Rule 497(c)
Registration No. 2-10841
LEPERCQ-ISTEL FUND
P R O S P E C T U S
APRIL 28, 1998
Lepercq-Istel Fund
1675 Broadway
New York, New York 10019
800-497-1411
<PAGE>
LEPERCQ-ISTEL FUND
P R O S P E C T U S
APRIL 28, 1998
NEW ACCOUNT & SHAREHOLDER INFORMATION (800) 497-1411
INVESTMENT
OBJECTIVE
The investment objective of the Lepercq-Istel Fund (the
"Fund") is long-term capital appreciation. Production of
income is incidental to this objective. The Fund seeks to
achieve its investment objective by investing in common
stock of companies undergoing a transformation that provides
an opportunity for capital appreciation.
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 14)
*Professional Management: Investors have access to
investment areas and techniques with professional management
that would be difficult to achieve as individual investors.
(See page 7)
*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 9)
*Systematic Withdrawal: The Fund offers plans whereby
investors may arrange regular systematic withdrawals from
their investment accounts. (See page 11)
*Retirement Plans: Investors may invest in the Fund through
IRAs, Profit-Sharing, and Money Purchase Plans. (See page
15)
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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 28, 1998 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
Informa- tion is incorporated herein by reference.
Additional Information, including this prospectus and the
Statement of Additional Information, may be obtained be
accessing the internet web site maintained by the Securities
and Exchange Commission (http://www.sec.gov).
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 6
How to Purchase Shares 6
Automatic Investment Plan 8
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 13
Code of Ethics 14
Custodian, Transfer Agent, Dividend
Paying Agent, Accounting Services
Agent and Administrator 14
Shareholder Inquiries 14
Year 2000 Issues 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.
<PAGE>
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, 1998. For
the fiscal year ended December 31, 1997, total fund expenses equaled 1.51% of
average net assets.
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............................ 0.70%
Total Fund Expenses.............................1.55%
* 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, 1998.
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C>
end of each time period: $16 $49 $84 $185
</TABLE>
<PAGE>
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.
PER SHARE DATA:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year 19.03 $15.83 $13.17 $14.84 $14.17 $14.05 $12.46 $14.00 $12.33 $12.23
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from investment operations:
Net investment income (loss) (0.07)(1) (0.11)(1) 0.14(1) 0.18 0.29 0.40 0.47 0.60 0.61 0.52
Net gain (loss) on securities
(both realized and
unrealized) 1.69 4.26 3.42 (0.93) 1.62 0.35 1.65 (1.52) 2.06 0.35
---- ---- ---- ----- ---- ---- ---- ----- ---- ----
Total from investment operations 1.62 4.15 3.56 (0.75) 1.91 0.75 2.12 (0.92) 2.67 0.87
---- ---- ---- ----- ---- ---- ---- ----- ---- ----
Less distributions:
Dividends from net investment
income -- -- (0.13) (0.18) (0.29) (0.40) (0.47) (0.60) (0.61) (0.52)
Dividends in excess of net
investment income -- -- -- (0.03) (0.03) (0.01) (0.06) (0.02) (0.02 (0.02)
Distributions from capital gains (1.44) (0.95) (0.77) (0.71) (0.92) 0.22 0.00 0.00 (0.37 (0.23)
----- ----- ----- ----- ----- ---- ---- ---- ----- -----
Total distributions (1.44) (0.95) (0.90) (0.92) (1.24) (0.63) (0.53) (0.62) (1.00) (0.77)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net asset value, end of year $19.21 $19.03 $15.83 $13.17) $14.84 $14.17 $14.05 $12.46 $14.00 $12.33
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total return (as a %) 9.0 26.3 27.1 (5.1) 13.5 5.3 17.0 (6.6) 21.7 7.1
Ratios/supplemental data
Net assets (in millions) end $28.4 $24.2 $20.2 $18.5 $16.6 $17.0 $17.4 $19.2 $22.0 $20.1
of year Ratio of expenses
to average net assets (as a %) 1.51% 1.65(2) 1.50 1.56 1.51 1.53 1.54 1.50 1.48 1.50
Ratio of net investment income
(loss) to
average net assets (as a %) (0.40) (0.65)(2) 0.89 1.36 2.00 2.90 3.80 4.57 4.41 4.13
Portfolio turnover rate (as a %) 71.20 54.13 59.72 70.66 19.88 20.37 21.81 24.28 48.33 72.09
Average Commission rate per share(3) $0.0825 $0.0917 -- -- -- -- -- -- -- --
</TABLE>
(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 investment objective of the Lepercq-Istel Fund
("the Fund") is long-term capital appreciation.
Production of income is incidental to this objective.
INVESTMENT
POLICIES
The Fund seeks to achieve its investment objective by
investing primarily in common stocks of companies
undergoing a transformation that is unrecognized by
the stock market and provides an opportunity for
capital appreciation. The Fund will also invest in
convertible securities and bonds. In furtherance of
its policy of investing in companies undergoing a
transformation, the Fund has the flexibility of
identifying opportunities in all areas of the market
without limits on company size or market sector. 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 judgment of Lepercq, de
Neuflize & Co. Incorporated, (the "Adviser"), 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.
The Fund may lend securities to broker-dealers and
other financial institutions as a means of earning
income. This practice could result in a loss or a
delay in recovering the Fund's securities. The Fund's
loans will not exceed 33 1/3% of the Fund's total
assets.
The Fund may invest in variable rate master demand
notes. Variable rate master demand notes are notes
issued by corporations to finance their current
operations. Master demand notes are direct lending
arrangements between the Fund and the corporation.
There is no secondary market for the notes, but the
Fund may demand payment of the principal of the
instrument at any time.
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<PAGE>
RISK FACTORS
In seeking capital appreciation, investors should be
aware that investments in small and medium
capitalization issuers carry more risks than
investments in 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
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.
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<PAGE>
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 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
MANAGER
Tsering Ngudu is primarily responsible for the
day-to-day management of the Fund's investment
portfolio. Mr. Ngudu is President of the Fund and
Senior Vice President of Lepercq, de Neuflize & Co.
(the "Adviser"). Mr. Ngudu has been with the Adviser
since December 1985. Mr. Ngudu was co-manager of the
Fund from December 1993 to October 1997 and since
November 1997 has been the sole manager of the Fund.
MANAGEMENT
OF THE FUND
The business affairs of the Fund are managed under
the direction of its Board of Trustees. There are
currently eight Trustees (of whom six are not
interested persons of the Fund) 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'
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<PAGE>
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 the Fund's average daily net
assets payable by the Fund under its Shareholder
Servicing Plan; 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 inure 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.
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, 1997, the Fund's
portfolio turnover rate was 71.20%. The Fund's
portfolio turnover 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
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<PAGE>
$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.
BY MAIL:
1. Complete the purchase 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.
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<PAGE>
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.
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
redemption 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 clearance 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.
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<PAGE>
A shareholder's right to redeem shares will be
suspended 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.
The Fund has elected to be governed by Rule 18g-1 of
the Investment Company Act of 1940, as amended, 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, 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.
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<PAGE>
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, 1997,
1996, and 1995, the total advisory fees amounted to
$186,157, 153,414, and 144,012 after waivers of $0,
$13,000, and $0 respectively.
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, 1997, including the advisory fee,
was 1.51% 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 and pay
dividends from its net investment income and any net
realized capital gains at least annually. Generally,
dividends and capital gains distributions will be
paid 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.
If the Fund fails to satisfy any of the Code
requirements for qualification as a regulated
investment company, it will be taxed at regular
corporate tax rates on all of its taxable income
(including capital gains) without any deduction for
distributions to shareholders, and distributions to
shareholders will be taxable as ordinary dividends
(even if derived from the Fund's net long-term
capital gains) to the extent of the Fund's current
and accumulated earnings and profits.
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. In the case of corporate
shareholders of the Fund, a portion of these
distributions (essentially, the
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portion attributable to qualifying dividends from
domestic corporations received by the Fund during
the year) may qualify for the 70% dividends-received
deduction. Since it is anticipated that the Fund's
investment income will include interest and
dividends from foreign corporations and since the
Fund may have long-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 will be taxed to
shareholders as long-term capital gains, regardless
of the length of time the shareholders have held
their shares.
Distributions to shareholders will be treated in the
same manner for federal income tax purposes whether
received in cash or reinvested in additional shares
of the Fund. 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 a dividend record date will
be taxed on the entire amount of the dividend
received, even though the price they paid for the
shares reflected the amount of the anticipated
dividend.
A shareholder will recognize gain or loss upon 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. Any loss realized upon 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 on such shares. All or a portion of any loss
recognized upon a taxable disposition of shares of
the Fund may be disallowed if other shares of the
Fund are purchased within thirty days before or after
such disposition.
Ordinary income dividends paid to foreign
shareholders generally will be subject to United
States withholding tax at the rate of 30% (or lower
rate under an applicable treaty). Foreign
shareholders are urged to consult their own tax
advisors concerning the applicability of United
States withholding taxes.
Under the back up withholding rules of the Code,
certain shareholders may be subject to withholding of
federal income tax on dividends redemption payments
made by the Fund. In order to avoid back up
withholding, a shareholder must provide the Fund with
a correct taxpayer identification number (which for
an individual is usually his/her Social Security
number), or certify that the shareholder is a
corporation or otherwise exempt from or
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<PAGE>
not subject to back up withholding. The purchase
account application provides for shareholder
compliance with these certification requirements.
The foregoing discussion of federal income tax
consequences is based on tax laws and regulations in
effect on the date of this Prospectus, and is subject
to change by judicial, legislative or administrative
action. As the foregoing discussion is for general
information only, a prospective shareholder should
also review the more detailed discussion of federal
income tax considerations relevant to the Fund and
its shareholders that is contained 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 such shareholder's
particular circumstances, including the application
of state and local taxes, 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, as amended, 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.)
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
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<PAGE>
providing subaccounting 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, Martin Luther King 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.
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.
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<PAGE>
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 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.
YEAR 2000
ISSUES
Like other mutual funds, financial and business
organizations and individuals around the world, the
Fund could be adversely affected if the computer
systems used by the Adviser, the Administrator and
other service providers do not properly process and
calculate date- related information and data from and
after January 1, 2000. This is commonly known as the
"Year 2000 Problem." The Adviser and the
Administrator are taking steps that they believe are
reasonably designed to address the Year 2000 Problem
with respect to computer systems that they use and to
obtain reasonable assurances that comparable steps
are being taken by the Fund's other major service
providers.
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<PAGE>
TRUSTEES AND OFFICERS
TRUSTEES
Stanley A. Deitch Principal, CPI Associates, Inc., Member, American
Institute of CPAs.
+Bruno Desforges Managing Director, Lepercq, de Neuflize & Co.
Incorporated; Director and Chairman of the Board,
Lepercq, de Neuflize Securities Inc.
+Francois Letaconnoux Director, President and Chief Executive Officer, Lepercq
Inc., Lepercq, de Neuflize & Co. Incorporated and
Lepercq, de Neuflize Securities Inc.
Jean-Louis Milin Managing Director, Banque de Neuflize, Schlumberger,
Mallet
*Dr. Marvin Schiller Director, Salant Corporation; Director, Tutor Time
Learning Systems, Inc.; General Partner, Reprise Capital
Corp.; Former Managing Director, A.T. Kearney, Inc.
*Franz Skryanz Financial Consultant; prior thereto, Vice President,
Sutton & Edwards; prior thereto, Treasurer, Chief
Financial Officer, Schenkers International
Marie-Monique Steckel President, France Telecom North America;
Director, Microcard Technologies Inc.; Director,
GlobeCast North America Inc.; Director, C&P Press, Inc.
Dennis Tarzian President and Chief Executive Officer, New Century
Education Corp.; Director, National Registered Agents,
Inc.; prior thereto, Vice President and Chief Operating
Officer, Paramount Communications Business, Technical
and Professional Group.
*Member of Audit, Ethics and Nominating Committees
+Interested Trustees
OFFICERS
Tsering Ngudu President
Stephen T. Murphy Treasurer and Secretary
Peter Hartnedy Controller
Investment Adviser Lepercq, de Neuflize & Co. Incorporated, New York
Underwriter and
Distributor Lepercq, de Neuflize Securities Inc., New York
Custodian, Transfer Firstar Trust Company, Wisconsin
Agent, Dividend
Paying Agent,
Accounting Services
Agent and
Administrator
Legal Counsel Kramer, Levin, Naftalis & Frankel, New York
Independent Auditors KPMG Peat Marwick LLP, Wisconsin
-15-
<PAGE>
Rule 497(c)
Registration No. 2-10841
STATEMENT OF ADDITIONAL INFORMATION
April 28, 1998
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 28, 1998. 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...............................8
Control Persons and Pricipal Shareholders.......................10
Management of the Trust........................................ 10
The Investment Adviser..........................................10
Distribution Plan...............................................11
Brokerage Commissions...........................................12
The Distributor.................................................13
Investment Advisory and Distribution Agreements.................14
Redemption of Shares ...........................................14
How Net Asset Value is Computed.................................14
Performance Information.........................................15
Taxes...........................................................16
Independent Auditors............................................23
Financial Statements............................................23
<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
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<PAGE>
would 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.
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<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives: As described in the Fund's Prospectus, the
investment objective of the Fund is long-term capital appreciation. There is no
assurance that the Fund's investment objective will be achieved. 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.
Lending Portfolio Securities. To a limited extent, the Fund
may lend its portfolio securities to broker-dealers and
other financial institutions, provided it receives cash
collateral which at all times is maintained in an amount
equal to at least 100% of the current market value of the
securities loaned. By lending its portfolio securities, the
Fund can increase its income through the investment of the
cash collateral. From time to time, the Fund may return to
the borrower or a third party which is unaffiliated with the
Fund, and which is acting as a "placing broker", a part of
the interest earned from the investment of collateral
received for securities loaned.
The Securities and Exchange Commission currently requires
that the following conditions must be met whenever portfolio
securities are loaned: (1) the Fund must receive at least
100% cash collateral from the borrower; (2) the borrower
must increase such collateral whenever the market value of
the securities rises
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<PAGE>
above the level of such collateral; (3) the Fund must be
able to terminate the loan at any time; (4) the Fund must
receive reasonable interest on the loan, as well as any
dividends, interest or other distributions payable on the
loaned securities, and any increase in market value; (5) the
Fund may pay only reasonable custodian fees in connection
with the loan; and (6) while voting rights on the loaned
securities may pass to the borrower, the Fund's Board of
Trustees must terminate the loan and regain the right to
vote the securities if a material event adversely affecting
the investment occurs. These conditions are subject to
future modification.
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, 1997, 1996, and 1995 were
71.20%, 54.13%, and 59.72%, 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).
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, except
that the
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<PAGE>
Fund may lend portfolio securities provided that the value of such
loaned securities does not exceed 33 1/3% of the value of the Fund's
total assets.
2. The Fund will not buy or sell real estate, commodities, or commodity
contracts, except the Fund may purchase or sell futures or options on
futures.
3. 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.
4. With respect to 75% of the value of the Fund's assets, the Fund will
not purchase any securities (other than obligations issued or
guaranteed by the U.S. Government or its agencies or
instrumentalities) if, immediately after such purchase, more than 5%
of the value of the Fund's total assets would be invested in
securities of any one issuer, or more than 10% of the outstanding
voting securities of any one issuer would be owned by the Fund.
5. The Fund will not issue senior securities.
6. The Fund will not borrow money, except from banks for temporary or
emergency purposes, in excess of 10% of the value of the Fund's total
assets. The Fund may not purchase securities while borrowings exceed
5% of the value of its total assets.
The following restrictions are non-fundamental and may be changed by
the Fund's Board of Trustees:
1. The Fund will not sell securities short.
2. 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.
3. The Fund will not purchase securities for the purpose of exercising
control or management of any issuer.
4. 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
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<PAGE>
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 its 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.
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<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
- ------------------- --------------- ------------------------
Stanley A. Deitch, 52 Trustee Principal, CPI Associates, Inc.;
774 Dumont Place Member, American Institute of
No. Woodmere, NY 11581 CPAs.
*Bruno Desforges, 72 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, 47 Trustee Director, President and Chief
Executive Officer, Lepercq Inc.,
Lepercq, de Neuflize & Co.
Incorporated and Lepercq, de
Neuflize Securities Inc.
Jean-Louis Milin, 52 Trustee Managing Director, Banue de
3, Avenue Hoche Neuflize, Schlumberge, Mallet.
75008 Paris, Franc
Dr. Marvin Schiller, 64 Trustee Director, Salant Corporation;
17319 St. James Court Director, Tutor Time Learning
Boca Raton, Florida 33496 Systems Inc.; General Partner,
Reprise Capital Corp.; Former
Managing Director, A.T. Kearney,
Inc.
Franz Skryanz, 60 Trustee Financial Consultant; prior thereto,
30 East 81st Street Vice President, Sutton & Edwards;
New York, New York 10028 prior thereto, Treasurer and Chief
Financial Officer, Schenkers
International.
Marie-Monique Steckel, 58 Trustee President, France Telecom North
210 West 90th Street, 11B America since 1979; Director,
New York, NY 10024 Microcard Technologies Inc.;
Director, GlobeCast North America
Inc.; Director, C&P Press, Inc.
- 8 -
<PAGE>
Position(s) Held Principal Occupation(s)
Name, Address, Age with Registrant During Past 5 Years
- ------------------- --------------- ------------------------
Dennis Tarzian, 47 Trustee President and Chief Executive
575 Highland Avenue Officer, New Century Education
Ridgwood, NJ 07450 Corp.; Director and Chief
Financial Officer, National
Registered Agents, Inc.; prior
thereto, Vice President and Chief
Operating Officer, Paramount
Communications Business,
Technical, and Professional
Group.
*Peter Hartnedy, 48 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.
- ---------
*Deemed to be interested person (as defined by the 1940 Act, as amended) of the
Trust.
The following table indicates the compensation received by each Trustee
from the Trust for the 12-month period ended December 31, 1997.
<TABLE>
<CAPTION>
Total Compensa-
Aggregate Pension or Retire- tion From
Compensation ment Benefits Estimated Annual Registrant and
from Accrued As Part of Benefits Upon Fund Complex
Name of Person, Position Registrant(1) Fund Expenses Retirement Paid to Trustees(1)
- ------------------------ ------------- ---------------------- --------------------- -----------------
<S> <C> <C> <C> <C>
Jean-Louis Milin, Trustee 1,500(2) -0- -0- 1,500(1)
Dr. Marvin Schiller, Trustee 3,375 -0- -0- 3,375
Franz Skryanz, Trustee 3,375 -0- -0- 3,375
</TABLE>
- --------------
(1) Compensation does not include reimbursement for travel expenses.
(2) Net amount = $1,050.
As of December 31, 1997 Trustees and officers of the Fund, as a group,
owned 39,761.043 shares of the Fund.
- 9 -
<PAGE>
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
As of January 30, 1998, the following shareholders owned, directly or
indirectly, 5% or more of the outstanding shares of the Fund:
Name and Address Percent of Fund Shares Outstanding
Morgan Stanley & Co., Inc. 34.55%
Special Custody Account
for the Exclusive Benefit
of Customers
1 Pierrepont Plaza, Suite 10
Brooklyn, New York 11201-2776
Donaldson Lufkin & Jenrette 7.91%
Securities Corp.
1 Pershing Plaza
Jersey City, NJ 07399-0001
A shareholder who beneficially owns, directly or indirectly, more than
25% of the Portfolio's voting securities may be deemed a "control person" (as
defined in the 1940 Act, as amended) of the Fund.
MANAGEMENT OF THE TRUST
The Trust is managed by its Officers and a Board of Trustees (listed
above) who have available to them the services of Lepercq, de Neuflize & Co.
Incorporated. For the years ended December 31, 1997, 1996, and 1995 those
Trustees who are not "interested" Trustees received from the Trust an aggregate
remuneration of $8,250, $7,680, and $13,800, respectively. The Trust compensates
all Trustees except for Francois Letaconnoux and Bruno Desforges.
The Trust's regulation and registration under the 1940 Act, as amended,
does 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 February 11, 1998.
- 10 -
<PAGE>
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,
1997, totaling approximately $194 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
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, 1998, Lepercq
Inc. controlled the Investment Adviser, owning beneficially 100% of the voting
stock of Lepercq, de Neuflize & Co. Incorporated.
DISTRIBUTION PLAN
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 (the "Plan"), pursuant to Rule 12b-1
under the 1940 Act, as amended. 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
February 11, 1998.
- 11 -
<PAGE>
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 0.75% 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 incurred $15,183, $9,732, and
$3,058 pursuant to the Plan for the year ended December 31, 1997, 1996, and
1995, respectively. The expenses of distribution in excess of 0.75% 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 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, 1997, 1996, and 1995, the Fund paid
$50,284, $52,508, and $48,481, respectively, in brokerage commissions on the
purchase and sale of its portfolio securities. Of the $50,284 of brokerage
commissions paid by the Fund in 1997, $15,950 (31.7%) was paid to Lepercq, de
Neuflize Securities Inc., of which $1,279 was paid to other brokers or dealers
by Lepercq, de Neuflize Securities Inc. 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.
- 12 -
<PAGE>
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 1997, 1996, and 1995, the Fund allocated 68.3%, 54.1% and 61.6%,
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.
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 February 11, 1998. 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
- 13 -
<PAGE>
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, as amended) 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.
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
The Fund will determine the net asset value of its shares once daily as
of the close of trading on the New York Stock Exchange, Inc. (the "Exchange") on
each day that the Exchange is open for business. It is expected that the
Exchange will be closed on Saturdays and Sundays and on New Year's Day, Martin
Luther King Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. The Fund may make or cause to be
made a more frequent determination of the net asset value and offering price,
which determination shall reasonably reflect any material changes in the value
of securities and other assets held by the Fund from the immediately preceding
determination of net asset value. The net asset value is determined by dividing
the market value of the Fund's investments as of the close of trading plus any
cash or other assets (including dividends receivable and accrued interest) less
all liabilities (including accrued expenses) by the number
- 14 -
<PAGE>
of the Fund's shares outstanding. Securities traded on the New York Stock
Exchange or the American Stock Exchange will be valued at the last sale or close
price, or if no sale or close, at the mean between the latest bid and asked
price. Securities traded in any other U.S. or foreign market shall be valued in
a manner as similar as possible to the above, or if not so traded, on the basis
of the latest available price. Where there are no readily available quotations
for securities they will be valued at a fair value as determined by the Board of
Trustees acting in good faith.
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:
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
- 15 -
<PAGE>
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, 1997, was as follows:
1) Ending redeemable value of initial $1,000 investment calculated
pursuant to the above formula is $1,089.50 which equates to an
average annual total return of 8.95%.
2) Value of an initial investment of $10,000 is $10,895.00 pursuant
to the alternative computation, which equates to 8.95%.
The average annual total return for the Fund for the 5 year and 10 year
periods ended December 31, 1997 was 13.52% and 11.01%, respectively.
TAXES
The following is only a summary of certain additional federal income
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 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
- 16 -
<PAGE>
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 will, therefore, count
towards the satisfaction of the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a regulated
investment company must 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").
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) 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.
Further, the Code also treats as ordinary income a portion of the
capital gain attributable to a transaction where substantially all of the return
realized is attributable to the time value of the Fund's net investment in the
transaction and: (1) the transaction consists of the acquisition of property by
the Fund and a contemporaneous contract to sell substantially identical property
in the future; (2) the transaction is a straddle within the meaning of section
1092 of the Code; (3) the transaction is one that was marketed or sold to the
Fund on the basis that it would have the economic characteristics of a loan but
the interest-like return would be taxed as capital gain; or (4) the transaction
is described as a conversion transaction in the Treasury Regulations. The amount
of the gain recharacterized generally will not exceed the amount of the interest
that would have accrued on the net investment for the relevant period at a yield
equal to 120% of the federal long-term, mid-term, or short-term rate, depending
upon the type of instrument at issue, reduced by an amount equal to: (1) prior
inclusions of ordinary income items from the conversion transaction and (2) the
capital interest on acquisition indebtedness under Code section 263(g). Built-in
losses will be preserved where the Fund has a built-in loss with respect to
property that becomes a part of a conversion transaction. No authority exists
that indicates that the converted character of the income will not be passed
through to the Fund's shareholders.
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
- 17 -
<PAGE>
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. 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.
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 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 rather than by the issuer of the option.
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
its ordinary taxable
- 18 -
<PAGE>
income for such 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. However, such distributions will qualify for the 70%
dividends-received deduction for corporate shareholders, but 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. Net capital gain that is distributed and designated as a capital
gain dividend 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% (58% for alternative minimum tax purposes) 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
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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.
Generally, 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) 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 that the stock on which the dividend is paid is treated as
debt-financed under the rules of Code section 246A. The 46-day holding period
must be satisfied during the 90-day period beginning 45 days prior to each
applicable ex-dividend date; the 91-day holding period must be satisfied during
the 180-day period beginning 90 days before each applicable ex-dividend date.
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).
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. For purposes of the corporate AMT, 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, a corporate shareholder 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
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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.
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 failed
to provide a correct taxpayer identification number, (2) who is subject to
backup withholding for failure to properly report the receipt of interest or
dividend income, 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. Long-term capital gain recognized by an individual
shareholder will be taxed at the lowest rates applicable to capital gains if the
holder has held such shares for more than 18 months at the time of the sale.
However, any capital loss arising from the sale or redemption of shares held for
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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 at
least 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
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 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 a foreign shareholder other than a corporation, 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 shareholder furnishes the Fund with proper
notification of his 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; STATE AND 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.
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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, 1997.
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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