20549-6009 (duplicating fee required)
ON THE INTERNET: www.sec.gov
Investment Company Act No.
888-03176
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Dated April 30, 1999
As Amended
October 21, 1999
Declaration Fund
555 North Lane, Suite 6160
Conshohocken, PA 19428
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of The Water Fund, dated April 30, 1999, as
amended on October 21, 1999. You may obtain a copy of the Prospectus, free of
charge, by writing to Declaration Fund, c/o The Declaration Group, 555 North
Lane, Suite 6160, Conshohocken, PA 19428, phone number 800-318-8353.
TABLE OF CONTENTS
Investment Policies and Restrictions Custodian
Investment Adviser Transfer Agent
Trustees and Officers Administration
Performance Information Distributor
Purchasing and Redeeming Shares Independent Accountants
Tax Information Distribution Fees
Portfolio Transactions Financial Statements
INVESTMENT POLICIES AND RESTRICTIONS
The Fund's investment objectives and the manner in which the Fund pursues its
investment objectives are generally discussed in the prospectus. This section
provides additional information concerning the Fund's investments and its
investment restrictions.
The Fund is a non-diversified Fund, meaning that the Fund can concentrate its
investments in a smaller number of companies than a more diversified fund. The
Fund normally will invest at least 85% of total assets in the common stock of
U.S. and foreign companies, and will normally hold a focused portfolio
consisting of "Water Companies", as that term is defined in the prospectus. The
Fund may also invest in a variety of other securities. The types of securities
in which the Fund may ordinarily invest are listed below, along with any
restrictions on such investments, and, where necessary, a brief discussion of
any risks unique to the particular security.
COMMON STOCKS. The Fund will ordinarily invest at least 85% of its total assets
in U.S. and foreign common stocks or securities convertible into common stock.
The market value of common stock can fluctuate significantly, reflecting the
business performance of
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the issuing company, investor perceptions and general economic or financial
market movements. Smaller companies are especially sensitive to these factors.
Despite the risk of price volatility, however, common stocks historically have
offered the greatest potential for gain on investment, compared to other classes
of financial assets. For purposes of the Fund's 85% minimum investment in common
stocks, REITS are considered to be common stock.
FOREIGN SECURITIES. The Fund may invest up to 40% of its total net assets in the
common stock of foreign issuers. Up to 25% of the Fund's total assets may be
invested in foreign securities trading of foreign exchanges. The Fund may also
invest in foreign securities in the form of American Depository Receipts (ADRs).
The Fund will only invest in ADRs that are issuer sponsored. Sponsored ADRs
typically are issued by a U.S. bank or trust company and evidence ownership of
underlying securities issued by a foreign corporation.
Investments in foreign companies involve certain risks not typically associated
with investing in domestic companies. An investment may be affected by changes
in currency rates and in exchange control regulations. There may be less
publicly available information about a foreign company than about a domestic
company, because foreign companies are not subject to the regulatory
requirements of U.S. companies. Foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards. Dividends and
interest on foreign securities may be subject to foreign withholding taxes. Such
taxes may reduce the net return to Fund shareholders. Foreign securities are
often denominated in a currency other than the U.S. dollar. Accordingly, the
Fund will be subject to the risks associated with fluctuations in currency
values. Although the Fund will only invest in foreign issuers that are domiciled
in nations considered to have stable and friendly governments, there is the
possibility of expropriation, confiscation, taxation, currency blockage or
political or social instability which could negatively affect the Fund.
PREFERRED STOCK. The Fund may invest in preferred stock. Preferred stock
generally pays dividends at a specified rate and generally has preference over
common stock in the payments of dividends and the liquidation of the issuer's
assets. Dividends on preferred stock are generally payable at the discretion of
the issuer's board of directors. Accordingly, shareholders may suffer a loss of
value if dividends are not paid. The market prices of preferred stocks are also
sensitive to changes in interest rates and in the issuer's creditworthiness.
Accordingly, shareholders may experience a loss of value due to adverse interest
rate movements or a decline in the issuer's credit rating.
CONVERTIBLE SECURITIES. Traditional convertible securities include corporate
bonds, notes and preferred stocks that may be converted into or exchanged for
common stock, and other securities that also provide an opportunity for equity
participation. These securities are generally convertible either at a stated
price or a stated rate (that is, for a specific number of shares of common stock
or other security). As with other fixed income securities, the price of a
convertible security to some extent varies inversely with interest rates. While
providing a fixed-income stream (generally higher in yield than the income
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derivable from a common stock but lower than that afforded by a non-convertible
debt security), a convertible security also affords the investor an opportunity,
through its conversion feature, to participate in the capital appreciation of
the common stock into which it is convertible. As the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis and so may not experience market value declines to
the same extent as the underlying common stock. When the market price of the
underlying common stock increases, the price of a convertible security tends to
rise as a reflection of the value of the underlying common stock. To obtain such
a higher yield, the Fund may be required to pay for a convertible security an
amount in excess of the value of the underlying common stock. Common stock
acquired by the Fund upon conversion of a convertible security will generally be
held for so long as the Advisor anticipates such stock will provide the Fund
with opportunities which are consistent with the Fund's investment objectives
and policies.
DEBT SECURITIES. The Fund may invest in U.S. Government debt securities. U.S.
Government securities include direct obligations of the U.S. Government and
obligations issued by U.S. Government agencies and instrumentalities. The market
value of such securities fluctuates in response to interest rates and the
creditworthiness of the issuer. In the case of securities backed by the full
faith and credit of the United States Government, shareholders are only exposed
to interest rate risk.
Credit Risk- A debt instrument's credit quality depends on the issuer's
ability to pay interest on the security and repay the debt: the lower the
credit rating, the greater the risk that the security's issuer will
default. The credit risk of a security may also depend on the credit
quality of any bank or financial institution that provides credit
enhancement for the security.
Interest Rate Risk- All debt securities face the risk that their principal
value will decline because of a change in interest rates. Generally,
investments subject to interest rate risk will decrease in value when
interest rates rise and will rise in value when interest rates decline.
Also, the longer a security has until it matures, the more pronounced will
be a change in its value when interest rates change.
MONEY MARKET MUTUAL FUNDS. The Fund may invest in securities issued by other
registered investment companies. As a shareholder of another registered
investment company, the Fund would bear its pro rata portion of that company's
advisory fees and other expenses. Such fees and expenses will be borne
indirectly by the Fund's shareholders.
REPURCHASE AGREEMENTS. The Fund may invest a portion of its assets in repurchase
agreements ("Repos") with broker-dealers, banks and other financial
institutions, provided that the Fund's custodian at all times has possession of
the securities serving as collateral for the Repos or has proper evidence of
book entry receipt of said securities. In a Repo, the Fund purchases securities
subject to the seller's simultaneous agreement to repurchase those securities
from the Fund at a specified time (usually one day) and price. The repurchase
price reflects an agreed-upon interest rate during the time of investment.
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All Repos entered into by the Fund must be collateralized by U.S. Government
Securities, the market values of which equal or exceed 102% of the principal
amount of the money invested by the Fund. If an institution with whom the Fund
has entered into a Repo enters insolvency proceedings, the resulting delay, if
any, in the Fund's ability to liquidate the securities serving as collateral
could cause the Fund some loss if the securities declined in value prior to
liquidation. To minimize the risk of such loss, the Fund will enter into Repos
only with institutions and dealers considered creditworthy.
Repurchase Agreement Risk- A repurchase agreement exposes the Fund to the
risk that the party that sells the securities will default on its
obligation to repurchase those securities. If that happens the Fund can
lose money because: (i) it may not be able to sell the securities at the
agreed-upon time and price; and (ii) the securities may lose value before
they can be sold.
CASH RESERVES. The Fund may hold a significant portion of its net assets in
cash, either to maintain liquidity or for temporary defensive purposes.
RESTRICTED AND ILLIQUID SECURITIES. The Fund will not invest more than 15% of
its net assets in securities that the Adviser determines to be illiquid.
Illiquid securities are securities that may be difficult to sell promptly at an
acceptable price because of a lack of an available market and other factors. The
sale of some illiquid and other types of securities may be subject to legal
restrictions. Because illiquid and restricted securities may present a greater
risk of loss than other types of securities, the Fund will not invest in such
securities in excess of the limits set forth above.
The Fund may also invest in securities acquired in a privately negotiated
transaction from the issuer or a holder of the issuer's securities and which may
not be distributed publicly without registration under the Securities Act of
1933.
Restricted and illiquid securities are valued in such manner as the Fund's Board
of Directors ("Board" or "Directors") in good faith deems appropriate to reflect
the fair market value of such securities.
SPECIAL SITUATIONS. The Fund intends to invest in special situations from time
to time. A special situation arises when, in the opinion of Fund management, the
securities of a company will, within a reasonably estimated time period, be
accorded market recognition at an appreciated value solely by reason of a
development particularly or uniquely applicable to that company and regardless
of general business conditions or movements of the market as a whole. Such
developments and situations include, but are not limited to: liquidations,
reorganizations, recapitalizations or mergers, material litigation,
technological breakthroughs, and new management or management policies. Although
large and well-known companies may be involved, special situations often involve
much greater risk than is found in the normal course of investing. To minimize
these risks, the Fund will not invest in special situations unless the target
company has at least three years of continuous operations (including
predecessors), or unless the aggregate value of such investments is not greater
than 25% of the Fund's total net assets (valued at the time of investment).
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WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued basis, and it may purchase or sell securities for
delayed-delivery. These transactions occur when securities are purchased or sold
by the Fund with payment and delivery taking place at some future date. The Fund
may enter into such transactions when, in the Adviser's opinion, doing so may
secure an advantageous yield and/or price to the Fund that might otherwise be
unavailable. The Fund has not established any limit on the percentage of assets
it may commit to such transactions, but to minimize the risks of entering into
these transactions, the Fund will maintain a segregated account with its
custodian consisting of cash, or other high-grade liquid debt securities,
denominated in U.S. dollars or non-U.S. currencies, in an amount equal to the
aggregate fair market value of its commitments to such transactions.
MASTER-FEEDER OPTION. Notwithstanding its other investment policies, the Fund
may seek to achieve its investment objective by investing all of its investable
net assets in another investment company having the same investment objective
and substantially the same investment policies and restrictions as those of the
Fund. Although such an investment may be made in the sole discretion of the
Directors, the Fund's shareholders will be given 30 days prior notice of any
such investment. There is no current intent to make such an investment.
PORTFOLIO TURNOVER. The Fund has no operating history and therefore has no
annual reportable portfolio turnover. The Fund will generally purchase and sell
securities without regard to the length of time the security has been held.
Accordingly, it can be expected that the rate of portfolio turnover may be
substantial. The Fund expects that its annual portfolio turnover rate will not
exceed 100% under normal conditions. However, there can be no assurance that the
Fund will not exceed this rate, and the portfolio turnover rate may vary from
year to year.
High portfolio turnover in any year will result in the payment by the Fund of
above-average transaction costs. This also could result in the payment by
shareholders of above-average amounts of taxes on realized investment gains,
although every effort will be made to minimize taxes. Distributions to
shareholders of such investment gains, to the extent they consist of short-term
capital gains, will be considered ordinary income for federal income tax
purposes.
Portfolio turnover rate is calculated by dividing (1) the lesser of purchases or
sales of portfolio securities for the for the fiscal year by (2) the monthly
average of the value of portfolio securities owned during the fiscal year. A
100% turnover rate would occur if all the securities in the Fund's portfolio,
with the exception of securities whose maturities at the time of acquisition
were one year or less, were sold and either repurchased or replaced within one
year.
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INVESTMENT RESTRICTIONS
The restrictions listed below are fundamental policies and may be changed only
with the approval of a "majority of the outstanding voting securities" of the
Fund as defined in the Investment Company Act of 1940 (the "1940 Act"). As
provided in the 1940 Act, a vote of a "majority of the outstanding voting
securities" of the Fund means the affirmative vote of the lesser of (1) more
than 50% of the outstanding shares of the Fund, or (2) 67% or more of the shares
of the Fund present at a meeting, if more than 50% of the shares are represented
at the meeting in person or by proxy. Except with respect to borrowing, changes
in values of the Fund's assets as a whole will not cause a violation of the
following investment restrictions so long as percentage restrictions are
observed by the Fund at the time it purchases any security.
The Fund will not:
1. Acquire securities of any one issuer that at the time of investment (a)
represent more than 10% of the voting securities of the issuer or (b) have
a value greater than 10% of the value of the outstanding securities of the
issuer;
2. Invest less than 85% of its assets (valued at time of investment) in
securities of "Water Companies", as that term is defined in the Prospectus;
3. Borrow money, except from banks for temporary or emergency purposes in
amounts not exceeding 5% of the value of the Fund's assets at the time of
borrowing;
4. Underwrite the distribution of securities of other issuers, or acquire
"restricted" securities that, in the event of a resale, might be required
to be registered under the Securities Act of 1933;
5. Make margin purchases or short sales of securities;
6. Invest in companies for the purpose of management or the exercise of
control;
7. Lend money (but this restriction shall not prevent the Fund from investing
in debt securities or repurchase agreements, or lend its portfolio
securities).
8. Acquire or retain any security issued by a company, an officer or director
of which is an officer or Trustee of the Trust or an officer, director or
other affiliated person of the Advisor.
9. Invest in oil, gas or other mineral exploration or development programs, or
invest in marketable securities of companies engaged in oil, gas or mineral
exploration;
10. Purchase or sell real estate or real estate loans or real estate limited
partnerships, or invest in marketable securities of companies that invest
in real estate or interests in real estate.
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11. Purchase warrants on securities.
12. Issue senior securities.
13. Invest in commodities, or invest in futures or options on commodities.
Restrictions 1 through 13 listed above are fundamental policies, and may be
changed only with the approval of a "majority of the outstanding voting
securities" of the Fund as defined in the Investment Company Act of 1940.
The Fund has also adopted the following restrictions that may be changed by the
Board of Trustees without shareholder approval:
The Fund may not:
a. Invest more than 15% of its assets (valued at time of investment) in
securities of issuers with less than three years' operation (including
predecessors);
b. Invest more than 15% of its net assets in securities that are not readily
marketable;
c. Acquire securities of other investment companies except (a) by purchase in
the open market, where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission and
(b) where acquisition results from a dividend or merger, consolidation or
other reorganization.
d. purchase more than 3% of the voting securities of any one investment
company;
e. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 5% of its total
assets at cost;
f. Invest more than 10% of the Fund's assets (valued at time of investment) in
initial margin deposits of options or futures contracts;
INVESTMENT ADVISER
Information concerning Avalon Trust Company, the Fund's Adviser, is contained in
the Fund's prospectus. This section contains additional information about the
contractual arrangements between the Adviser and the Trust.
The Adviser manages the investment portfolio and the general business affairs of
the Fund pursuant to an investment services agreement with the Trust dated
October 15, 1999 (the "Agreement").
The Agreement provides that the Adviser shall not be liable for any loss
suffered by the Fund or its shareholders as a consequence of any act or omission
in connection with services under the Agreement, except by reason of the
Adviser's willful misfeasance, bad faith, gross negligence, or reckless
disregard of its obligations and duties under the Advisory Agreement.
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The Agreement has a term of two years, but may be continued from year to year so
long as its continuance is approved annually (a) by the vote of a majority of
the Trustees of the Fund who are not "interested persons" of the Fund or the
adviser cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Trustees as a whole or by the vote of a
majority (as defined in the 1940 Act) of the outstanding shares of the Fund. The
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
TRUSTEES AND OFFICERS
The Board of Trustees has overall responsibility for conduct of the Trust's
affairs. The day-to-day operations of the Fund are managed by the Advisor,
subject to the bylaws of the Trust and review by the Board of Trustees. The
Trustees of the Trust, including those Trustees who are also officers, are
listed below:
Position Principal Occupation For the
Name, Age, with Trust Last Five Years
- --------------------------------------------------------------------------------
Stephen B. Tiley, III Chairman From 1981 to January, 1992, President,
Trustee (Age 62) Chairman of the Board, Director
of Delaware Charter Guarantee & Trust
Company. Became Chairman and CEO on
January 1992. Retired December 1993.
Trustee of the Declaration Fund since
1988.
George R. Stasen* Trustee Co-founder and partner of Mentor Capital
(Age 52) Partners, Ltd., a Philadelphia merchant
banking firm, since 1993. Formerly CFO
of the Rushmore Group of Bethesda, MD.
A. Louis Denton Trustee President and Chief Executive Officer of
(Age 39) Philadelphia Corporation for Investment
Services, a financial advice and
services firm. Employed by firm since
1989.
Dow W. Stewart Trustee President and CEO of Prime Capital
(Age 53) Holdings since 1997. Formerly Chief
Operating Officer and Treasurer of Stone
& McCarthy Research Associates
(1995-1996) and co-founded and served as
senior Managing partner and Chief
Financial Officer to R. J. Walls &
Company (1990- 1995).
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Terence P. Smith* President Chief Executive Officer, controlling
(Age 52) Trustee shareholder, Declaration Service
Company, Declaration Distributors, Inc.,
Declaration Investment Advisers, Inc.
(Declaration Holdings, Inc.). Officer of
the Fund and Officer and or controlling
shareholder of Declarations Holdings,
Inc. since 1987.
* Indicates an "interested person" as defined in the Investment Company Act of
1940.
Declaration Fund is an open-end, diversified, management investment company.
Originally incorporated in Pennsylvania on April 9, 1981, Declaration Fund
changed its form of organization to a business trust effective, July 9,1984. It
became registered with the Commonwealth of Pennsylvania as a Pennsylvania
Business Trust on May 16, 1990. Declaration Fund is a series fund.
The table below sets forth the compensation anticipated to be paid by the Trust
to each of the independent Trustees of the Trust during the fiscal year ending
December 31, 2000.
NAME OF TRUSTEE COMPENSATION PENSION ANNUAL TOTAL COMPENSATION
FROM TRUST BENEFITS BENEFITS PAID TO TRUSTEE
- --------------------------------------------------------------------------------
Stephen B. Tiley 0.00 0.00 0.00
George R. Stasen 0.00 0.00 0.00
A. Louis Denton 0.00 0.00 0.00
Dow W. Stewart 0.00 0.00 0.00
Terence P. Smith 0.00 0.00 0.00
The Adviser intends to purchase substantially all of the shares the Fund prior
to the effective date of the Fund's registration and will be deemed initially to
control the Fund.
The Trust will call a meeting of shareholders for the purpose of voting upon the
question of removal of a Trustee or Trustees when requested in writing to do so
by record holders of at least 10% of the Fund's outstanding common shares. The
Trust's bylaws contain procedures for the removal of Trustees by its
stockholders. At any meeting of stockholders, duly called and at which a quorum
is present, the stockholders may by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any Trustee or
Trustees from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of the removed Trustees.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return" for a
period is the percentage change in value during the period of an investment in
Fund shares, including the value of shares acquired through reinvestment of all
dividends and capital gains distributions. "Average Annual Total Return" is the
average annual compounded rate of change in value represented by the Total
Return Percentage for the period.
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[n]
Average Annual Total Return is computed as follows: P(1+T) = ERV
Where: P = a hypothetical initial investment of $1000]
T = average annual total return
n = number of years
ERV = ending redeemable value of shares at the end of the period
Yield. The Fund may advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
6
Yield = 2[(a-b/cd + 1) - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that they were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
The Fund's performance is a function of conditions in the securities markets,
portfolio management, and operating expenses. Although information such as that
shown above is useful in reviewing the Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
In sales literature, the Fund's performance may be compared with that of market
indices and other mutual funds. In addition to the above computations, the Fund
might use comparative performance as computed in a ranking determined by Lipper
Analytical Services, Morningstar, Inc., or that of another service.
PURCHASING AND REDEEMING SHARES
Redemptions will be made at net asset value. The Fund's net asset value is
determined on days on which the New York Stock Exchange is open for trading. For
purposes of computing the net asset value of a share of the Fund, securities
traded on security exchanges, or in the over-the-counter market in which
transaction prices are reported, are valued at the last sales price at the time
of valuation or, lacking any reported sales on that day, at the most recent bid
quotations. Securities for which quotations are not available and any other
assets are valued at a fair market value as determined in good faith by the
Advisor, subject to the review and supervision of the board of Trustees. The
price per share for a purchase order or redemption request is the net asset
value next determined after receipt of the order.
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The Fund is open for business on each day that the New York Stock Exchange
("NYSE") is open. The Fund's share price or net asset value per share ("NAV") is
normally determined as of 4:00 p.m., New York time. The Fund's share price is
calculated by subtracting its liabilities from the closing fair market value of
its total assets and dividing the result by the total number of shares
outstanding on that day. Fund liabilities include accrued expenses and dividends
payable, and its total assets include the market value of the portfolio
securities as well as income accrued but not yet received. Since the Fund
generally does not charge sales or redemption fees, the NAV is the offering
price for shares of the Fund. For shares redeemed prior to being held for at
least six months, the redemption value is the NAV less a redemption fee equal to
1.00% of the NAV.
TAX INFORMATION
The Fund intends to qualify as a regulated investment company under the Internal
Revenue Code so as to be relieved of federal income tax on its capital gains and
net investment income currently distributed to its shareholders. To qualify as a
regulated investment company, the Fund must, among other things, derive at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities,
or other income derived with respect to its business of investing in such stock
or securities.
If the Fund qualifies as a regulated investment company and distributes at least
90% of its net investment income, the Fund will not be subject to Federal income
tax on the income so distributed. However, the Fund would be subject to
corporate income tax on any undistributed income other than tax-exempt income
from municipal securities.
The Fund intends to distribute to shareholders, at least annually, substantially
all net investment income and any net capital gains realized from sales of the
Fund's portfolio securities. Dividends from net investment income and
distributions from any net realized capital gains are reinvested in additional
shares of the Fund unless the shareholder has requested in writing to have them
paid by check.
Dividends from investment income and net short-term capital gains are generally
taxable to the shareholder as ordinary income. Distributions of long-term
capital gains are taxable as long-term capital gains regardless of the length of
time shares in the Fund have been held. Distributions are taxable, whether
received in cash or reinvested in shares of the Fund.
Each shareholder is advised annually of the source of distributions for federal
income tax purposes. A shareholder who is not subject to federal income tax will
not be required to pay tax on distributions received.
If shares are purchased shortly before a record date for a distribution, the
shareholder will, in effect, receive a return of a portion of his investment,
but the distribution will be taxable to him even if the net asset value of the
shares is reduced below the shareholder's cost. However, for federal income tax
purposes the original cost would continue as the tax basis.
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<PAGE>
If a shareholder fails to furnish his social security or other tax
identification number or to certify properly that it is correct, the Fund may be
required to withhold federal income tax at the rate of 31% (backup withholding)
from dividend, capital gain and redemption payments to him. Dividend and capital
gain payments may also be subject to backup withholding if the shareholder fails
to certify properly that he is not subject to backup withholding due to the
under-reporting of certain income.
Taxation of the Shareholder. Taxable distributions generally are included in a
shareholder's gross income for the taxable year in which they are received.
However, dividends declared in October, November and December and made payable
to shareholders of record in such month will be deemed to have been received on
December 31st if paid by the Fund during the following January.
Distributions by the Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution would be taxable to the shareholder
as ordinary income or as a long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares of the Fund just prior to a distribution. The price of such shares
include the amount of any forthcoming distribution so that those investors may
receive a return of investment upon distribution which will, nevertheless, be
taxable to them.
A redemption of shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. Each investor should consult a tax advisor regarding the
effect of federal, state, local, and foreign taxes on an investment in the Fund.
Dividends. A portion of the Fund's income may qualify for the dividends-received
deduction available to corporate shareholders to the extent that the Fund's
income is derived from qualifying dividends. Because the Fund may earn other
types of income, such as interest, income from securities loans, non-qualifying
dividends, and short-term capital gains, the percentage of dividends from the
Fund that qualifies for the deduction generally will be less than 100%. The Fund
will notify corporate shareholders annually of the percentage of Fund dividends
that qualifies for the dividend received deductions.
A portion of the Fund's dividends derived from certain U.S. Government
obligations may be exempt from state and local taxation. Short-term capital
gains are distributed as dividend income. The Fund will send each shareholder a
notice in January describing the tax status of dividends and capital gain
distributions for the prior year.
Capital Gain Distribution. Long-term capital gains earned by the Fund from the
sale of securities and distributed to shareholders are federally taxable as
long-term capital gains, regardless of the length of time shareholders have held
their shares. If a shareholder receives a long-term capital gain distribution on
shares of the Fund, and subsequently
12
<PAGE>
such shares are sold at a loss, the portion of the loss equal to the amount of
the long-term capital gain distribution may 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. Taxation issues are complex and
highly individual. You should consult with your tax advisor concerning the
effects of transactions in the Fund.
PORTFOLIO TRANSACTIONS
The Fund will generally purchase and sell securities without regard to the
length of time the security has been held. Accordingly, the rate of portfolio
turnover may be substantial. However, the Fund expects that its annual portfolio
turnover rate will not exceed 100% under normal conditions. However, there can
be no assurance that the Fund will not exceed this rate, and the portfolio
turnover rate may vary from year to year.
High portfolio turnover in any year will result in the payment by the Fund of
above-average transaction costs and could result in the payment by shareholders
of above-average amounts of taxes on realized investment gains. Distributions to
shareholders of such investment gains, to the extent they consist of short-term
capital gains, will be considered ordinary income for federal income tax
purposes.
Decisions to buy and sell securities for the Fund are made by the Adviser
subject to review by the Trust's Board of Trustees. In placing purchase and sale
orders for portfolio securities for the Fund, it is the policy of the Adviser to
seek the best execution of orders at the most favorable price. In selecting
brokers to effect portfolio transactions, the determination of what is expected
to result in the best execution at the most favorable price involves a number of
largely judgmental considerations. Among these are the Adviser's evaluations of
the broker's efficiency in executing and clearing transactions. Over-the-counter
securities are generally purchased and sold directly with principal market
makers who retain the difference in their cost in the security and its selling
price. In some instances, the Adviser feels that better prices are available
from non-principal market makers that are paid commissions directly.
CUSTODIAN
First Union National Bank acts as custodian for the Fund. As such, First Union
holds all securities and cash of the Fund, delivers and receives payment for
securities sold, receives and pays for securities purchased, collects income
from investments and performs other duties, all as directed by officers of the
Trust. First Union Bank does not exercise any supervisory function over the
management of the Fund, the purchase and sale of securities or the payment of
distributions to shareholders.
TRANSFER AGENT
Declaration Services Company ("DSC") acts as transfer, dividend disbursing, and
shareholder servicing agent for the Fund pursuant to a written agreement with
the
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Advisor and Fund. Under the agreement, DSC is responsible for administering and
performing transfer agent functions, dividend distribution, shareholder
administration, and maintaining necessary records in accordance with applicable
rules and regulations.
ADMINISTRATION
DSC also provides services as Administrator to the Fund pursuant to a written
agreement with the Advisor and Fund. The Administrator supervises all aspects of
the operations of the Fund except those performed by the Adviser under the
Fund's investment advisory agreement. The Administrator is responsible for:
(a) calculating the Fund's net asset value
(b) preparing and maintaining the books and accounts specified in Rule 31a-1
and 31a-2 of the Investment Company Act of 1940
(c) preparing financial statements contained in reports to stockholders of the
Fund
(d) preparing the Fund's federal and state tax returns
(e) preparing reports and filings with the Securities and Exchange Commission
(f) preparing filings with state Blue Sky authorities
(g) maintaining the Fund's financial accounts and records
(h) dividend disbursing agent, dividend reinvestment agent, transfer agent, and
registrar services and functions (including answering inquiries related to
shareholder Portfolio accounts);
DISTRIBUTOR
Declaration Distributors, Inc., 555 North Lane, Suite 6160, Conshohocken, Pa
19428, a wholly-owned subsidiary of The Declaration Group, serves as distributor
and principal underwriter of the Fund's shares pursuant to a written agreement
with the Advisor and Fund.
INDEPENDENT ACCOUNTANTS
Sanville & Company serves as the Company's independent auditors for the fiscal
year ending December 31, 1999.
DISTRIBUTION FEES
The Fund has adopted a Plan of Distribution, or "12b-1 Plan" under which it may
finance activities primarily intended to sell shares. Under the 12b-1 Plan, the
Fund may pay a distribution fee at an annual rate of up to 0.25% of average
daily net assets of the Fund to the Adviser for services primarily intended to
sell shares and for providing certain shareholder services. These services
include, among other things, processing new shareholder account applications,
preparing and transmitting to the Fund's Transfer Agent computer processable
tapes of all transactions by customers, and serving as the primary source of
information to customers in answering questions concerning the Fund and their
transactions with the Fund.
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Payments under the 12b-1 Plan are not tied exclusively to the distribution
and/or shareholder servicing expenses actually incurred by the Adviser, and such
payments may exceed the expenses actually incurred. The Trust's Board of
Trustees evaluates the Plan on a regular basis.
You should be aware that, over time, 12b-1 fees will increase the costs of your
investment, and may eventually cost you more than other types of sales charges.
The Board of Trustees, including those Trustees that are not affiliated with the
Trust, Adviser or any of the Trust's service providers, and who have no interest
in the Plan, approved the Plan after finding, based on their reasonable business
judgement, that the Plan would likely benefit the Fund and its shareholders.
In approving the Plan, the Board determined that there is a reasonable
likelihood that the Plan would benefit the Trust, the Fund and its shareholders.
In doing so, the Board considered several factors, including that the Plan would
(i) enable investors to choose the purchasing option best suited to their
individual situations, thereby encouraging current shareholders to make
additional investments in the Fund and attracting new investors and assets to
Trust to the benefit of the Fund and its shareholders, (ii) facilitate
distribution of the Fund's shares, (iii) help maintain the competitive position
of the Trust in relation to other funds that have implemented or are seeking to
implement similar distribution arrangements; and (iv) permit possible economies
of scale through increased Fund size.
FINANCIAL STATEMENTS
This is a new Fund without a prior operating history. Accordingly, the Fund has
no current financial statements.
