PROSPECTUS
MATRIX/LMH
VALUE FUND
OCTOBER 29, 1999
747 THIRD AVENUE, 31ST FLOOR
NEW YORK, NEW YORK 10017
<PAGE>
MATRIX/LMH
VALUE FUND
The Matrix/LMH Value Fund, Inc. is a no-load mutual fund that principally
invests in common stocks. The Fund seeks to achieve a total rate of return which
is comprised of capital appreciation and current income.
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION DOES NOT
APPROVE THESE SHARES OR DETERMINE IF THE INFORMATION IN THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 29, 1999
TABLE OF CONTENTS
An Overview of the Fund................................................... 2
Performance............................................................... 3
Fees and Expenses......................................................... 4
Investment Objective and Principal Investment Strategies.................. 4
Principal Risks of Investing in the Fund.................................. 5
Investment Advisor........................................................ 6
Shareholder Information................................................... 6
Pricing of Fund Shares.................................................... 10
Dividends and Distributions............................................... 10
Tax Consequences.......................................................... 10
Financial Highlights...................................................... 11
1
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MATRIX/LMH
VALUE FUND
AN OVERVIEW OF THE FUND
THE FUND'S INVESTMENT GOAL
The Fund seeks to achieve a total rate of return which is comprised of capital
appreciation and current income.
THE FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily in common stocks of domestic companies that the
Advisor believes are financially strong and meet specific valuation criteria
using the principles of value investing based on Classic Valuation Analysis.
Stocks will be sold when the Advisor believes they no longer represent value.
PRINCIPAL RISKS OF INVESTING IN THE FUND
There is the risk that you could lose money on your investment in the Fund. The
following risks could affect the value of your investment:
* The stock market goes down
* Interest rates rise which can result in lower equity valuations
* Value stocks fall out of favor with the stock market
* Stocks in the Fund's portfoli* may not increase their earnings at the rate
anticipated
* The Advisor's investment strategies do not produce the expected results
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for investors who:
* Are pursuing a long-term goal such as retirement
* Want to add an investment in undervalued stocks to their equity portfolio
* Are willing to accept higher short-term risk along with higher potential
for long-term growth of capital
The Fund may not be appropriate for investors who:
* Need regular income or stability of principal
* Are pursuing a short-term goal
2
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MATRIX/LMH
VALUE FUND
PERFORMANCE
The following performance information indicates some of the risks of
investing in the Fund. The bar chart shows how the Fund's total return has
varied from year to year. The table shows the Fund's average return over time
compared with a broad-based market index. This past performance will not
necessarily continue in the future. Matrix Asset Advisors became sub-Advisor on
July 3, 1996 and Advisor to the Fund on May 11, 1997. Previous periods during
which the Fund was advised by another investment adviser are not shown.
CALENDAR YEAR TOTAL RETURNS (%)*
1997 1998
---- ----
17.87% 2.90%
* The Fund's year-to-date return as of 9/30/99 was 14.71%.
During the period shown in the bar chart, the Fund's highest quarterly return
was 24.33% for the quarter ended December 31, 1998 and the lowest quarterly
return was -22.37% for the quarter ended June 30, 1998.
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
From
1 Year (7/3/96)**
------ ----------
Matrix/LMH Value Fund 2.90% 12.49%
S&P 500 Index* 28.57% 29.66%
- ----------
* The S&P 500 Index is an unmanaged index generally representative of the
market for the stocks of large sized U.S. companies.
** The date Matrix Asset Advisors became sub-Advisor to the Fund.
3
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MATRIX/LMH
VALUE FUND
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment).......................... None
ANNUAL FUND OPERATING EXPENSES*
(expenses that are deducted from Fund assets)
Management Fees.................................................... 1.00%
Distribution and Service (12b-1) Fees.............................. None
Other Expenses..................................................... 0.83%
-----
Total Annual Fund Operating Expenses............................... 1.83%
-----
Fee Reduction and/or Expense Reimbursement......................... (0.48%)
Net Expenses....................................................... 1.25%
=====
* The Advisor has contractually agreed to reduce the fees and/or net expenses of
the Fund for an indefinite period and at least through June 30, 2000 to ensure
that Total Fund Operating Expenses will not exceed the net expense amount shown.
EXAMPLE
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, under the assumptions, your costs would be:
One Year ............. $ 127
Three Years........... $ 437
Five Years............ $ 755
Ten Years............. $1,657
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The goal of the Fund is to achieve a total rate of return which is
comprised of capital appreciation and current income. The Fund selects for
investment only securities that are financially strong and meet specific
valuation criteria using the principles of value investing based on Classic
Valuation Analysis.
CLASSIC VALUATION ANALYSIS
Classic Valuation Analysis is an investment methodology based on principles
developed over 50 years ago by Benjamin Graham. The underlying principle of
Classical Valuation Analysis is "Buy value . . . it will out." Value criteria
4
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MATRIX/LMH
VALUE FUND
require companies to have a strong financial position, as measured by balance
sheet data, and current low stock market valuation in comparison to investment
value, as measured by historic and current earnings, dividends, return on equity
and book values.
Consistent with the principles of Classic Valuation Analysis, the Fund
diversifies its portfolio over a range of companies and industries.
Once an equity investment has been purchased for the Fund's portfolio, it
generally is sold for one of two reasons:
* the security no longer represents a value, as determined by the Advisor, or
* there has been a fundamental change in the issuer's balance sheet or
results of operations so that it no longer meets the Fund's financial or
valuation criteria.
In addition, the Fund may, in unusual circumstances, sell a security at a time
when the sale is not indicated by Classic Valuation Analysis to avoid adverse
tax consequences or to meet abnormally heavy redemption requests.
The Fund anticipates that it will have a low rate of portfolio turnover.
This means that the Fund has the potential to be a tax efficient investment.
This should result in the realization and the distribution to shareholders of
lower capital gains, which would be considered tax efficient. This anticipated
lack of frequent trading also leads to lower transaction costs, which could help
to improve performance.
Under normal market conditions, the Fund will stay fully invested in
stocks. However, the Fund may temporarily depart from its principal investment
strategies by making substantial short-term investments in cash equivalents in
response to adverse market, economic or political conditions. This may result in
the Fund not achieving its investment objective.
PRINCIPAL RISKS OF INVESTING IN THE FUND
The principal risks that may adversely affect the Fund's net asset value or
total return are summarized above in "An Overview of the Fund." These risks are
discussed in more detail below.
MANAGEMENT RISK. Management risk means that your investment in the Fund
varies with the success and failure of the Advisor's investment strategies and
the Advisor's research, analysis and determination of portfolio securities. If
the Advisor's investment strategies do not produce the expected results, your
investment could be diminished or even lost.
MARKET RISK. Market risk means that the price of common stock may move up
or down (sometimes rapidly and unpredictably) in response to general market and
economic conditions, investor perception and anticipated events, as well as the
activities of the particular issuer. Market risk may affect a single issuer,
industry, section of the economy or the market as a whole. Since the Fund
invests in equity securities, its share price will change daily in response to
stock market movements.
UNDERVALUED STOCKS RISK. Undervalued stocks can react differently to
issuer, political, market and economic developments than the market as a whole
and other types of stocks. Undervalued stocks tend to be inexpensive relative to
their earnings or assets compared to other types of stocks. However, these
stocks can continue to be inexpensive for long periods of time and may not
realize their full economic value.
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MATRIX/LMH
VALUE FUND
YEAR 2000 RISK. The risk that the Fund could be adversely affected if the
computer systems used by the Advisor and other service providers do not properly
process and calculate information related to dates beginning January 1, 2000.
This is commonly known as the "Year 2000 Problem." This situation may negatively
affect the companies in which the Fund invests and by extension the value of the
Fund's shares. Although the Fund's service providers are taking steps to address
this issue, there may still be some risk of adverse effects.
INVESTMENT ADVISOR
Matrix Asset Advisors, Inc. is the investment advisor to the Fund. The
Advisor's address is 747 Third Avenue, New York, NY 10017. The Advisor has
provided investment advisory services to individuals, endowment, and pension
accounts since 1986. The Advisor presently manages assets in excess of $450
million. The Advisor provides the Fund with advice on buying and selling
securities. The Advisor also furnishes the Fund with office space and certain
administrative services and provides most of the personnel needed by the Fund.
For its services, the Fund pays the Advisor a monthly management fee based upon
its average daily net assets. For the fiscal year ended June 30, 1999, the
Advisor received advisory fees of 0.42% of the Fund's average daily net assets,
net of waiver.
PORTFOLIO MANAGER
Mr. David A. Katz, President, Chief Investment and Financial Officer and
Secretary of the Fund, is principally responsible for the management of the
Fund's portfolio. Mr. Katz has been President and Chief Investment Officer and a
principal shareholder of the Advisor for over five years.
FUND EXPENSES
The Fund is responsible for its own operating expenses. The Advisor has
contractually agreed to reduce its fees and/or pay expenses of the Fund to
ensure that the Fund's aggregate annual operating expenses (excluding interest
and tax expenses) will not exceed 1.25% of the Fund's average daily net assets.
Any reduction in advisory fees or payment of expenses made by the Advisor may be
reimbursed by the Fund if the Advisor requests in subsequent fiscal years. This
reimbursement may be requested if the aggregate amount actually paid by the Fund
toward operating expenses for such fiscal year (taking into account the
reimbursement) does not exceed the applicable limitation on Fund expenses. The
Advisor is permitted to be reimbursed for fee reductions and/or expense payments
made in the prior three fiscal years. Any such reimbursement will be reviewed by
the Directors. The Fund must pay its current ordinary operating expenses before
the Advisor is entitled to any reimbursement of fees and/or expenses.
SHAREHOLDER INFORMATION
HOW TO BUY SHARES
You may open a Fund account with $1,000 and add to your account at any time
with $100 or more. You may open a retirement account or Automatic Investment
Plan account with $500 and add to your account at any time with $100 or more.
The Fund may waive minimum investment requirements from time to time.
You may purchase shares of the Fund by check or wire. Shares are purchased
at the net asset value next determined after the Transfer Agent receives your
order with complete information and meeting all the requirements discussed in
this Prospectus. All purchases by check must be in U.S. dollars. Third party
checks and cash will not be accepted. A charge may be imposed if your check does
not clear. The Fund reserves the right to require payment by certified or
6
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MATRIX/LMH
VALUE FUND
official bank check or wire transfer for orders of $50,000 or more. The Fund is
not required to issue share certificates. The Fund reserves the right to reject
any purchase in whole or in part.
BY CHECK
If you are making your first investment in the Fund, simply complete the
Application Form included with this Prospectus and mail it with a check (made
payable to "Matrix/LMH Value Fund") to:
Matrix/LMH Value Fund
P.O. Box 641220
Cincinnati, OH 45264-1220
If using an overnight service send to Matrix/LMH Value Fund, Firstar Bank,
NA, 425 Walnut Street, ML CN-WN-06TC, 6th Floor, Cincinnati, OH 45202.
If you are making a subsequent purchase, a stub is attached to the account
statement you will receive after each transaction. Detach the stub from the
statement and mail it together with a check made payable to "Matrix/LMH Value
Fund" to the Fund in the envelope provided with your statement or to the address
noted above. You should write your account number on the check. You may also
mail a letter together with a check to the Transfer Agent identifying the name
of the Fund, indicating the dollar value of shares to purchased and write your
account number on the check.
BY WIRE
If you are making your first investment in the Fund, before you wire funds
you should call the Transfer Agent at (800) 385-7003 between 9:00 a.m. and 4:00
p.m., Eastern time, on a day when the New York Stock Exchange ("NYSE") is open
to advise them that you are making an investment by wire. The Transfer Agent
will ask for your name and the dollar amount you are investing. You will then
receive your account number and an order confirmation number. You should then
complete the Account Application included with this Prospectus. Include the date
and the order confirmation number on the Account Application and mail the
completed Account Application to the address at the top of the Account
Application. Your bank should transmit immediately available funds by wire in
your name to:
Firstar Bank, N.A. Cinti/Trust
ABA Routing #0420-0001-3
Attn: Matrix/LMH Value Fund
DDA #486447501
Account name (shareholder name)
Shareholder account number
If you are making a subsequent purchase, your bank should wire funds as
indicated above. Before each wire purchase, you should be sure to notify the
Transfer Agent. IT IS ESSENTIAL THAT YOUR BANK INCLUDE COMPLETE INFORMATION
ABOUT YOUR ACCOUNT IN ALL WIRE INSTRUCTIONS. If you have questions about how to
invest by wire, you may call the Transfer Agent. Your bank may charge you a fee
for sending a wire to the Fund.
You may buy, sell and exchange shares of the Fund through certain brokers
(and their agents) that have made arrangements with the Fund to sell its shares.
When you place your order with such a broker or its authorized agent, your order
7
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MATRIX/LMH
VALUE FUND
is treated as if you had placed it directly with the Fund's Transfer Agent, and
you will pay or receive the next price calculated by the Fund. The broker (or
agent) holds your shares in an omnibus account in the broker's (or agent's)
name, and the broker (or agent) maintains your individual ownership records. The
Advisor may pay the broker (or its agent) for maintaining these records as well
as providing other shareholder services. The broker (or its agent) may charge
you a fee for handling your order. The broker (or agent) is responsible for
processing your order correctly and promptly, keeping you advised regarding the
status of your individual account, confirming your transactions and ensuring
that you receive copies of the Fund's prospectus.
AUTOMATIC INVESTMENT PLAN
For your convenience, the Fund offers an Automatic Investment Plan. The
initial minimum investment is reduced to $500 for investors who wish to enroll
in this Plan. Under this Plan, you authorize the Fund to withdraw from your
personal checking account each month an amount that you wish to invest, which
must be at least $100. If you wish to enroll in this Plan, complete the
appropriate section in the Account Application. The Fund may terminate or modify
this privilege at any time. You may terminate your participation in the Plan at
any time by notifying the Transfer Agent in writing.
RETIREMENT PLANS
The Fund offers an Individual Retirement Account ("IRA") plan. You may
obtain information about opening an account by calling the Transfer Agent.
HOW TO SELL SHARES
You may sell (redeem) your Fund shares on any day the Fund and the NYSE are
open for business.
You may redeem your shares by simply sending a written request to the
Transfer Agent. You should give your account number and state whether you want
all or some of your shares redeemed. The letter should be signed by all of the
shareholders whose names appear in the account registration. If stock
certificates have been issued for shares being redeemed, your must include the
stock certificates with your request. Corporations, executors, administrators,
trustees or guardians must submit documents evidencing their authority to act.
You should send your redemption request to:
Matrix/LMH Value Fund
P.O. Box 5536
Hauppauge, NY 11788-0132
To protect the Fund and its shareholders, a signature guarantee is required
to (a) redeem shares having a net asset value of more than $5,000 by mail; (b)
request that the bank account to which redemption proceeds are sent be changed;
(c) authorize transmission of redemption proceeds by bank wire; (d) issue shares
in certificate form; or (e) transfer shares to another person.
Signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution." These include banks, broker-dealers, credit unions and
savings institutions. A broker-dealer guaranteeing signatures must be a member
of a clearing corporation or maintain net capital of at least $100,000. Credit
unions must be authorized to issue signature guarantees. Signature guarantees
will be accepted from any eligible guarantor institution which participates in a
signature guarantee program. A notary public is not an acceptable guarantor.
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MATRIX/LMH
VALUE FUND
Payment of your redemption proceeds will be made promptly, but not later
than seven days after the receipt of your written request in proper form as
discussed in this Prospectus. If you made your first investment by wire, payment
of your redemption proceeds for those shares will not be made until one business
day after your completed Account Application is received by the Fund. If you did
not purchase your shares with a certified check or wire, the Fund may delay
payment of your redemption proceeds for up to 15 days from date of purchase or
until your check has cleared, whichever occurs first.
The Fund may redeem the shares in your account if the value of your account
is less than $1,000 as a result of redemptions you have made. This does not
apply to retirement plan or Uniform Gifts or Transfers to Minors Act accounts.
You will be notified that the value of your account is less than $1,000 before
the Fund makes an involuntary redemption. You will then have 30 days in which to
make an additional investment to bring the value of your account to at least
$1,000 before the Fund takes any action.
The Fund has the right to pay redemption proceeds to you in whole or in
part by a distribution of securities from the Fund's portfolio. It is not
expected that the Fund would do so except in unusual circumstances.
EXCHANGE PRIVILEGE
You may exchange your Fund shares for shares of the Firstar Stellar
Treasury Fund, a money market fund affiliated with the Fund's Custodian. Prior
to making such exchange, you should obtain and carefully read the prospectus for
the Firstar Stellar Treasury Fund.
You may exchange your shares by simply sending a written request to the
Fund's Transfer Agent. You should give the name of the Fund, your name and
account number and the number of shares or dollar amount to be exchanged. The
letter should be signed by all of the persons whose name appear on the account
registration.
If you complete the Exchange Privilege Authorization option on the Account
Application, you may exchange all or some of your shares by calling the Transfer
Agent at (800) 385-7003 before 4:00 p.m., Eastern time, on any business day the
NYSE is open.
When you establish any telephone privileges, you are authorizing the Fund
and its Transfer Agent to act upon the telephone instructions of the person or
persons you have designated on your Account Application. Before acting on
instructions received by telephone, the Fund and the Transfer Agent will use
reasonable procedures to confirm that the telephone instructions are genuine.
These procedures will include recording the telephone call and asking the caller
for a form of personal identification. The Fund reserves the right to refuse a
telephone request if it believes that the person making the request is neither
the record owner of the shares nor otherwise authorized by the shareholder to
request the transaction. Shareholders will be promptly notified of any refused
request for a telephone exchange. If the Fund and the Transfer Agent follow
these reasonable procedures, they will not be liable for any loss, expense, or
cost arising out of any telephone transaction request that is reasonably
believed to be genuine. This includes any fraudulent or unauthorized request.
The Fund may change, modify or terminate these privileges at any time upon at
least 60 days' notice to shareholders.
The Fund reserves the right on notice to shareholders to limit the number
of exchanges you may make in any year to avoid excess Fund expenses. Once an
exchange request is made, either in writing or by telephone, it may not be
modified or canceled. The Fund may modify, restrict or terminate the exchange
privilege at any time.
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MATRIX/LMH
VALUE FUND
Shareholders of the Firstar Stellar Treasury Fund may request that
redemption proceeds of $1,000 or more be wired directly to a bank account. If
you did not purchase your shares with a certified check or wire, the Firstar
Stellar Treasury Fund may delay payment of your redemption proceeds for up to 15
days from date of purchase or until your check has cleared, whichever occurs
first.
You may request telephone exchange privileges after your account is opened
by calling the Transfer Agent at (800) 385-7003 for instructions.
You may have difficulties in making a telephone exchange during periods of
abnormal market activity. If this occurs, you may make your exchange request in
writing.
PRICING OF FUND SHARES
The price of the Fund's shares is based on the Fund's net asset value. This
is done by dividing the Fund's assets, minus its liabilities, by the number of
shares outstanding. The Fund's assets are the market value of securities held in
its portfolio, plus any cash and other assets. The Fund's liabilities are fees
and expenses owed by the Fund. The number of Fund shares outstanding is the
amount of shares which have been issued to shareholders. The price you will pay
to buy Fund shares or the amount you will receive when you sell your Fund shares
is based on the net asset value next calculated after your order is received by
the Transfer Agent with complete information and meeting all the requirements
discussed in this Prospectus.
The net asset value of the Fund's shares is determined as of the close of
regular trading on the NYSE. This is normally 4:00 p.m., Eastern time. Fund
shares will not be priced on days that the NYSE is closed for trading (including
certain U.S. holidays).
DIVIDENDS AND DISTRIBUTIONS
The Fund will make distributions of dividends and capital gains, if any, at
least annually, typically after year end.
All distributions will be reinvested in Fund shares unless you choose one
of the following options: (1) receive dividends in cash, while reinvesting
capital gain distributions in additional Fund shares; or (2) receive all
distributions in cash. If you wish to change your distribution option, write to
the Transfer Agent in advance of the payment date of the distribution.
TAX CONSEQUENCES
The Fund intends to make distributions of dividends and capital gains.
Dividends are taxable to you as ordinary income. The rate you pay on capital
gain distributions will depend on how long the Fund held the securities that
generated the gains, not on how long you owned your Fund shares. You will be
taxed in the same manner whether you receive your dividends and capital gain
distributions in cash or reinvest them in additional Fund shares.
If you sell or exchange your Fund shares, it is considered a taxable event
for you. Depending on the purchase price and the sale price of the shares you
exchange or sell, you may have a gain or a loss on the transaction. You are
responsible for any tax liabilities generated by your transaction.
10
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MATRIX/LMH
VALUE FUND
FINANCIAL HIGHLIGHTS
This table shows the Fund's financial performance for the past five years.
Certain information reflects financial results for a single fund share. "Total
return" shows how much your investment in the Fund would have increased or
decreased during each period, assuming you had reinvested all dividends and
distributions. The information for the fiscal year ended June 30, 1999 has been
audited by Tait, Weller & Baker, independent accountants. Their report and the
Fund's financial statements are included in the Annual Report, which is
available upon request. Information for earlier periods shown was audited by
other independent accountants.
For a share outstanding throughout each year
<TABLE>
<CAPTION>
Years Ended June 30,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............... $32.90 $29.39 $24.10 $20.98 $17.78
------ ------ ------ ------ ------
Income from investment operations:
Net investment income....................... 0.03 0.14 0.10 0.47 0.46
Net realized and unrealized gain
on investments........................... 6.26 3.54 5.52 3.12 3.13
------ ------ ------ ------ ------
Total from investment operations................. 6.29 3.68 5.62 3.59 3.59
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment income........ (0.09) (0.17) (0.33) (0.47) (0.39)
Distributions from realized gains........... (0.70) (0.00) (0.00) (0.00) (0.00)
------ ------ ------ ------ ------
Total distributions.............................. (0.79) (0.17) (0.33) (0.47) (0.39)
------ ------ ------ ------ ------
Net asset value, end of year..................... $38.40 $32.90 $29.39 $24.10 $20.98
====== ====== ====== ====== ======
Total return..................................... 19.79% 12.56% 23.47% 17.16% 20.47%
Ratios/supplemental data:
Net assets, end of year (millions)............... $ 11.1 $ 10.0 $ 8.5 $ 6.6 $ 6.0
Ratio of operating expenses to average net assets:
Before expense reimbursement................ 1.83% 1.80% 1.92% 1.84% 2.35%
After expense reimbursement................. 1.25% 1.23% 1.42% 1.84% 2.35%
Ratio of net investment income (loss) to
average net assets:
Before expense reimbursement................ (0.48)% (0.12)% (0.06)% 2.01% 2.27%
After expense reimbursement................. 0.10% 0.45% 0.44% 2.01% 2.27%
Portfolio turnover rate.......................... 33% 68% 129% 57% 34%
</TABLE>
11
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MATRIX/LMH VALUE FUND, INC.
www.matrixlmh.com
For investors who want more information about the Fund, the following documents
are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS: Additional information about the Fund's investments
is available in the Fund's annual and semi-annual reports to shareholders. In
the Fund's annual report, you will find a discussion of market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Fund and is incorporated by reference into this
Prospectus.
You can get free copies of reports and the SAI, request other information and
discuss your questions about the Fund by contacting the Fund at:
Matrix Asset Advisors, Inc.
747 Third Avenue, 31st Floor
New York, New York 10017
Telephone: 1-800-366-6223
You can review and copy information including the Fund's reports and SAI at the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. You can obtain information on the operation of the Public Reference Room by
calling 1-800-SEC-0330. You can get text-only copies:
* For a fee, by writing to the Public Reference Room of the Commission,
Washington, DC 20549-6009, or
* For a fee, by calling 1-800-SEC-0330, or
* Free of charge from the Commission's Internet website at http://www.sec.gov.
(The Fund's SEC Investment Company Act
file number is 811-03758)
<PAGE>
MATRIX/LMH VALUE FUND, INC.
747 THIRD AVENUE, 31ST FLOOR
NEW YORK, NY 10017
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 29, 1999
This Statement of Additional Information ("SAI") is not a prospectus and it
should be read in conjunction with the Prospectus dated October 29, 1999, as may
be revised, of Matrix/LMH Value Fund, Inc. (the "Fund"). Matrix Asset Advisors,
Inc. (the "Advisor") is the advisor to the Fund. A copy of the Fund's Prospectus
is available by calling (212) 486-2004 or (800) 385-7003.
TABLE OF CONTENTS
The Fund ................................................................. B-2
Investment Objective and Policies ........................................ B-2
Investment Restrictions .................................................. B-5
Directors and Officers ................................................... B-7
The Fund's Investment Advisor ............................................ B-8
Execution of Portfolio Transactions ...................................... B-9
Portfolio Turnover ....................................................... B-11
Additional Purchase and Redemption Information ........................... B-11
Distributions and Tax Information ........................................ B-13
Determination of Share Price ............................................. B-14
Performance Information .................................................. B-14
General Information ...................................................... B-15
Financial Statements ..................................................... B-16
Appendix ................................................................. B-16
B-1
<PAGE>
THE FUND
The Fund is an open-end management investment company organized as a
Maryland corporation. The Fund is registered with the SEC as a management
investment company. Such a registration does not involve supervision of the
management or policies of the Fund. The Prospectus of the Fund and this SAI omit
certain of the information contained in the Registration Statement filed with
the SEC. Copies of such information may be obtained from the SEC upon payment of
the prescribed fee.
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a mutual fund with the investment objective of seeking to
achieve a total rate of return which is comprised of capital appreciation and
current income. The following discussion supplements the discussion of the
Fund's investment objective and policies as set forth in the Prospectus. There
can be no assurance the objective of the Fund will be attained.
PREFERRED STOCK
The Fund may invest in preferred stocks. A preferred stock is a blend of
the characteristics of a bond and common stock. It can offer the higher yield of
a bond and has priority over common stock in equity ownership, but does not have
the seniority of a bond and, unlike common stock, its participation in the
issuer's growth may be limited. Preferred stock has preference over common stock
in the receipt of dividends and in any residual assets after payment to
creditors should the issuer be dissolved. Although the dividend is set at a
fixed annual rate, in some circumstances it can be changed or omitted by the
issuer.
CONVERTIBLE SECURITIES
The Fund may invest in convertible securities (bonds, notes, debentures,
preferred stock and other securities convertible income common stocks ) that may
offer higher income than the common stocks into which they are convertible. The
convertible securities in which the Fund may invest include fixed-income or zero
coupon debt securities, which may be converted or exchanged at a rated or
determinable exchange ratio into underlying shares of common stock. Prior to
their conversion, convertible securities may have characteristics similar to
non-convertible debt securities. While convertible securities generally offer
lower yields than non-convertible debt securities of similar quality, their
prices may reflect changes in the value of the underlying common stock.
Convertible securities generally entail less credit risk than the issuer's
common stock.
INVESTMENT COMPANIES
The Fund may invest in shares of other investment companies in pursuit of
its investment objective. This may include investment in money market mutual
funds in connection with the Fund's management of daily cash positions. In
addition to the advisory and operational fees the Fund bears directly in
connection with its own operation, the Fund and its shareholders will also bear
the pro rata portion of each other investment company's advisory and operational
expenses.
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FOREIGN SECURITIES
The Fund may invest up to 10% of its total assets in securities of foreign
issuers that are listed and traded on national securities exchanges or traded
over-the-counter in the United States.
RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and diversification and balance of
payments position. The internal politics of some foreign countries may not be as
stable as those of the United States. Governments in some foreign countries also
continue to participate to a significant degree, through ownership interest or
regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are affected by the
trade policies and economic conditions of their trading partners. If these
trading partners enacted protectionist trade legislation, it could have a
significant adverse effect upon the securities markets of such countries.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. A change in the value of any such currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of the
Fund's assets denominated in that currency. Such changes will also affect the
Fund's income. The value of the Fund's assets may also be affected by currency
restrictions and exchange control regulations enacted from time to time.
EURO CONVERSION. Several European countries adopted a single uniform
currency known as the "euro," effective January 1, 1999. The euro conversion,
that will take place over a several-year period, could have potential adverse
effects on the Fund's ability to value its portfolio holdings in foreign
securities, and could increase the costs associated with the Fund's operations.
The Fund and the Advisor are working with providers of services to the Fund in
the areas of clearance and settlement of trade to avoid any material impact on
the Fund due to the euro conversion; there can be no assurance, however, that
the steps taken will be sufficient to avoid any adverse impact on the Fund.
MARKET CHARACTERISTICS. The Advisor expects that many foreign securities in
which the Fund invests will be purchased in over-the-counter markets or on
exchanges located in the countries in which the principal offices of the issuers
of the various securities are located, if that is the best available market.
Foreign exchanges and markets may be more volatile than those in the United
States. While growing, they usually have substantially less volume than U.S.
markets, and the Fund's foreign securities may be less liquid and more volatile
than U.S. securities. Also, settlement practices for transactions in foreign
markets may differ from those in United States markets, and may include delays
beyond periods customary in the United States. Foreign security trading
practices, including those involving securities settlement where Fund assets may
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be released prior to receipt of payment or securities, may expose the Fund to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer.
LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest and dividends payable on some of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to Fund shareholders.
COSTS. To the extent that the Fund invests in foreign securities, its
expense ratio is likely to be higher than those of investment companies
investing only in domestic securities, since the cost of maintaining the custody
of foreign securities is higher.
OPTIONS ON SECURITIES
The Fund may write (sell) covered call options on its portfolio securities
("covered options") in an attempt to enhance gain, although it has no present
intention to do so and may only do so to the extent of up to 5% of its net
assets.
When the Fund writes a covered call option, it gives the purchaser of the
option the right, upon exercise of the option, to buy the underlying security at
the price specified in the option (the "exercise price") at any time during the
option period, generally ranging up to nine months. If the option expires
unexercised, the Fund will realize income to the extent of the amount received
for the option (the "premium"). If the call option is exercised, a decision over
which the Fund has no control, the Fund must sell the underlying security to the
option holder at the exercise price. By writing a covered option, the Fund
forgoes, in exchange for the premium less the commission ("net premium") the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
The Fund may terminate its obligation as writer of a call option by
purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction."
Closing purchase transactions enable the Fund immediately to realize gains
or minimize losses on its options positions. There is no assurance that a liquid
secondary market on an options exchange will exist for any particular option, or
at any particular time, and for some options no secondary market may exist. In
addition, stock index prices may be distorted by interruptions in the trading of
securities of certain companies or of issuers in certain industries, which could
disrupt trading in option positions on such indices and preclude the Fund from
closing out its options positions. If the Fund is unable to effect a closing
purchase transaction with respect to options it has written, it will not be able
to terminate its obligations or minimize its losses under such options prior to
their expiration.
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The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements may take place in the underlying markets that cannot be reflected
in the options markets.
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The Fund
may hold certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar- denominated obligations of domestic banks, savings and loan associations
or financial institutions which, at the time of purchase, have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully insured
by the U.S. Government.
In addition to buying certificates of deposit and bankers' acceptances, the
Fund also may make interest-bearing time or other interest-bearing deposits in
commercial or savings banks. Time deposits are non-negotiable deposits
maintained at a banking institution for a specified period of time at a
specified interest rate.
COMMERCIAL PAPER AND SHORT-TERM NOTES. The Fund may invest a portion of its
assets in commercial paper and short-term notes. Commercial paper consists of
unsecured promissory notes issued by corporations. Commercial paper and
short-term notes will normally have maturities of less than nine months and
fixed rates of return, although such instruments may have maturities of up to
one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's, or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Advisor to be of comparable quality.
These rating symbols are described in the Appendix.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by the
Fund and (unless otherwise noted) are fundamental and cannot be changed without
the affirmative vote of a majority of the Fund's outstanding voting securities
as defined in the 1940 Act. The Fund may not:
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1. Purchase any securities which would cause more than 5% of the Fund's
total assets at the time of such purchase to be invested in the securities of
any issuer, but this limitation does not apply to obligations issued or
guaranteed by the U.S. Government;
2. Purchase any securities which would cause the Fund at the time of such
purchase to own more than 10% of the outstanding voting securities of any class
of any issuer, but this limitation does not apply to obligations issued or
guaranteed by the U.S. Government;
3. Purchase any securities which would cause more than 25% of the Fund's
total assets at the time of such purchase to be concentrated in the securities
of issuers engaged in any one industry;
4. Invest in companies for the purpose of exercising management or control;
5. Purchase or sell real estate, although the Fund may invest in the
readily marketable securities of companies whose business involves the purchase
or sale of real estate;
6. Purchase or sell commodities or commodities contracts;
7. Purchase the securities of any investment company, except (i) in the
open market where no profit to a sponsor or dealer other than customary
brokerage commissions results from such purchases or (ii) if acquired in
connection with a plan of reorganization;
8. Purchase securities on margin;
9. Effect short sales of any securities;
10. Make loans, except by the acquisition of a portion of an issue of
publicly traded bonds, debentures, notes, and other debt securities;
11. Borrow money, except for temporary emergency purposes in amounts not in
excess of 5% of the Fund's total assets;
12. Mortgage, pledge or hypothecate securities;
13. Act as an underwriter of securities except insofar as the Fund might
technically be deemed an underwriter for purposes of the Securities Act of 1933
upon the disposition of certain securities;
14. Purchase or retain the securities of any issuer if the Fund's officers
or directors, or those of the Advisor, who each own 0.5% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
securities; or
15. Issue any class of securities senior to any other class of securities.
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As a matter of operating but not fundamental policy, which can be changed
without shareholder approval, the Fund may not purchase any securities which
would cause more than 5% of the Fund's net assets at the time of such purchase
to be invested in securities which may not be publicly sold without registration
under the Securities Act of 1933 or are otherwise not readily marketable. If
such policy were to be changed, such investments would be limited to no more
than 15% of net assets.
If a percentage restriction set forth in the prospectus or in this SAI is
adhered to at the time of investment, a subsequent increase or decrease in a
percentage resulting from a change in the values of assets will not constitute a
violation of that restriction, except with respect to borrowing or the purchase
of restricted or illiquid securities.
DIRECTORS AND OFFICERS
The directors and officers of the Fund are as follows:
Name and Address and Principal
Occupations During the Past Five Yrs. Offices With the Fund
- ------------------------------------- ---------------------
David A. Katz, CFA, Age 36* President, Secretary, and Treasurer
747 Third Avenue
New York, NY 10017
Mr. Katz is President and Chief Investment Officer of Matrix Asset Advisors, the
Fund's Advisor, and portfolio manager of the Fund. He has been associated with
the Advisor and its predecessor since its founding in 1986.
Robert M. Rosencrans, Age 70 Director
331 Round Hill Rd.
Greenwich, CT 06830
Mr. Rosencrans has been President of Columbia International, Inc. since 1984.
From 1962 to 1984 he was President and Chief Executive Officer of United Artists
Cablesystems Corporation.
T. Michael Tucker, Age 55 Director
218 South Pear Street
Blountstown, FL 32424
Mr. Tucker is the owner of T. Michael Tucker, a certified public accounting firm
which he established in 1977.
Larry D. Kieszek, Age 47 Director
222 Northeast First Street
Gainesville, FL 32601
Mr. Kieszek is Managing Partner of Purvis, Gray & Company, a certified public
accounting firm with which he has been associated since 1974.
- ----------
* Mr. Katz is an "interested person" of the Fund within the meaning of the
Investment Company Act of 1940 (the "1940 Act").
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All Directors who are not interested persons are entitled to receive a fee
of $500 per meeting plus expenses of attending Board of Directors meetings. With
respect to meetings held during the fiscal year ended June 30, 1999, the
Directors did not receive fees or expense reimbursement.
The Directors and officers of the Fund as a group may be deemed to own
beneficially less than 1% of Fund shares outstanding as of the date of this SAI.
THE FUND'S INVESTMENT ADVISOR
Matrix Asset Advisors, Inc. (the "Advisor") serves as the Fund's Advisor
under an Advisory Agreement, which provides that the Advisor will obtain and
evaluate information relating to the economy, industries, businesses, securities
markets and securities, formulate a continuing program for the management of the
Fund's assets in a manner consistent with its investment objective, and
implement this program by selecting on a discretionary basis the securities to
be purchased or sold by the Fund and placing orders for such purchases and
sales. In addition, the Advisor provides for the Fund's office needs, supervises
the maintenance of the Fund's books and records, provides the Fund with persons
competent to perform all of these executive and administrative functions,
supervises and coordinates the activities of the Fund's institutional and other
agents (e.g., custodian, transfer agent, independent accountants, outside legal
counsel), and permits its officers and employees to serve as directors and
officers of the Fund, all without additional cost to the Fund. Certain directors
and officers of the Advisor presently serve as directors or officers of the
Fund. The Advisor has retained, at its own expense, Investment Company
Administration LLC, 560 Hudson St., Hackensack, NJ 07601, to assist it in
providing the Fund with certain administrative services.
The Fund pays all other expenses incurred in the operation of the Fund,
except as provided below, including taxes, fees and commissions, bookkeeping
expenses, share issuance expenses, expenses of redemption of shares, charges of
its custodian and transfer agent, costs of preparing and printing reports and
prospectuses for the Fund's existing shareholders, registration fees, auditing
and legal expenses, and expenses and fees of outside directors.
The Advisor also has agreed to pay the fees and expenses of printing and
distributing reports or prospectuses prepared for the Fund in connection with
the offering or sale of its shares, of preparing and setting in type, printing
and mailing all advertising and sales literature and all other expenses in
connection with the offer and sale of Fund shares not specifically allocated to
the Fund.
The Advisory Agreement continues in effect from year to year, if such
continuation is specifically approved at least annually by the Fund's Board of
Directors at a meeting called for that purpose, or by vote of the holders of a
majority of the Fund's shares, and in either case, also by a vote of a majority
of the Fund's shares and in either case, also by a vote of a majority of
directors who are not "interested persons" of the Advisor or the Fund within the
meaning of the Investment Company Act of 1940. The Advisory Agreement is subject
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to termination by either party without penalty on 60 days' written notice to the
other and terminates automatically in the event of its assignment.
The Advisory Agreement provides that neither the Advisor, its directors,
officers or employees, nor certain other persons performing specific functions
for the Fund, shall be liable to the Fund, except for any loss resulting from
willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Fund has agreed to pay the Advisor, as compensation for all services
rendered, staff and facilities provided and expenses paid or assumed (excluding
organizational costs), an annual fee, payable monthly, of 1.00% of the Fund's
average daily net assets. Heine Management Group, Inc. served as Advisor to the
Fund from its inception until April 18, 1997, when shareholders approved the
Investment Advisory Agreement with the Advisor. For the fiscal year ended June
30, 1999, investment advisory fees of $92,001 were incurred, of which $51,319
were waived by the Advisor. For the same period, the Advisor reimbursed the Fund
an additional $2,000 in expenses. For the fiscal year ended June 30, 1998,
investment advisory fees of $92,091 were incurred, of which $52,397 were waived
by the Advisor. For the fiscal year ended June 30, 1997, investment advisory
fees of $75,679 were incurred, of which $38,128 were waived by Heine Management
and the Advisor.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreement, the Advisor determines which securities
are to be purchased and sold by the Fund and which broker-dealers are eligible
to execute the Fund's portfolio transactions. Purchases and sales of securities
in the over-the-counter market will generally be executed directly with a
"market-maker" unless, in the opinion of the Advisor, a better price and
execution can otherwise be obtained by using a broker for the transaction.
Purchases of portfolio securities for the Fund also may be made directly
from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Fund will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principal for their own accounts. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Advisor will use its reasonable
efforts to choose broker- dealers capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
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given to those broker-dealers which furnish or supply research and statistical
information to the Advisor that it may lawfully and appropriately use in its
investment advisory capacities, as well as provide other services in addition to
execution services. The Advisor considers such information, which is in addition
to and not in lieu of the services required to be performed by it under its
Agreement with the Fund, to be useful in varying degrees, but of indeterminable
value. Portfolio transactions may be placed with broker-dealers who sell shares
of the Fund subject to rules adopted by the National Association of Securities
Dealers, Inc.
While it is the Fund's general policy to seek first to obtain the most
favorable price and execution available in selecting a broker-dealer to execute
portfolio transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Advisor, even if the specific services are not directly useful to the Fund and
may be useful to the Advisor in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, the
Fund may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Advisor to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer. The standard of reasonableness
is to be measured in light of the Advisor's overall responsibilities to the
Fund.
Investment decisions for the Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts or Funds.
In such event, the position of the Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or Funds seeks to acquire the same security as the Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such security. Similarly, the Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts or Funds simultaneously
purchases or sells the same security that the Fund is purchasing or selling,
each day's transactions in such security will be allocated between the Fund and
all such client accounts or Funds in a manner deemed equitable by the Advisor,
taking into account the respective sizes of the accounts and the amount being
purchased or sold. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as the Fund is
concerned. In other cases, however, it is believed that the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
brokers solely for selling shares of the Fund, although the Fund may consider
the sale of shares as a factor in allocating brokerage. However, as stated
above, broker-dealers who execute brokerage transactions may effect purchase of
shares of the Fund for their customers.
For the fiscal year ended June 30, 1999, the Fund paid $13,223 in brokerage
commissions.
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For the fiscal years ended June 30, 1998 and 1997, the Fund paid brokerage
commissions of $23,617 and $38,079, respectively. All such commissions were paid
to persons unaffiliated with the Fund or the Advisor.
PORTFOLIO TURNOVER
Although the Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Advisor, investment
considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in the Fund's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to higher transaction costs and may
result in a greater number of taxable transactions. See "Execution of Portfolio
Transactions." For the fiscal years ended June 30, 1999 and 1998, the Fund had a
portfolio turnover rate of 33% and 68%, respectively.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The information provided below supplements the information contained in the
Fund's Prospectus regarding the purchase and redemption of Fund shares.
HOW TO BUY SHARES
The public offering price of Fund shares is the net asset value. The Fund
receives the net asset value. Shares are purchased at the public offering price
next determined after the Transfer Agent receives your order in proper form as
discussed in the Fund's Prospectus. In most cases, in order to receive that
day's public offering price, the Transfer Agent must receive your order in
proper form before the close of regular trading on the New York Stock Exchange
("NYSE"), normally 4:00 p.m., Eastern time.
The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that it will not be open on the
following days: New Year's Day, Martin Luther King Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, the NYSE may close on days not included in that
announcement.
The Fund may suspend the right of redemption: (a) for any period during
which the New York Stock Exchange ("NYSE") is closed, or the Securities and
Exchange Commission ("SEC") determines that trading on the NYSE is restricted;
(b) when there is an emergency as determined by the SEC as a result of which it
is not practicable for the Fund to dispose of its securities; or ( c) for such
other period as the SEC may by order permit for the protection of the Fund's
shareholders.
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HOW TO SELL SHARES
You can sell your Fund shares any day the NYSE is open for regular trading.
DELIVERY OF REDEMPTION PROCEEDS
Payments to shareholders for shares of the Fund redeemed directly from the
Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the NYSE is restricted as determined by the SEC or
the NYSE is closed for other than weekends and holidays; (b) an emergency exists
as determined by the SEC making disposal of portfolio securities or valuation of
net assets of the Fund not reasonably practicable; or (c) for such other period
as the SEC may permit for the protection of the Fund's shareholders. Under
unusual circumstances, the Fund may suspend redemptions, or postpone payment for
more than seven days, but only as authorized by SEC rules.
The value of shares on redemption or repurchase may be more or less than
the investor's cost, depending upon the market value of the Fund's portfolio
securities at the time of redemption or repurchase.
REDEMPTIONS-IN-KIND
The Fund has made an election pursuant to Rule 18f-1 under the 1940 Act
which obligates it to pay in cash all redemptions to any shareholder of record
unless a shareholder requests a redemption, within a 90 day period, of shares
having a value in excess of (i) $250,000, or (ii) 1% of the Fund's net asset
value, whichever is less. In this case, the Fund is permitted to pay the
redemption price in whole or in part by a distribution of securities from its
portfolio. In that event, the value of the securities distributed would be equal
to the amount redeemed, determined at the same time, and in the same manner, as
the redemption price is determined. Shareholders who receive redemption payments
in securities may incur brokerage costs in converting the securities they
receive into cash.
AUTOMATIC INVESTMENT PLAN
As discussed in the Prospectus, the Fund provides an Automatic Investment
Plan for the convenience of investors who wish to purchase shares of the Fund on
a regular basis. All record keeping and custodial costs of the Automatic
Investment Plan are paid by the Fund. The market value of the Fund's shares is
subject to fluctuation, so before undertaking any plan for systematic
investment, the investor should keep in mind that this plan does not assure a
profit nor protect against depreciation in declining markets.
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DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually. Also, the Fund expects
to distribute any undistributed net investment income on or about December 31 of
each year. Any net capital gains realized through the period ended October 31 of
each year will also be distributed by December 31 of each year.
Each distribution by the Fund is accompanied by a brief explanation of the
form and character of the distribution. In January of each year the Fund will
issue to each shareholder a statement of the federal income tax status of all
distributions.
TAX INFORMATION
The Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code, and, as such, will pay no
Federal income taxes on net income or net realized capital gains distributed to
shareholders. Consistent with requirements for qualification as a regulated
investment company, the Fund intends to distribute each year substantially all
of its net investment income and net profits received from sales of portfolio
securities, after offsetting against these profits any available capital loss
carryforwards. The availability of net income for dividends is dependent on the
level of the Fund's income and expenses, and the actual amount and timing of any
dividend or distribution is subject to the discretion of the Fund's Board of
Directors.
Under current law, ordinary income dividends received by corporate
shareholders may be eligible for the 70% dividends-received deduction for
corporations. The dividends-received deduction for corporations will apply to
that portion of the ordinary income dividend designated by the Fund as
qualifying for the dividends-received deduction. Any distributions made by the
Fund will not be eligible for the dividends-received deduction with respect to
shares which are held by the shareholder for 45 days or less. Capital gain
distributions do not qualify for the dividends- received deduction.
Investors should carefully consider the impact of buying Fund shares just
before the declaration of an income dividend or capital gains distribution. Any
such dividend or distribution paid shortly after a purchase of shares will
reduce the net asset value of the shares by the amount of the dividend or
distribution. The dividend or distribution, though in effect a return of
capital, would be taxable as ordinary income.
Investors will recognize gain or loss upon the redemption of shares of the
Fund. Such gain or loss will be capital gain or loss if the shares were held as
capital assets by the investor. Such capital gain or loss will be long-term or
short-term depending upon the investor's holding period for such shares.
The Fund is subject to a non-deductible 4% excise tax on the excess of
required distributions over the amounts actually distributed by the Fund on a
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calendar year basis. The Fund expects to declare and pay such distributions of
net investment income and capital gains as may be necessary to avoid the
application of this excise tax. The foregoing is a summary discussion of the
federal income tax consequences based on federal income tax laws and regulations
is believed to be in effect on the date of this SAI. This discussion is not
intended to be comprehensive and investors are urged to consult their tax
advisors concerning specific questions regarding federal, state and local
taxation.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Fund will be determined once daily as of the close of public
trading on the NYSE (normally 4:00 p.m., Eastern time) on each day that the NYSE
is open for trading. The Fund does not expect to determine the net asset value
of its shares on any day when the NYSE is not open for trading even if there is
sufficient trading in its portfolio securities on such days to materially affect
the net asset value per share. However, the net asset value of the Fund's shares
may be determined on days the NYSE is closed or at times other than 4:00 p.m. if
the Board of Directors decides it is necessary.
In valuing the Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Directors of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of the Fund are valued in such manner as the Board of Directors in
good faith deems appropriate to reflect their fair value.
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
As indicated in the prospectus, from time to time the Fund may include its
average total return and other total return data in advertisements or
information furnished to present or prospective shareholders. Total return
figures are based on the Fund's historical performance and are not intended to
indicate future performance.
Average annual total return quotations for the specified periods are
computed rates of return ("T") (based on net investment income and any realized
and unrealized capital gains or losses on portfolio investments over such
periods) that would equate the initial amount invested ("P") to the redeemable
value of such investment at the end of each period ("ERV"), over a period of
time ["n"], according to the following formula:
n
P (1 + T) = ERV
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The Fund may also quote aggregate total return performance data. Aggregate
total return data generally will be higher than average annual total return data
since the aggregate rate of return reflects performance over a longer period of
time. The Fund's average annual total return for the period July 3, 1996 through
June 30, 1999 was 17.80%. The Fund's total return for the fiscal year ended June
30, 1999 was 19.78%. Prior to July 3, 1996, the Fund was advised by another
investment advisor. Certain fees and expenses of the Fund have been reimbursed
during this period. Accordingly, return figures are higher than they would have
been had such fees and expenses not been reimbursed.
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
Firstar Institutional Custody Services, located at 425 Walnut St.,
Cincinnati, Ohio 45201 acts as Custodian of the securities and other assets of
the Fund. American Data Services, P.O. Box 5536, Hauppauge, NY 11788-0132 acts
as the Fund's transfer and shareholder service agent. The Custodian and Transfer
Agent do not participate in decisions relating to the purchase and sale of
securities by the Fund.
Swidler Berlin Shereff Friedman, LLP, 919 Third Avenue, New York, NY 10022,
serves as counsel to the Fund. Tait, Weller & Baker, 8 Penn Center Plaza,
Philadelphia, PA 19103, serves as the Fund's independent accountants.
On October 1, 1999, the following persons owned 5% or more of the Fund's
outstanding voting securities:
Charles Schwab & Co., Inc. Special Custody Account for Benefit of
Customers, San Francisco, CA 94104-4122 - 35.12%.
Star Bank, N/A, Custodian P. S. Brooks IRA, Tarrytown, NY 10591 - 6.16%
The Fund's shares are denominated "Common Stock, $.01 par value." Shares
have no pre- emptive rights and are fully paid and non-assessable. Shares have
non-cumulative voting rights, which means the holders of more than 50% of the
shares voting for the election of directors can elect all of the directors if
they choose to do so, in which event the holders of the remaining less than 50%
of the shares voting for the election of directors will not be able to elect any
directors.
Shareholders are entitled to one vote for each share held and fractional
votes for fractional shares held and will vote on any matter submitted to a
shareholder vote. The Fund does not intend to hold meetings of shareholders in
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any year in which the 1940 Act does not require shareholders to act upon any of
the following matters: (i) election of directors; (ii) approval of an investment
advisory agreement; (iii) approval of a distribution agreement; (iv)
ratification of selection of independent accountants.
FINANCIAL STATEMENTS
The annual report to shareholders for the Fund for the fiscal year ended
June 30, 1999 s a separate document supplied with this SAI and the financial
statements, accompanying notes and report of independent accountants appearing
therein are incorporated by reference in this SAI.
APPENDIX
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have
a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have
a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
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