Rule 497(c)
Registration No. 33-78574
LEPERCQ-ISTEL FUND
a growth & income fund
P R O S P E C T U S
APRIL 30, 1997
Lepercq-Istel Fund
1675 Broadway
New York, New York 10019
800-497-1411
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LEPERCQ-ISTEL FUND
a growth & income fund
P R O S P E C T U S
APRIL 30, 1997
NEW ACCOUNT & SHAREHOLDER INFORMATION (800) 497-1411
INVESTMENT
OBJECTIVE The primary investment objective of the Lepercq-Istel Fund
(the "Fund") is long-term capital appreciation. The Fund's
secondary investment objective is to provide dividend income.
In pursuit of its investment objectives the Fund invests in
companies that are undergoing a transformation that is
unrecognized by the stock market. The Fund also invests in
companies which Lepercq, de Neuflize & Co. Incorporated ("the
Adviser ")considers to have growth prospects that are not
fully valued by the stock market.
HIGHLIGHTS
*No Sales Charges: Investors in the Fund pay no sales
commissions, service charges or redemption fees on shares
purchased directly. The Fund has a distribution plan through
which the Fund could incur distribution expenses not to exceed
0.75% per annum of its average daily net assets. (See page 11)
*Professional Management: Investors have access to investment
areas and techniques with professional management that would
be difficult to achieve as individual investors. (See page 5)
*Automatic Investment Plan: The Fund offers its investors the
option to make purchases of shares of the Fund automatically
on a regular basis. (See page 7)
*Systematic Withdrawal: The Fund offers plans whereby
investors may arrange regular systematic withdrawals from
their investment accounts. (See page 9)
*Retirement Plans: Investors may invest in the Fund through
IRAs, Profit-Sharing, and Money Purchase Plans. (See page 13)
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ABOUT THIS
PROSPECTUS This prospectus should be read and retained for
future reference. Additional information about the
Fund is contained in the Statement of Additional
Information dated April 30, 1997 which is available
at no charge upon written request to the Fund at the
address printed on the cover or by calling (800)
497-1411. The Statement of Additional Information is
incorporated herein by reference.
TABLE OF CONTENTS
Fee Table 2
Financial Highlights 2
Investment Objective 3
Investment Policies 3
Risk Factors 4
Investment Restrictions 4
Writing Covered Call Options 5
Portfolio Managers 5
Management of the Fund 5
Fees and Expenses 5
Performance Information 6
Portfolio Turnover 7
How to Purchase Shares 7
Automatic Investment Plan 7
How to Redeem Shares 8
Systematic Withdrawal Plan 9
The Investment Adviser 9
Distributions 10
Tax Matters 10
Distribution Plan 12
Shareholder Servicing Plan 12
Reinvestment of Distributions 13
How Net Asset Value is Computed 13
Individual Retirement Accounts 13
General Information 14
Code of Ethics 14
Custodian, Transfer Agent, Dividend
Paying Agent, Accounting Services
Agent and Administrator 14
Shareholder Inquiries 14
Trustees and Officers 15
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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FEE TABLE
The purpose of this table is to assist an investor in understanding the
various costs and expenses which may be borne directly or indirectly by an
investment in the Fund. Below is a summary of the annual operating expenses
expected to be incurred by the Fund for the year ended December 31, 1997. For
the fiscal year ended December 31, 1996, total fund expenses equaled 1.65% of
average net assets after waivers.
Shareholder Transaction Expense............. None*
Annual Fund Operating Expenses
(as a % of average net assets)
Management Fees........................... 0.75%
Rule 12b-1 Fees (after fee deferrals)..... 0.10%**
Other Expenses............................ 0.86%
------
Total Fund Expenses......................... 1.71%
======
* No sales loads or transaction fees are charged in connection with the
purchase or redemption of Fund shares. Shareholders, however, will be
assessed fees for outgoing wire transfers, returned checks and stop payment
orders.
** Under the Fund's Rule 12b-1 Plan, the Fund may incur sales and distribution
expenses of up to 0.75% per annum of the Fund's average daily net assets.
The Fund, however, has agreed to voluntarily cap the amount paid under such
Plan to 0.10% per annum of the Fund's average daily net assets for the
fiscal year ending December 31, 1997. Shareholders will be provided 30 days
prior notice in the event that the Fund decides to discontinue such cap. As
a result of distribution fees, a long-term shareholder in the Fund may pay
more than the economic equivalent of the Fund's maximum sales charges
permitted by the rules of the National Association of Securities Dealers,
Inc.
EXAMPLE:
1 year 3 years 5 years 10 years
------ ------- ------- --------
You would pay the following
expenses on a $1,000 investment
assuming (1) 5% annual return and
(2) redemption at the end of each
time period: $17 $54 $93 $202
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LEPERCQ-ISTEL FUND
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report is incorporated by reference from the Annual
Report. See accompanying notes to financial statements.
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
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<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year... $15.83 $13.17 $13.17 $14.17 $14.05 $12.46 $14.00
------- ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss)..... (0.11)(1) 0.14(1) 0.18 0.29 0.40 0.47 0.60
Net gain (loss) on
securities (both real-
ized and unrealized)........... 4.26 3.42 (0.93) 1.62 0.35 1.65 (1.52)
------- ------ ------ ------ ------ ------ ------
Total from investment operations. 4.15 3.56 (0.75) 1.91 0.75 2.12 (0.92)
------- ------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment
income......................... -- (0.13) (0.18) (0.29) (0.40) (0.47) (0.60)
Dividends in excess of net
investment income............... -- 0.00 (0.03) (0.03) (0.01) (0.06) (0.02)
Distributions from capital gains. (0.95) (0 .77) (0.92) (0.22) 0.00 0.00 (0.37)
------- ------ ------ ------ ------ ------ ------
Total distributions.............. (0.95) (0.90) (0.92) (1.24) (0.63) (0.53) (0.62)
------- ------ ------ ------ ------ ------ ------
Net asset value, end of year......... $19.03 $15.83 $13.17 $14.84 $14.17 $14.05 $12.46
======= ====== ====== ====== ====== ====== ======
Total return (as a %)................ 26.3 27.1 (5.1) 13.5 5.3 17.0 (6.6)
Ratios/supplemental data
Net assets,(end of year in millions) $24.2 $20.2 $18.5 $16.6 $17.0 $17.4 $19.2
Ratio of expenses to average
net assets (as a %)............ 1.65(2) 1.50 1.56 1.51 1.53 1.54 1.50
Ratio of net investment income to
average net assets (as a %).... (0.65) 0.89 1.36 2.00 2.90 3.80 4.57
Portfolio turnover rate (as a %) 54.13 59.72 70.66 19.88 20.37 21.81 24.28
Average Commission rate per share.... $0.0917(3) -- -- -- -- -- --
</TABLE>
Year ended December 31,
----------------------------
1989 1988 1987
---- ---- ----
Net asset value, beginning of year... $12.33 $12.23 $13.29
------ ------ ------
Income from investment operations:
Net investment income (loss)..... 0.61 0.52 0.40
Net gain (loss) on
securities (both real-
ized and unrealized)........... 2.06 0.35 (0.04)
------ ------ ------
Total from investment operations. 2.67 0.87 0.36
------ ------ ------
Less distributions:
Dividends from net investment
income......................... (0.61) (0.52) (0.40
Dividends in excess of net
investment income............... (0.02) (0.02) (0.17)
------ ------ ------
Distributions from capital gains. (0.23) (0.85) (1.08)
------ ------ ------
Total distributions.............. (1.00) (0.77) (1.42)
Net asset value, end of year......... $12.46 $14.00 $12.33
===== ====== ======
Total return (as a %)................ 21.7 7.1 2.1
Ratios/supplemental data
Net assets,(end of year in millions) $22.0 $20.1 $22.3
Ratio of expenses to average
net assets (as a %)............ 1.48 1.50 1.44
Ratio of net investment income to
average net assets (as a %).... 4.41 4.13 2.69
Portfolio turnover rate (as a %) 48.33 72.09 67.05
Average Commission rate per share.... -- -- --
(1) Net investment income per share is calculated using ending balances prior
to consideration or adjustment for permanent book and tax differences.
(2) Without voluntary expense reimbursements of $13,000 for the year ended
December 31, 1996, the ratio of expenses to average net assets would have
been 1.71% and the ratio of net investment loss to average net assets would
have been (0.71)%.
(3) Average per share amounts of brokerage commissions on portfolio
transactions. Required by regulations first effective for the fiscal year
ended December 31, 1996.
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INVESTMENT
OBJECTIVE
The primary investment objective of the Lepercq- Istel Fund
("the Fund") is long-term capital appreciation. The Fund's
secondary investment objective is to provide dividend
income. There can be no assurance that the objectives of the
Fund will be realized, nor can there be any assurance
against possible loss in value of the Fund's portfolio.
INVESTMENT
POLICIES
The Fund seeks to achieve its investment objectives by
investing primarily in common stocks. The principal
investment approach of the Fund will be to invest in common
stock and other securities of companies that Lepercq, de
Neuflize & Co. Incorporated ("the Adviser") believes are
undergoing a transformation that is unrecognized by the
stock market. The Fund also invests in companies which the
Adviser considers to have growth prospects that are not
fully valued by the stock market. Investments will be made
in stocks of issuers (including foreign issuers) ranging
from $50 million to in excess of $1 billion in market
capitalization. The Fund will be managed with a long-term
perspective and will not engage in short-term trading on a
regular basis.
The Fund may invest up to 20% of its total assets in
securities of foreign issuers with the foregoing
characteristics. The Fund may invest in the securities of
foreign issuers in the form of American Depository Receipts
("ADRs") or other securities convertible into securities of
foreign issuers. ADRs are receipts typically issued by U.S.
banks representing the right to receive securities of a
foreign issuer deposited with that bank or a correspondent
bank. The Fund may also invest in the securities of foreign
issuers directly in foreign markets so long as, in the
Adviser's judgment, an established public trading market
exists for those securities.
The Fund may invest in debt securities and preferred stock
that are convertible into or carry rights to acquire common
stock, and other short- term and long-term debt securities
that are investment grade and lower-quality, high- yielding
debt instruments as rated by Moody's or Standard & Poor's.
The Fund intends to limit its investments in these
securities to less than 25% of its total assets.
The Fund may also invest up to 10% of its total assets in
rights or warrants to subscribe for or purchase common
stock.
It is anticipated that the major portion of the portfolio
will at all times be invested in common stock. The Fund
reserves the right, as a temporary defensive measure, to
hold other types of securities including short-term U.S.
Government securities, money market securities, including
repurchase agreements, or cash, in such proportions as, in
the opinion of the Adviser, prevailing market or economic
conditions warrant.
RISK FACTORS
In seeking capital appreciation, Investors should be aware
that investment in small and medium capitalization issuers
carry more risks than issuers with market capitalization
greater than $1 billion. Generally, such companies rely on
limited product lines, financial resources and business
activities that may make them more susceptible to setbacks
or downturns. In addition, the stock of such companies may
be more thinly
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traded. Accordingly, the performance of small and medium
capitalization issuers may be more volatile.
Investments in securities of foreign issuers involve certain
risks, including fluctuations in foreign exchange rates,
future political and economic developments, and possible
imposition of exchange controls or other foreign
governmental laws or restrictions. In addition, foreign
companies are not subject to accounting, auditing, and
financial reporting standards and requirements comparable to
those of United States companies. Delays or problems with
settlement could affect the liquidity of the Fund's
portfolio and adversely affect the Fund's performance. To
the extent such investments are subject to withholding or
other taxes, or to regulations relating to repatriation of
assets, the Fund's distributable income will be reduced. The
prices of securities in different countries are subject to
different economic, financial, political and social factors.
The Fund may purchase lower-graded debt securities (those
rated Ba or lower by Moody's or BB or lower by Standard &
Poor's) that have poor protection against default in the
payment of principal and interest. These securities are
often considered to be speculative and involve greater risk
of loss or price change due to change in the issuer's
capacity to pay. The market prices of lower-rated debt
securities may fluctuate more than those of higher-rated
debt securities, and may decline significantly in periods of
general economic difficulty, which may follow periods of
rising interest rates.
INVESTMENT
RESTRICTIONS
The Fund has also adopted the following restrictions, which
are matters of fundamental policy and cannot be changed
without the approval of the lesser of: (a) 67% or more of
the voting securities present at a meeting if the holders of
more than 50% are present or represented by proxy; or (b)
more than 50% of the voting securities.
Investments will not be made for the purpose of exercising
control or management of any company. The Fund will not
purchase securities of any issuer if, as a result of such
purchase, the Fund would hold more than 10% of the voting
securities of such issuer. Not more than 5% at the time of
purchase of the Fund's total net assets, taken at market
value, will be invested in the securities of any one issuer
(excluding United States Government Securities). Not more
than 25% of the Fund's total net assets will be concentrated
in companies of any one industry or group of related
industries.
WRITING COVERED
CALL OPTIONS
The Fund is authorized to write (i.e., sell) covered call
options on the equity securities in which it may invest and
to enter into closing transactions with respect to such
options. A covered call option is an option where the Fund,
in return for a premium, gives another party a right to buy
specified securities owned by the Fund at the stated
exercise price at any time until the stated expiration date
of the option. By writing covered call options, the Fund
gives up the opportunity, while the option is in effect, to
profit from an increase in price of the underlying security
above the option's exercise price. In addition, the Fund's
ability to sell the underlying security will be limited
while the option is in effect unless the Fund effects a
closing purchase transaction. A closing purchase
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transaction cancels out the Fund's position as the writer of
an option by means of an offsetting purchase of an identical
option prior to the expiration of the option it has written.
The Fund intends to employ covered call options for the
purpose of partially reducing portfolio risk and the
possibility of enhancing portfolio income. The Fund may not
write covered call options in underlying securities in an
amount whereby portfolio securities exceeding 15% of the
Fund's net assets would be subject to covered call options.
PORTFOLIO
MANAGERS
Andrew Merz Hanson and Tsering Ngudu are primarily
responsible for the day-to-day management of the Fund's
investment portfolio. Mr. Hanson is Co- President of the
Fund and Senior Vice President and Director of Equity
Research of the Adviser. Mr. Hanson has been with the
Adviser since November 1989. Mr. Ngudu is also Co-President
of the Fund and Senior Vice President of the Adviser. Mr.
Ngudu has been with the Adviser since December 1985. Mr.
Hanson and Mr. Ngudu have been primarily responsible for
managing the Fund's investment portfolio since December
1993.
MANAGEMENT
OF THE FUND
The business affairs of the Fund are managed under the
direction of its Board of Trustees. There are currently five
Trustees (of whom three are non- affiliated persons) who
meet four times each year. The Statement of Additional
Information contains additional information regarding the
trustees and officers of the Fund.
FEES AND
EXPENSES
The Fund pays its own expenses including, without
limitation: its investment management fee; interest, taxes
and brokerage commissions; extraordinary expenses, including
but not limited to legal claims and liabilities and
litigation costs and any indemnification related thereto;
the charges and expenses of any registrar, any custodian or
depository appointed by the Fund for the safekeeping of its
cash, portfolio securities and other property, and any stock
transfer, dividend, accounting or administrator agent or
agents appointed by the Fund; all fees payable by the Fund
to federal, state or other government agencies; the cost and
expense of engraving or printing certificates representing
shares of the Fund; all costs and expenses in connection
with the registration and maintenance of the Fund and its
shares with the Securities and Exchange Commission and
various states and other jurisdictions (including filing
fees and legal fees); the cost and expense of printing,
including typesetting, and Distributing Prospectuses and
Statements of Additional Information of the Fund, and
supplements thereto, to the Fund's shareholders; all
expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing of proxy statements and
reports to shareholders; all expenses incident to the
payment of any dividend, distribution, withdrawal or
redemption, whether in shares or in cash; charges and
expenses of any outside service used for pricing of the
Fund's shares; any distribution fee up to the maximum
aggregate rate of 0.75% per annum of the Fund's average
daily net assets payable by the Fund under its Rule 12b-1
Plan of Distribution, any shareholder service fee up to the
maximum aggregate rate of 0.25% per annum of
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the Fund's average net assets payable by the Fund under its
Shareholder Servicing Plan, and expenses of legal counsel
and of independent public accountants in connection with any
matter relating to the Fund; membership dues of industry
associations; postage; insurance premiums on property or
personnel (including officers and Trustees) of the Fund
which incure to its benefit; and all other charges and costs
of the Fund's operations unless otherwise explicitly assumed
by the Adviser. The Fund may also reimburse the Adviser for
the costs of performing certain internal accounting
functions. The expenses may exceed those for other mutual
funds.
PERFORMANCE
INFORMATION
From time to time the Fund may advertise its performance as
compared to other mutual funds with similar investment
objectives, to stock or other indices and to data prepared
by independent services which monitor the performance of
mutual funds. All such advertisements will show the value of
an assumed initial investment of $10,000 in the Fund at the
end of a one-, five-and ten-year period. These values will
be calculated by multiplying the compounded average annual
total return for each time period by the amount of the
assumed initial investment. If the Fund compares its
performance to other funds, relevant indices or independent
services, the Fund's performance will be stated in the same
terms in which such comparative data and indices are stated,
which is normally total return rather than yield.
Performance will fluctuate and any statement of performance
should not be considered as representative of the future
performance of the Fund. Shareholders should remember that
the Fund's performance is generally a function of the type
and quality of instruments held by the Fund, operating
expenses and market conditions. Any fees charged by banks
with respect to customer accounts through which shares of
the Fund may be purchased, although not included in the
calculations of performance for the Fund, will reduce
performance results.
PORTFOLIO
TURNOVER
For the year ended December 31, 1996, the Fund's portfolio
turn-over rate was 54.13%. The Fund's rate may vary and is
not necessarily indicative of future rates.
HOW TO PURCHASE
SHARES
Shares may be purchased at the next determined net asset
value (see "How Net Asset Value is Computed") after receipt
of an order to purchase such shares. There are no sales
charges. Initial investments are subject to a $1,000
minimum, except for UGMA, 401(k), Keogh and other pension or
profit sharing accounts where the minimum is $500. The
minimum subsequent investment in the Fund is $100, however,
the Fund has waived this minimum additional investment
amount for shareholders who invested in the Fund prior to
May 1, 1997.
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BY MAIL:
1. Complete the enclosed application form.
2. Make check payable to Lepercq-Istel Fund for the
amount invested.
3. Send both to:
Lepercq-Istel Fund
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
Firstar's telephone number is (800) 497-1411
BY OVERNIGHT/EXPRESS MAIL OR BY WIRE:
Investors who wish to invest by Overnight/Express Mail or by
wire should call Firstar Trust Company for directions at
(800) 497-1411. Firstar Trust Company will charge a $20 fee
against a shareholder's account for any check returned to it
for insufficient funds.
Shares may also be purchased through unaffiliated
broker/dealers who will not impose a "sales load " but may
instead impose a service charge for services rendered on
behalf of the purchaser.
The investor will receive from the Transfer Agent and the
Dividend paying Agent (also referred to herein as the
"Shareholder Servicing Agent") for the Fund, a confirmation
indicating the number of full shares and fractional shares
(if any) acquired. The Shareholder Servicing Agent will also
provide the investor with a confirmation of each new
transaction in his or her account. The Fund bears the
administrative cost of this service.
Shareholders may, upon written request to the Shareholder
Servicing Agent, obtain certificates for their full shares.
It is recommended, however, that shareholders not request
certificates until they need them. Certificates, which can
be lost or stolen, are unnecessary except for certain
purposes, such as collateral for a loan. A shareholder
retains full voting rights whether or not he or she receives
certificates.
Lepercq, de Neuflize Securities Inc., 1675 Broadway, New
York, New York 10019 (the "Distributor") has agreed to
promote and sell shares of the Fund. The Distributor has
agreed to purchase shares of the Fund only to fill orders
received from subscribers or broker/dealers. The Distributor
however, is not bound to accept such orders, and the Fund
has retained the right to reject orders received from the
Distributor.
AUTOMATIC
INVESTMENT PLAN
Shareholders who choose the Automatic Investment Plan (AIP)
option may make purchases of shares of the Fund
automatically on a regular basis (monthly, bimonthly,
quarterly, or yearly) in any amount subject to a $50
minimum. Shareholders may establish this option by
completing the appropriate section of the New Account
Application.
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HOW TO REDEEM
SHARES
Shareholders of the Fund may redeem their shares at any time
without charge. Upon receipt of a redemption request in good
order, the Shareholder Servicing Agent will effect the
requested redemption at the next determined net asset value.
Payment will be made as soon as practicable, but in no event
later than three business days after proper receipt of
redemption notification, except that when a purchase has
been made by check, the Fund can hold payment on redemtption
until the Fund is reasonably satisfied the check has
cleared. (This may normally take up to three days for local
personal or corporate checks and up to seven days for other
personal or corporate checks.) The shareholder's redemption
proceeds will be mailed upon clearnace of the purchase
check. Shareholders who wish to have their redemption
proceeds wired to their bank account should call Firstar
Trust Company at (800) 497-1411. Firstar Trust Company
will assess a $12 wire charge against redemption proceeds.
THE REDEMPTION REQUEST MUST:
1. Be in writing;
2. Specify account number and account name;
3. Be mailed to:
Lepercq-Istel Fund
c/o Firstar Trust Company
P.O. Box 701
Milwaukee, WI 53201-0701
4. Be signed by all account owners;
5. Include endorsed Certificates or Stock Powers when
share certificates have been issued; and
6. All signatures must be Medallion guaranteed for
redemptions in excess of $50,000.
Medallion guarantees are available from a commercial bank
which is a member of Federal Deposit Insurance Corporation,
a trust company or a member firm (broker/dealer) of a
national securities exchange. A notary public or a savings
and loan association is not an acceptable guarantor.
Shareholders who hold Fund shares in an Individual
Retirement Account ("IRA") or other retirement plan must
indicate on their redemption request whether federal income
tax should be withheld by the Fund. All IRA redemptions will
be subject to withholding tax unless the shareholder
specifically instructs the Fund not to withhold their
redemption request.
A shareholder's right to redeem shares will be sus pended
for any period during which (a) the New York Stock Exchange
is closed because of financial conditions or any other
extraordinary reason, (b) trading on the New York Stock
Exchange is restricted pursuant to rules and regulations of
the Securities and Exchange Commission, (c) the Securities
and Exchange Commission has by order permitted such
suspension or (d) such emergency, as defined by rules and
regulations of the Securities and Exchange Commission,
exists as a result of which it is not reasonably practicable
for the Fund to dispose of its securities or fairly to
determine the value of its net assets.
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The Fund has elected to be governed by Rule 18g -1 of the
Investment Company Act of 1940, under which it is obligated
to redeem the shares of any shareholder solely in cash up to
the lesser of 1% of the net assets of the Fund or $250,000
during any 90-day period. Should any shareholder's
redemption exceed this limitation, the Fund can, at its sole
option, redeem the excess in cash or in portfolio securities
selected solely by the Fund (and valued as in computing the
net asset value). In these circumstances, a shareholder
selling such securities would probably incur a brokerage
charge and there can be no assurance that the price realized
by the shareholder upon the sale of such securities will not
be less than the value used in computing the net asset value
for the purpose of such redemption.
SYSTEMATIC
WITHDRAWAL
PLAN
A shareholder who owns or purchases shares having a total
value of at least $10,000 (at the then current net asset
value) may open a Systematic Withdrawal Plan. The
shareholder can request payments of any amount, but not less
than $50 to be paid monthly , quarterly or annually. The
Fund does not make any recommendation as to an appropriate
amount for periodic withdrawal. Payments are made by Firstar
Trust Company by redeeming as many shares as necessary to
make such periodic payments on the day of the shareholder's
choosing (or, if not a business day, the next preceding
business day). All income dividends and capital-gains
distributions on the shares held under a Systematic
Withdrawal Plan are automatically reinvested at the next
determined net asset value.
The cost of administering a Systematic Withdrawal Plan is
presently borne by the Fund and is an expense of all
shareholders of the Fund. A shareholder may terminate its
Systematic Withdrawal Plan at any time upon 30 days' written
notice to Firstar Trust Company. A Systematic Withdrawal
Plan may also be terminated by the Fund, the Distributor or
Firstar Trust Company, upon 30 days' written notice to the
shareholder.
THE INVESTMENT
ADVISER
Since December 21, 1953, Lepercq, de Neuflize & Co.
Incorporated (or its predecessors), 1675 Broadway, New York,
New York 10019 (the "Adviser"), has acted as the investment
adviser to the Fund and to its predecessor, Istel Fund, Inc.
The current investment advisory agreement, dated April 8,
1986, is subject to the annual review and approval of the
Board of Trustees.
The Fund's investment advisory agreement entered into with
the Adviser provides, in substance, that the Adviser will
submit analytical reports and recommendations as to
investments of the Fund, and will furnish office space and
general management, subject at all times to the policies set
forth by the Fund's Board of Trustees. In return, the
Adviser will receive an annual fee equal to 3/4 of 1% per
annum of the Fund's average daily net assets paid quarterly.
For the years ended December 31, 1996, 1995, and 1994, the
total advisory fees amounted to $153,414, 144,012, and
$133,137 after waivers of $13,000, $0 and $0 respectively.
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The advisory fee may be higher than those of most other
investment companies; however, the Board of Trustees has
determined that these fees are comparable to those of
similar investment companies with similar investment
objectives and policies. The total of all expenses paid by
the Fund in the year ended December 31, 1996, including the
advisory fee, was 1.65%, after waiver, of the Fund's
average daily net assets.
The Adviser provides investment counsel and/or advice for
various institutions, including educational, charitable,
industrial, financial and banking organizations, as well as
for individuals. Lepercq, de Neuflize Securities Inc., a
wholly owned subsidiary of the Adviser, conducts
broker/dealer operations and is a member of the New York
Stock Exchange.
DISTRIBUTIONS
Currently, the Fund intends to declare semi- annual
dividends from its net investment income, to be paid in July
and December of each calendar year. In addition, a year-end
distribution of any net realized capital gains will be paid
at least annually and will generally be made in December.
TAX MATTERS
The Fund intends to qualify as a regulated investment
company by satisfying the requirements under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"),
including requirements with respect to diversification of
assets, distribution of income and sources of income. It is
the Fund's policy to distribute to shareholders all of its
investment income (net of expenses) and any capital gains
(net of capital losses) in accordance with the timing
requirements imposed by the Code so that the Fund will not
be subject to the federal income or excise tax.
Distributions by the Fund of its net investment income and
the excess, if any, of its net short- term capital gain over
its net long-term capital loss are taxable to shareholders
as ordinary income. These distributions are treated as
dividends for federal income-tax purposes, but only a
portion thereof (essentially, the portion attribu- table to
qualifying dividends from domestic corporations received by
the Fund during the year) may qualify for the 70% dividends-
received deduction for corporate shareholders. Since it is
anticipated that the Fund's investment income will include
interest and dividends from foreign corporations and since
the Fund may have short-term capital gains, substantially
less than 100% of ordinary income dividends paid by the Fund
may qualify for the dividends-received deduction.
Distributions by the Fund of the excess, if any, of its net
long-term capital gain over its net short-term capital loss
will be designated as capital-gain dividends and be taxed to
shareholders as long-term capital gains regardless of the
holding periods of Fund shares in the hands of shareholders.
Distributions to shareholders will be treated in the same
manner for federal income-tax purposes whether received in
cash or reinvested in aditional shares. In general,
distributions by the Fund are taken into account by the
shareholders in the year in which they are made. However,
certain distributions made during January will be treated as
having been paid by the Fund and received by the
shareholders on December 31 of the preceding year. A
statement setting forth the federal income-tax status of all
distributions made or deemed made during the year will be
sent to shareholders promptly after the end of each year.
Shareholders purchasing shares of the Fund shortly before an
-12-
<PAGE>
ex-dividend date will be taxed on the entire amount of the
dividend received, even though the price they paid for the
shares already reflected the amount of the anticipated
dividend.
A shareholder will recognize a gain or loss on a sale or
redemption of shares of the Fund in an amount equal to the
difference between the anticipated amount realized on the
sale or redemption and the adjusted tax basis in the shares.
A loss realized on a taxable disposition of shares within
six months from the date of purchase will be treated as a
long-term capital loss to the extent of any capital gain
dividends received in the interim on such shares. All or a
portion of any loss realized on a taxable disposition of
Fund shares may be disallowed if other shares of the Fund
are purchased within thirty days before or after such
disposition.
Under the back-up withholding rules of the Code, certain
shareholders may be subject to withholding of federal income
tax on dividend and redemption payments made by the Fund. In
order to avoid this back-up withholding, a shareholder must
provide the Fund with a correct taxpayer identification
number (which for most individuals, their Social Security
number), or certify that it is a corporation or otherwise
exempt from back-up withholding. The New Account Application
enclosed with this Prospectus provides for shareholder
compliance with these certification requirements.
The foregoing discussion is based on tax laws and
regulations in effect on the date of this Prospectus, and is
subject to change by legislative or administrative action. A
prospective shareholder should also review the more detailed
discussion of federal income tax considerations relevant to
the Fund and its shareholders in the Statement of Additional
Information. In addition, each prospective shareholder
should consult with his/her own tax adviser as to the tax
consequences of investing in the Fund in light of these
particular circumstances, including the application of state
and local taxes and its shareholders, which may differ from
the federal consequences described above.
DISTRIBUTION
PLAN
The Board of Trustees, on behalf of the Fund, has adopted a
distribution plan (the "Distribution Plan") pursuant to Rule
12b-1 of the Investment Company Act of 1940, pursuant to
which the Fund may incur distribution expenses of up to
0.75% per annum of its average daily net assets. The
Distribution Plan provides that the Fund may finance
activities which are primarily intended to result in the
sale of the Fund's shares, including, but not limited to,
advertising, printing of Prospectuses and reports for other
than existing shareholders, preparation and distribution of
advertising material and sales literature .
The Distribution Plan will only make payments for expenses
actually incurred on behalf of the Fund. The Distribution
Plan will not carry over expenses from year to year and if
the Distribution Plan is terminated in accordance with its
terms, the obligations of the Fund to make reimbursement
payments to the Distributor pursuant to the Distribution
Plan will cease and the Fund will not be required to make
any payments for expenses incurred after the date the
Distribution Plan terminates. (See the Statement of
Additional Information "Distribution Plan" for further
information about the Distribution Plan.)
-13-
<PAGE>
SHAREHOLDER
SERVICING PLAN
In accordance with the Shareholder Servicing Plan, the Fund
may enter into Shareholder Service Agreements under which it
pays fees of up to 0.25% of the average daily net assets for
fees incurred in connection with the personal service and
maintenance of accounts holding the shares of the Fund. Such
agreements are entered into between the Trust and various
shareholder servicing agents, including the Distributor and
its affiliates, and other financial institutions and
securities brokers (each, a "Shareholder Servicing Agent").
Among the services provided by Shareholder Servicing Agents
are: answering customer inquiries regarding account matters;
assisting shareholders in designating and changing various
account options; aggregating and processing purchase and
redemption orders and transmitting and receiving funds for
shareholder orders; transmitting, on behalf of the Trust,
proxy statements, prospectuses and shareholder reports to
shareholders and tabulating proxies; processing dividend
payments and providing subacounting services for Fund shares
held beneficially; and providing such other services as the
Trust or a shareholder may request. Shareholder Servicing
Agents may periodically waive all or a portion of their
respective shareholder servicing fees.
REINVESTMENT OF
DISTRIBUTIONS
All ordinary income dividends and capital-gain distributions
are automatically reinvested in shares of the Fund unless
the shareholder elects to receive such distributions in cash
by completing the applicable section on the New Account
Application form. All reinvestments will be at the net asset
value on the reinvestment date and the shareholder will
receive a confirmation indicating the number of full and
fractional shares so purchased.
HOW NET ASSET VALUE IS COMPUTED The net asset value per
share is equal to the total assets of the Fund less total
liabilities divided by the number of shares outstanding. It
is determined as of the close of business of the New York
Stock Exchange on each day that the Exchange is open. In
addition, the Fund will also determine a net asset value on
any day during which there is sufficient trading in its
portfolio securities that the net asset value may be
materially affected, except for New Year's Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day, and only if on any such
day the Fund is required to redeem shares.
-14-
<PAGE>
INDIVIDUAL
RETIREMENT
ACCOUNTS
The Fund offers Individual Retirement Accounts (IRAs), as
well as various other retirement plan accounts. To obtain
the appropriate disclosure documentation and more complete
information on how to open a retirement account, call (800)
497-1411.
GENERAL
INFORMATION
The Fund is a series of the Lepercq-Istel Trust which is an
open-end management investment company organized as a
Massachusetts business trust on April 8, 1986. As such, the
Fund is not required to hold annual shareholders' meetings.
However, pursuant to its Declaration of Trust, the Trust
will hold special meetings for purposes such as electing
Trustees, changing fundamental policies, approving an
investment advisory agreement or amending its Distribution
Plan to increase materially the amount to be spent by the
Fund under its Distribution Plan and, at the request of its
shareholders, to call a meeting to replace Trustees. In
addition, the Trust has undertaken to hold a shareholders'
meeting to fill vacancies created on the Board of Trustees
if less than a majority of the Trustees are not elected by
the shareholders. The Trust currently has one series,
Lepercq-Istel Fund with only one class and with a par value
of $1.00 per share. All shares when issued are fully paid,
non-assessable and redeemable. All shares have equal voting,
dividend and liquidation rights but have no subscription,
preemptive or conversion rights and no sinking-fund
provisions. There is no limitation on the transferability of
shares, and no share is subject to further call. The Board
of Trustees may create additional series of the Trust
without shareholder approval.
CODE OF ETHICS
The Code of Ethics of the Adviser and the Fund prohibits all
affiliated personnel from engaging in personal investment
activities which compete with or attempt to take advantage
of the Fund's planned portfolio transactions. The objective
of the Code of Ethics of both the Adviser and the Fund is
that their operations be carried out for the exclusive
benefit of the Fund's shareholders. Both organizations
maintain careful monitoring of compliance with the Code of
Ethics.
CUSTODIAN,
TRANSFER AGENT,
DIVIDEND PAYING
AGENT, ACCOUNTING
SERVICES AGENT
AND ADMINISTRATOR
Firstar Trust Company, P.O. Box 701, Milwaukee, Wisconsin
53201-0701 is the Fund's custodian, transfer agent and
dividend paying agent. Firstar Trust Company also serves as
the Fund's accounting services agent and Fund administrator.
As such, Firstar Trust Company provides a variety of
administrative and accounting services to the Fund, such as
accounting relating to the Fund's portfolio and portfolio
transactions, the determination
-15-
<PAGE>
of net asset value and pricing of the Fund's shares, and
maintaining the books of account of the Fund.
SHAREHOLDER
INQUIRIES
Shareholder inquiries may be made by writing or calling
Firstar Trust Company, Mutual Fund Services, P.O. Box 701,
Milwaukee, Wisconsin 53201-0701, telephone (800) 497-1411 or
Lepercq- Istel Fund at 1675 Broadway, New York, New York
10019, telephone (800) 655-7766.
-16-
<PAGE>
Rule 497(c)
Registration No. 33-78574
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1997
LEPERCQ-ISTEL FUND
(a series of Lepercq-Istel Trust)
1675 Broadway
New York, New York 10019
Telephone: (800) 497-1411 or (212) 698-0749
Lepercq-Istel Trust (the "Trust") is a diversified, open-end
management investment company (or mutual fund) organized into one series:
Lepercq-Istel Fund (the "Fund"). This Statement of Additional Information is
intended to provide investors with additional information concerning the Fund.
To avoid repetition of information, investors are referred to the Fund's
Prospectus dated April 30, 1997. Additionally, the Prospectus and the Statement
of Additional Information omit certain information contained in the Trust's
Registration Statement, filed with the United States Securities and Exchange
Commission (the "SEC"). Copies of the Registration Statement may be obtained
from the SEC by paying the charges prescribed under its rules and regulations.
This Statement of Additional Information is intended to
supplement the Fund's Prospectus and should be read in conjunction with the
Prospectus which may be obtained without charge upon written request to the
above address or by calling (800) 497-1411 or (212) 698-0749.
TABLE OF CONTENTS
General Information and History...........................................2
Investment Objectives and Policies........................................4
Investment Restrictions...................................................5
Trustees and Officers of the Trust........................................7
Management of the Trust...................................................9
The Investment Adviser....................................................9
Distribution Plan........................................................10
Brokerage Commissions....................................................11
The Distributor..........................................................12
Investment Advisory and Distribution Agreements..........................12
Redemption of Shares ....................................................13
How Net Asset Value is Computed..........................................13
Performance Information..................................................13
Taxes....................................................................14
Independent Auditors.....................................................21
Financial Statements.....................................................21
<PAGE>
GENERAL INFORMATION AND HISTORY
On April 8, 1986, the shareholders of Istel Fund, Inc. (the
Trust's predecessor) approved a plan of reorganization (the "Reorganization")
under which Istel Fund, Inc. converted its corporate structure to change from a
Delaware corporation to a Massachusetts business trust. In accordance with the
terms and conditions of the Reorganization, Istel Fund, Inc. changed its name to
Lepercq-Istel Trust and the shareholders of Istel Fund, Inc. exchanged their
common stock for an equal number of shares of beneficial interest in the Fund. A
copy of the Agreement and Declaration of Trust is on file with the Secretary of
State of The Commonwealth of Massachusetts.
Shares of the Fund are redeemable at the net asset value
thereof at the option of the shareholders or, in certain circumstances, at the
option of the Fund. For information concerning the methods of redemptions and
the rights of share ownership, consult the Prospectus.
The Board of Trustees may classify or reclassify any unissued
shares of any series in addition to those already authorized by setting or
changing in any one or more respects, from time to time, prior to the issuance
of such shares, the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption, of such shares. Any such classification or
reclassification will comply with the provisions of the Investment Company Act
of 1940, as amended (the "1940 Act"). The Declaration of Trust permits the
Trustees to issue an unlimited number of full and fractional shares, $1.00 par
value, of the Fund. A share represents an equal proportionate interest in the
Fund with each other share of the Fund and is entitled to a proportionate
interest in the dividends and distributions with respect thereto. Additional
information concerning the rights of share ownership is set forth in the
Prospectus. The assets received by the Fund from the issue of its shares and all
income, earnings, profits, losses and proceeds therefrom, subject only to the
rights of creditors, are allocated to the Fund and constitute the underlying
assets of the Fund. The underlying assets of the Fund are segregated and are
charged with the expenses attributable to the Fund and with a share of the
general expenses of the Trust and with expenses incurred directly or allocated
to the Fund.
Under Massachusetts law, shareholders could, under certain
circumstances, be held liable for the obligations of the Trust. However, the
Declaration of Trust disclaims shareholder responsibility for acts or
obligations of the Trust and requires that notice of such disclaimer be given in
each agreement, obligation or instrument entered into or executed by the Trust
or Trustees to all parties, and each party thereto must expressly waive all
rights of action directly against shareholders. The Declaration of Trust
provides for indemnification out of the Fund's property for all loss and expense
of any shareholder of the Fund held liable on account of being or having been a
shareholder. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Trust or Fund
would
- 2 -
<PAGE>
be unable to meet its obligations wherein the complaining party was held not to
be bound by the disclaimer. The Declaration of Trust further provides that the
Trustees will not be liable for errors of judgment or mistakes of fact or law.
However, nothing in the Declaration of Trust protects a Trustee against any
liability to which the Trustees would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved for the conduct of his office. The Declaration of Trust provides for
indemnification of the Trustees and officers of the Trust except with respect to
any matter to which any such person did not act in good faith in the reasonable
belief that his action was in or not opposed to the best interest of the Trust.
Such person may not be indemnified against any liability to the Trust or the
Fund shareholders to which he would otherwise be subject by reason of the duties
involved in the conduct of his office. The Declaration of Trust also authorizes
the purchase of liability insurance on behalf of the Trustees and officers,
except that such liability insurance will not indemnify Trustees and officers
against actions adjudicated to have been the result of willful misfeasance, bad
faith, gross negligence or reckless disregard of one's duties.
The Trust will not normally hold annual shareholders'
meetings. At such time as less than a majority of the Trustees have been elected
by the shareholders, the Trustees then in office will call a shareholders'
meeting for the election of Trustees. In addition, Trustees may be removed from
office by a written consent signed by the holders of two-thirds of the Trust's
outstanding shares and filed with the Trust's custodian or by a vote of the
holders of two-thirds of the Trust's outstanding shares at a meeting duly called
for the purpose, which meeting shall be held upon written request of the holders
of not less than 10% of the outstanding shares of the Trust. Upon written
request by ten or more shareholders, who have been such for at least six months
and who hold shares constituting 10% of the Trust's outstanding shares, stating
that such shareholders wish to communicate with the other shareholders for the
purpose of obtaining the signatures necessary to demand a meeting to consider
removal of a Trustee, the Trust has undertaken to provide a list of shareholders
or to disseminate appropriate materials (at the expense of the requesting
shareholders).
Shareholders do not have cumulative voting rights and
therefore the holders of more than 50% of the outstanding shares of the Trust
voting together for election of Trustees may elect all of the members of the
Board of Trustees. In such event, the remaining shareholders cannot elect any
members of the Board of Trustees. Except as otherwise disclosed in the
Prospectus and in this Statement of Additional Information, the Trustees shall
continue to hold office and may appoint their successors.
- 3 -
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives: As described in the Fund's Prospectus,
the primary investment objective of the Fund is long-term capital appreciation.
The Fund's secondary investment objective is to provide dividend income. There
is no assurance of attaining the Fund's investment objectives. Investment in the
Fund does not constitute a complete investment program.
Investment Techniques - Writing Covered Call Option Contracts:
The Fund may, at times, write (sell) call options against securities held in its
portfolio, a practice known as covered call options writing. Only call options
which are listed on a national securities exchange will be written. The Fund may
purchase call options of matching maturity and exercise price covering the same
underlying security for the sole and specific purpose of canceling the
obligation incurred through the previous writing of a covered call option. When
it appears that a previously written covered call option is likely to be
exercised, it may be considered appropriate to avoid liquidating its position,
or the Fund may wish to extinguish the previously written call option so as to
be free to sell the underlying security, to realize a profit on the previously
written call option, or to write another call option. The Fund will realize a
short-term capital gain if the amount paid to purchase the call option plus
transaction costs is less than the premium received for writing the covered call
option. The Fund will realize a short-term capital loss if the amount paid to
purchase the call option plus transaction costs is greater than the premium
received for writing the covered call option. There is no assurance that the
Fund will be able to purchase a call option in a closing transaction at any
given time. Alternatively, the Fund may allow the call obligation to be
extinguished by exercise or expiration.
PORTFOLIO TURNOVER
The frequency of changes in the Fund's investment portfolio
during its fiscal year is known as its portfolio turnover rate. The Fund intends
to purchase securities primarily for investment rather than with a view to
trading for profits. It is the policy of the Trustees to allow only such
portfolio turnover as is in the best interest of the shareholders. The Fund's
annual rates of portfolio turnover for the years ended December 31, 1996, 1995
and 1994 were 54.13%, 59.72% and 70.66%, respectively. The Fund's rate may vary
and is not necessarily indicative of future rates. In particular, if a
substantial number of the call options written by the Fund are exercised, its
portfolio turnover rate may exceed historical levels. In general, the rate of
turnover of portfolio securities is a ratio determined by dividing the lesser of
the purchases or the sales of portfolio securities during the year by the
monthly average of the aggregate value of the portfolio securities owned during
that year (excluding, in each case, short-term investments).
- 4 -
<PAGE>
INVESTMENT RESTRICTIONS
The Trustees on behalf of the Fund have adopted investment
restrictions as matters of fundamental policy. These restrictions cannot be
altered without the authorization of a majority of the Fund's outstanding voting
securities. The vote of a majority of the outstanding voting securities of the
Fund means the vote, at a special meeting of the security holders of the Fund
duly called (a) of 67% or more of the voting securities present or represented
by proxy at such meeting, if the holders of more than 50% of the outstanding
voting securities of the Fund are present or represented by proxy; or (b) of
more than 50% of the outstanding voting securities of the Fund, whichever is
less.
The following investment restrictions apply to the Fund:
1. The Fund will not make loans nor will it underwrite
securities.
2. The Fund will not sell securities short.
3. The Fund may, from time to time, invest up to 10% of its total
assets in the shares of closed-end investment companies
particularly if such shares are selling at less than net asset
value, but it will invest rarely in the shares of other
open-end investment companies. No investment by the Fund in an
investment company will at the time it is made cause the Fund
to own in the aggregate more than 3% of the total outstanding
voting stock of the investment company.
4. The Fund will not purchase securities for the purpose of
exercising control or management of any issuer.
5. No securities of any corporation will be purchased or held if
after such purchase any officer or Trustee of the Trust, the
Investment Adviser or the Distributor for its own account,
owns beneficially more than 1/2 of 1% of any securities (taken
at market value) of that corporation, and such persons owning
more than 1/2 of 1% of such securities together own
beneficially more than 5% of such securities taken at market
value.
6. The Fund will not purchase or sell real estate or real estate
mortgage loans (other than marketable securities issued by
companies which invest in real estate or interests therein),
nor will it engage in the purchase or sale of commodities or
commodity contracts.
7. The Fund will maintain a diversification of investments among
industries. Consistent with this policy, the Fund does not
intend to invest more than 25% of it assets in any one
industry.
- 5 -
<PAGE>
8. The Fund will not make any investment which would cause, at
the time of purchase, more than 5% of the value of its total
assets to be invested in the securities of any single issuer,
or that would cause the Fund to own more than 10% of the
outstanding voting securities of any issuer.
9. The Fund will not issue senior securities.
10. The Fund will not borrow money, except from a bank, and only
as a temporary measure to meet extraordinary circumstances
(but not for the purchase of investment securities) and such
borrowings will not exceed 5% of the value of its assets.
11. The Fund will not make any investment which would cause, at
the time of purchase, more than 5% of the value of its total
assets to be invested in the securities of issuers which,
including any predecessors, have records of less than 3 years
continuous operation. The fundamental policies of the Fund do
not restrict the acquisition of securities which might require
registration under the Securities Act of 1933 prior to their
disposition in a public offering. However, the Trustees have
determined, as a matter of policy, that the Fund shall make no
further investments in such restricted securities, and that no
investment shall be made if it would cause more than 10% of
the net assets to be invested in securities which are not
readily marketable. Included in this category are illiquid
assets including, but not limited to, repurchase agreements
which mature in more than seven days and other securities
including securities of foreign issuers for which a bona fide
market does not exist. It is the Fund's policy to value such
securities in good faith at fair value giving consideration,
among other factors, to underlying assets, lack of
marketability, past and prospective earnings and market prices
of similar securities. The Trustees have also determined as a
matter of policy that the Fund will not invest in interests in
oil, gas or other mineral exploration or development programs.
Furthermore, the Fund will not invest in puts, calls,
straddles, spreads or any combinations thereof, except as
otherwise set forth in the Fund's Prospectus. The Trustees
have also determined, as a matter of policy that no covered
call option will be written if, as a result, portfolio
securities exceeding in value 25% of the Fund's net assets
would be subject to covered call options.
- 6 -
<PAGE>
TRUSTEES AND OFFICERS OF THE TRUST
The Trustees and Officers of the Trust, their addresses, ages and their
principal occupations for the last five years are set forth below. Unless
otherwise indicated, the address of each Trustee and Officer is 1675 Broadway,
New York, New York 10019.
Position(s) Held Principal Occupation(s)
Name, Address, Age with Registrant During Past 5 Years
- -------------------------- --------------- --------------------------------
*Bruno Desforges, 71 Trustee and Managing Director, Lepercq, de
Chairman of Neuflize & Co. Incorporated;
the Board Director and Chairman of the
Board, Lepercq, de Neuflize
Securities Inc.
*Francois Letaconnoux, 46 Trustee Director, President and Chief
Executive Officer, Lepercq Inc.
and Lepercq, de Neuflize & Co.
Incorporated; Director and
President, Lepercq, de Neuflize
Securities Inc.
Jean-Louis Milin, 51 Trustee Managing Director, Banque de
3, Avenue Hoche Neuflize, Schlumberger, Mallet.
75008 Paris, France
Dr. Marvin Schiller, 63 Trustee Former Managing Director, A.T.
17319 St. James Court Kearney, Inc.
Boca Raton, Florida 33496
Franz Skryanz, 59 Trustee Financial Consultant; prior
30 East 81st Street thereto, Vice President, Sutton
New York, New York 10028 & Edwards; prior thereto,
Treasurer and Chief Financial
Officer, Schenkers International.
*Pamela Kaye, 34 Secretary Vice President and Director of
Marketing, Lepercq, de Neuflize
Securities Inc.; prior thereto,
Store Manager, Modern Age
Furniture.
*Andrew M. Hanson, C.F.A., Co-President Senior Vice President and Director
47 of Equity Research, Lepercq, de
Neuflize & Co. Incorporated;
President, Broadway Capital
Growth Incorporated.
- 7 -
<PAGE>
*Peter Hartnedy, 47 Controller Senior Vice President, Treasurer
and Secretary, Lepercq, de
Neuflize & Co. Incorporated;
Director, Vice President, Treasurer
and Secretary, Lepercq, de
Neuflize Securities Inc.; Treasurer
and Secretary, Lepercq Inc.
Donna Levantini, 28 Treasurer Vice President, Lepercq, de
Neuflize & Co. Incorporated prior
thereto, Human Resources
Administrator, Cushman & Wakefield.
*Tsering Ngudu, 41 Co-President Senior Vice President, Lepercq, de
Neuflize & Co. Incorporated;
Executive Vice President and
Director, Lepercq, de Neuflize
Securities Inc.
- -----------
*Deemed to be interested person (as defined by the 1940 Act) of the Trust.
The following table indicates the compensation received by
each Trustee from the Trust for the 12-month period ended December 31, 1996.
<TABLE>
<CAPTION>
Total Compensa-
Pension or Retire- tion From
Aggregate ment Benefits Estimated Annual Registrant and
Compensation Accrued As Part of Benefits Upon Fund Complex
Name of Person, Position from Registrant Fund Expenses Retirement Paid to Trustees
- ------------------------ --------------- ---------------------- --------------------- ----------------
<S> <C> <C> <C> <C>
Jean-Louis Milin, Trustee 1,380(1) -0- -0- 1,380(1)
Dr. Marvin Schiller, Trustee 3,150 -0- -0- 3,150
Franz Skyranz, Trustee 3,150 -0- -0- 3,150
</TABLE>
- --------------
(1) Net amount = $1,020
- 8 -
<PAGE>
MANAGEMENT OF THE TRUST
The Trust is managed by its officers and a board of five
Trustees (listed above) who have available to them the services of Lepercq, de
Neuflize & Co. Incorporated. For the years ended December 31, 1996, 1995, and
1994 those Trustees who are not "interested" Trustees received from the Trust an
aggregate remuneration of $7,680, $13,800, and $11,400 respectively. The Trust
compensates all Trustees except for Francois Letaconnoux and Bruno Desforges.
The Trust's regulation and registration under the 1940 Act do
not involve Federal supervision of management or investment practices.
THE INVESTMENT ADVISER
The firm of Lepercq, de Neuflize & Co. Incorporated (the
"Investment Adviser") is the investment adviser to the Fund pursuant to the
investment advisory agreement (the "Agreement"). The Fund's Agreement, dated
April 8, 1986 was adopted by the Trust's Board of Trustees on January 29, 1986
and approved by the Fund's shareholders on April 8, 1986. The continuance of the
Investment Advisory Agreement was approved by the Trustees at a Board of
Trustees' Meeting held on January 29, 1997.
Under the terms of the Agreement, the expenses incurred
relating to the investment-advisory services performed by the Investment Adviser
and the furnishing of office space, office services and equipment to the Fund
and salaries of the officers of the Trust, except as indicated below, are borne
by the Investment Adviser, and the expenses relating to other services,
including, but not limited to, fees and expenses of non-interested Trustees,
fees and expenses of legal counsel and independent accountants, and the fees and
expenses involved in the registering and maintaining registration of the Fund's
shares under state securities laws are borne by the Fund. The costs (including
applicable office space, facilities and equipment) of the services of a
principal financial officer of the Trust, or any of the personnel operating
under his direction, may be borne by the Fund. Such costs include maintaining
the financial accounts and books and records of the Fund, including the
reviewing calculations of daily net asset value and reviewing tax returns.
Investment decisions for the Fund are made by the Investment
Adviser. These investment-advisory decisions receive regular review by the
Trustees.
In addition, the Investment Adviser acts as investment adviser
to clients other than investment companies under discretionary and
non-discretionary advisory contracts covering net assets as of December 31,
1996, totaling approximately $212 million. Investment decisions for the Fund are
made independently from those for other clients which have different investment
objectives than those of the Fund. It is possible that, at times, identical
securities will be acceptable for the Fund and one or more of such investment
clients. However, the position of a client's or the Fund's account in the
securities of the same issue may vary and the length of time that each account
may choose to hold its investment in the securities of the same issue may
likewise vary. The timing and amount of purchase by each account will also be
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determined by its cash position. If the purchase or sale of securities
consistent with the investment policies of the Fund and one or more of these
investment clients is considered at or about the same time, transactions in such
securities will be allocated among the accounts in a manner deemed equitable by
the Investment Adviser. The Investment Adviser may combine such transactions, in
accordance with applicable laws and regulations, in order to obtain the best net
price and most favorable execution. However, simultaneous transactions could
adversely affect the ability of the Fund to obtain or dispose of the full amount
of a security which it seeks to purchase or sell. As of March 31, 1997, Lepercq
Inc. controlled the Investment Adviser, owning beneficially 100% of the voting
stock of Lepercq, de Neuflize & Co. Incorporated.
On January 29, 1986, the Board of Trustees, including a
majority of the Trustees who were not interested persons of the Trust and who
had no direct or indirect financial interest in the operations of a distribution
plan, on behalf of the Fund, adopted a Distribution Plan, pursuant to Rule 12b-1
under the 1940 Act (the "Plan"). The Plan was approved by the Trust's
shareholders on April 8, 1986 and its continuance was approved by the Trustees,
including a majority of the Trustees who are not interested persons and who have
no direct or indirect financial interest in the operation of the Plan, on
January 29, 1997.
Pursuant to the Plan, Lepercq, de Neuflize Securities Inc., a
wholly owned subsidiary of the Investment Adviser (the "Distributor"), will be
entitled to reimbursement each month of up to an aggregate maximum of .75% per
annum of the Fund's average daily net assets for actual expenses incurred in the
distribution and promotion of the shares of the Fund, including, but not limited
to, the printing of Prospectuses, Statements of Additional Information, reports
used for sales purposes, advertisements, expenses of preparation and printing of
sales literature, and other distribution-related expenses. No officer or Trustee
has any substantial interest in the Plan, except to the extent the Distributor,
which is a wholly owned subsidiary of the Investment Adviser, will be reimbursed
for expenses it might otherwise have been required to pay pursuant to its
Distribution Agreement with the Fund. The Fund paid $9,732, 3,058, and 5,077
pursuant to the Plan for the year ended December 31, 1996, 1995, and 1994,
respectively. The expenses of distribution in excess of .75% per annum will be
borne by the Distributor and will not be eligible for any reimbursement or
payment by the Fund under the provisions of the Plan.
The Fund's Plan may be continued from year to year if approved
at least annually by the Board of Trustees (including the affirmative vote of a
majority of the Trustees who have no direct or indirect interest in the Plan or
any related agreement and are not interested persons of any such party) by votes
cast in person at a meeting called for such purpose. The Plan may be terminated
at any time as to the Trust by vote of a majority of the disinterested Trustees
or with respect to the Plan, by a vote of a majority of the outstanding voting
securities of the Fund. Any agreement entered into under the Plan may be
terminated at any time on 60 days' written notice by a vote of a majority of the
outstanding voting securities
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<PAGE>
of the Fund. Any agreement entered into under the Plan will terminate
automatically in the event of its assignment.
The Plan may not be amended to increase materially the amount
to be spent by the Fund under the Plan without the approval of the shareholders
of the Fund, and all material amendments to the provisions of the Plan must be
approved by a vote of the Board of Trustees and the Trustees who have no direct
or indirect interest in the Plan, cast in person at a meeting called for the
purpose of such vote. During the continuance of the Plan, the Investment Adviser
will report in writing to the Board of Trustees quarterly the amounts and
purposes of all payments made pursuant to the Plan. Further, during the term of
the Plan, the selection and nomination of those Trustees who are not interested
persons of the Trust must be committed to the discretion of the Trustees who
have no direct or indirect interest in the Plan or any related agreement.
BROKERAGE COMMISSIONS
For the years ended December 31, 1996, 1995 and 1994 , the
Fund paid $52,508, $48,481 and $54,503 , respectively, in brokerage commissions
on the purchase and sale of its portfolio securities. Of the $52,508 of
brokerage commissions paid by the Fund in 1996, $24,081 (45.9%) was paid to the
Distributor, of which $4,924 was paid to other brokers or dealers by the
Distributor. Lepercq, de Neuflize Securities Inc., a wholly owned subsidiary of
the Adviser, conducts broker/dealer operations and holds a seat on the New York
Stock Exchange, Inc.
The Fund does not use a fixed formula in the allocation of
brokerage business but will allocate such business on a
transaction-by-transaction basis. In 1996, 1995 and 1994 , the Fund allocated
61.1%, 61.6% and 73.3% , respectively, of its brokerage business to
non-affiliated brokers who supplied the Fund or its Investment Adviser with
research. The Fund does not now, nor does it in the future, intend to allocate
its brokerage business if as a result thereof the Fund does not obtain the best
prices and executions. Brokerage transactions are allocated to brokers whom the
Investment Adviser believes will supply research or statistical services in
accordance with the Fund's policy of obtaining the best prices and executions.
Research and/or statistical services include, but are not limited to, stock
analyses, research reports, newsletters and updates. To the extent that the
research and/or statistical services supplied by brokers, services which cannot
be valued, were available to aid the Investment Adviser in fulfilling its
obligations under its advisory contract with the Fund, or to its other clients,
the receipt of such services by the Investment Adviser tended to reduce its
expenses. When commissions paid reflect research or statistical services
furnished in addition to execution, the Investment Adviser stands ready to
demonstrate that such services were bona fide and rendered for the benefit of
the Fund. Lepercq, de Neuflize Securities Inc. offers to effect transactions for
the Fund at commission rates at least as low as it offers to effect comparable
transactions for any of its other customers. Whenever Lepercq, de Neuflize
Securities Inc. effects a transaction on the New York Stock Exchange, Inc. for
the Fund, it will transmit the order to an unaffiliated broker for execution on
the floor of the Exchange and pay such broker a negotiated portion of the
commission for rendering such service.
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<PAGE>
Lepercq, de Neuflize Securities Inc. will not encourage or
solicit brokerage business in return for brokerage transactions executed by
other brokers on behalf of the Fund. However, Lepercq, de Neuflize & Co.
Incorporated and Lepercq, de Neuflize Securities Inc. have in the past executed,
and Lepercq, de Neuflize Securities Inc. intends in the future to execute,
brokerage transactions from such other brokers in the normal course of business.
In connection with over-the-counter transactions, the Fund
will attempt to deal directly with the principal market-maker except in those
circumstances where the Fund believes better prices and executions are available
elsewhere.
THE DISTRIBUTOR
Lepercq, de Neuflize Securities Inc. (the "Distributor"), 1675
Broadway, New York, New York 10019, a wholly owned subsidiary of Lepercq, de
Neuflize & Co. Incorporated, is the distributor and underwriter of the shares of
the Fund, pursuant to a Distribution Agreement dated April 9, 1986, and adopted
by the shareholders on April 8, 1986. The continuation of the Agreement was
approved by the Trustees on January 29, 1997. The Distributor offers shares of
the Fund at the net asset value per share, computed once daily at the close of
trading on the New York Stock Exchange, Inc.
The Distributor will be entitled to reimbursement each month
under the terms of the Plan set forth above. If purchases of the Fund's shares
are made directly from the Distributor, without the intervention of another
broker or dealer, the shares may be purchased at the net asset value per share
of the Fund next determined after receipt of an order to purchase such shares.
However, if the Fund's shares are purchased through a broker or a dealer, a
service charge may be incurred for services rendered to the purchaser by the
broker or dealer.
Lepercq, de Neuflize Securities Inc. is controlled by its sole
parent, Lepercq, de Neuflize & Co. Incorporated. The officers and directors of
Lepercq, de Neuflize Securities Inc. include Bruno Desforges, Chairman of the
Board and Director; Francois Letaconnoux, President and Director; Peter
Hartnedy, Vice President, Treasurer, Secretary and Director; and Tsering Ngudu,
Executive Vice President and Director . Some of the officers of the Distributor
are also officers of the Trust.
INVESTMENT ADVISORY AND DISTRIBUTION AGREEMENTS
The Investment Advisory and Distribution Agreements each may
be terminated by either party on 60 days' notice without penalty. Each contract
remains in effect from year to year provided its continuance is approved at
least annually (a) by the vote of a majority of those members of the Board of
Trustees who are not parties thereto or interested persons (as such term is
defined in the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of voting on such approval, and (b) either by the Board of
Trustees or by the vote of a majority of the outstanding voting securities of
the Fund.
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<PAGE>
The Investment Advisory and Distribution Agreements terminate
automatically if assigned and can be amended only by a vote of a majority of the
outstanding voting securities of the Fund.
REDEMPTION OF SHARES
The Fund's obligation to redeem shares may be suspended and
the date of payment postponed for more than seven days during any period when
(1) trading on the New York Stock Exchange, Inc., other than weekends or
holidays, is suspended or restricted; (2) an emergency exists, as determined by
the Securities and Exchange Commission; or (3) the Securities and Exchange
Commission has by order permitted such suspension.
HOW NET ASSET VALUE IS COMPUTED
In determining the net asset value, the Fund's investments are
valued at the current value. Investments listed on the New York Stock Exchange,
Inc. or the American Stock Exchange, Inc. are valued at the last reported sale
price of the day or, in the absence of such sale, at the latest bid quotation.
Investments listed on other securities exchanges are similarly valued, unless
the exchange has not closed as of the time of computation in which case the
latest sale price of the day or, in the absence of such a sale, the latest bid
quotation is used. Investments not listed on a securities exchange are valued at
the latest bid quotation. If market quotations are not readily available or when
restricted securities or securities issued by affiliated companies or other
assets are being valued, the value is determined in good faith at fair value by
the Trustees or by the officers as empowered by the Trustees.
Premiums received by the Fund for investing in options are
included in the Fund's assets, and an equal amount is recorded as a liability.
This liability will be adjusted daily to the option's current market value,
which will be the latest sale price at the time as of which the net asset value
per share of the Fund is computed, or, in the absence of such sale, at the
latest asked quotation. If the option's current market value is less than the
premium received, the difference will be unrealized appreciation and,
conversely, if the option's current market value exceeds the premium received,
the excess will be unrealized depreciation. Upon expiration of the option or the
purchase of an identical option in a closing transaction, the liability will be
extinguished and the Fund will realize a gain (or a loss if the purchase price
of the closing option plus transaction costs exceeds the premium received for
writing the covered-call option.) Alternatively, upon exercise of the option,
the liability will be extinguished and the Fund will realize a gain or loss from
the sale of the underlying securities, with the proceeds of the sale being
increased by the premium received for writing the option.
PERFORMANCE INFORMATION
For the purposes of quoting and comparing the performance of
the Fund to that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to shareholders, performance will be stated in
terms of total return, rather than in terms of yield. Under the rules of the
Securities and Exchange Commission (the "SEC"), funds advertising performance
must include return quotes calculated according to the following formula:
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P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
the 1-, 5- or 10-year periods (or fractional
portion thereof)
Under the foregoing formula the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and will cover one-,
five- and ten-year periods or a shorter period dating from the effectiveness of
the Fund's registration date during the period. Total return, or "T" in the
formula above, is computed by finding the average annual compounded rate of
return over the 1-, 5-, or 10-year periods (or fractional portion thereof) that
would equate the initial amount invested to the ending redeemable value.
The Fund may also from time to time include in such
advertising a total-return figure that is not calculated according to the
formula set forth above in order to compare more accurately the Fund's
performance with other measures of investment return. For example, in comparing
total return of the Fund with data published by independent services, or with
the performance of certain stock or other relevant indices, the Fund calculates
its total return for the specified periods of time by assuming the investment of
$10,000 in shares of the Fund and assuming the reinvestment of each dividend of
other distribution at net asset value on the reinvestment date. Percentage
changes are determined by subtracting the initial value of the investment from
the ending value and by dividing the difference by the beginning value. Such
alternative total return information will be given no greater prominence in such
advertising than the information prescribed under SEC rules and all
advertisements containing performance data will include a legend disclosing that
such performance data represent past performance and that the investment return
and principal value of an investment will fluctuate so that the investor's
shares, when redeemed, may be worth more or less than their original cost.
The total return of the Fund for the one year period ending
December 31, 1996, was as follows:
1) Ending redeemable value of initial $1,000 investment
calculated pursuant to the above formula is $1,262.60
which equates to an average annual total return of
26.26%.
2) Value of an initial investment of $10,000 is
$12,626.00 pursuant to the alternative computation,
which equates to 26.26% .
The average annual total return for the Fund for the 5 year
and 10 year periods ended December 31, 1996 was 12.79% and 10.25%, respectively.
TAXES
The following is only a summary of certain additional tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and
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the discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
QUALIFICATION AS A REGULATED INVESTMENT COMPANY
The Fund has elected to be taxed as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, the Fund is not subject to federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess of
net short-term capital gain over net long-term capital loss) for the taxable
year (the "Distribution Requirement"), and satisfies certain other requirements
of the Code that are described below. Distributions by the Fund made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a
regulated investment company must: (1) derive at least 90% of its gross income
from dividends, interest, certain payments with respect to securities loans,
gains from the sale or other disposition of stock or securities or foreign
currencies (to the extent such currency gains are directly related to the
regulated investment company's principal business of investing in stock or
securities) and other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of investing
in such stock, securities or currencies (the "Income Requirement"); and (2)
derive less than 30% of its gross income (exclusive of certain gains on
designated hedging transactions that are offset by realized or unrealized losses
on offsetting positions) from the sale or other disposition of stock, securities
or foreign currencies (or options, futures or forward contracts thereon) held
for less than three months (the "Short-Short Gain Test"). However, foreign
currency gains, including those derived from options, futures and forwards, will
not in any event be characterized as Short-Short Gain if they are directly
related to the regulated investment company's investments in stock or securities
(or options or futures thereon). Because of the Short-Short Gain Test, the Fund
may have to limit the sale of appreciated securities that it has held for less
than three months. However, the Short-Short Gain Test will not prevent the Fund
from disposing of investments at a loss, since the recognition of a loss before
the expiration of the three-month holding period is disregarded for this
purpose. Interest (including original issue discount) received by the Fund at
maturity or upon the disposition of a security held for less than three months
will not be treated as gross income derived from the sale or other disposition
of such security within the meaning of the Short-Short Gain Test. However,
income that is attributable to realized market appreciation will be treated as
gross income from the sale or other disposition of securities for this purpose.
In general, gain or loss recognized by the Fund on the
disposition of an asset will be a capital gain or loss. However, gain recognized
on the disposition of a debt obligation purchased by the Fund at a market
discount (generally, at a price less than its principal amount)
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will be treated as ordinary income to the extent of the portion of the market
discount which accrued during the period of time the Fund held the debt
obligation. In addition, under the rules of Code Section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section 1256
(unless the Fund elects otherwise), will generally be treated as ordinary income
or loss.
In general, for purposes of determining whether capital gain
or loss recognized by the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (1) the asset is
used to close a "short sale" (which includes for certain purposes the
acquisition of a put option) or is substantially identical to another asset so
used, or (2) the asset is otherwise held by the Fund as part of a "straddle"
(which term generally excludes a situation where the asset is stock and the Fund
grants a qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (3) the asset is stock and the Fund
grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (1) above. In
addition, the Fund may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by the Fund on the lapse of, or any gain
or loss recognized by the Fund from a closing transaction with respect to, an
option written by the Fund will be treated as a short-term capital gain or loss.
For purposes of the Short-Short Gain Test, the holding period of an option
written by the Fund will commence on the date it is written and end on the date
it lapses or the date a closing transaction is entered into. Accordingly, the
Fund may be limited in its ability to write options which expire within three
months and to enter into closing transactions at a gain within three months of
the writing of options.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above,
the Fund must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of
the Fund's taxable year, at least 50% of the value of the Fund's assets must
consist of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Fund has not invested more than 5% of the value of the Fund's total assets in
securities of such issuer and as to which the Fund does not hold more than 10%
of the outstanding voting securities of such issuer), and no more than 25% of
the value of its total assets may be invested in the securities
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<PAGE>
of any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
Generally, an option (call or put) with respect to a security is treated as
issued by the issuer of the security not the issuer of the option. However, with
regard to forward currency contracts, there does not appear to be any formal or
informal authority which identifies the issuer of such instrument.
If for any taxable year the Fund does not qualify as a
regulated investment company, all of its taxable income (including its net
capital gain) will be subject to tax at regular corporate rates without any
deduction for distributions to shareholders, and such distributions will be
taxable to the shareholders as ordinary dividends to the extent of the Fund's
current and accumulated earnings and profits. Such distributions generally will
be eligible for the dividends-received deduction in the case of corporate
shareholders.
EXCISE TAX ON REGULATED INVESTMENT COMPANIES
A 4% non-deductible excise tax is imposed on a regulated
investment company that fails to distribute in each calendar year an amount
equal to 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year (a "taxable year
election")). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses incurred after October 31 of any year
(or after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
The Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that the Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
FUND DISTRIBUTIONS
The Fund anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they will qualify
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for the 70% dividends-received deduction for corporate shareholders only to the
extent discussed below.
The Fund may either retain or distribute to shareholders its
net capital gain for each taxable year. The Fund currently intends to distribute
any such amounts. If net capital gain is distributed and designated as a capital
gain dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by the Fund prior to the date on which the shareholder
acquired his shares. The Code provides, however, that under certain conditions
only 50% of the capital gain recognized upon the Fund's disposition of domestic
"small business" stock will be subject to tax.
Conversely, if the Fund elects to retain its net capital gain,
the Fund will be taxed thereon (except to the extent of any available capital
loss carryovers) at the 35% corporate tax rate. If the Fund elects to retain its
net capital gain, it is expected that the Fund also will elect to have
shareholders of record on the last day of its taxable year treated as if each
received a distribution of his pro rata share of such gain, with the result that
each shareholder will be required to report his pro rata share of such gain on
his tax return as long-term capital gain, will receive a refundable tax credit
for his pro rata share of tax paid by the Fund on the gain, and will increase
the tax basis for his shares by an amount equal to the deemed distribution less
the tax credit.
Ordinary income dividends paid by the Fund with respect to a
taxable year will qualify for the 70% dividends-received deduction generally
available to corporations (other than corporations, such as S corporations,
which are not eligible for the deduction because of their special
characteristics and other than for purposes of special taxes such as the
accumulated earnings tax and the personal holding company tax) to the extent of
the amount of qualifying dividends received by the Fund from domestic
corporations for the taxable year. A dividend received by the Fund will not be
treated as a qualifying dividend (1) if it has been received with respect to any
share of stock that the Fund has held for less than 46 days (91 days in the case
of certain preferred stock), excluding for this purpose under the rules of Code
Section 246(c)(3) and (4): (i) any day more than 45 days (or 90 days in the case
of certain preferred stock) after the date on which the stock becomes
ex-dividend and (ii) any period during which the Fund has an option to sell, is
under a contractual obligation to sell, has made and not closed a short sale of,
is the grantor of a deep-in-the-money or otherwise nonqualified option to buy,
or has otherwise diminished its risk of loss by holding other positions with
respect to, such (or substantially identical) stock; (2) to the extent that the
Fund is under an obligation (pursuant to a short sale or otherwise) to make
related payments with respect to positions in substantially similar or related
property; or (3) to the extent the stock on which the dividend is paid is
treated as debt-financed under the rules of Code Section 246A. Moreover, the
dividends-received deduction for a corporate shareholder may be disallowed or
reduced (1) if the corporate shareholder fails to satisfy the foregoing
requirements with respect to its shares of the Fund or (2) by application of
Code Section 246(b) which in general limits the dividends-received deduction to
70% of the shareholder's taxable income (determined without regard to the
dividends-received deduction and certain other items).
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<PAGE>
Alternative minimum tax ("AMT") is imposed in addition to, but
only to the extent it exceeds, the regular tax and is computed at a maximum
marginal rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers
on the excess of the taxpayer's alternative minimum taxable income ("AMTI") over
an exemption amount. In addition, under the Superfund Amendments and
Reauthorization Act of 1986, a tax is imposed for taxable years beginning after
1986 and before 1996 at the rate of 0.12% on the excess of a corporate
taxpayer's AMTI (determined without regard to the deduction for this tax and the
AMT net operating loss deduction) over $2 million. For purposes of the corporate
AMT and the environmental superfund tax (which are discussed above), the
corporate dividends-received deduction is not itself an item of tax preference
that must be added back to taxable income or is otherwise disallowed in
determining a corporation's AMTI. However, corporate shareholders will generally
be required to take the full amount of any dividend received from the Fund into
account (without a dividends-received deduction) in determining its adjusted
current earnings, which are used in computing an additional corporate preference
item (i.e., 75% of the excess of a corporate taxpayer's adjusted current
earnings over its AMTI (determined without regard to this item and the AMT net
operating loss deduction)) includable in AMTI.
Investment income that may be received by the Fund from
sources within foreign countries may be subject to foreign taxes withheld at the
source. The United States has entered into tax treaties with many foreign
countries which entitle the Fund to a reduced rate of, or exemption from, taxes
on such income. It is impossible to determine the effective rate of foreign tax
in advance since the amount of the Fund's assets to be invested in various
countries is not known.
Distributions by the Fund that do not constitute ordinary
income dividends or capital gain dividends will be treated as a return of
capital to the extent of (and in reduction of) the shareholder's tax basis in
his shares; any excess will be treated as gain from the sale of his shares, as
discussed below.
Distributions by the Fund will be treated in the manner
described above regardless of whether such distributions are paid in cash or
reinvested in additional shares of the Fund (or of another fund). Shareholders
receiving a distribution in the form of additional shares will be treated as
receiving a distribution in an amount equal to the fair market value of the
shares received, determined as of the reinvestment date. In addition, if the net
asset value at the time a shareholder purchases shares of the Fund reflects
undistributed net investment income or recognized capital gain net income, or
unrealized appreciation in the value of the assets of the Fund, distributions of
such amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by
the Fund into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by the Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
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The Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of ordinary income dividends and capital gain
dividends, and the proceeds of redemption of shares, paid to any shareholder (1)
who has provided either an incorrect tax identification number or no number at
all, (2) who is subject to backup withholding by the IRS for failure to report
the receipt of interest or dividend income properly, or (3) who has failed to
certify to the Fund that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."
SALE OR REDEMPTION OF SHARES
A shareholder will recognize gain or loss on the sale or
redemption of shares of the Fund in an amount equal to the difference between
the proceeds of the sale or redemption and the shareholder's adjusted tax basis
in the shares. All or a portion of any loss so recognized may be disallowed if
the shareholder purchases other shares of the Fund within 30 days before or
after the sale or redemption. In general, any gain or loss arising from (or
treated as arising from) the sale or redemption of shares of the Fund will be
considered capital gain or loss and will be long-term capital gain or loss if
the shares were held for longer than one year. However, any capital loss arising
from the sale or redemption of shares held for six months or less will be
treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on such shares. For this purpose, the special holding period
rules of Code Section 246(c)(3) and (4) (discussed above in connection with the
dividends-received deduction for corporations) generally will apply in
determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
FOREIGN SHAREHOLDERS
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the Fund is not effectively connected with
a U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate) upon the gross amount of the dividend.
Such a foreign shareholder would generally be exempt from U.S. federal income
tax on gains realized on the sale of shares of the Fund, capital gain dividends
and amounts retained by the Fund that are designated as undistributed capital
gains.
If the income from the Fund is effectively connected with a
U.S. trade or business carried on by a foreign shareholder, then ordinary income
dividends, capital gain dividends, and
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<PAGE>
any gains realized upon the sale of shares of the Fund will be subject to U.S.
federal income tax at the rates applicable to U.S. citizens or domestic
corporations.
In the case of foreign noncorporate shareholders, the Fund may
be required to withhold U.S. federal income tax at a rate of 31% on
distributions that are otherwise exempt from withholding tax (or taxable at a
reduced treaty rate) unless such shareholders furnish the Fund with proper
notification of its foreign status.
The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund, including the applicability of foreign taxes.
EFFECT OF FUTURE LEGISLATION; LOCAL TAX CONSIDERATIONS
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends
and capital gain dividends from regulated investment companies often differ from
the rules for U.S. federal income taxation described above. Shareholders are
urged to consult their tax advisers as to the consequences of these and other
state and local tax rules affecting investment in the Fund.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, Milwaukee, Wisconsin, acts as
independent auditors for the Trust.
FINANCIAL STATEMENTS
The Financial Statements for the Fund are incorporated herein
by reference from the Fund's Audited Annual Report, dated December 31, 1996.
Shareholders will receive a copy of the Audited Annual Report at no additional
charge when requesting a copy of the Statement of Additional Information.
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