STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
MATRIX GROWTH FUND
MATRIX EMERGING GROWTH FUND
series of
PROFESSIONALLY MANAGED PORTFOLIOS
300 Main St., Cincinnati, OH 45202-4123
(513) 621-2875
This Statement of Additional Information is not a prospectus and it should be
read in conjunction with the prospectus of the Matrix Growth Fund or the Matrix
Emerging Growth Fund (the "Fund" or the "Funds"). A copy of the prospectus of
the Funds dated May 1, 1996 is available by calling the numbers 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-10
The Funds' Investment Advisor . . . . . . . . . . . . . . B-12
The Funds' Administrator. . . . . . . . . . . . . . . . B-12
The Funds' Distributor. . . . . . . . . . . . . . . . . . B-13
Execution of Portfolio Transactions . . . . . . . . . . . B-13
Additional Purchase and Redemption Information . . . . . B-16
Determination of Share Price . . . . . . . . . . . . . . B-17
Performance Information . . . . . . . . . . . . . . . . . B-18
General Information . . . . . . . . . . . . . . . . . . . B-19
Financial Statements . . . . . . . . . . . . . . . . .. . 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 various series which represent separate investment portfolios.
This Statement of Additional Information relates only to the Matrix Growth Fund
and Matrix Emerging Growth Fund series (the "Fund" or "Funds").
INVESTMENT OBJECTIVE AND POLICIES
The Matrix Growth Fund is a mutual fund with the investment objective
of long-term growth of capital with a secondary objective of conserving
principal. The Matrix Emerging Growth Fund is a mutual fund with the investment
objective of seeking long-term capital appreciation. The following discussion
supplements the discussion of the Funds' investment objectives and policies as
set forth in the Prospectus. There can be no assurance the objective of either
Fund will be attained.
Repurchase Agreements
The Funds may enter into repurchase agreements as discussed in the
Prospectus. Under such agreements, the seller of the security agrees to
repurchase it at a mutually agreed upon time and price. The repurchase price may
be higher than the purchase price, the difference being income to the Funds, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Funds together with the repurchase price on repurchase. In
either case, the income to the Funds is unrelated to the interest rate on the
U.S. Government security itself. Such repurchase agreements will be made only
with banks with assets 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
Funds will generally enter into repurchase agreements of short durations, from
overnight to one week, although the underlying securities generally have longer
maturities. The Funds may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 15% of the value of each
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 Funds to the seller of the
U.S. Government security subject to the repurchase agreement. It is not clear
whether a court would consider the U.S. Government security acquired by a Fund
subject to a repurchase agreement as being owned by the Fund or
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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, 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
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 the 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 advisor 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, a
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 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 a Fund
will be unsuccessful in seeking to impose on the seller a contractual obligation
to deliver additional securities.
When-Issued Securities
The Funds 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 Funds' 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 Funds intend to
purchase such securities
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with the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time a 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
Funds do not believe that net asset value or income will be adversely affected
by its purchase of securities on a when-issued basis. The Funds 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.
Options Transactions
As indicated in the Prospectus, the Adviser may at time purchase index put
options with respect to the Matrix Growth Fund's portfolio, principally to
protect against declines in the value of the common stocks held in the Fund's
portfolio or to attempt to retain unrealized gains in the value of the
securities held.
When the Fund purchases a put, it pays a premium in return for the right to
sell the underlying security at the exercise price at any time during the option
period. If any put is not exercised or sold, it will become worthless on its
expiration date. The Fund's option positions may be closed out only on an
exchange which provides a secondary market for options of the same series, but
there can be no assurance that a liquid secondary market will exist at a given
time for any particular option.
In the event of a shortage of the underlying securities deliverable on
exercise of an option, the Options Clearing Corporation has the authority to
permit other, generally comparable securities to be delivered in fulfillment of
option exercise obligations. If the Options Clearing Corporation exercises its
discretionary authority to allow such other securities to be delivered, it may
also adjust the exercise prices of the affected options by setting different
prices at which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options Clearing
Corporation may impose special exercise settlement procedures.
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
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specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Funds 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 Funds may not:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b)
through the lending of its portfolio securities as described above and in its
Prospectus, or (C) to the extent the entry into a repurchase agreement is deemed
to be a loan.
2. (a) Borrow money, except temporarily for extraordinary or emergency
purposes from a bank and then not in excess of 10% of its total assets (at the
lower of cost or fair market value; 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 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. (Does
not preclude the Fund 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 (As a matter of
operating policy, the Board of Trustees may in the future authorize the Fund to
engage in certain activities regarding futures contracts for bona fide hedging
purposes; any such authorization will be accompanied by appropriate notification
to shareholders).
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
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Fund from (a) making any permitted borrowings, mortgages or pledges, or (b)
entering into repurchase transactions.
7. Invest in any issuer for purposes of exercising control
or management.
8. Buy or sell interests in oil, gas, mineral exploration or development
programs or leases, or real estate, provided that this restriction does not
preclude the investment in marketable securities of issuers engaged in real
estate related activities.
The Funds observe the following policies, which are not deemed fundamental
and which may be changed without shareholder vote. The Funds may not:
9. 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
investment manager 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.
10. 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.
11. Invest, in the aggregate, more than 15% 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.
Under applicable provisions of Texas law, any investment by a Fund in
warrants may not exceed 5% of the value of the Fund's net assets. Included
within that amount, but not to exceed 2% of the value of the Fund's net assets
may be warrants which are not listed on the New York or American Stock Exchange.
Also, as provided for under Texas law, the Funds may not purchase real estate
limited partnership interests.
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
with respect to borrowing and illiquid securities, or as otherwise noted.
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DISTRIBUTIONS AND TAX INFORMATION
Distributions
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually, as described in the
Prospectus after the conclusion of the Funds' fiscal year (December 31). Also,
the Funds expect to distribute any undistributed net investment income on or
about December 31 of each year. Any net capital gains realized through the
period ended October 31 of each year will also be distributed by December 31 of
each year.
Each distribution by the Funds is accompanied by a brief explanation of
the form and character of the distribution. In January of each year the Funds
will issue to each shareholder a statement of the federal income tax status of
all distributions.
Tax Information
Each series of the Trust is treated as a separate entity for federal
income tax purposes. Each Fund expects to continue to qualify and be treated as
a regulated investment company under Subchapter M of the Internal Revenue Code
of 1986, as amended (the "Code") provided it complies with all applicable
requirements regarding the source of its income, diversification of its assets
and timing of distributions. Each 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 or excise taxes. To comply with the requirements, the Fund
must also 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 and on which
the Fund paid no federal income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carry forward of a Fund.
Distributions of net investment income and net short-term capital gains
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
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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 that 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 they 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 or exchange of Fund shares may result in recognition of a
taxable gain or loss. Any loss realized upon a redemption or exchange 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. In determining gain or loss from an
exchange of Fund shares for shares of another mutual fund, the sales charge
incurred in purchasing the shares that are surrendered will be excluded from
their tax basis to the extent that a sales charge that would otherwise be
imposed in the purchase of the shares received in the exchange is reduced. Any
portion of a sales charge excluded from the basis of the shares surrendered will
be added to the basis of the shares received. Any loss realized upon a
redemption or exchange may be disallowed under certain wash sale rules to the
extent shares of the same Fund are purchased (through reinvestment of
distributions or otherwise) within 30 days before or after the redemption or
exchange.
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Under the Code, the Fund will be required to report to the Internal
Revenue Service ("IRS") 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, which includes most corporations. Pursuant to
the backup withholding provisions of the Internal Revenue 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 federal income tax law. 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 Funds reserve
the right to refuse to open an account for any person failing to provide a
certified taxpayer identification number.
The Funds will not be subject to tax in the Commonwealth of Massachusetts
as long as they qualify 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 federal
tax consequences of an investment in the Funds. Shareholders are advised to
consult with their own tax advisers concerning the application of federal, state
and local taxes to an investment in the Funds.
The foregoing discussion of U.S. federal income tax law 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 Funds, 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 Funds has expressed no opinion
in respect thereof.
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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 Funds. 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 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 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 President and Founder, National Investor Data Services, Inc.
(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).
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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. Formerly Vice President, Huntington
Advisors, Inc. (investment advisors) 1988-90.
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), and Legal
Product Manager, Mitchell Hutchins Asset Management (1988-91).
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.
Set forth below is the total compensation received by the following
Trustees from the Funds and all other portfolios of the Trust. This total amount
is allocated among the portfolios. Disinterested trustees are also reimbursed
for expenses in connection with each Board meeting attended. No other
compensation or retirement benefits were received by any Trustee or officer from
the Funds or any other portfolios of the Trust. During the fiscal year ended
December 31, 1995, trustees fees and expenses of $5,850 were allocated to the
Matrix Growth Fund and $3,696 to the Matrix Emerging Growth Fund.
Name of Trustee Total Compensation
Dorothy A. Berry $10,000
Wallace L. Cook $10,000
Carl A. Froebel $10,000
Rowley W.P Redington $10,000
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THE FUNDS' INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided
to the Funds by Sena, Weller, Rohs Williams., (the "Advisor"), pursuant to an
Investment Advisory Agreement. The Advisor is in the business of furnishing
investment advice to institutional and private clients and currently manages
approximately $850 million for such clients.
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 Funds,
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 Funds or the Advisor upon sixty days' written
notice and is automatically terminated in the event of its assignment as defined
in the 1940 Act.
The Advisor has agreed to reduce fees payable to it by the Funds to the
extent necessary to limit each Fund's aggregate annual operating expenses to the
most stringent limits prescribed by any state in which the Fund's sales are
offered for sale. Currently, the expense limit is 2.5% on the first $30 million
of net assets, 2% on the next $70 million of net assets and 1 1/2% thereafter.
During the Matrix Emerging Growth Fund's initial fiscal period ended December
31, 1995 , the Advisor waived advisory fees and reimbursed expenses totalling
$32,234 in accord with its agreement to limit that Fund's expenses to 2.00% of
average net assets annually. During the fiscal year ended December 31, 1995, the
Matrix Growth Fund incurred advisory fees of $141,358 and reimbursed expenses of
$1,060. Investment advisory and management fees for the fiscal year ended
December 31, 1994 totalled $157,897.
THE FUNDS' ADMINISTRATOR
The Funds have entered into an Administrative Agreement with Investment
Company Administration Corporation (the "Administrator"), a corporation owned in
part and controlled by Messrs. Banhazl, Paggioli and Wadsworth. The
Administrative Agreement provides that the Administrator 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
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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 Administrator. For its
services, the Administrator receives a monthly fee at the following annual rate:
Average net assets Fee or Fee rate
under $15 million $30,000
$15 million to $50 million 0.20% of average net assets
$50 million to $100 million 0.15% of average net assets
$100 million to $150 million 0.10% of average net assets
Over $150 million 0.05% of average net assets
During the Matrix Emerging Growth Fund's initial fiscal period from May 1, 1995
to December 31, 1995, and for the Matrix Growth Fund's fiscal year ended on that
date, Southampton Investment Management Company, Inc., a corporation owned by
the same individuals, which previously served as the Funds' Administrative
Manager, received fees of $22,356 from the Matrix Emerging Growth Fund and
$36,750 from the Matrix Growth Fund.
THE FUNDS' DISTRIBUTOR
Reynolds, DeWitt Securities Company,(the "Distributor"), an affiliate
of the Advisor, acts as the Funds' principal underwriter in a continuous public
offering of the Funds' 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 Funds (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
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Investment Management Agreement, the Advisor determines which
securities are to be purchased and sold by the Funds and which broker-dealers
are eligible to execute the Funds' portfolio transactions, subject to
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the instructions of and review by the Funds. 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 Funds 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 best
efforts to choose a broker-dealer capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
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 Funds, to be useful in varying degrees, but of indeterminable
value. The placement of portfolio transactions with broker-dealers who sell
shares of the Funds is subject to rules adopted by the National Association of
Securities Dealers, Inc. Provided the Trust's officers are satisfied that the
Funds are receiving the most favorable price and execution available, the Funds
may also consider the sale of its shares as a factor in the selection of
broker-dealers to execute its portfolio transactions.
While it is the Funds' 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 Funds, weight may also be given to the ability of
a broker-dealer to furnish brokerage and research services to the Funds or to
the Advisor, even if the specific services were not imputed just to the
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Fund and may be useful to the Advisor in advising other clients. In negotiating
any commissions with a broker or evaluating the spread to be paid to a dealer,
the Funds 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 Funds and the Advisor to be reasonable in relation to the
value of the brokerage and/or research services provided by such broker-dealer,
which services either produce a direct benefit to the Funds or assist the
Advisor in carrying out its responsibilities to the Funds. The standard of
reasonableness is to be measured in light of the Advisor's overall
responsibilities to the Funds.
Investment decisions for the Funds are made independently from those of
other client accounts or mutual funds managed or advised by the Advisor.
Nevertheless, it is possible that at times identical securities will be
acceptable for both the Funds and one or more of such client accounts or other
Funds. In such event, the position of the Fund and such client account(s) or
other 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 other Funds seeks to acquire the same
security as the Funds at the same time, a 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 other Funds simultaneously purchases or sells the same security that
the Fund is purchasing or selling, each day's transactions in such security will
be allocated between the Funds and all such client accounts or other 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 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.
Because the Funds' Distributor is a member of the National Association
of Securities Dealers, it is sometimes entitled to obtain certain fees when a
Fund tenders portfolio securities pursuant to a tender-offer solicitation. As a
means of recapturing brokerage for the benefit of a Fund, any portfolio
securities tendered by the Funds will be tendered through the Distributor if it
is legally permissible to do so.
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<PAGE>
The Funds do not effect securities transactions through brokers in
accordance with any formula, nor do they effect securities transactions through
such brokers solely for selling shares of the Fund, although a 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 Funds for their customers.
The Funds do not use the Distributor to execute their portfolio
transactions. During the Matrix Growth Fund's initial fiscal period ended
December 31, 1995, aggregate brokerage commissions paid by the Fund were $3,539.
During the fiscal year ended December 31, 1995, the Matrix Growth Fund's
aggregate brokerage commissions were $27,494.
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 Funds, 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 Funds'
shares.
Payments to shareholders for shares of the Funds redeemed directly from
the Fund will be made as promptly as possible but no later than seven days after
receipt by the Funds' Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Funds
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 Funds' shareholders. At various times, the Funds may be
requested to redeem shares for which they have not yet received confirmation of
good payment; in this circumstance, a Fund may delay the redemption until
payment for the purchase of such shares has been collected and confirmed to the
Fund.
The Funds intend to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions which make payment in cash unwise, the Funds may
make payment partly in securities with a current market value equal to the
redemption price. Although the Funds do not anticipate that they 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
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<PAGE>
cash. The Funds have 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 Funds'
portfolio securities at the time of redemption or repurchase.
As discussed in the Prospectus, the Funds provide a Check-A-Matic Plan
for the convenience of investors who wish to purchase shares of the Fund on a
regular basis. All record keeping and custodial costs of the Check-A-Matic Plan
are paid by the Funds. The market value of the Funds' shares is subject to
fluctuation, so before undertaking any plan for systematic investment, the
investor should keep in mind that this plan does not assure a profit nor protect
against depreciation in declining markets.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Funds 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 Funds do not expect to determine the
net asset value of their shares on any day when the Exchange is not open for
trading even if there is sufficient trading in their portfolio securities on
such days to materially affect the net asset value per share.
In valuing the Funds' assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each 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 each 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
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number of shares of the Fund outstanding at the time of the valuation and the
result (adjusted to the nearest cent) is the net asset value per share.
PERFORMANCE INFORMATION
From time to time, a 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. A Fund may also advertise
aggregate and average total return information over different periods of time.
A 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.
The Matrix Emerging Growth Fund's average annual total return from inception
on April 4, 1995 through March 31, 1996 was 39.38%. Its aggregate total return
for that period was 39.00%. The Matrix Growth Fund's average annual total
returns for the one-year and five-year periods and from inception on May 14,
1986 through March 31, 1996 were 24.70%, 11.06% and 9.87% respectively.
The Funds' 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 a Fund's performance
by independent sources may also be used in advertisements and in information
furnished to present
or prospective investors in the Funds.
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<PAGE>
Investors should note that the investment results of the Funds will
fluctuate over time, and any presentation of the Funds' 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.
GENERAL INFORMATION
Investors in the Funds will be informed of the Funds' progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
Star Bank, N.A., 425 Walnut Street, Cincinnati, OH 45202 acts as Custodian
of the securities and other assets of the Funds. American Data Services, 24 West
Carver St., Huntington, NY 11743 and as the Fund's transfer and shareholder
service agent. The Custodian does not participate in decisions relating to the
purchase and sale of securities by the Funds.
Joseph DeCosimo and Company PLL, Atrium Two, Suite 2727, 221 East
Fourth St., Cincinnati, OH 45202 are the independent auditors for the Funds.
Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco,
California 94104, are legal counsel to the Funds.
As of April 26, 1996, Saxon & Co., FBO RIW B 1981 Trust, Philadelphia, PA
19182, owned of record 5.80% of the outstanding shares of the Matrix Growth
Fund.
As of April 26, 1996, Saxon & Co., A/C 70-70-090-9804067, Philadelphia, PA
19182 owned of record the following percentages of the outstanding shares of the
Matrix Emerging Growth Fund: Rep #4 Acct., 44.51%; Rep #5 Acct., 8.40%; Rep. #
13 Acct., 7.41%; Rep.
#14 Acct., 6.31%.
The shareholders 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 shareholder 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 Funds' assets for any shareholder held
personally liable for obligations of the Funds or Trust. The Agreement and
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Funds or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Funds. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate
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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 shareholder incurring
financial loss on account of shareholder liability is limited to circumstances
in which both inadequate insurance exists and a 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 Funds. The Prospectus of the Funds 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 Funds for the fiscal period ended
December 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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<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
INSIGHTFUL INVESTOR GROWTH FUND
a series of
PROFESSIONALLY MANAGED PORTFOLIOS
175 Great Neck Rd., Ste. 307
Great Neck, NY 11021
(800) 385-7003
This Statement of Additional Information is not a prospectus and it
should be read in conjunction with the prospectus of the Insightful Investor
Growth Fund (the "Fund"). A copy of the prospectus of the Fund dated May 1, 1996
is available by calling the number above or (212) 633-9700.
TABLE OF CONTENTS
Page
The Trust . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objective and Policies . . . . . . . . . . . . B-2
Investment Restrictions . . . . . . . . . . . . . . . . . B-9
Distributions and Tax Information . . . . . . . . . . . . B-10
Management . . . . . . . . . . . . . . . . . . . . . . . B-14
The Fund's Investment Advisor . . . . . . . . . . . . . . B-16
The Fund's Administrator. . . . . . . . . . . . . . . . . B-17
The Fund's Distributor. . . . . . . . . . . . . . . . . . . B-18
Execution of Portfolio Transactions . . . . . . . . . . . B-18
Additional Purchase and Redemption Information . . . . . B-21
Determination of Share Price . . . . . . . . . . . . . . B-22
Performance Information . . . . . . . . . . . . . . . . . B-23
General Information . . . . . . . . . . . . . . . . . . . B-24
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of various series which represent separate investment portfolios.
This Statement of Additional Information relates only to the Insightful Investor
Growth Fund series (the "Fund").
INVESTMENT OBJECTIVE AND POLICIES
The Insightful Investor Growth Fund (the "Fund") is a mutual fund with
the investment objective of seeking growth of capital. 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 security agrees to
repurchase it at a mutually agreed upon 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 U.S.
Government security itself. Such repurchase agreements will be made only with
banks with assets 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
whether a court would
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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. 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
the 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 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
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<PAGE>
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 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 Investments
The Fund many invest 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 security trading practices, including those
involving the release of assets in advance of payment, may invoke 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
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<PAGE>
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 is no assurance that an Adviser will be able to
anticipate or counter these potential events and their impacts on the Fund's
share price.
American Depositary Receipts and European Depositary Receipts ("ADRs"
and "EDRs") 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.
Options on Securities
The Fund may engage in certain purchases and sales of options on
securities. The Fund may write (i.e., sell) call options ("calls") on equity
securities if the calls are "covered" throughout the life of the option. A call
is "covered" if the Fund owns the optioned securities. When the Fund writes a
call, it receives a premium and gives the purchaser the right to buy the
underlying security at any time during the call period at a fixed exercise price
regardless of market price changes during the call period. If the call is
exercised, the Fund will forgo any gain from an increase in the market price of
the underlying security over the exercise price.
The Fund may purchase a call on securities to effect a "closing
purchase transaction" which is the purchase of a call covering the same
underlying security and having the same exercise price and expiration date as a
call previously written by the Fund on which it wishes to terminate its
obligation. If the Fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call previously
written by the Fund expires (or until the call is exercised and the Fund
delivers the underlying security).
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<PAGE>
The Fund also may write and purchase put options ("puts"). When the
Fund writes a put, it receives a premium and gives the purchaser of the put the
right to sell the underlying security to the Fund at the exercise price at any
time during the option period. When the Fund purchases a put, it pays a premium
in return for the right to sell the underlying security at the exercise price at
any time during the option period. If any put is not exercised or sold, it will
become worthless on its expiration date. When the Fund writes a put, it will
maintain at all times during the option period, in a segregated account, cash or
U.S. Government securities equal in value to the exercise price of the put.
The Fund's option positions may be closed out only on an exchange which
provides a secondary market for options of the same series, but there can be no
assurance that a liquid secondary market will exist at a given time for any
particular option.
The Fund's custodian, or a securities depository acting for it,
generally acts as escrow agent as to the securities on which the Fund as written
puts or calls, or as to other securities acceptable for such escrow so that no
margin deposit is required of the Fund. Until the underlying securities are
released from escrow, they cannot be sold by the Fund.
In the event of a shortage of the underlying securities deliverable on
exercise of an option, the Options Clearing Corporation has the authority to
permit other, generally comparable securities to be delivered in fulfillment of
option exercise obligations. If the Options Clearing Corporation exercises its
discretionary authority to allow such other securities to be delivered, it may
also adjust the exercise prices of the affected options by setting different
prices at which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options Clearing
Corporation may impose special exercise settlement procedures.
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.
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<PAGE>
Futures Contracts
The Fund has reserved the right to use futures contracts, upon notification
to shareholders, although it does not currently intend to do so.
When a Fund purchases a futures contract, it agrees to purchase a
specified underlying instrument or precious metal at a specified future date.
When a Fund sells a futures contract, it agrees to sell the underlying
instrument at a specified future date. The price at which the purchase and sale
will take place is fixed when the Fund enters into the contract. Some currently
available futures contracts are based on specific securities, such as U.S.
Treasury bonds or notes, and some are based on indices of securities or precious
metal prices, such as the Standard & Poor's 500 Composite Stock Price Index
("S&P 500") or gold. Futures can be held until their delivery dates, or can be
closed out before then if a liquid secondary market is available.
The value of a futures contract tends to increase and decrease in
tandem with the value of its underlying instrument or precious metal. Therefore,
purchasing futures contracts will tend to increase a Fund's exposure to positive
and negative price fluctuations in the underlying instrument or precious metal,
much as if it had purchased the underlying instrument or precious metal
directly. When a Fund sells a futures contract, by contrast, the value of its
futures position will tend to move in a direction contrary to the market.
Selling futures contracts, therefore, will tend to offset both positive and
negative market price changes, much as if the underlying instrument or precious
metal had been sold.
Futures Margin Payments. The purchaser or seller of a futures contract
is not required to deliver or pay for the underlying instrument or precious
metal unless the contact is held until the delivery date. However, both the
purchaser and seller are required to deposit "initial margin" with a futures
broker, known as a futures commission merchant ("FCM"), when the contract is
entered into. Initial margin deposits are typically equal to a percentage of the
contract's value. If the value of either party's position declines, that party
will be required to make additional "variation margin" payments to settle the
change in value on a daily basis. The party that has a gain may be entitled to
receive all or a portion of this amount. Initial end variation margin payments
do not constitute purchasing securities on margin for purposes of a Fund's
investment limitations. In the event of the bankruptcy of the FCM that holds
margin on behalf of a Fund, the Fund may be entitled to return of margin owed to
it
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<PAGE>
only in proportion to the amount received by the FCM's other customers,
potentially resulting in losses to the Fund.
Short Sales
The Fund may seek to hedge investments or realize additional gains
through short sales. The Fund may make short sales, which are transactions in
which the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, the Fund must
borrow the security to make delivery to the buyer. The Fund than is obligated to
replace the security borrowed by purchasing it at the market price at or prior
to the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or interest
that accrue during the period of the loan. To borrow the security, the Fund also
may be required to pay a premium, which would increase the cost of the security
sold. The net proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out. The Fund also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain if
the security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased by the amount of the premium,
dividends, interest, or expenses the Fund may be required to pay in connection
with a short sale.
No securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Fund's net equity. The Fund similarly will limit its short
sales of the securities of any single issuer if the market value of the
securities that have been sold short by the Fund would exceed the two percent
(2%) of the value of the Fund's net equity or if such securities would
constitute more than two percent (2%) of any class of the issuer's securities.
Whenever the Fund engages in short sales, its custodian segregates an
amount of cash or U.S. Government securities or other high-grade liquid debt
securities equal to the difference between (a) the market value of the
securities sold short at the time they were sold short and (b) any cash or U.S.
Government
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securities required to be deposited with the broker in connection with the short
sale (not including the proceeds from the short sale). The segregated assets are
marked to market daily, provided that at no time will the amount deposited in it
plus the amount deposited with the broker be less than the market value of the
securities at the time they were sold short.
In addition, the Fund may make short sales "against the box," i.e. when
a security identical to one owned by the Fund is borrowed and sold short. If the
Fund enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required to
hold such securities while the short sale is outstanding. The Fund will incur
transaction costs, in connection with opening, maintaining, and closing short
sales against the box.
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)
through the lending of its portfolio securities as described above and in its
Prospectus, or (c) 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.
(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. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
4. 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
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of issuers engaged in such activities.)
5. Purchase or sell commodities or commodity contracts
(except for the purchase and sale of futures contracts as
described in this Statement of Additional Information).
6. 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.)
7. 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 or repurchase transactions.
8. Invest in any issuer for purposes of exercising control
or management.
The Fund observes the following policies, which are not deemed fundamental
and which may be changed without shareholder vote. The Fund may not:
9. 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
investment manager 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.
10. 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.
11. Invest, in the aggregate, more than 10% 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.
Under applicable provisions of Texas law, any investment by the Fund in
warrants may not exceed 5% of the value of the Fund's
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net assets. Included within that amount, but not to exceed 2% of the value of
the Fund's net assets may be warrants which are not listed on the New York or
American Stock Exchange. Also, as provided for under Texas law, the Fund may not
purchase real estate limited partnership interests.
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
with respect to borrowing or investment in illiquid securities, or as otherwise
noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually, as described in the
Prospectus after the conclusion of the Fund's fiscal year (December 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
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
Each series of the Trust is treated as a separate entity for federal
income tax purposes. The Fund expects to continue to qualify and be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), provided it complies with all applicable
requirements regarding the source of its income, diversification of its assets
and timing of 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 or excise taxes. To comply with the requirements, the Fund
must also 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
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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 and on which the Fund
paid no federal income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains
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 that 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 they 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
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alternative minimum tax.
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. Any loss realized upon a redemption or exchange 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. In determining gain or loss from an
exchange of Fund shares for shares of another mutual fund, the sales charge
incurred in purchasing the shares that are surrendered will be excluded from
their tax basis to the extent that a sales charge that would otherwise be
imposed in the purchase of the shares received in the exchange is reduced. Any
portion of a sales charge excluded from the basis of the shares surrendered will
be added to the basis of the shares received. Any loss realized upon a
redemption or exchange may be disallowed under certain wash sale rules to the
extent shares of the same Fund are purchased (through reinvestment of
distributions or otherwise) within 30 days before or after the redemption or
exchange.
Under the Code, the Fund will be required to report to the Internal
Revenue Service ("IRS") 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, which includes most corporations. Pursuant to
the backup withholding provisions of the Internal Revenue 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 federal income tax law. 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
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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 federal 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 U.S. federal income tax law 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 each of the Funds. The Trustees, in turn, elect the
officers of the Trust, who are responsible for administering the day-to-day
operations of the Trust and the Funds. 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); Executive Vice President
of Investment Company Administration Corporation ("ICAC");President of First
Fund Distributors, Inc. ("FFD"), (registered broker-dealer).
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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
33 Flying Point Rd., Southampton, New York 11968. Founder and President,
National Investor Data Services, Inc. (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 91740. Senior Vice
President, Robert H. Wadsworth & Associates, Inc. since March 1990; Senior Vice
President of ICAC and Vice President of FFD. Formerly Vice President, Huntington
Advisors, Inc. (investment advisors).
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), and Legal
Product Manager, Mitchell Hutchins Asset Management (1988-91).
Robert H. Wadsworth*, 56, Vice President
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4455 E. Camelback Road, Suite 261E, Phoenix, Arizona 85018. President of
Robert H. Wadsworth & Associates, Inc., ICAC and FFD.
*Indicates an "interested person" of the Trust as defined in the
1940 Act.
Set forth below is the total compensation received by the following
Trustees from the Fund and all other portfolios of the Trust. This total amount
is allocated among the portfolios. Disinterested trustees are also reimbursed
for expenses in connection with each Board meeting attended. No other
compensation or retirement benefits were received by any Trustee or officer from
the Fund or any other portfolios of the Trust. During the initial fiscal period
ended December 31, 1995, trustees fees and expenses of $1,438 were allocated to
the Fund.
Name of Trustee Total compensation
Dorothy A. Berry $10,000
Wallace L. Cook $10,000
Carl A. Froebel $10,000
Rowley W.P. Redington $10,000
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 from the Trust.
THE FUND'S INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided
to the Fund by Insightful Management Corporation., the Advisor, pursuant to an
Investment Advisory Agreement. The Advisor is controlled by Mr. Dan Bruce
Levine. 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'
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written notice and is automatically terminated in the event of its
assignment as defined in the 1940 Act.
Under the Investment Advisory Agreement, the Advisor is entitled to a
monthly fee at the annual rate of 1.25% of the average daily net assets of the
Fund. During the period ended December 31, 1995, the Adviser waived all of its
advisory fees ($7,268)and in addition voluntarily reimbursed $25,509 of the
Fund's operating expenses.
The Advisor has agreed to reduce fees payable to it by the Fund to the
extent necessary to limit the Fund's aggregate annual operating expenses to the
most stringent limits prescribed by any state in which the Fund's sales are
offered for sale. Currently, the expense limit is 2.5% on the first $30 million
of net assets, 2% on the next $70 million of net assets and 1 1/2% thereafter.
The use of the name "Insightful Investor" by the Fund is pursuant to a
license granted by the Advisor, and in the event the Investment Advisory
Agreement with the Fund is terminated, the Advisor has reserved the right to
require the Fund to remove any references to that name.
THE FUND'S ADMINISTRATOR
The Fund has entered into an Administrative Agreement with Investment
Company Administration Corporation (the "Administrator"), a corporation owned in
part and controlled by Messrs. Banhazl, Paggioli and Wadsworth. The
Administration Agreement provides that the Administrator 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 Administrator. For its
services,
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the Administrator receives a monthly fee at the following annual
rate:
Average net assets Fee or fee rate
Under $15 million $30,000
$15 to $50 million 0.20% of average net assets
$50 to $100 million 0.15% of average net assets
$100 to $150 million 0.10% of average net assets
Over $150 million 0.05% of average net assets
During the period from inception on July 28, 1995 through December 31, 1995,
Southampton Investment Management Company, Inc., a corporation owned by the same
individuals, which previously served as the Fund's administrative manager,
received fees of $15,061.
THE FUND'S DISTRIBUTOR
Newcomb & Company (the "Distributor") acts as the Fund's 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. During the Fund's initial fiscal period from July 28, 1995 through December
31, 1995, its sales were sold at net asset value plus a sales charge. The
Distributor received commissions of $1,155 on sales of the Fund's shares during
that period.
As more fully described in the Prospectus, the Fund has adopted a
Distribution and Shareholder Service Plan pursuant to Rule 12b-1 under the 1940
Act under which the Fund pays the Distributor an amount at an annual rate of up
to 0.25% of the Fund's average daily net assets for services related to the
distribution of the Fund's shares. During the initial fiscal period from July
28, 1995 through December 31, 1995, the Fund incurred distribution expenses in
the amount of $1,444.
EXECUTION OF PORTFOLIO TRANSACTIONS
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In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Investment Management 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 best
efforts to choose a broker-dealer capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
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. The placement of portfolio transactions with broker-dealers who sell
shares of the Fund is subject to rules adopted by the National Association of
Securities Dealers, Inc.
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Provided the Trust's officers are satisfied that the Fund is receiving the most
favorable price and execution available, the Fund may also consider the sale of
its shares as a factor in the selection of broker-dealers to execute its
portfolio transactions.
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 were not imputed just to the Fund and may
be useful to the Advisor in advising other clients. In negotiating any
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, which
services either produce a direct benefit to the Fund or assist the Advisor in
carrying out its responsibilities to the Fund. The standard of reasonableness is
to be measured in light of the Advisor's overall responsibilities to the Fund.
Investment decisions for the Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts or Funds.
In such event, the position of the Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or Funds seeks to acquire the same security as the Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such security. Similarly, the Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts or Funds simultaneously
purchases or sells the same security that the Fund is purchasing or selling,
each day's transactions in such security will be allocated between the Fund and
all such client accounts or Funds in a manner deemed equitable by the Advisor,
taking into account the respective sizes of the accounts and the amount being
purchased or sold. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as the Fund is
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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.
Because the Fund's Distributor is a member of the National Association
of Securities Dealers, it is sometimes entitled to obtain certain fees when the
Fund tenders portfolio securities pursuant to a tender-offer solicitation. As a
means of recapturing brokerage for the benefit of the Fund, any portfolio
securities tendered by the Fund will be tendered through the Distributor if it
is legally permissible to do so.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
such 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 Fund's initial fiscal period from July 28, 1995 through
December 31, 1995, brokerage commissions paid by the Fund totaled $6,370.
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
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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 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.
As discussed in the Prospectus, the Fund provides a Check-A-Matic Plan
for the convenience of investors who wish to purchase shares of the Fund on a
regular basis. All record keeping and custodial costs of the Check-A-Matic Plan
are paid by the Fund. The market value of the Fund's shares is subject to
fluctuation, so before undertaking any plan for systematic investment, the
investor should keep in mind that this plan does not assure a profit nor protect
against depreciation in declining markets.
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.
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In valuing the Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each 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.
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
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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 average annual total return from inception on July 28, 1995
through March 31, 1996 was 16.41%. Aggregate total return for that period was
10.83%.
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 a 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.
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.
As of April 24, 1996, Lee Investment Corporation, Tiburon, CA 94928 owned
5.10% of the Fund's outstanding voting securities.
Star Bank, 425 Walnut St., 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 does not participate in decisions relating to the
purchase and sale of securities by the Fund.
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Tait, Weller & Baker, 121 South Broad Street, Philadelphia, PA 19107,
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 shareholders 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 shareholder 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 shareholder 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 shareholder 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 shareholder incurring financial loss
on account of shareholder liability is 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.
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STATEMENT OF ADDITIONAL INFORMATION
May 1, 1996
KAYNE, ANDERSON RISING DIVIDENDS FUND
a series of
PROFESSIONALLY MANAGED PORTFOLIOS
1800 Avenue of the Stars, Second Floor
Los Angeles, CA 90067
(310) 556-2721
This Statement of Additional Information is not a prospectus and it should be
read in conjunction with the prospectus of the Kayne Anderson Rising Dividends
Fund (the "Fund"). A copy of the prospectus of the Fund dated May 1, 1996 is
available by calling the numbers listed above or (212) 633-9700.
TABLE OF CONTENTS
Page
The Trust . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objective and Policies . . . . . . . . . . . . B-2
Investment Restrictions . . . . . . . . . . . . . . . . . B-6
Distributions and Tax Information . . . . . . . . . . . . B-11
Management . . . . . . . . . . . . . . . . . . . . . . . B-13
The Fund's Investment Advisor . . . . . . . . . . . . . . B-13
The Fund's Administrator. . . . . . . . . . . . . . . . B-14
The Fund's Distributor. . . . . . . . . . . . . . . . . . . B-15
Execution of Portfolio Transactions . . . . . . . . . . . B-15
Additional Purchase and Redemption Information . . . . . B-18
Determination of Share Price . . . . . . . . . . . . . . B-19
Performance Information . . . . . . . . . . . . . . . . . B-20
General Information . . . . . . . . . . . . . . . . . . . B-21
Financial Statements . . . . . . . . . . . . . . . . .. . B-22
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of various series which represent separate investment portfolios.
This Statement of Additional Information relates only to the Kayne, Anderson
Rising Dividends Fund series (the "Fund").
INVESTMENT OBJECTIVE AND POLICIES
The Kayne, Anderson Rising Dividends Fund (the "Fund") is a mutual fund
with the primary investment objective of long-term capital appreciation, with
dividend income as a secondary consideration. 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 security agrees to
repurchase it at a mutually agreed upon 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 U.S.
Government security itself. Such repurchase agreements will be made only with
banks with assets 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
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
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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. 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 the 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 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
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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 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.
Securities Lending
The Fund's primary objective is long term capital appreciation, with
dividend income as a secondary consideration. The Fund reserves the right to
lend its portfolio securities in order to generate additional income. Securities
may be loaned to broker-dealers, major banks or other recognized domestic
institutional borrowers of securities who are not affiliated with the Advisor or
Distributor and whose creditworthiness is acceptable to the Advisor. The
borrower must deliver to the Fund cash or cash equivalent collateral, or provide
to the Fund an irrevocable letter of credit equal in value to at least 100% of
the value of the loaned securities at all times during the loan, marked to
market daily. During the time the portfolio securities are on loan, the borrower
pays the Fund any interest paid on such securities. The Fund may invest the cash
collateral and earn additional income, or it may receive an agreed-upon amount
of interest income if the borrower has delivered equivalent collateral or a
letter of credit. The Fund may pay reasonable administrative and custodial fees
in connection with a loan and may pay a negotiated portion of the income earned
on the cash to the borrower or placing broker. Loans are subject to termination
at the option of the Fund or the borrower at any time. It is not anticipated
that more than 5% of the value of the Fund's portfolio securities will be
subject to lending.
Foreign Investments
The Fund may invest 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
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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 security trading practices, including those
involving the release of assets in advance of payment, may invoke 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 is no assurance that an Adviser will be able to
anticipate or counter these potential events and their impacts on the Fund's
share price.
American Depositary Receipts and European Depositary Receipts ("ADRs"
and "EDRs") 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)
through the lending of its portfolio securities as described above and in its
Prospectus, or (c) to the extent the entry into a repurchase agreement is deemed
to be a loan.
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<PAGE>
2. (a) Borrow money, except as stated in the Prospectus and this Statement
of Additional Information. Any such borrowing will be made only if immediately
thereafter there is an asset coverage of at least 300% of all borrowings.
(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. (Does
not preclude the Fund 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 (As a matter of
operating policy, the Board of Trustees may in the future authorize the Fund to
engage in certain activities regarding futures contracts for bona fide hedging
purposes; any such authorization will be accompanied by appropriate notification
to shareholders).
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 repurchase
transactions.
7. Invest in any issuer for purposes of exercising control
or management.
8. Invest in real estate, provided that this restriction does not preclude
the investment in marketable securities of issuers engaged in real estate
related activities.
The Fund observes the following policies, which are not deemed fundamental
and which may be changed without shareholder vote. The Fund may not:
9. 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
investment manager 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.
10. 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,
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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.
11. Invest, in the aggregate, more than 10% 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.
12. Buy or sell interests in oil, gas or mineral exploration or development
programs or related leases, provided that this restriction does not preclude
investments in marketable securities of issuers engaged in securities;
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
with respect to borrowing and illiquid securities, or as otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually, as described in the
Prospectus after the conclusion of the Fund's fiscal year (December 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
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
Each series of the Trust is treated as a separate entity for federal
income tax purposes. The Fund intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), provided it complies with all applicable requirements
regarding the source of its income, diversification of its assets and timing of
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
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of the Code, so that the Fund will not be subject to any federal income or
excise taxes. To comply with the requirements, the Fund must also 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 and on which the Fund paid no federal
income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains
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 that 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 they 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
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taxable income in computing a shareholder's liability for the
alternative minimum tax.
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. Any loss realized upon a redemption or exchange 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. In determining gain or loss from an
exchange of Fund shares for shares of another mutual fund, the sales charge
incurred in purchasing the shares that are surrendered will be excluded from
their tax basis to the extent that a sales charge that would otherwise be
imposed in the purchase of the shares received in the exchange is reduced. Any
portion of a sales charge excluded from the basis of the shares surrendered will
be added to the basis of the shares received. Any loss realized upon a
redemption or exchange may be disallowed under certain wash sale rules to the
extent shares of the same Fund are purchased (through reinvestment of
distributions or otherwise) within 30 days before or after the redemption or
exchange.
Under the Code, the Fund will be required to report to the Internal
Revenue Service ("IRS") 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, which includes most corporations. Pursuant to
the backup withholding provisions of the Internal Revenue 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 federal income tax law. 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
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discussion of all applicable federal 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 U.S. federal income tax law 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 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), President of Southampton Investment Management Company
("Southampton"; mutual fund administrator and the Fund's Administrative
Manager), 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
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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 President and Founder, National Investor Data Services, Inc.
(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. Formerly Vice President, Huntington
Advisors, Inc. (investment advisors) 1988-90.
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), and Legal
Product Manager, Mitchell Hutchins Asset Management (1988-91).
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 and
Vice President of Southampton since 1990.
*Indicates an "interested person" of the Trust as defined in the
1940 Act.
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Set forth below is the total compensation received by the following
Trustees from the Fund and all other portfolios of the Trust. This total amount
is allocated among the portfolios. Disinterested trustees are also reimbursed
for expenses in connection with each Board meeting attended. No other
compensation or retirement benefits were received by any Trustee or officer from
the Fund or any other portfolios of the Trust. During the fiscal year ended
December 31, 1995, trustees fees and expenses of $2,006 were allocated to the
Fund.
Name of Trustee Total Compensation
Dorothy A. Berry $10,000
Wallace L. Cook $10,000
Carl A. Froebel $10,000
Rowley W.P Redington $10,000
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.
THE FUND'S INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided
to the Fund by Kayne Anderson Investment Management L.P., (the "Advisor"),
pursuant to an Investment Advisory Agreement. The Advisor is controlled by Mr.
Richard Kayne and Mr. John Anderson. The Advisor is a registered investment
advisor organized as a California limited partnership succeeding to the
investment advisory business of Kayne, Anderson Investment Management, Inc.,
which was founded in 1984 by Richard Kayne and John Anderson. The Advisor is in
the business of furnishing investment advice to institutional and private
clients and currently manages approximately $2.2 billion for such clients.
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
B-12
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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.
The Advisor has agreed to reduce fees payable to it by the Fund to the
extent necessary to limit the Fund's aggregate annual operating expenses to the
most stringent limits prescribed by any state in which the Fund's sales are
offered for sale. Currently, the expense limit is 2.5% on the first $30 million
of net assets, 2% on the next $70 million of net assets and 1 1/2% thereafter.
During the Fund's initial fiscal period from May 1, 1995 to December 31, 1995,
the Advisor received investment advisory fees of $90,944.
The use of the name "Kayne Anderson" by the Fund is pursuant to a
license granted by the Advisor, and in the event the Investment Advisory
Agreement with the Fund is terminated, the Advisor has reserved the right to
require the Fund to remove any references to the name "Kayne Anderson."
THE FUND'S ADMINISTRATOR
The Fund has entered into an Administrative Agreement with Investment
Company Administration Corporation (the "Administrator"), a corporation owned in
part and controlled by Messrs. Banhazl, Paggioli and Wadsworth. The
Administrative Agreement provides that the Administrator 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 Administrator. For its
services, the Administrator receives a monthly fee at the following annual rate:
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<PAGE>
Average net assets Fee or fee rate
Under $15 million $30,000
$15 to $50 million 0.20% of average net assets
$50 to $100 million 0.15% of average net assets
$100 to $150 million 0.10% of average net assets
Over $150 million 0.05% of average net assets
During the initial fiscal period from May 1, 1995 to December 31, 1995,
Southampton Investment Management Company, a corporation owned by the same
individuals, which previously served as the Fund's Administrative Manager,
received fees of $30,224.
THE FUND'S DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a corporation owned
by Messrs. Banhazl, Paggioli and Wadsworth, acts as the Fund's 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
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Investment Management 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
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<PAGE>
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 best
efforts to choose a broker-dealer capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
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. The placement of portfolio transactions with broker-dealers who sell
shares of the Fund is subject to rules adopted by the National Association of
Securities Dealers, Inc. Provided the Trust's officers are satisfied that the
Fund is receiving the most favorable price and execution available, the Fund may
also consider the sale of its shares as a factor in the selection of
broker-dealers to execute its portfolio transactions.
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 were not imputed just to the Fund and may
be useful to the Advisor in advising other clients. In negotiating any
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, which
services either produce a direct benefit to the Fund or assist the Advisor in
carrying out its responsibilities to the Fund. The standard of reasonableness is
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<PAGE>
to be measured in light of the Advisor's overall responsibilities
to the Fund.
Investment decisions for the Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts or Funds.
In such event, the position of the Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or Funds seeks to acquire the same security as the Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such security. Similarly, the Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts or Funds simultaneously
purchases or sells the same security that the Fund is purchasing or selling,
each day's transactions in such security will be allocated between the Fund and
all such client accounts or Funds in a manner deemed equitable by the Advisor,
taking into account the respective sizes of the accounts and the amount being
purchased or sold. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as the Fund is
concerned. In other cases, however, it is believed that the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund.
Because the Fund's Distributor is a member of the National Association
of Securities Dealers, it is sometimes entitled to obtain certain fees when the
Fund tenders portfolio securities pursuant to a tender-offer solicitation. As a
means of recapturing brokerage for the benefit of the Fund, any portfolio
securities tendered by the Fund will be tendered through the Distributor if it
is legally permissible to do so.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
such 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 Fund's initial fiscal period from May 1, 1995 through
December 31, 1995, aggregate brokerage commissions paid by the Fund were
$21,458. Of this amount, $156.60 was paid to KA Associates, Inc., an affiliate
of the Advisor.
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<PAGE>
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 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.
As discussed in the Prospectus, the Fund provides a Check-A-Matic Plan
for the convenience of investors who wish to purchase shares of the Fund on a
regular basis. All record keeping and custodial costs of the Check-A-Matic Plan
are paid by the Fund. The market value of the Fund's shares is subject to
fluctuation, so before undertaking any plan for systematic investment, the
investor
B-17
<PAGE>
should keep in mind that this plan does not assure a profit nor protect against
depreciation in declining markets.
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
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each 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.
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.
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<PAGE>
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 average annual total return from inception on April 28, 1995
through March 31, 1996 was 30.97%. Aggregate total return for that period was
28.10%.
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 a 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.
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.
As of April 24, 1996, the following shareholders owned 5% or more of the
Fund's outstanding voting securities:
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<PAGE>
Nations Bank Trustee FBO Big B Inc Profit Sharing 401k Retirement Plan, 715
Peachtree St., 5th floor, Atlanta, GA 30060; 11.78%.
Daniel A. Picard, Trustee/Cust., Picard Trust, UGMA, IRA accts., 101 Park
Ave., New York, NY 10178, 7.82%.
Tronstein Trust, 1800 Avenue of the Stars, Ste. 1400, Los
Angeles, CA 90067; 5.95%.
The Provident Bank, One East Fourth Street, Cincinnati, OH 45202 acts as
Custodian of the securities and other assets of the Fund and as the Fund's
transfer and shareholder service agent. The Custodian and Transfer Agent does
not participate in decisions relating to the purchase and sale of securities by
the Fund.
Tait, Weller & Baker, 121 South Broad Street, Philadelphia, PA 19107,
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 shareholders 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 shareholder 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 shareholder 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 shareholder 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 shareholder incurring financial loss
on account of shareholder liability is 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
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<PAGE>
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 period ended
December 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.
B-21
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1995
Revised March 8, 1996
UAM/FPA CRESCENT FUND
a series of
PROFESSIONALLY MANAGED PORTFOLIOS
11400 West Olympic Blvd.
Los Angeles, CA 90064
(310) 996-5417
This Statement of Additional Information is not a prospectus and it
should be read in conjunction with the prospectus of the UAM/FPA Crescent Fund
(the "Fund"). A copy of the prospectus of the Fund dated August 1, 1995 as
supplemented March 8, 1996 is available by calling the number listed avbove or
(212) 633-9700.
TABLE OF CONTENTS
Page
The Trust . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objective and Policies . . . . . . . . . . . . B-2
Investment Restrictions . . . . . . . . . . . . . . . . . B-8
Distributions and Tax Information . . . . . . . . . . . . B-10
Management . . . . . . . . . . . . . . . . . . B-13
Execution of Portfolio Transactions . . . . . . . . . . . B-16
Additional Purchase and Redemption Information . . . . . B-19
Determination of Share Price . . . . . . . . . . . . . . B-20
Performance Information . . . . . . . . . . . . . . . . . B-21
General Information . . . . . . . . . . . . . . . . . . . B-22
Financial Statements . . . . . . . . . . . . . . . . . . . B-23
Appendix-Description of Bond Ratings . . . . . . . . . . . B-24
1
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust currently consists of various series which represent separate investment
portfolios. This Statement of Additional Information relates only to the UAM/FPA
Crescent Fund series (the "Fund").
INVESTMENT OBJECTIVE AND POLICIES
UAM/FPA Crescent Fund (the "Fund") is a mutual fund with the investment
objective of seeking to provide, through a combination of income and capital
appreciation, a total return consistent with reasonable investment risk. 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 security agrees to
repurchase it at a mutually agreed upon 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 U.S.
Government security itself. Such repurchase agreements will be made only with
banks with assets 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
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
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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. 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 the 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 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
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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 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
Among the means through which the Fund may invest in foreign securities is
the purchase of American Depository Receipts ("ADR's") or European Depository
Receipts ("EDR's"). Generally, ADR's, in registered form, are denominated in
U.S. dollars and are designed for use in the U.S. securities markets, while
EDR's, in bearer form, may be denominated in other currencies and are designed
for use in European securities markets. ADR's are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDR's are European receipts evidencing a similar arrangement. For purposes of
the Funds' investment policies, ADR's and EDR's are deemed to have the same
classification as the underlying securities they represent. Thus an ADR or EDR
representing ownership of common stock will be treated as common stock.
Debt Securities and Ratings
Ratings of debt securities represent the rating agencies' opinions
regarding their quality, are not a guarantee of quality and may be reduced after
the Fund has acquired the security. The Advisor will consider whether the Fund
should continue to hold the security but is not required to dispose of it.
Credit ratings attempt to evaluate the safety of principal and interest payments
and do not evaluate the risks of fluctuations in market value. Also, rating
agencies may fail to make timely changes in credit ratings in response to
subsequent events, so that an issuer's current financial conditions may be
better or worse than the rating indicates.
The Fund reserves the right to invest up to 20% of its assets in securities
rated lower than BBB by S & P or lower than Baa by Moody's but rated at least B
by S & P or Moody's (or, in either case, if unrated, deemed by the Advisor to be
of comparable quality). Lower rated securities generally offer a higher current
yield than that available for higher grade issues. However, lower rated
securities involve higher risks, in that
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<PAGE>
they are especially subject to adverse changes in general economic conditions
and in the industries in which the issuers are engaged, to changes in the
financial condition of the issuers and to price fluctuations in response to
changes in interest rates. During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress which
could adversely affect their ability to make payments of interest and principal
and increase the possibility of default. In addition, the market for lower rated
debt securities has expanded rapidly in recent years, and its growth paralleled
a long economic expansion. At times in recent years, the prices of many lower
rated debt securities declined substantially, reflecting an expectation that
many issuers of such securities might experience financial difficulties. As a
result, the yields on lower rated debt securities rose dramatically, but such
higher yields did not reflect the value of the income stream that holders of
such securities expected, but rather, the risk that holders of such securities
could lose a substantial portion of their value as a result of the issuers'
financial restructuring or default. There can be no assurance that such declines
will not recur. The market for lower-rated debt issues generally is thinner and
less active than that for higher quality securities, which may limit the Fund's
ability to sell such securities at fair value in response to changes in the
economy or financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may also decrease the values and
liquidity of lower rated securities, especially in a thinly traded market.
Short Sales
The Fund may seek to hedge investments or realize additional gains
through short sales. The Fund may make short sales, which are transactions in
which the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, the Fund must
borrow the security to make delivery to the buyer. The Fund than is obligated to
replace the security borrowed by purchasing it at the market price at or prior
to the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or interest
that accrue during the period of the loan. To borrow the security, the Fund also
may be required to pay a premium, which would increase the cost of the security
sold. The net proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out. The Fund also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short
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sale and the date on which the Fund replaces the borrowed security. The Fund
will realize a gain if the security declines in price between those dates. The
amount of any gain will be decreased, and the amount of any loss increased by
the amount of the premium, dividends, interest, or expenses the Fund may be
required to pay in connection with a short sale.
No securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Fund's net equity. The Fund similarly will limit its short
sales of the securities of any single issuer if the market value of the
securities that have been sold short by the Fund would exceed the two percent
(2%) of the value of the Fund's net equity or if such securities would
constitute more than two percent (2%) of any class of the issuer's securities.
Whenever the Fund engages in short sales, its custodian segregates an
amount of cash or U.S. Government securities or other high-grade liquid debt
securities equal to the difference between (a) the market value of the
securities sold short at the time they were sold short and (b) any cash or U.S.
Government securities required to be deposited with the broker in connection
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked to market daily, provided that at no time will the
amount deposited in it plus the amount deposited with the broker be less than
the market value of the securities at the time they were sold short.
In addition, the Fund may make short sales "against the box," i.e. when
a security identical to one owned by the Fund is borrowed and sold short. If the
Fund enters into a short sale against the box, it is required to segregate
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities) and is required to
hold such securities while the short sale is outstanding. The Fund will incur
transaction costs, in connection with opening, maintaining, and closing short
sales against the box.
Options and Futures Transactions.
As indicated in the prospectus, to the extent consistent with its investment
objectives and policies, the Fund may purchase and write call and put options on
securities, securities indexes and on foreign currencies and enter into futures
contracts and use options on futures contracts, to the extent of up to 5% of its
assets.
Transactions in options on securities and on indexes involve certain risks.
For example, there are significant differences between the securities and
options markets that could result in
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an imperfect correlation between these markets, causing a given transaction not
to achieve its objectives. A decision as to whether, when and how to use options
involves the exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior or
unexpected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; such losses may be mitigated or exacerbated by
changes in the value of the Fund's securities during the period the option was
outstanding.
Use of futures contracts and options thereon also involves certain risks.
The variable degree of correlation between price movements of futures contracts
and price movements in the related portfolio positions of the Fund creates the
possibility that losses on the hedging instrument may be greater than gains in
the value of the Fund's position. Also, futures and options markets may not be
liquid in all circumstances and certain over the counter options may have no
markets. As a result, in certain markets, the Fund might not be able to close
out a transaction at all or without incurring losses. Although the use of
options and futures transactions for hedging should minimize the risk of loss
due to a decline in the value of the hedged position, at the same time they tend
to limit any potential gain which might result from an increase in the value of
such position. If losses were to result from the use of such transactions, they
could reduce net asset value and possibly income. The Fund may use these
techniques to hedge against changes in interest rates or securities prices or as
part of its overall investment strategy. The Fund will maintain segregated
accounts consisting of cash, U.S. Government securities, or other high grade
debt obligations (or, as permitted by applicable regulation, enter into certain
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offsetting positions) to cover its obligations under options and futures
contracts to avoid leveraging of the Fund.
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 as stated in the Prospectus and this Statement
of Additional Information. Any such borrowing will be made only if immediately
thereafter there is an asset coverage of at least 300% of all borrowings.
(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. (Does
not preclude the Fund 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 (other than
futures transactions for the purposes and under the conditions described in the
prospectus and in this Statement of Additional Information).
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, ortgages or pledges, or (b) entering into options, futures
or repurchase transactions.
7. Purchase the securities of any issuer, if as a result more than 5% of
the total assets of the Fund would be invested in the securities of that issuer,
other than obligations of the U.S. Government, its agencies or
instrumentalities, provided that up to 25% of the value of the Fund's assets may
be invested without regard to this limitation.
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8. Purchase or sell real estate; however, the Fund may invest in debt
securities secured by real estate or interests therein or issued by companies
which invest in real estate or interests therein, including real estate
investment trusts;
The Fund observes the following policies, which are not deemed fundamental
and which may be changed without shareholder vote. The Fund may not:
9. Purchase any security if as a result the Fund would then hold more than
10% of any class of securities of an issuer (taking all common stock issues of
an issuer as a single class, all preferred stock issues as a single class, and
all debt issues as a single class) or more than 10% of the outstanding voting
securities of an issuer.
10. Invest in any issuer for purposes of exercising control
or management.
11. 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.)
12. 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
investment manager 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.
13. 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.
14. Invest, in the aggregate, more than 15% of its total assets in
securities which are not readily marketable or are illiquid.
Under applicable provisions of Texas law, any investment by the Fund in
warrants may not exceed 5% of the value of the Fund's net assets. Included
within that amount, but not to exceed 2% of the value of the Fund's net assets
may be warrants which are not listed on the New York or American Stock 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 (March 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.
The Fund may write, purchase or sell certain options and futures contracts.
Such transactions are subject to special tax rules that may affect the amount,
timing and character of distributions to shareholders. Unless the Fund is
eligible to make and makes a special election, such contracts that are "Section
1256 contracts" will be "marked-to-market" for federal income tax purposes at
the end of each taxable year, i.e., each contract will be treated as sold for
its fair market value on the last day of the taxable year. In general, unless
the special election referred to in the previous sentence is made, gain or loss
from transactions in such contracts will be 60% long-term and 40% short-term
capital gain or loss. Section 1092 of the
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Code, which applies to certain "straddles", may affect the taxation of the
Fund's transactions in options and futures contracts. Under Section 1092 of the
Code, the Fund may be required to postpone recognition for tax purposes of
losses incurred in certain closing transactions.
One of the requirements for qualification as a regulated investment
company is that less than 30% of the Fund's gross income must be derived from
gains from the sale or other disposition of securities held for less than three
months. Accordingly, the Fund may be restricted in effecting closing
transactions within three months after entering into an option contract.
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, 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
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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 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,* 45 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), President of Southampton Investment Management Company
("Southampton"; mutual fund administrator and the Fund's Administrative
Manager), and Vice President of First Fund Distributors, Inc. ("FFD"; registered
broker-dealer and the Fund's Distributor) since 1990.
Dorothy A. Berry, 51 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
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manager) and formerly President, Value Line, Inc., (investment advisory and
financial publishing firm).
Wallace L. Cook, 55 Trustee
30 Rockefeller Plaza, New York, New York 10112. Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
Carl A. Froebel, 56 Trustee
33 Flying Point Rd., Southampton, New York 11968. Founder and President,
National Investor Data Services, Inc. (investment related computer software).
Rowley W.P. Redington, 50 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*, 37 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. Formerly Vice President, Huntington
Advisors, Inc. (investment advisors) 1988-90.
Robin Berger*, 38 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), and Legal
Product Manager, Mitchell Hutchins Asset Management (1988-91).
Robert H. Wadsworth*, 55 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 and
Vice President of Southampton since 1990.
*Indicates an "interested person" of the Trust as defined in the
1940 Act.
Set forth below is the total compensation received by the following
Trustees from the Fund and all other portfolios of the
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Trust. This total amount is allocated among the portfolios. Disinterested
trustees are also reimbursed for expenses in connection with each Board meeting
attended. No other compensation or retirement benefits were received by any
Trustee or officer from the Fund or any other portfolios of the Trust.
Name of Trustee Total Compensation
Dorothy A. Berry $9,250
Wallace L. Cook $9,250
Carl A. Froebel $9,250
Rowley W.P Redington $9,250
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
Investment advisory services are provided to the Fund by First Pacific
Advisors, Inc., (the "Advisor"), pursuant to an Investment Advisory Agreement.
The Agreement continues in effect from year to year for periods not exceeding
one 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.
During the Fund's initial fiscal period ended March 31, 1994, Crescent
Management, the Fund's previous Advisor received advisory fees of $75,407 and
reimbursed expenses of $927. For the fiscal year ended March 31, 1995, the
previous Advisor received advisory fees of $132,646.
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Administrator
The Fund has entered into an Administrative Agreement with Investment
Company Administration Corporation (the "Administrator"), a corporation owned in
part and controlled by Messrs. Banhazl, Paggioli and Wadsworth. The Agreement
provides that the Administrator 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 Administrator. For its
services, the Administrator receives a fee at the following annual rate:
Average net assets Fee or fee rate
Under $15 million $30,000
$15 to $50 million 0.20%
$50 to $100 million 0.15%
$100 million to $150 million 0.10%
Over $150 million 0.05%
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.
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EXECUTION OF PORTFOLIO TRANSACTIONS
In all purchases and sales of securities for the Fund, the primary
consideration is to obtain the most favorable price and execution available.
Pursuant to the Investment Management 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 best
efforts to choose a broker-dealer capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
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. The placement of portfolio transactions with broker-dealers who sell
shares of the Fund is subject to rules adopted by the National Association of
Securities Dealers, Inc. Provided the Trust's officers are satisfied that the
Fund is receiving the most favorable price and execution available, the
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Fund may also consider the sale of its shares as a factor in the selection of
broker-dealers to execute its portfolio transactions.
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 were not imputed just to the Fund and may
be useful to the Advisor in advising other clients. In negotiating any
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, which
services either produce a direct benefit to the Fund or assist the Advisor in
carrying out its responsibilities to the Fund. The standard of reasonableness is
to be measured in light of the Advisor's overall responsibilities to the Fund.
Investment decisions for the Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts or Funds.
In such event, the position of the Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or Funds seeks to acquire the same security as the Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such security. Similarly, the Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts or Funds simultaneously
purchases or sells the same security that the Fund is purchasing or selling,
each day's transactions in such security will be allocated between the Fund and
all such client accounts or Funds in a manner deemed equitable by the Advisor,
taking into account the respective sizes of the accounts and the amount being
purchased or sold. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as the Fund is
concerned. In other cases, however, it is believed that the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund.
Because the Fund's Distributor is a member of the National
Association of Securities Dealers, it is sometimes entitled to
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obtain certain fees when the Fund tenders portfolio securities pursuant to a
tender-offer solicitation. As a means of recapturing brokerage for the benefit
of the Fund, any portfolio securities tendered by the Fund will be tendered
through the Distributor if it is legally permissible to do so.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
such 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 initial fiscal period from June 2, 1993 through March
31, 1994 and for the fiscal year ended March 31, 1995, brokerage commissions
paid by the Fund totalled $38,160 and $51,853, 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 unwise, the Fund may
make payment partly in securities with a
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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.
As discussed in the Prospectus, the Fund provides a Check-A-Matic Plan
for the convenience of investors who wish to purchase shares of the Fund on a
regular basis. All record keeping and custodial costs of the Check-A-Matic Plan
are paid by the Fund. The market value of the Fund's shares is subject to
fluctuation, so before undertaking any plan for systematic investment, the
investor should keep in mind that this plan does not assure a profit nor protect
against depreciation in declining markets.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value 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
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each Fund are valued in such manner as the Board of Trustees in
good faith deems appropriate to reflect their fair value.
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The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
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 average annual total returns for the one year period and from
inception on June 2, 1993 through June 30, 1995 were 14.53% and 13.35%
respectively.
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,
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evaluations of a 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.
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.
The Provident Bank, located at One East Fourth Street, Cincinnati, Ohio
45202 acts as Custodian of the securities and other assets of the Fund and as
the Fund's transfer and shareholder service agent. The Custodian does 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, 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 January 31, 1996. An asterisk (*) denotes an
account affiliated with the Fund's investment advisor, officers or trustees:
David Sofro Trust DTD 1990, Van Nuys, CA 91409; 14.31%
Maple Group, Beverly Hills, CA 90210; 6.22%
*Crescent Multi-Advisor Fund, LP, Los Angeles, CA; 14.31%
The shareholders 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 shareholder 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 shareholder 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 shareholder 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
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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 shareholder incurring
financial loss on account of shareholder liability is 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
March 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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