RNC MUTUAL FUND GROUP, INC.
SUPPLEMENT TO THE PROSPECTUS
DATED FEBRUARY 1, 1997
SUPPLEMENT DATED FEBRUARY 24, 1997
This supplement amends the section in the Prospectus entitled "FINANCIAL
HIGHLIGHTS for RNC Money Market Fund."
The Table for Fiscal Period Ended September 30, 1996 is hereby amended to read:
Net asset value, beginning of period.............$1.000
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...........................0.047
LESS DISTRIBUTIONS
Dividends from net
Investment income..............................(0.047)
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Net asset value, end of year......................$1.000
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Total Annual Return..............................4.70%
The remaining information remains unchanged.
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STATEMENT OF ADDITIONAL INFORMATION
RNC MUTUAL FUND GROUP, INC.
11601 WILSHIRE BOULEVARD, 25TH FLOOR
LOS ANGELES, CALIFORNIA 90025
FOR GENERAL INFORMATION AND PURCHASES CALL
(800) 385-7003
RNC Mutual Fund Group, Inc. (the "Group") is a no-load fund
group with two diversified mutual funds: RNC Equity Fund and RNC Money Market
Fund.
RNC Equity Fund invests primarily in common stocks with the
objective of achieving above-average total return consistent with reasonable
risk. The Fund's ability to achieve above-average total return cannot be
guaranteed and is subject to the risk of occasional volatile market conditions.
RNC Money Market Fund invests in a diversified portfolio of
short-term money market securities with the objective of obtaining as high as
possible current income consistent with preservation of capital and liquidity.
There can be no assurance that the investment objective to maintain a constant
net asset value of $1.00 per share will be achieved.
Shares of the Funds may be purchased at their net asset value
with no sales load.
This Statement of Additional Information of the Group is not a
prospectus and should be read in conjunction with the Prospectus of the Group
dated February 1, 1997, as may be amended from time to time (the "Prospectus").
The Prospectus provides the basic information a prospective investor should know
before purchasing shares of the Funds and may be obtained by calling or by
writing the Group at the above telephone number or address. This Statement of
Additional Information has been incorporated by reference into the Prospectus.
Both the Prospectus and this Statement of Additional Information have been filed
with the Securities and Exchange Commission.
The date of this Statement of Additional Information is
February 1, 1997.
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TABLE OF CONTENTS
Page
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Objectives and Policies............................................B- 3
Management of the Group............................................B-15
Investment Advisory and Other Services.............................B-17
Portfolio Transactions.............................................B-19
Purchase of Shares.................................................B-21
Redemption of Shares...............................................B-22
Taxes..............................................................B-23
Dividends..........................................................B-27
Shareholder Rule 12b-1 Plans.......................................B-29
Performance Information............................................B-31
Principal Underwriter..............................................B-34
Financial Statements...............................................B-35
Appendix...........................................................B-36
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OBJECTIVES AND POLICIES
Reference is made to the "Objectives and Policies" in the
Prospectus for a discussion of the investment objectives and policies of the
Funds.
The Group was organized as a Maryland corporation on April 9,
1985 and currently consists of two diversified mutual funds: an equity fund and
a money market fund.
INVESTMENT RESTRICTIONS. In addition to the investment restrictions set forth in
the Prospectus, each Fund has adopted a set of investment restrictions, none of
which may be changed without the approval of a majority of the relevant Fund's
outstanding shares. For this purpose, majority approval means the vote of (I)
67% or more of the respective Fund's shares present at a meeting, if the holders
of more than 50% of the outstanding shares of the Fund are present or
represented by proxy, or (ii) more than 50% of the respective Fund's outstanding
shares, whichever is less.
RNC Equity Fund may not:
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(1) Make investments for the purpose of exercising control or
management.
(2) Invest in oil, gas or other mineral exploration or development
programs, commodities or commodity contracts, except that RNC Equity
Fund may invest in securities of issuers which invest or deal in any of
the above.
(3) Invest in real estate or in interests in real estate, except that
RNC Equity Fund may purchase readily marketable securities of companies
holding real estate or interests therein, and may invest in
mortgaged-backed securities.
(4) Purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities.
(5) Make loans, except that RNC Equity Fund may (a) purchase debt
obligations in accordance with its investment objective and policies,
(b) make loans of
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portfolio securities provided, among other things, that the value of
the securities loaned does not exceed 10% of the value of its net
assets and (C) enter into repurchase agreements as disclosed in the
Prospectus. (RNC Equity Fund does not presently loan portfolio
securities.) The acquisition of bonds, debentures or other corporate
debt securities which are not publicly distributed is considered to be
the making of a loan under the Investment Company Act of 1940 (the
"1940 Act").
(6) Mortgage, pledge, hypothecate or in any manner transfer as security
for indebtedness any securities owned or held by RNC Equity Fund except
as may be necessary in connection with borrowings mentioned in (7)
below, and then such mortgaging, pledging or hypothecating may not
exceed 10% of RNC Equity Fund's total assets, taken at market value.
(7) Borrow in excess of 10% of the total assets of RNC Equity Fund,
taken at market value, and then only from banks as a temporary measure
for extraordinary or emergency purposes. Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets;
however, RNC Equity Fund will not borrow to increase income but only to
meet redemption requests which might otherwise require untimely
dispositions of portfolio securities. In addition, RNC Equity Fund will
not purchase securities while outstanding borrowings exceed 5% of its
total assets.
(8) Act as an underwriter of securities, except to the extent that RNC
Equity Fund may technically be deemed to be an underwriter when engaged
in the activities described in (5) above or insofar as RNC Equity Fund
may be deemed an underwriter under the Securities Act of 1933 (the
"1933 Act") in selling portfolio securities.
(9) Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit RNC Equity Fund from
(a) making any permitted borrowings, mortgages or pledges, or (b)
entering into options, forward or repurchase transactions.
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(10) Purchase or sell futures or futures contracts or invest in put,
call, straddle or spread options. (As a matter of operating policy, the
Board of Directors may authorize RNC Equity Fund to engage in certain
activities involving options and/or futures for bona fide hedging
purposes. Any such authorization will be accompanied by appropriate
notification to shareholders.)
(11) Invest in the securities of other investment companies, except as
provided in the 1940 Act.
RNC Money Market Fund may not:
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(1) Make investments for the purpose of exercising control or
management.
(2) Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
(3) Invest in oil, gas or other mineral exploration or development
programs, commodities or commodity contracts, except that RNC Money
Market Fund may invest in securities of issuers which invest or deal in
any of the above.
(4) Invest in real estate or in interests in real estate, but RNC Money
Market Fund may purchase readily marketable securities of companies
holding real estate or interests therein.
(5) Purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities.
(6) Make short sales of securities or maintain a short position or
write, purchase or sell puts, calls, straddles, spreads or combinations
thereof.
(7) Make loans, provided that RNC Money Market Fund may (a) purchase
debt obligations in accordance with its investment objective and
policies, (b) make loans of portfolio securities provided, among other
things, that the value of the securities loaned does not exceed 10% of
the value of RNC Money Market Fund's net assets and (C) enter into
repurchase agreements as disclosed in the Prospectus. (RNC Money Market
Fund does not presently loan portfolio
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securities.) The acquisition of bonds, debentures or other corporate
debt securities which are not publicly distributed is considered to be
the making of a loan under the 1940 Act.
(8) Mortgage, pledge, hypothecate or in any manner transfer as security
for indebtedness any securities owned or held by RNC Money Market Fund
except as may be necessary in connection with borrowings mentioned in
(9) below, and then such mortgaging, pledging or hypothecating may not
exceed 10% of RNC Money Market Fund's total assets, taken at market
value.
(9) Borrow in excess of 10% of the total assets of RNC Money Market
Fund, taken at market value, and then only from banks as a temporary
measure for extraordinary or emergency purposes. Usually only
"leveraged" investment companies may borrow in excess of 5% of their
assets; however, RNC Money Market Fund will not borrow to increase
income but only to meet redemption requests which might otherwise
require untimely dispositions of portfolio securities. In addition, RNC
Money Market Fund will not purchase securities while borrowings are
outstanding.
(10) Act as an underwriter of securities, except to the extent that RNC
Money Market Fund may technically be deemed an underwriter when engaged
in the activities described in (7) above or insofar as RNC Money Market
Fund may be deemed an underwriter under the 1933 Act in selling
portfolio securities.
(11) Invest in securities of any one issuer with a record of less than
three years of continuous operation, including predecessors, except
obligations issued or guaranteed by the United States Government or its
agencies.
(12) Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit RNC Money Market Fund
from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into permissible repurchase transactions.
Bank money instruments in which a Fund invests must be issued
by depository institutions with total assets of at least $500 million or capital
surplus and undivided profits in excess of $100 million.
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Each Fund's commercial paper investments will be rated at the
time of purchase in the top rating category as determined by the requisite
number of nationally recognized statistical rating organizations ("NRSROs") or
be of "comparable quality" as determined by the Board of Directors if unrated.
Each Fund's investments in corporate bonds (which for RNC Money Market Fund must
have maturities at purchase of one year or less) must be rated at least "A" by
at least two of the NRSROs. For further information regarding various corporate
debt ratings, see the attached Appendix.
FORWARD COMMITMENTS. Each Fund may purchase money market securities on a forward
commitment basis at fixed purchase terms. The purchase will be recorded on the
date the Fund enters into the commitment and the value of the security will
thereafter be reflected in the calculation of the relevant Fund's net asset
value. The value of the security on the delivery date may be more or less than
its purchase price. A segregated account for each Fund will be established with
its custodian consisting of liquid assets having a market value at all times at
least equal to the amount of the forward commitment.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. As stated in the Prospectus,
RNC Equity Fund does not currently enter into futures contracts and options on
futures contracts. However, to hedge against movements in interest rates,
securities prices or currency exchange rates, RNC Equity Fund reserves the right
to purchase and sell various kinds of futures contracts and options on futures
contracts. However, RNC Equity Fund will enter such transactions only upon the
approval of the Group's Board of Directors and notice to shareholders.
OPTIONS ON SECURITIES. RNC Equity Fund may write (sell) covered call options to
a limited extent on its portfolio securities ("covered options") in an attempt
to enhance gain.
When RNC Equity 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, RNC Equity 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 RNC Equity Fund has no control, the Fund
must sell the underlying security to the option holder at the exercise price. By
writing a covered
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option, RNC Equity 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.
RNC Equity 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 sale transactions enable RNC Equity 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 RNC Equity Fund from closing out its options positions. If
RNC Equity 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. If RNC Equity
Fund is unable to effect a closing sale transaction with respect to options that
it has purchased, it would have to exercise the option in order to realize any
profit.
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. The purchase of options is a
highly specialized activity which involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
OPTIONS ON SECURITIES INDICES. RNC Equity Fund may write (sell) covered call
options on securities indices in an attempt to increase gain. A securities index
option written by RNC Equity Fund would obligate it, upon exercise of the
option, to pay a cash settlement, rather than to deliver actual securities, to
the option holder. Although RNC Equity Fund will not ordinarily own all of the
securities comprising the stock indices on which it writes call options, such
options will usually be written on
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those indices which correspond most closely to the composition of RNC Equity
Fund's portfolio. As with writing covered call options on securities, RNC Equity
Fund will realize a gain in the amount of the premium received upon writing an
option if the value of the underlying index increases above the exercise price
and the option is exercised. RNC Equity Fund will be required to pay a cash
settlement that may exceed the amount of the premium received by the Fund. RNC
Equity Fund may purchase call options in order to terminate its obligations
under call options it has written.
RNC Equity Fund may purchase call and put options on
securities indices for the purpose of hedging against the risk of unfavorable
price movements adversely affecting the value of RNC Equity Fund's securities or
securities the Fund intends to buy. Securities index options will not be
purchased for speculative purposes. Unlike an option on securities, which gives
the holder the right to purchase or sell specified securities at a specified
price, an option on a securities index gives the holder the right, upon the
exercise of the option, to receive a cash "exercise settlement amount" equal to
(I) the difference between the exercise price of the option and the value of the
underlying securities index on the exercise date multiplied by (ii) a fixed
"index multiplier."
A securities index fluctuates with changes in the market value
of the securities included in the index. For example, some securities index
options are based on a broad market index such as the Standard & Poor's 500 or
the Value Line Composite Index, or a narrower market index such as the Standard
& Poor's 100. Indices may also be based on industry or market segments.
RNC Equity Fund may purchase put options in order to hedge
against an anticipated decline in stock market prices that might adversely
affect the value of RNC Equity Fund's portfolio securities. If RNC Equity Fund
purchases a put option on a stock index, the amount of payment it receives on
exercising the option depends on the extent of any decline in the level of the
stock index below the exercise price. Such payments would tend to offset a
decline in the value of RNC Equity Fund's portfolio securities. If, however, the
level of the stock index increases and remains above the exercise price while
the put option is outstanding, RNC Equity Fund will not be able to exercise the
option profitably and will lose the amount of the premium and any transaction
costs. Such loss may be partially offset by an
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increase in the value of RNC Equity Fund's portfolio securities. RNC Equity Fund
may write put options on stock indices in order to close out positions in stock
index put options which it has purchased.
RNC Equity Fund may purchase call options on stock indices in
order to participate in an anticipated increase in stock market prices or to
lock in a favorable price on securities that it intends to buy in the future. If
RNC Equity Fund purchases a call option on a stock index, the amount of the
payment it receives upon exercising the option depends on the extent of any
increase in the level of the stock index above the exercise price. Such payments
would in effect allow RNC Equity Fund to benefit from stock market appreciation
even though it may not have had sufficient cash to purchase the underlying
stocks. Such payments may also offset increases in the price of stocks that RNC
Equity Fund intends to purchase. If, however, the level of the stock index
declines and remains below the exercise price while the call option is
outstanding, RNC Equity Fund will not be able to exercise the option profitably
and will lose the amount of the premium and transaction costs. Such loss may be
partially offset by a reduction in the price RNC Equity Fund pays to buy
additional securities for its portfolio. RNC Equity Fund may write call options
on stock indices in order to close out positions in stock index call options
which it has purchased.
The effectiveness of hedging through the purchase of options
on securities indices will depend upon the extent to which price movements in
the portion of the securities portfolio being hedged correlate with price
movements in the selected stock index. Perfect correlation is not possible
because the securities held or to be acquired by RNC Equity Fund will not
exactly match the composition of the stock indices on which the options are
available. In addition, the purchase of stock index options involves the risk
that the premium and transaction costs paid by RNC Equity Fund in purchasing an
option will be lost as a result of unanticipated movements in prices of the
securities comprising the stock index on which the option is based.
REPURCHASE AGREEMENTS. As noted in the Prospectus, the Funds may enter into
repurchase agreements. A Fund's repurchase agreements will generally involve a
short-term investment in a U.S. Government security or other high-grade liquid
debt security, with the seller of the underlying security agreeing to repurchase
it at a mutually agreed-upon time and price. (For RNC Money Market Fund, the
security must be rated in the highest grade.)
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The repurchase price is generally higher than the purchase price, the difference
being interest income to the Fund. Alternatively, the purchase and repurchase
prices may be the same, with interest at a stated rate due to a Fund together
with the repurchase price on the date of repurchase. In either case, the income
to a Fund is unrelated to the interest rate on the underlying security.
Under each repurchase agreement, the seller is required to
maintain the value of the securities subject to the repurchase agreement at not
less than their repurchase price. The Adviser, acting under the supervision of
the Board of Directors, reviews on a periodic basis the suitability and
creditworthiness, as well as the value of the collateral, of those sellers with
whom the Funds enter into repurchase agreements to evaluate potential risk. All
repurchase agreements will be made pursuant to procedures adopted and regularly
reviewed by the Board of Directors.
The Funds generally will enter into repurchase agreements of
short maturities, from overnight to one week, although the underlying securities
will generally have longer maturities. The Funds regard repurchase agreements
with maturities in excess of seven days as illiquid. RNC Equity Fund may not
invest more than 15%, while RNC Money Market Fund may not invest more than 10%,
of the value of its net assets in illiquid securities, including repurchase
agreements with maturities greater than seven days.
For purposes of the 1940 Act, a repurchase agreement is deemed
to be a collateralized loan from a Fund to the seller of the security subject to
the repurchase agreement. It is not clear whether a court would consider the
security acquired by a Fund subject to a repurchase agreement as being owned by
that Fund or as being collateral for a loan by that Fund to the seller. If
bankruptcy or insolvency proceedings are commenced with respect to the seller of
the security before its repurchase under a repurchase agreement, a Fund may
encounter delays and incur costs before being able to sell the security. Delays
may involve loss of interest or a decline in price of the security. If a court
characterizes such a transaction as a loan and a Fund has not perfected a
security interest in the security, that Fund may be required to return the
security to the seller's estate and be treated as an unsecured creditor of the
seller. As an unsecured creditor, a Fund would be at risk of losing some or all
of the principal and income involved in the transaction. As with any unsecured
debt instrument purchased for a Fund, the Adviser
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seeks to minimize the risk of loss through repurchase agreements by analyzing
the creditworthiness of the seller of the security.
Apart from the risk of bankruptcy or insolvency proceedings, a
Fund also runs the risk that the seller may fail to repurchase the security.
However, each Fund always requires collateral for any repurchase agreement to
which it is a party in the form of securities acceptable to the Fund, the market
value of which is equal to at least 100% of the amount invested by the Fund plus
accrued interest, and a Fund makes payment against such securities only upon
physical delivery or evidence of book entry transfer to the account of the
Fund's custodian bank. If the market value of the security subject to the
repurchase agreement becomes less than the repurchase price (including
interest), a Fund, pursuant to its repurchase agreement, may require the seller
of the security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement equals or exceeds the repurchase
price (including interest) at all times.
Each Fund may participate in one or more joint accounts with
another Fund within the Group that invests in repurchase agreements
collateralized, subject to each Fund's investment policies, either by (I)
obligations issued or guaranteed as to principal and interest by the U.S.
Government or by one of its agencies or instrumentalities, or (ii) privately
issued mortgage-related securities that are in turn collateralized by securities
issued by GNMA, FNMA or FHLMC, and are rated in the highest rating category by a
NRSRO (See Appendix) or, if unrated, are deemed by the Adviser to be of
comparable quality using objective criteria. Any such repurchase agreement will
have, with rare exceptions, an overnight, over-the-weekend or over-the-holiday
duration, and will in no event have a duration of more than seven days.
REVERSE REPURCHASE AGREEMENTS. RNC Equity Fund may enter into reverse repurchase
agreements, as set forth in the Prospectus. RNC Equity Fund typically will
invest the proceeds of a reverse repurchase agreement in money market
instruments or repurchase agreements maturing not later than the expiration of
the reverse repurchase agreement. This use of proceeds involves leverage. RNC
Equity Fund will enter into a reverse repurchase agreement for leverage purposes
only when the Adviser believes that the interest income to be earned from the
investment of the proceeds would be greater than the interest expense of the
transaction. RNC Equity Fund also may use the proceeds of reverse repurchase
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agreements to provide liquidity to meet redemption requests when the sale of RNC
Equity Fund's securities is disadvantageous.
RNC Equity Fund causes its custodian to segregate liquid
assets, equal in value to their obligations (including accrued interest) with
respect to reverse repurchase agreements. In segregating such assets, RNC Equity
Fund's custodian either places such securities in a segregated account or
separately identifies such assets and renders them unavailable for investment.
Such assets are marked to market daily to ensure that full collateralization is
maintained.
ILLIQUID SECURITIES. RNC Equity Fund may invest up to 15% of its net assets in
illiquid securities. RNC Money Market Fund may invest up to 10% of its net
assets in illiquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which a Fund has valued the
securities and includes, among others, repurchase agreements maturing in more
than seven days, certain restricted securities and securities that are otherwise
not freely transferable. Illiquid securities also include shares of an
investment company held by a Fund in excess of 1% of the total outstanding
shares of that investment company. Restricted securities may be sold only in
privately negotiated transactions or in public offerings with respect to which a
registration statement is in effect under the 1933 Act. Illiquid securities
acquired by a Fund may include those that are subject to restrictions on
transferability contained in the securities laws of other countries. Securities
that are freely marketable in the country where they are principally traded, but
that would not be freely marketable in the United States, will not be considered
illiquid. Where registration is required, a Fund may be obligated to pay all or
part of the registration expenses and a considerable period may elapse between
the time of the decision to sell and the time the Fund may be permitted to sell
a security under an effective registration statement. If, during such a period,
adverse market conditions were to develop, the Fund might obtain a less
favorable price than prevailed when it decided to sell.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments often are
restricted securities because the securities are sold in
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transactions not requiring registration. Institutional investors generally will
not seek to sell these instruments to the general public, but instead will often
depend either on an efficient institutional market in which such unregistered
securities can be resold readily or on an issuer's ability to honor a demand for
repayment. Therefore, the fact that there are contractual or legal restrictions
on resale to the general public or certain institutions is not determinative of
the liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from
the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted
securities sold pursuant to Rule 144A in many cases provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. An insufficient number
of qualified buyers interested in purchasing Rule 144A-eligible restricted
securities held by a Fund, however, could adversely affect the marketability of
such portfolio securities and result in the Fund's inability to dispose of such
securities promptly or at favorable prices.
The Board of Directors has delegated the function of making
day-to-day determinations of liquidity to the Adviser pursuant to guidelines
approved by the Board. The Adviser takes into account a number of factors in
reaching liquidity decisions, including, but not limited to: (I) the frequency
of trades for the security, (ii) the number of dealers that quote prices for the
security, (iii) the number of dealers that have undertaken to make a market in
the security, (iv) the number of other potential purchasers, and (v) the nature
of the security and how trading is effected (e.g., the time needed to sell the
security, how bids are solicited and the mechanics of transfer). The Adviser
monitors the liquidity of restricted securities in the Funds' portfolios and
reports periodically on such decisions to the Board of Directors.
FOREIGN SECURITIES. As noted in the Prospectus, RNC Equity Fund may invest in
foreign securities in the form of U.S. dollar- denominated American Depository
Receipts ("ADRs") and European Depository Receipts ("EDRs"). Both ADRs and EDRs
are
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certificates evidencing ownership of shares of a foreign-based issuer held in
trust by a bank or similar financial institution. Designed for use in U.S. and
European securities markets, respectively, ADRs and EDRs are alternatives to the
purchase of the underlying securities in their national market and currencies.
It is not expected that RNC Equity Fund will invest in unsponsored ADRs or EDRs.
RNC Equity Fund will not concentrate its investments in any particular foreign
country and will only purchase securities denominated in U.S. Dollars.
Investments in foreign securities, particularly those of non-governmental
issuers, involve considerations which are not ordinarily associated with
investing in U.S. issuers. These considerations include changes in currency
rates, currency exchange control regulations, the possibility of expropriation,
the unavailability of financial information or the difficulty of interpreting
financial information prepared under foreign accounting standards, less
liquidity and more volatility in foreign securities markets, the impact of
political, social or diplomatic developments, and the difficulty of assessing
economic trends in countries outside the United States. If it should become
necessary, RNC Equity Fund could encounter greater difficulties in invoking
legal processes abroad than would be the case in the United States. Transaction
costs in foreign securities may be higher. These and other factors will be
considered before investing in foreign securities, unless such investments will
meet RNC Equity Fund's standards and objectives.
VARIABLE RATE DEMAND NOTES. Each Fund may also purchase variable rate demand
notes ("VRDNs") issued by U.S. and foreign companies having an outstanding debt
issue at the time of purchase rated in the top two grades of any NRSRO. (See
Appendix.) VRDNs are obligations with rates of interest that are adjusted
periodically or "float" continuously according to specific formulae. Often,
VRDNs have a demand feature entitling the purchaser to resell the securities at
an amount approximately equal to amortized cost or the principal amount plus
accrued interest. See "Investment Restrictions" in Prospectus, as may be amended
from time to time.
See "Illiquid Securities."
MANAGEMENT OF THE GROUP
The Board of Directors is responsible for the overall
management of the Group and the Funds, including general supervision and review
of investment activities. None of the
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Group's current Directors is an "interested person" (as defined in the 1940 Act)
of the Group, the Funds or any adviser, administrator or principal underwriter
of the Funds. The officers who administer the Group's daily operations are
appointed by the Board of Directors. The current Directors and officers of the
Group, their addresses, and their principal occupations for the past five years
are set forth below.
ERIC M. BANHAZL, 39, -- President, Treasurer and Secretary of
the Group; 2025 E. Financial Way, Suite 101, Glendora, California 91741.
Currently, Mr. Banhazl is Senior Vice President of The Wadsworth Group, Vice
President of Investment Company Administration Corporation, the Funds'
administrator and First Fund Distributors, Inc., the Funds' principal
underwriter. Mr. Banhazl is also the President of E.M. Banhazl & Associates,
Inc., a mutual fund consulting firm and the Treasurer of Professionally Managed
Portfolios, Guinness Flight Investment Funds, Inc., Target Income Fund, Inc.,
and Matterhorn Growth Fund, Inc., all of which are investment companies
unaffiliated with the Group.
BRUCE B. STUART, 54, -- Director; 1440-2E South State College
Boulevard, Anaheim, California 92806. Since 1991, Mr. Stuart has been the
president of Nu-Ceramic Technology, Inc., a company involved in the research and
development of advanced ceramic metallization for the semiconductor and hybrid
industry. From 1984 to 1991, Mr. Stuart was a partner of the Richmar Group, a
management consulting firm.
DEVERE W. McGUFFIN, II, 53, -- Director; 1441 East Chevy
Chase, Glendale, California 91206. Mr. McGuffin is the owner and principal
executive officer of the Meadow Grove Group, a finance and investment firm with
which he has been associated since 1974. Mr. McGuffin is also the Chief
Executive Officer of California Adventist Federal Credit Union. Mr. McGuffin
also directs First Interurban Development Corporation, a non-profit financial
corporation which he founded in 1981. Mr. McGuffin is also currently licensed as
a securities representative and as a commodities futures principal.
The Directors receive an annual retainer plus fees and
expenses for each Board meeting and Audit Committee meeting attended. (For the
latest fiscal year, the Directors each received $4,500 for their attendance at
Board meetings and Audit Committee meetings.) The Group does not provide any
pension or retirement benefits for its Directors. Pursuant to the terms of
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the Administration Agreement, the Funds' administrator pays all compensation of
officers of the Group, and no person receives any compensation directly from the
Group or the Funds for acting as an officer of the Group. However, such officers
may be deemed to receive remuneration indirectly from the Group and the Funds
because the administrator is paid an administrative fee by the Group.
As of December 31, 1996, the following persons held of record
5% or more of the outstanding shares of the RNC Money Market Fund: Repub & Co.,
c/o Imperial Trust, 70.26%; 201 N. Figueroa Street, Suite 610, Los Angeles,
California 90071; and RNC Capital Management Co., 11601 Wilshire Boulevard, 25th
Floor, Los Angeles, California 90025 17.50%. As of December 31, 1996, the
following persons held of record 5% or more of the outstanding shares of RNC
Equity Fund: Cleveland E. Norton & Libia E. Norton Trust Estate, 10572 Paliament
Avenue, Garden Grove, CA 92840, 6.87% and Velma J. Osadchuck, 7520 East Adobe
Drive, Scottsdale, AZ 85255, 6.07%.
As of December 31, 1996, the Directors and officers of the
Group as a whole owned less than 1% of the outstanding shares of both RNC Money
Market Fund and RNC Equity Fund.
While the Group is not required and does not intend to hold
annual meetings of shareholders, such meetings may be called by the Directors in
their discretion, or upon demand by the holders of 10% or more of the
outstanding shares of the Funds for the purpose of electing or removing
Directors. Shareholders may receive assistance from the Group in communicating
with other shareholders, in connection with the election or removal of
Directors, pursuant to the provisions contained in Section 16(C) of the 1940
Act.
INVESTMENT ADVISORY AND OTHER SERVICES
The Group on behalf of each Fund has entered into Investment
Advisory Agreements with RNC Capital Management Co. (the "Adviser"). The
principal business address of the Adviser is 11601 Wilshire Boulevard, 25th
Floor, Los Angeles, California 90025. The Adviser is an indirect subsidiary of
Bank Austria America, Inc. (the "Bank"), an indirect subsidiary of Bank Austria
Aktiengesellschaft, a banking organization which is organized under the laws of
and domiciled in the Republic of Austria. Anteilsverwaltung-Zentralsparkasse
holds 49% of the
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voting securities of the Bank, Post-und
Telekombeteiligungsverwaltungsgesellschaft owns 19% of the voting securities of
the Bank and Westdeutsche Landesbank Girozentrale owns 9% of the voting
securities of the Bank. No other single entity owns more than 5% of the issued
and outstanding stock of the Bank.
The Directors and principal executive officers of the Adviser
are: Daniel J. Genter, Jr., President, Chief Executive Officer and Director;
Thomas Pastore, Vice President/Assistant Secretary and Director; James O'Neill,
Vice President/Assistant Treasurer and Director; Nicanor M. Mamaril, Senior Vice
President, Treasurer and Secretary; Jan Kallik, Senior Vice President and
Director of Equity Research; A. Robert Blais, Senior Vice President and Director
of Fixed Income; Bruce A. Mandel, Senior Vice President and Director of
Marketing; and John G. Marshall, Senior Vice President and Director of Equity.
Subject to supervision by the Group's Board of Directors, the
Adviser is responsible for the actual management of each Fund's portfolio and
constantly reviews the holdings of each portfolio in light of its own research
analysis and analyses from other relevant sources. The responsibility for making
decisions to buy, sell or hold a particular security rests with the Adviser. The
Adviser provides the portfolio managers for the Funds who consider analyses from
various sources, make the necessary investment decisions and place transactions
accordingly.
Unless earlier terminated as described below, the Investment
Advisory Agreements will continue in effect until December 31, 1997 for RNC
Money Market Fund and RNC Equity Fund. Each Agreement will continue in effect
for successive one-year periods thereafter if approved annually (a) by the Board
of Directors of the Group or by a majority of the outstanding voting shares of
the relevant Fund and (b) by a majority of the Directors who are not parties to
such contracts or interested persons (as defined in the 1940 Act) of any such
party. Each Agreement terminates upon assignment and may be terminated without
penalty upon 60-days' written notice at the option of either party thereto or by
the vote of the shareholders of the relevant Fund.
From time to time the Adviser may voluntarily reduce its fee
or reimburse all or a portion of a Fund's other expenses, which reimbursement
will have the effect of lowering the overall
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net expense ratio of a Fund and of increasing its yield or return to investors
for the period for which such expenses were payable. Any reductions made by the
Adviser in its fees and any payments or reimbursement of expenses made by the
Adviser which are a Fund's obligation are subject to reimbursement within the
following three years by the appropriate Fund provided the Fund is able to
effect such reimbursement and remain in compliance with applicable expense
limitations.
For RNC Money Market Fund, in the years ended September 30,
1994, 1995 and 1996, total fees payable by the Fund to the Adviser were $64,897,
$106,810 and $93,294, respectively. The amount of the management fee paid by the
Fund reflects a voluntary fee reduction by the Adviser which is anticipated to
continue for the current fiscal year. In the absence of this fee reduction, the
rate of management fee payable under the Investment Advisory Agreement would be
0.41% for RNC Money Market Fund. RNC Equity Fund commenced operations on
November 1, 1996.
LICENSE OF INITIALS. The Adviser has granted the Group and the Funds a
non-exclusive license to use the initials "RNC" in its name for so long as the
Adviser serves as investment adviser to the Funds.
PORTFOLIO TRANSACTIONS
The cost of executing portfolio securities transactions for
the Money Market Fund will primarily consist of dealer spreads and underwriting
commissions. The money market securities in which the Fund invests are traded
primarily in the over-the-counter market. Bonds and debentures are usually
traded over-the-counter, but may be traded on an exchange. Where possible, the
Fund will deal directly with the dealers who make a market in the securities
involved except in those circumstances where prices and execution are available
elsewhere. Such dealers are acting as principals for their own accounts.
On occasion, securities may be purchased directly from the
issuer. Bonds and money market securities also are generally traded on a net
basis and do not normally involve either brokerage commissions or transfer
taxes. Therefore, RNC Money Market Fund rarely pays any brokerage commissions.
During the three fiscal years ended September 30, 1994, 1995 and 1996, the Group
paid no brokerage fees on behalf of RNC Money Market Fund.
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With respect to RNC Equity Fund, portfolio securities are
purchased either from a dealer (typically a market maker in the particular
security or a selling group member in the case of an initial or secondary public
offering) at a negotiated mark-up, or from a broker to whom the Fund is buying
or selling listed securities, futures contracts and options thereon, it will use
a broker and pay a brokerage commission. [RNC Equity Fund does not typically
invest in futures contracts.] Since RNC Equity Fund commenced operations on
November 1, 1996, no commissions were paid during the last three fiscal years
ending September 30, 1996.
The Adviser is responsible for effecting portfolio
transactions and does so in a manner deemed fair and reasonable to each Fund.
The primary consideration in all portfolio transactions will be the prompt
execution of orders in an efficient manner a competitive price. In selecting and
monitoring broker-dealers and negotiating commissions, the Adviser considers the
firm's reliability, the quality of its execution services on a continuing basis,
its financial condition, and the broker's ability to generate "soft dollar"
credits which are used to purchase research services that are of assistance to
the Adviser in managing its client accounts, including the Funds. Currently, the
Adviser places all, or substantially all, of the Equity Fund's brokerage with a
single firm, Jones & Associates, at pre-established rates. The Adviser believes
that it receives competitively priced executions through this broker. The broker
also gives soft dollar credits that are used to purchase various types of third
party research and research-related services that are of assistance to the
Adviser in its overall advisory business. Brokerage commissions and the use of
soft dollar credits generated by the Fund's brokerage is reviewed regularly by
the Group's Board of Directors.
Investment decisions for the Funds are made independently from
those of other client accounts of the Adviser or its affiliates. Nevertheless,
it is possible that at times the same securities will be acceptable for the
Funds and for one or more of such client accounts. The Adviser and its personnel
may have interests in one or more of those client accounts, either through
direct investment or because of management fees based on gains in the account.
To the extent any of these client accounts and the Funds seek to acquire the
same security at the same time, the Funds may not be able to acquire as large a
portion of such security as they would otherwise, or they may have to pay a
higher price or obtain a lower yield for such
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security. Similarly, the Funds 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 simultaneously purchases or sells
the same security that the Funds are purchasing or selling, each day's
transactions in such security will be allocated between the Funds and all such
client accounts in a manner deemed equitable by the Adviser, taking into account
the respective sizes of the accounts, the amount being purchased or sold and
other factors deemed relevant by the Adviser. 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 Funds are concerned. In other cases, however, it is
believed that the ability of the Funds to participate in volume transactions may
produce better executions for the Funds.
PURCHASE OF SHARES
As described in the Prospectus, shares of each Fund are
offered on a continuous basis at a price equal to the net asset value per share
of the relevant Fund next determined after receipt of a purchase order in proper
form.
NET ASSET VALUE. The value of each Fund's portfolio securities is determined on
each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is
open on business days other than certain holidays (New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day).
The net asset value of shares of RNC Equity Fund will
fluctuate daily. The net asset value per share is computed by dividing the value
of the securities held in RNC Equity Fund plus any cash or other assets
(including interests and dividends accrued but not yet received) minus all
liabilities (including accrued expenses) by the total numbers of shares in RNC
Equity Fund outstanding at such time.
RNC Money Market Fund uses the amortized cost method of
valuation. The amortized cost method of valuation involves valuing a security at
its cost on the date of purchase, and thereafter (absent unusual circumstances)
assuming a constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the market value of
the instrument. While this method provides certainty in
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<PAGE>
valuation, it may result in periods during which value, as determined by this
method, is higher or lower than the price RNC Money Market Fund would receive if
it sold the instrument. During such periods the yield to investors in RNC Money
Market Fund may differ somewhat from that obtained in a similar fund which uses
other methods to determine the fair or market value of its portfolio securities.
RNC Money Market Fund intends to use its best efforts to
maintain a constant net asset value of $1.00 per share. If net unrealized gains
or losses were to exceed $.005 per share, RNC Money Market Fund's net asset
value would deviate from $1.00 per share. RNC Money Market Fund endeavors to
reduce the amount of unrealized gains and losses which result from, among other
things, interest rate changes, by maintaining a dollar weighted average
portfolio maturity of less than 90 days.
INDIVIDUAL RETIREMENT ACCOUNTS. An investor desiring to purchase shares in a
Fund through an individual retirement account may establish such an account
through the Funds' custodian, Star Bank. Through such an account, investments
may be made in each Fund and certain of the other mutual funds sponsored by the
Adviser. Star Bank charges an initial establishment fee and an annual custodial
fee for each account. Information with respect to these accounts is available
upon request from the Group or First Fund Distributors, Inc., the Funds'
principal underwriter. The minimum investment for an individual retirement
account is $1,000.
Capital gains and ordinary income received in such an account
are generally exempt from federal income taxation until distributed from the
account. Capital gains and ordinary income may be taxable in whole or in part,
however, if the account has borrowed to purchase or carry shares of a Fund.
Investors considering participation in such an account should review specific
tax laws relating thereto and should consult their attorneys or tax advisers
with respect to the establishment and maintenance of such an account.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares -- Repurchase" in
the Prospectus for a discussion of the redemption and repurchase rights of
shareholders.
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<PAGE>
The right to redeem shares or to receive payment with respect
to any such redemption may be suspended for more than seven days only for
periods during which trading on the NYSE is restricted as determined by the
Securities and Exchange Commission or the NYSE is closed (other than customary
weekend and holiday closings), for periods during which an emergency exists as
defined by the Securities and Exchange Commission as a result of which disposal
of portfolio securities or determination of the net asset value of a Fund is not
reasonably practicable, and for such other periods as the Securities and
Exchange Commission may by order permit for the protection of a Fund's
shareholders.
The Prospectus describes when signature guarantees may be
required to effect a redemption. A signature guarantee is a widely accepted way
to protect stockholders and the Group by verifying the signature on the request.
Signature guarantees should not be qualified in any way, whether by date or
otherwise. Signatures must be guaranteed by an "Eligible Guarantor Institution"
and not by a notary public or any other person or entity. An "Eligible Guarantor
Institution" means a bank, trust company, broker, dealer, municipal or
government securities broker or dealer, credit union, national securities
exchange, registered securities association, clearing agency or savings
association that is a participant in the Securities Transfer Agents Medallion
Program endorsed by the Securities Transfer Association.
Subject to the Funds' compliance with applicable regulations,
the Funds have reserved the right to pay the redemption or repurchase price,
either totally or partially, by a distribution in kind of securities (instead of
cash) from the respective Fund's portfolio. Such regulations require, in part,
that the Funds commit to pay in cash all requests for redemption by any
shareholder, limited in amount for each shareholder during any 90-day period to
the lesser of $250,000 or 1% of the net asset value of the respective Fund at
the beginning of such period. Each Fund anticipates that it would make
redemptions in kind only if it received redemption requests with respect to a
substantial portion of its net assets at a time when disposition of a
substantial portion of its portfolio securities would be disadvantageous. The
securities distributed in such a distribution would be valued at the same price
as the price assigned to such securities in calculating the net asset value of
the particular Fund. If a shareholder receives a distribution in kind in
securities, in most instances brokerage charges will be
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<PAGE>
incurred when the securities received are converted by the shareholder into
cash.
TAXES
In all prior fiscal years RNC Money Market Fund (previously
known as RNC Liquid Assets Fund) has qualified for and elected the special tax
treatment afforded regulated investment companies under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). RNC Money Market Fund
intends to continue to so qualify. RNC Equity Fund intends to qualify for and
elect such treatment. Under the relevant Code provisions, a Fund that qualifies
as a regulated investment company under Subchapter M of the Code is not subject
to federal income tax on that part of its net ordinary income and net realized
capital gains which it distributes to shareholders. To qualify for such tax
treatment each Fund must, among other things, pay to its shareholders in each
taxable year at least 90% of its investment company taxable income (consisting
of investment income and short-term capital gains) and derive less than 30% of
its gross income in each taxable year from gains (without deduction for losses)
from the sale or other disposition of securities held for less than three
months. If in any taxable year a Fund does not qualify as a regulated investment
company, all its taxable income will be taxed to the Fund at corporate rates and
its distributions will be taxed to the shareholders as dividends to the extent
of the Fund's current and accumulated earnings and profits. The Code also
imposes a non-deductible 4% excise tax on the excess, if any, of a Fund's
"required distribution" over its actual distributions in any calendar year.
Generally, the "required distribution" is 98% of a Fund's ordinary income for
the calendar year plus 98% of its capital gain net income recognized for the
one-year period ending on October 31 plus undistributed amounts from prior
years. It is anticipated that each Fund will be able to meet such distribution
requirements and will not be subject to the 4% excise tax.
Dividends paid by each Fund from its short-term investment
income are taxable to shareholders as ordinary income. Dividends paid by a Fund
from its net capital gains (generally the excess of a Fund's net long-term
capital gain over its net short-term capital loss) are taxable to a shareholder
as long-term capital gains regardless of the period for which the shareholder
has owned shares of the Fund. Dividends and
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<PAGE>
distributions are taxable as described, whether received in cash or reinvested
in additional shares of a Fund.
RNC Equity Fund may receive dividend distributions from U.S.
corporations. To the extent RNC Equity Fund receives such dividends and
distributes them to its shareholders, and meets certain other requirements of
the Code, corporate shareholders of RNC Equity Fund may be entitled to the
"dividends received" deduction. Availability of the deduction is subject to
certain holding period and debt-financing limitations.
RNC Equity Fund may also invest in securities of foreign
issuers, futures contracts, forward contracts and options. These investments
involve complex rules to determine the character and timing of recognition of
income received in connection therewith by RNC Equity Fund.
Any gain or loss realized by RNC Equity Fund upon the
expiration or sale of options held by it generally will be capital gain or loss.
Any security, option, or other position entered into or held by RNC Equity Fund
that substantially diminishes its risk of loss from any other position held by
that Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
character and timing of RNC Equity Fund's gains and losses with respect to
straddle positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to RNC
Equity Fund that may mitigate the effects of the straddle rules.
Certain options, futures contracts and forward contracts that
are subject to Section 1256 of the Code ("Section 1256 Contracts") and that are
held by RNC Equity Fund at the end of its taxable year generally will be
required to be "marked to market" for federal income tax purposes, that is,
deemed to have been sold at market value. Sixty percent of any net gain or loss
recognized on these deemed sales and 60% of any net gain or loss realized from
any actual sales of Section 1256 Contracts will be
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<PAGE>
treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable
to certain foreign currency transactions that may affect the amount, timing and
character of income, gain or loss recognized by RNC Equity Fund. Under these
rules, foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60/40 rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of that Fund's gain or loss on the sale or other disposition of shares of a
foreign corporation may, because of changes in foreign currency exchange rates,
be treated as ordinary income or loss under Section 988 of the Code, rather than
as capital gain or loss.
RNC Equity Fund may be subject to foreign withholding taxes on
dividends and interest earned with respect to securities of foreign
corporations. Foreign companies in which RNC Equity Fund may invest may be
treated as "passive foreign investment companies" ("PFICs") under the Code. A
portion of the income and gains that RNC Equity Fund derives from PFIC stock may
be subject to a non-deductible federal income tax at the Fund level. In some
cases, RNC Equity Fund may avoid this tax by electing to be taxed currently on
its share of the PFIC's income, whether or not such income is actually
distributed by the PFIC. RNC Equity Fund will endeavor to limit its exposure to
the PFIC tax by investing in PFICs only where the election to be taxed currently
will be made. This election could require RNC Equity Fund to include certain
amounts as income or gain without a concurrent receipt of cash, and increase the
amount that RNC Equity Fund is required to distribute to its shareholders to
qualify as a regulated investment company. Because it is not always possible to
identify a foreign issuer as a PFIC in advance of making the investment, RNC
Equity Fund may incur the PFIC tax in some instances.
Redemptions and exchanges of shares of a Fund will result in
gains or losses for tax purposes to the extent of the difference between the
proceeds and the shareholder's adjusted tax basis for the shares. Any loss
realized upon the redemption or exchange of shares within six months from their
date of
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purchase will be treated as a long-term capital loss to the extent of
distributions of long-term capital gain dividends with respect to such shares
during such six-month period. All or a portion of a loss realized upon the
redemption of shares of a Fund may be disallowed to the extent shares of the
same Fund are purchased (including shares acquired by means of reinvested
dividends) within 30 days before or after such redemption.
Some shareholders may be subject to a 31% withholding tax on
reportable dividend distributions, capital gains distributions and redemption
payments ("backup withholding"). Generally, shareholders subject to backup
withholding will be those for whom taxpayer identification numbers are not on
file with the Group or who, to the Group's knowledge, have furnished an
incorrect number. When establishing an account, an investor must certify under
penalties of perjury that such number is correct and that he or she is not
subject to backup withholding. Foreign shareholders may also be subject to other
withholding requirements.
Shares of the Funds are redeemable at the option of the Group
if, in the opinion of the Group, ownership has or may become concentrated to an
extent that would cause the Group or a Fund to be deemed a personal holding
company within the meaning of the Code, or in the event that the value of a
shareholder's shares in a Fund falls below $1,000 as the result of shareholder
redemptions. In the event of such concentration, the Group may compel the
redemption of, reject any order for, or refuse to give effect on the books of
the Group or the Funds to the transfer of shares in an effort to maintain the
ownership of shares so as to prevent that consequence. Neither the Group nor the
Funds, however, assumes responsibility to compel redemptions or to reject any
orders.
Depending upon the extent of the Group's activities in those
states and localities in which its offices are maintained or in which its agents
or independent contractors are located, the Group and the Funds may be subject
to the tax laws of such states or localities. In addition, the treatment of each
Fund and its shareholders under applicable state and local tax laws may differ
from their treatment under the federal income tax laws. For example,
distributions of net investment income (including capital gains) may be taxable
to shareholders as dividend income. Shareholders are advised to consult their
tax advisers concerning the application of state and local taxes.
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<PAGE>
The foregoing is a general and abbreviated summary of certain
provisions of the Code and Treasury Regulations currently in effect. For
complete provisions, reference should be made to the pertinent Code sections and
Treasury Regulations promulgated thereunder. The Code and Treasury Regulations
are subject to change by legislative or administrative action, which may have
retroactive affect. Heller, Ehrman, White & McAuliffe has expressed no opinion
on the tax matters discussed herein.
DIVIDENDS
Dividends of each Fund are automatically reinvested in
additional shares of the appropriate Fund at net asset value and credited to the
shareholder's account or, at the shareholder's option, paid in cash to the
shareholder.
Should a Fund incur or anticipate any unusual or unexpected
significant expense or loss which would affect disproportionately the Fund's
income for a particular period, the Board of Directors would at that time
consider whether to adhere to the present dividend policy or to revise it in the
light of the then-prevailing circumstances in order to ameliorate, to the extent
possible, the disproportionate effect of such expense or loss on then-existing
shareholders. Such expenses or losses may nevertheless result in a shareholder's
receiving no dividends for the period during which he or she held his or her
shares and in his or her receiving upon redemption a price per share lower than
that which he or she paid.
Shareholders of RNC Money Market Fund may receive their
dividends in cash monthly by completing the appropriate section of the Account
Application. Such cash distributions will be paid by check within seven days
after the end of each month. The election to receive cash distributions may be
made at the time of purchase of Fund shares or at any time subsequent thereto by
giving written notice to the Transfer Agent. Dividends and distributions are
taxable to shareholders whether distributed in cash or reinvested in additional
shares. See "Taxes."
The Transfer Agent will send each shareholder of RNC Money
Market Fund a monthly statement showing the total number of shares owned as of
the last business day of the month, as well as the current month's and
year-to-date dividends paid in terms of total cash distributed and, for those
shareholders which have dividends reinvested, the number of shares acquired
through the
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reinvestment of dividends. The policy of each Fund with respect to dividends is
further explained below.
RNC Equity Fund
- ---------------
All of RNC Equity Fund's net investment income is declared and
paid as dividends on an annual basis. Dividends declared in October, November or
December of any year and payable to shareholders of record on a date in one of
such months will be deemed to have been paid by RNC Equity Fund and received by
the shareholders on the record date if the dividends are paid by RNC Equity Fund
during the following January. Accordingly, such dividends will be taxable to
shareholders for the year in which the record date falls.
Net income of RNC Equity Fund (from the time of the
immediately preceding determination thereof) will consist of (i) interest
accrued or discount earned (including both original issue and market discount),
(ii) plus or minus all realized gains and losses, if any, on the portfolio
securities of RNC Equity Fund (iii) less the estimated expenses of RNC Equity
Fund applicable to that dividend period.
RNC Money Market Fund
- ---------------------
All of RNC Money Market Fund's net investment income is
declared as dividends daily. RNC Money Market Fund's dividends are paid monthly.
RNC Money Market Fund's net investment income for dividend
purposes is determined daily. Such determination will be made as of 4:00 p.m.
Eastern time and, on days when RNC Money Market Fund's net asset value is
calculated, immediately prior to such calculation. Immediately after each
calculation of net asset value, RNC Money Market Fund will declare a dividend
(with respect to one or more days) payable to shareholders of record as of 2:00
p.m. Eastern time on such day. Each day's dividend will be declared and paid
with respect to shares effectively purchased at or before 2:00 p.m., but will
not be declared or paid with respect to shares effectively redeemed at or before
2:00 p.m. Net income of RNC Money Market Fund (from the time of the immediately
preceding determination thereof) will consist of (i) interest accrued or
discount earned (including both original issue and market discount), (ii) plus
or minus all realized gains and losses, if any, on the portfolio securities of
RNC Money
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Market Fund (iii) less the estimated expenses of RNC Money Market Fund
applicable to that dividend period.
RNC Money Market Fund intends to use its best efforts to
maintain its net asset value at $1.00 per share. As a result of a significant
expense or realized or unrealized loss, it is possible that RNC Money Market
Fund's net asset value may fall below $1.00 per share. See "Purchase of Shares
- -- Net Asset Value."
SHAREHOLDER RULE 12b-1 PLANS
The Group on behalf of each Fund has adopted a Shareholder
Rule 12b-1 Plan (the "Rule 12b-1 Plan") pursuant to
Rule 12b-1 promulgated under the 1940 Act.
Each Rule 12b-1 Plan requires annual renewal by a vote of the
Group's Board of Directors including those Directors who are not "interested
persons" of the Group, as defined in the 1940 Act, and who have no direct or
indirect interest in the plans or any related agreements (referred to herein as
"disinterested Directors"). Each plan may be terminated at any time if so voted
by a majority of the disinterested Directors or by holders of a majority of the
relevant outstanding shares.
The Rule 12b-1 Plans may not be amended to increase materially
the amounts payable to First Fund Distributors, Inc., or Midvale Securities
Corporation (the "Distributors") unless approved by a majority of the affected
outstanding voting shares, as defined in the 1940 Act, and may not be amended in
any other material respect unless approved by a majority of the disinterested
Directors. Each plan requires that quarterly reports be made to the Board of
Directors detailing the payments made under each plan and the expenses for which
reimbursement is being sought. The Rule 12b-1 Plans contemplate that the
Distributors may delegate their shareholder servicing functions for certain
shareholder accounts to other persons and compensate such persons accordingly.
No payments were made under a Rule 12b-1 Plan during the fiscal year ended
September 30, 1996.
The Board of Directors, including the disinterested Directors,
in approving the Rule 12b-1 Plans for another year concluded that, in the
exercise of their business judgment and in light of their fiduciary duties,
there is a reasonable likelihood that both Rule 12b-1 Plans could be of value to
benefit the Group, the Funds and their shareholders, and could be used to
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increase shareholder satisfaction, and preserve and expand the shareholder base
of each Fund. Among the possible benefits considered by the disinterested
Directors was the increased potential of a continuous cash flow arising out of
the retention of current shareholders and the expansion of the Funds to include
new shareholders, enabling the Funds to meet redemptions and to take advantage
of buying opportunities without having to make unwarranted liquidations of
portfolio securities. Another benefit anticipated by the disinterested Directors
is the potential for increasing the size of the Funds and thereby reducing the
operating costs on a per share basis of the Funds. [For more information on the
expenses paid through the Funds' 12b-1 plans, see the section in the Prospectus
entitled "Shareholder Rule 12b-1 Plans."]
PERFORMANCE INFORMATION
General
- -------
From time to time, each Fund may include general comparative
information, such as statistical data regarding inflation, securities indices or
the features or performance of alternative investments, in advertisements, sales
literature and reports to shareholders. Each Fund may also include calculations,
such as hypothetical compounding examples or tax-free compounding examples,
which describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of the relevant Fund.
From time to time, the yield and total return of a Fund may be
quoted in advertisements, shareholder reports or other communications to
shareholders.
Total Return
- ------------
Average annual total return quotations used in the Funds'
advertising and promotional materials are calculated according to the following
formula:
n
P(1 + T) = ERV
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where P equals a hypothetical initial investment of $1,000; T equals average
annual total return; n equals the number of years; and ERV equals the ending
redeemable value at the end of a period of a hypothetical $1,000 investment made
at the beginning of the period.
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. Average annual total return, or "T" in the above formula, is
computed by finding the average annual compounded rates of return over the
period that would equate the initial amount invested to the ending redeemable
value. Average annual total return assumes the reinvestment of all dividends and
distributions.
Adviser's Equity Performance History
- ------------------------------------
Set forth in the table below is certain performance data
provided by the Adviser relating to all of its managed equity accounts for the
last 20 years that have substantially the same investment objective as RNC
Equity Fund and are managed using substantially similar investment strategies
and techniques. See "Objectives and Policies" above as well as the "Objectives,
Policies and Risk Factors" section in the Prospectus. The results presented are
not intended to predict or suggest the return to be experienced by RNC Equity
Fund or the return an investor might achieve by investing in this Fund. Results
may differ because of, among other things, differences in brokerage commissions
paid, account expenses, including investment advisory fees, (which expenses and
fees may be higher for RNC Equity Fund than for the accounts), the size of
positions taken in relation to account size, diversification of securities,
timing of purchases and sales, timing of cash additions and withdrawals, the
private character of the composite accounts compared with the public character
of the Fund, and the tax-exempt status of some of the accounts compared with the
Fund and its shareholders. Investors should be aware that the use of different
methods of determining performance could result in different performance
results. Investors should not rely on the following performance data as an
indication of future performance of the Adviser or RNC Equity Fund.
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<PAGE>
RNC Equity Accounts
Average Annual Total Returns
For Periods Ending
December 31, 1996
Average Total
Time Periods Annual Returns
------------ --------------
Net Gross
of Fees of Fees
------- -------
One Year 17.9% 19.3%
Three Years 15.2% 16.3%
Five Years 12.6% 13.7%
Ten Years 11.6% 12.6%
Fifteen Years 13.2% 14.2%
Twenty Years 15.4% 16.7%
The performance data presented is based upon audited figures.
The computation of performance results includes all fully discretionary,
unrestricted and institutional equity accounts under RNC management for each
full year within the period ending December 31, 1996. The performance results
are shown both net of all applicable fees as well as gross of all fees. For the
periods one through ten years, the performance computation is prepared and
presented in compliance with the Association for Investment Management and
Research Performance Presentation Standards ("AIMR - PPS") and Level II
Verification. AIMR has not been involved with the preparation or review of this
presentation of performance. AIMR standards went into effect during the
1983-1984 time period. Performance results for all time periods shown represent
time-weighted measures of the percentage change in the total market value after
considering the effect of additions and withdrawals of capital.
Other Information
- -----------------
Performance data of a Fund quoted in advertising and other
promotional materials represents past performance and is not intended to predict
or indicate future results. The return and principal value of an investment in a
Fund will fluctuate, and an investor's redemption proceeds may be more or less
than the original investment amount. In advertising and promotional materials a
Fund may compare its performance with data published by Lipper Analytical
Services, Inc. ("Lipper"), Morningstar, Inc. ("Morningstar") or CDA Investment
Technologies, Inc. ("CDA"). A
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Fund also may refer in such materials to mutual fund performance rankings and
other data, such as comparative asset, expense and fee levels, published by
Lipper, CDA or Morningstar. Advertising and promotional materials also may refer
to discussions of a Fund and comparative mutual fund data and ratings reported
in independent periodicals including, but not limited to, The Wall Street
Journal, Money Magazine, Forbes, Business Week, Financial World and Barron's.
Yield Calculation
- -----------------
RNC Money Market Fund quotes current yield, and for this
purpose the yield quoted is the net average annualized yield for the most recent
7-day period. The yield quoted is computed by assuming that an account is
established with one share (the "one-share account") on the first day of the
period. To arrive at the quoted yield, the net change in the value of the
one-share account for the 7-day period (which includes interest accrued and
original issue discount and market discount earned, and is less premium
amortized and expenses accrued, but does not include any realized gains or
losses or unrealized appreciation or depreciation) is multiplied by 365 and then
divided by 7 (the number of days in the period), with the resulting figure
carried to the nearest one hundredth of one percent. RNC Money Market Fund also
furnishes a quotation of effective yield that assumes the reinvestment of
dividends for a 365-day year and a return for the entire year equal to the
average annualized yield for the period, which is computed by adding 1 to the
net change in the value of the one-share account during the period, raising the
sum to a power equal to 365 divided by 7, and then subtracting one from the
result.
Yields for the 7-day period ended September 30, 1996, for RNC
Money Market Fund were as follows:
Current yield................................... 4.84%
Effective yield ................................ 4.96%
====
Yields for the 7-day period ended January 15, 1997 for RNC
Money Market Fund were as follows:
Current Yield .................................. 4.75%
Effective Yield................................. 4.74%
====
RNC Money Market Fund may also quote the average
dollar-weighted portfolio maturity for the corresponding seven-
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day period. At September 30, 1996 this average was 50 days for RNC Money Market
Fund. At December 31, 1996 this average was 44 days for the RNC Money Market
Fund.
PRINCIPAL UNDERWRITER
First Fund Distributors, Inc., is currently the principal
underwriter of the Funds' shares pursuant to underwriting agreements with the
Group on behalf of the Funds. The Funds' shares are sold to the public on a best
efforts basis in a continuous offering without a sales load or other commission.
For each of the fiscal years ended September 30, 1994, 1995 and 1996, the Funds'
principal underwriter received no underwriting commission. The Funds' principal
underwriter is under common control with Investment Company Administration
Corporation, the Funds' administrator.
FINANCIAL STATEMENTS
The RNC Money Market Fund 1996 Annual Report to Shareholders
("Annual Report"), including audited financial statements for the fiscal year
ended September 30, 1996, has been previously sent to shareholders and filed
with the Securities and Exchange Commission.
The financial statements and independent auditors' report in
the Annual Report are incorporated by reference into this Statement of
Additional Information. Additional copies of the 1996 Annual Report may be
obtained at no charge by writing or telephoning the Group at the address or
telephone number appearing on the front page of this Statement of Additional
Information.
The Group's independent certified public accountants and
auditors for the fiscal year ending September 30, 1996 are Tait, Weller & Baker,
whose address is Two Penn Center Plaza, Philadelphia, Pennsylvania 19102. The
Funds' custodian is Star Bank, P.O. Box 1118, Cincinnati, Ohio 45201-1118.
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APPENDIX
DESCRIPTION OF NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS
("NRSROs") AND COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS:
Moody's Investors Service commercial paper ratings are
opinions of the ability of issuers to repay punctually promissory obligations
not having an original maturity in excess of nine months. Moody's employs three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers. The first of these three designations,
representing the securities in which the Funds may invest, is "Prime-1." Issuers
rated "Prime-1" (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS:
A Standard & Poor's Corporation commercial paper rating is a
current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. Ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Ratings are applicable to both taxable and tax-exempt commercial paper.
The highest category is described as follows:
A. Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 and 3
to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong.
DUFF & PHELPS CREDIT RATING CO. SHORT-TERM DEBT SCALE:
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Duff & Phelps' short-term ratings are consistent with the
rating criteria utilized by money market participants. The ratings apply to all
obligations with maturities of under one year, including commercial paper, the
uninsured portion of certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of credit, and current
maturities of long-term debt. Asset-back commercial paper is also rated
according to this scale. Emphasis is placed on liquidity which we define as not
only cash from operations, but also access to alternative sources of funds
including trade credit, bank lines, and the capital markets. An important
consideration is the level of an obligor's reliance on short-term funds on an
ongoing basis.
Duff 1+ Highest certainty of timely payment. Short-term liquidity,
including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is
just below risk-free U.S. Treasury short- term obligations.
Duff 1 Very high certainty of timely payment. Liquidity factors are
excellent and supported by good fundamental protection
factors. Risk factors are minor.
FITCH RATINGS SHORT-TERM RATINGS:
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three years,
including commercial paper, certificates of deposit, medium-term notes, and
municipal and investment notes. The short-term rating places greater emphasis
than a long-term rating on the existence of liquidity necessary to meet the
issuer's obligations in a timely manner.
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of
assurance for timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in
degree than issues rated F-1+.
CORPORATE BOND RATINGS
MOODY'S CORPORATE BOND RATINGS:
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Moody's corporate bond ratings are opinions of the relative
investment qualities of bonds. Moody's employs nine designations to indicate
such relative qualities, ranging from "AAA" for the highest quality obligations
to "C" for the lowest. Issues are further refined with the designation 1, 2 and
3 to indicate the relative ranking within designations. The highest two
designations are described as follows:
Aaa. Bonds in this category are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa. Bonds in this category are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks somewhat
larger than in Aaa securities.
STANDARD & POOR'S CORPORATE DEBT RATINGS
A Standard & Poor's corporate debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. Ratings are graded into ten categories, ranging from "AAA" for the
highest quality obligation to "D for debt in default. Issues are further refined
with a "Plus" or "Minus" sign to show relative standing within the categories.
The highest two categories are described as follows:
AAA. Issues having this rating indicate that capacity to pay
interest and repay principal is extremely strong.
AA. This debt has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only
in small degree.
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DUFF & PHELPS CREDIT RATING CO. LONG-TERM DEBT AND PREFERRED
STOCK RATING SCALE:
These ratings represent a summary opinion of the issuer's
long-term fundamental quality. Rating determination is based on qualitative and
quantitative factors which may vary according to the basic economic and
financial characteristics of each industry and each issuer. Important
considerations are vulnerability to economic cycles as well as risks related to
such factors as competition, government action, regulation, technological
obsolescence, demand shifts, cost structure, and management depth and expertise.
The projected viability of the obligor at the trough of the cycle is a critical
determination.
AAA Highest credit quality. The risk factors are negligible, being
only slightly more than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are strong.
AA Risk is modest but may vary slightly from time to time
AA- because of economic conditions.
FITCH RATINGS INVESTMENT BOND RATINGS:
Fitch investment grade bond ratings provide a guide to
investors in determining the credit risk associated with a particular security.
The ratings represent Fitch's assessment of the issuer's ability to meet the
obligations of a specific debt issue or class of debt in a timely manner. The
rating takes into consideration special features of the issuer. Its relationship
to other obligations of the issuer, the current and prospective financial
condition and operating performance of the issuer and any guarantor, as well as
the economic and political environment that might affect the issuer's future
financial strength and credit quality.
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because
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bonds rated in the "AAA" and "AA" categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated "F-1+".
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