TRENT EQUITY FUND
Supplement to Prospectus dated January 1, 1996
The address of the Fund has been changed to:
1 North Point Building, 3101 North Elm St., Greensboro, NC 27455
August 1, 1996
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STATEMENT OF ADDITIONAL INFORMATION
January 1, 1996
Revised August 1, 1996
TRENT EQUITY FUND
a series of
PROFESSIONALLY MANAGED PORTFOLIOS
1 North Point Bldg., 3101 N. Elm St.
Greensboro, NC 27455
(910) 282-9302
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the prospectus of the Trent Equity Fund. A copy of
the prospectus dated January 1, 1996 is available by calling the number listed
above or (212) 633-9700.
TABLE OF CONTENTS
Page
The Trust . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objective and Policies . . . . . . . . . . . . B-2
Investment Restrictions . . . . . . . . . . . . . . . . . B-5
Distributions and Tax Information . . . . . . . . . . . . B-7
Management . . . . . . . . . . . . . . . . . . . . . . . B-9
Execution of Portfolio Transactions . . . . . . . . . . . B-13
Additional Purchase and Redemption Information . . . . . B-15
Determination of Share Price . . . . . . . . . . . . . . B-16
Performance Information . . . . . . . . . . . . . . . . . B-17
General Information . . . . . . . . . . . . . . . . . . . B-18
Appendix . . . . . . . . . . . . . . . . . . . . . . . . B-20
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THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of a number of series which represent separate investment
portfolios. This Statement of Additional Information relates only to the Trent
Equity Fund series (the "Fund").
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a mutual fund with the investment objective of seeking
capital appreciation. 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.
Repurchase Agreements
The Fund may enter into repurchase agreements as discussed in the
Prospectus. Under such agreements, the seller of the U.S. Government security to
the Fund agrees to repurchase it at a mutually agreed time and price. The
repurchase price may be higher than the purchase price, the difference being
income to the Fund, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Fund together with the repurchase price on
repurchase. In either case, the income to the Fund is unrelated to the interest
rate on the underlying U.S. Government security itself. Such repurchase
agreements will be made only with banks with deposits of $500 million or more
that are insured by the Federal Deposit Insurance Corporation or with Government
securities dealers recognized by the Federal Reserve Board and registered as
broker-dealers with the Securities and Exchange Commission ("SEC") or exempt
from such registration. The Fund will generally enter into repurchase agreements
of short durations, from overnight to one week, although the underlying
securities generally have longer maturities. The Fund may not enter into a
repurchase agreement with more than seven days to maturity if, as a result, more
than 10% of the value of the Fund's total assets would be invested in illiquid
securities including such repurchase agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government security subject to the repurchase agreement. It is not clear,
however, whether a court would consider the U.S. Government security acquired by
the Fund subject to a repurchase agreement as being owned by the Fund or as
being collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the U.S. Government security before its repurchase under a repurchase
agreement, the Fund may encounter delays and incur costs before being able to
sell the security.
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Delays may involve loss of interest or a decline in price of the U.S. Government
security. If a court characterizes the transaction as a loan and the Fund has
not perfected a security interest in the U.S. Government security, the 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, the 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 the Fund, the
investment manager seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case the
seller of the U.S. Government security.
Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, the
Fund will always receive as collateral for any repurchase agreement to which it
is a party securities acceptable to it, the market value of which at the time
the transaction is entered into is equal to at least 100% of the amount invested
by the Fund plus accrued interest, and the Fund will make payment against such
securities only upon physical delivery or evidence of book entry transfer to the
account of its Custodian. If the market value of the U.S. Government security
subject to the repurchase agreement becomes less than the repurchase price
(including interest), the Fund will direct the seller of the U.S. Government
security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to impose on the seller a contractual obligation to deliver additional
securities.
When-Issued Securities
The Fund may from time to time purchase securities on a "when-issued"
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. To the extent that assets of the Fund are
held in cash pending the settlement of a purchase of securities, the Fund would
earn no income; however, it is the Fund's intention to be fully invested to the
extent practicable and subject to the policies stated above. While when-issued
securities may be sold prior to the settlement date, the Fund intends to
purchase such securities with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time the Fund makes the
commitment to purchase a security on a when-issued basis, it will record the
transaction and reflect the value of the security in determining its net asset
value. The market value of the when-issued securities may be more or less than
the purchase price. The Fund
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does not believe that its net asset value or income will be adversely affected
by its purchase of securities on a when-issued basis. The Fund will establish a
segregated account with its Custodian in which it will maintain cash and
marketable securities equal in value to commitments for when-issued securities.
Such segregated securities either will mature or, if necessary, be sold on or
before the settlement date.
Foreign Securities
The Fund may invest up to 10% of its assets in foreign securities.
Foreign investments can involve significant risks in addition to the risks
inherent in U.S. investments. The value of securities denominated in or indexed
to foreign currencies, and of dividends and interest from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. Foreign securities markets generally have less trading volume
and less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and disclosure
standards comparable to those applicable to U.S. companies, and it may be more
difficult to obtain reliable information regarding an issuer's financial
condition and operations. In addition, the costs of foreign investing, including
withholding taxes, brokerage commissions, and custodial costs, generally are
higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign securities trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It also may be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There can be no assurance that the
Advisor will be able to anticipate or counter these potential events and their
impacts on the Fund's share price.
Securities of foreign issuers may be held by the Fund in the
form of American Depositary Receipts and European Depositary
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Receipts ("ADRs" and "EDRs"). These are 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.
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:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b) to the
extent the entry into a repurchase agreement is deemed to be a loan.
2. (a) Borrow money, except from banks for temporary or emergency
purposes. Any such borrowing will be made only if immediately thereafter there
is an asset coverage of at least 300% of all borrowings and no additional
investments may be made while any such borrowings are in excess of 5% of total
assets.
(b) Mortgage, pledge or hypothecate any of its assets
except in connection with any such borrowings.
3. Purchase securities on margin, participate on a joint or joint and
several basis in any securities trading account, or underwrite securities, or
sell securities short (except for short sales "against the box"). (The Fund is
not precluded from obtaining such short-term credit as may be necessary for the
clearance of purchases and sales of its portfolio securities.)
4. Purchase or sell commodities or commodity contracts (except that the
Board of Trustees may authorize the Fund to engage in certain activities
involving futures for bona fide hedging purposes).
5. Invest more than 25% of the market value of its assets in
the securities of companies engaged in any one industry. (Does not
apply to investment in the securities of the U.S. Government, its
agencies or instrumentalities.)
6. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures, forward or repurchase transactions.
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7. Invest more than 5% of the value of its total assets in the securities
of any one issuer or purchase more than 10% of the outstanding voting securities
or of any class of securities of any one issuer.
8. Invest in any issuer for purposes of exercising control
or management.
9. Purchase or sell real estate; however, the Funds may invest in debt
securities secured by real estate or real estate interests, or issued by
companies, including real estate investment trusts, that invest in real estate
or real estate interests.
The Fund observes the following policies, which are not deemed
fundamental and which may be changed without shareholder vote. The
Fund may not:
10. Purchase or hold securities of any issuer, if, at the time of purchase
or thereafter, any of the Trustees or officers of the Trust or the Fund's
Advisor owns beneficially more than 1/2 of 1%, and all such Trustees or officers
holding more than 1/2 of 1% together own beneficially more than 5% of the
issuer's securities.
11. Invest in securities of other investment companies which
would result in the Fund owning more than 3% of the outstanding
voting securities of any one such investment company, the Fund
owning securities of another investment company having an aggregate
value in excess of 5% of the value of the Fund's total assets, or
the Fund owning securities of investment companies in the aggregate
which would exceed 10% of the value
of the Fund's total assets.
12. Invest, in the aggregate, more than 5% of its total assets in securities
with legal or contractual restrictions on resale, securities which are not
readily marketable and repurchase agreements with more than seven days to
maturity.
13. Buy or sell interests in oil, gas or mineral exploration or development
programs or related leases, or real estate. (Does not preclude investments in
marketable securities of issuers engaged in such activities.)
14. Purchase any security if as a result the Fund would have more than
5% of its total assets (taken at current value) invested in securities of
companies (including predecessors) less than three years old.
15. Invest more than 10% of its assets in securities of foreign issuers
(including American Depositary Receipts with respect to foreign issuers, but
excluding securities of foreign issuers listed and traded on a domestic national
securities exchange).
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If a percentage restriction 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 as
otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions
Dividends from net investment income and distributions from net profits
from the sale of securities, if any, are generally made annually by the Fund
after the conclusion of its fiscal year (August 31). 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 twelve month 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 is treated as a separate entity for federal income tax
purposes. The Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 (the
"Code"). In order to qualify, the Fund must comply with all applicable
requirements regarding the source of its income, diversification of its assets
and timing of its distributions. The Fund's policy is to distribute to its
shareholders all of its investment company taxable income and any net realized
long-term capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income tax or excise taxes based on net income. The Fund will
generally be subject to federal income tax on its undistributed net investment
income and capital gains. To avoid federal excise taxes based on its net income,
the Fund must distribute (or be deemed to have distributed) by December 31 of
each calendar year (I) at least 98% of its ordinary income for such year, (ii)
at least 98% of the excess of its realized capital gains over its realized
capital losses for the 12-month period ending on October 31 during such year and
(iii) any amounts from the prior calendar year that were not distributed.
Net investment income consists of interest and dividend income and
foreign currency gain, less expenses. Net realized capital gains for a fiscal
period are computed by taking into account any capital loss carryforward of the
Fund.
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Distributions of net investment income and the excess of net short-term
capital gain over net long-term capital loss are taxable to shareholders as
ordinary income. In the case of corporate shareholders, a portion of the
distributions may qualify for the intercorporate dividends-received deduction to
the extent the Fund designates the amount distributed as a qualifying dividend.
The aggregate amount so designated cannot, however, exceed the aggregate amount
of qualifying dividends received by the Fund for its taxable year. In view of
the Fund's investment policy, it is expected that dividends from domestic
corporations will be part of the Fund's gross income and that, accordingly, part
of the distributions by the Fund may be eligible for the dividends-received
deduction for corporate shareholders. However, the portion of the Fund's gross
income attributable to qualifying dividends is largely dependent on the Fund's
investment activities for a particular year and therefore cannot be predicted
with any certainty. The deduction may be reduced or eliminated if the Fund
shares held by a corporate investor are treated as debt-financed or are held for
less than 46 days.
Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time the shareholders have held their shares.
Capital gains distributions are not eligible for the dividends-received
deduction referred to in the previous paragraph. Distributions of any net
investment income and net realized capital gains will be taxable as described
above, whether received in shares or in cash. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share on the reinvestment date. Distributions are generally taxable
when received. However, distributions declared in October, November or December
to shareholders of record on a date in such a month and paid the following
January are taxable as if received on December 31. Distributions are includable
in alternative minimum taxable income in computing a shareholder's liability for
the alternative minimum tax.
A redemption of Fund shares may result in recognition of a taxable gain
or loss. Any loss realized upon a redemption of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gains during
such six-month period. Any loss realized upon a redemption of Fund shares may be
disallowed under certain wash sale rules to the extent shares of the Fund are
purchased (through reinvestment of distributions or otherwise) within 30 days
before or after the redemption.
Under the Code, the Fund will be required to report to the Internal
Revenue Service all distributions of taxable income and capital gains as well as
gross proceeds from the redemption or exchange of Fund shares, except in the
case of exempt shareholders,
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which includes most corporations. Pursuant to the backup withholding provisions
of the Code, distributions of any taxable income and capital gains and proceeds
from the redemption of Fund shares may be subject to withholding of federal
income tax at the rate of 31 percent in the case of non-exempt shareholders who
fail to furnish the Fund with their taxpayer identification numbers and with
required certifications regarding their status under the Code. If the
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in additional shares, will be reduced by the
amounts required to be withheld. Corporate and other exempt shareholders should
provide the Fund with their taxpayer identification numbers or certify their
exempt status in order to avoid possible erroneous application of backup
withholding. The Fund reserves the right to refuse to open an account for any
person failing to provide a certified taxpayer identification number.
The Fund will not be subject to tax in The Commonwealth of
Massachusetts as long as it qualifies as a regulated investment company for
federal income tax purposes. Distributions and the transactions referred to in
the preceding paragraphs may be subject to state and local income taxes, and the
tax treatment thereof may differ from the federal income tax treatment.
Moreover, the above discussion is not intended to be a complete discussion of
all applicable tax consequences of an investment in the Fund. Shareholders are
advised to consult with their own tax advisers concerning the application of
federal, state and local taxes to an investment in the Fund.
The foregoing discussion of the Code relates solely to the application of
that law to U.S. citizens or residents and U.S. domestic corporations,
partnerships, trusts and estates. Each shareholder who is not a U.S. person
should consider the U.S. and foreign tax consequences of ownership of shares of
the Fund, including the possibility that such a shareholder may be subject to a
U.S. withholding tax at a rate of 30 percent (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the prospectus have been
prepared by Fund management, and counsel to the Fund has expressed no opinion in
respect thereof.
MANAGEMENT
Trustees
The Trustees of the Trust, who were elected for an indefinite term by
the initial shareholders of the Trust, are responsible for the overall
management of the Trust, including general supervision and review of the
investment activities of the Fund. The Trustees, in turn, elect the officers of
the Trust, who are responsible for administering the day-to-day operations of
the Trust and its
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separate series. The current Trustees and officers and their affiliations and
principal occupations for the past five years are set forth below.
Steven J. Paggioli,* 46 President and Trustee
479 West 22nd Street, New York, New York 10011. Executive Vice
President, Robert H. Wadsworth & Associates, Inc. (consultants)
since 1986; Executive Vice President of Investment Company
Administration Corporation ("ICAC"; mutual fund administration and
the Fund's Administrator), and Vice President of First Fund
Distributors, Inc. ("FFD"; registered broker-dealer and the Fund's
Distributor) since 1990.
Dorothy A. Berry, 52 Trustee
Wildflower Hill, Ancram, New York 12502. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment advisor and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
Wallace L. Cook, 56 Trustee
30 Rockefeller Plaza, New York, New York 10112. Senior Vice
President, Rockefeller Trust Co. Financial Counselor, Rockefeller
& Co.
Carl A. Froebel, 57 Trustee
333 Technology Dr., Malvern, PA. Managing Director, Premier
Solutions, Ltd. Formerly Founder and President, National Investor
Data Services (investment related computer software).
Rowley W.P. Redington, 51 Trustee
260 Washington Street, Newark, New Jersey 07102. Vice President,
PRS of New Jersey, Inc. (management consulting); Chief Financial
Officer, Jersey Electronics, Inc. (formerly ESI, Inc.) (consumer
electronics service and marketing); formerly President, Aveco Inc.
(consumer electronic service and marketing) and formerly Chief
Executive Officer, Rowley Associates (consultants).
Eric M. Banhazl*, 38 Treasurer
2025 E. Financial Way, Suite 101, Glendora, California 91741.
Senior Vice President, Robert H. Wadsworth & Associates, Inc.,
Senior Vice President of ICAC and Vice President of
FFD since 1990.
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Robin Berger*, 39 Secretary
479 West 22nd St., New York, New York 10011. Vice President, Robert
H. Wadsworth & Associates, Inc. since June, 1993; formerly
Regulatory and Compliance Coordinator, Equitable Capital
Management, Inc. (1991-93).
Robert H. Wadsworth*, 56 Vice President
4455 E. Camelback Road, Suite 261E, Phoenix, Arizona 85018.
President of Robert H. Wadsworth & Associates, Inc. since 1982,
President of ICAC and FFD since 1990.
*Indicates an "interested person" of the Trust as defined in the
1940 Act.
The Trustees of the Trust who are not interested persons receive a
total annual retainer of $10,000 paid quarterly, and fees and expenses for each
Board meeting attended. This amount is allocated among all series of the Trust.
During the fiscal year ended August 31, 1995, $500 of such fees and expenses
were allocated to the Fund. The officers of the Trust receive no compensation
directly from it for performing the duties of their offices. However, those
officers and Trustees of the Trust who are officers and/or stockholders of those
companies that render administrative services to the Trust as noted below may
receive remuneration indirectly because of fees that these companies receive
from the Trust. As of the date of this Statement of Additional Information, the
Trustees and officers of the Trust as a group did not own more than 1% of the
outstanding shares of any Fund. Trustees receive no retirement benefits or
deferred compensation from the Trust.
The Fund receives investment advisory services pursuant to agreements
with the Advisor and the Trust. Each such agreement, after its initial term,
continues in effect for successive annual periods so long as such continuation
is approved at least annually by the vote of (1) the Board of Trustees of the
Trust (or a majority of the outstanding shares of the Fund to which the
agreement applies), and (2) a majority of the Trustees who are not interested
persons of any party to the Agreement, in each case cast in person at a meeting
called for the purpose of voting on such approval. Any such agreement may be
terminated at any time, without penalty, by either party to the agreement upon
sixty days' written notice and is automatically terminated in the event of its
"assignment," as defined in the 1940 Act.
Investment Advisor
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund. Trent Capital Management,
Inc., (the "Advisor") acts as investment advisor to the Fund.
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Under the Investment Advisory Agreement with the Fund, the Advisor
provides the Fund with advice on buying and selling securities, manages the
investments of the Fund, furnishes the Fund with office space and certain
administrative services, and provides most of the personnel needed by the Fund.
As compensation, the Fund pays the Advisor a monthly management fee (accrued
daily) based upon the average daily net assets of the Fund at the current rate
of 1.15% annually.
The Investment Advisory Agreement continues in effect from year to year so
long as such continuation is approved at least annually by (1) the Board of
Trustees of the Trust or the vote of a majority of the outstanding shares of the
Fund, and (2) a majority of the Trustees who are not interested persons of any
party to the Agreement, in each case cast in person at a meeting called for the
purpose of voting on such approval. The Agreement may be terminated at any time,
without penalty, by either the Fund or the Advisor upon sixty days' written
notice and is automatically terminated in the event of its assignment as defined
in the 1940 Act.
For the period ended August 31, 1993, the advisor voluntarily waived its
fee and reimbursed a portion of fund operating expenses in the total amount of
$25,050. For the fiscal year ended August 31, 1994, the Advisor waived advisory
fees of $36,474.81 and reimbursed operating expenses in the amount of $41,048.
For the fiscal year ended August 31, 1995, the Advisor waived advisory fees of
$44,380 and reimbursed operating expenses in the amount of $21,572.
Administrator
The Fund has entered into an Administrative Management Agreement with
Investment Company Administration Corp. ("ICAC"), a corporation owned in part
and controlled by Messrs. Banhazl, Paggioli and Wadsworth. The Agreement
provides that ICAC will prepare and coordinate reports and other materials
supplied to the Trustees; prepare and/or supervise the preparation and filing of
all securities filings, periodic financial reports, prospectuses, statements of
additional information, marketing materials, tax returns, shareholder reports
and other regulatory reports or filings required of the Fund; prepare all
required filings necessary to maintain the Fund's qualification and/or
registration to sell shares in all states where the Fund currently does, or
intends to do business; coordinate the preparation, printing and mailing of all
materials (e.g., Annual Reports) required to be sent to shareholders; coordinate
the preparation and payment of Fund related expenses; monitor and oversee the
activities of the Fund's servicing agents (i.e., transfer agent, custodian, fund
accountants, etc.); review and adjust as necessary the Fund's daily expense
accruals; and perform such additional services as may be agreed upon by the Fund
and the Manager. For its services, ICAC currently receives an annual fee equal
to the greater of 0.25% of
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the Fund's average daily net assets or $15,000. During the fiscal years ended
August 31, 1995, and August 31, 1994 ICAC and its predecessor firm received fees
of $30,000 and $22,614 respectively.
Distributor
First Fund Distributors, (the "Distributor") a corporation owned by
Messrs. Banhazl, Paggioli and Wadsworth, acts as the Fund's distributor and
principal underwriter in a continuous public offering of the Fund's shares. The
Distribution Agreement between the Fund and the Distributor continues in effect
from year to year if approved at least annually by (I) the Board of Trustees or
the vote of a majority of the outstanding shares of the Fund (as defined in the
1940 Act) and (ii) a majority of the Trustees who are not interested persons of
any such party, in each case cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement may be terminated without
penalty by the parties thereto upon sixty days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Investment 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,
subject to the instructions of and review by the Fund. 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 account. 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
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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 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
maybe 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 may also be 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 Fund and 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
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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 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.
The Fund does not use the Distributor to execute its portfolio transactions.
During the fiscal years ended August 31, 1995, 1994 and 1993, brokerage
commissions paid by the Fund on its portfolio transactions totaled, $7,818,
$23,494 and $72,024, respectively.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion (I) to suspend the
continued offering of the Fund's shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Fund, and (iii) to reduce or waive the minimum
for initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
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 New York Stock Exchange is restricted as
determined by the SEC or such Exchange 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. At various times, the Fund may be
requested to redeem shares for which it has not yet received confirmation of
good payment; in this circumstance, the Fund may delay the redemption until
payment for the purchase of such shares has been collected and confirmed to the
Fund.
The Fund intends to pay cash (U.S. dollars) for all shares
redeemed, but, under abnormal conditions which make payment in cash
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unwise, the Fund may make payment partly in securities with a current market
value equal to the redemption price. Although the Fund does not anticipate that
it will make any part of a redemption payment in securities, if such payment
were made, an investor may incur brokerage costs in converting such securities
to cash. The Fund has elected to be governed by the provisions of Rule 18f-1
under the 1940 Act, which contains a formula for determining the minimum
redemption amounts that must be paid in cash.
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.
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 4:00 p.m., New York City
time, on each day the New York Stock Exchange is open for trading. It is
expected that the Exchange will be closed on Saturdays and Sundays and on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas. The Fund does not expect to determine the
net asset value of its shares on any day when the Exchange 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.
In valuing the Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
the National Association of Securities Dealers' National Market System (the
"NASDAQ National Market System") 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 the NASDAQ National Market System 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 the NASDAQ
National Market System 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
Trustees 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 Trustees 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.
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PERFORMANCE INFORMATION
From time to time, the Fund may state its total return in
advertisements and investor communications. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return will be accompanied by information on the Fund's
average annual compounded rate of return over the most recent four calendar
quarters and the period from the Fund's inception of operations. The Fund may
also advertise aggregate and average total return information over different
periods of time.
The Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial purchase order of $1,000
from which the maximum sales load is deducted
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000
purchase at the end of the period
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period and gives effect to the maximum applicable sales charge.
The Fund's total return may be compared to relevant indices, including
Standard & Poor's 500 Composite Stock Index and indices published by Lipper
Analytical Services, Inc. From time to time, evaluations of the Fund's
performance by independent sources may also be used in advertisements and in
information furnished to present or prospective investors in the Funds.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
For the one year period ended June 30, 1996, and from inception on
September 2, 1992 through that date the Fund's average annual total returns were
14.99% and 9.54%, respectively.
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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.
Star Bank, 425 Walnut Street, Cincinnati, OH 45202 acts as Custodian of the
securities and other assets of the Fund. American Data Services, Inc., 24 West
Carver St., Huntington, NY 11743 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.
Tait, Weller & Baker, Two Penn Center Plaza, Philadelphia ,PA
19102-1707 are the independent auditors for the Fund.
Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco,
California 94104, are legal counsel to the Fund.
The following persons are beneficial owners of more than 5% of the Fund's
outstanding voting securities as of August 1, 1996. An asterisk (*) denotes an
account afffiliated with the Fund's investment advisor, officers or trustees:
Star Bank, N.A. Cust. for William M McCormack IRA, Apopka, FL
32712; 13.40%
Star Bank N.A. Cust. for Robert V. May IRA, Lexington, KY
40502; 5.64%*
The holders of beneficial interest of a Massachusetts business trust
could, under certain circumstances, be held personally liable as partners for
its obligations. However, the Trust's Agreement and Declaration of Trust
contains an express disclaimer of beneficial interest holder liability for acts
or obligations of the Trust. The Agreement and Declaration of Trust also
provides for indemnification and reimbursement of expenses out of the Fund's
assets for any beneficial interest holder held personally liable for obligations
of the Fund or Trust. The Agreement and Declaration of Trust provides that the
Trust shall, upon request, assume the defense of any claim made against any
beneficial interest holder for any act or obligation of the Fund or Trust and
satisfy any judgment thereon. All such rights are limited to the assets of the
Fund. The Agreement and Declaration of Trust further provides that the Trust may
maintain appropriate insurance (for example, fidelity bonding and errors and
omissions insurance) for the protection of the Trust, its shareholders,
trustees, officers, employees and agents to cover possible tort and other
liabilities. Furthermore, the activities of the Trust as an investment company
would not likely give rise to liabilities in excess of the Trust's total assets.
Thus, the risk of a beneficial interest holder incurring financial loss on
account of shareholder liability is
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limited to circumstances in which both inadequate insurance exists and the Fund
itself is unable to meet its obligations.
The Trust 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 Statement of
Additional Information 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.
FINANCIAL STATEMENTS
The annual report to shareholders for the Fund for the fiscal year
ended August 31, 1995 is a separate document supplied with this Statement of
Additional Information and the financial statements, accompanying notes and
report of independent accountants appearing therein are incorporated by
reference in this Statement of Additional Information.
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APPENDIX
Description of Bond Ratings*
Moody's Investors Service
Aaa: Bonds which are rated Aaa 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 which are rated Aa 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 fluctuations or protective elements
may be of greater amplitude or there may be other elements present which make
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements: their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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Standard & Poor's Corporation
AAA: Bonds rated AAA are highest grade debt obligations. This
rating indicates an extremely strong capacity to pay principal and
interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B: Bonds rated BB and B are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. While such bonds will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
Ratings may be modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
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