STATEMENT OF ADDITIONAL INFORMATION
HARRIS BRETALL SULLIVAN & SMITH GROWTH EQUITY FUND a series of
Professionally Managed Portfolios
One Sansome Street, Suite 3300
San Francisco, CA 94104
(800) 685-4277
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus of the Harris Bretall Sullivan & Smith Growth
Equity Fund (the "Fund"). A copy of the prospectus of the Fund dated April 1,
1996 is available by calling the number listed above or (818) 852-1033.
TABLE OF CONTENTS
Page
The Trust . . . . . . . . . . . . . . . . . . . . . . . . B-2
Investment Objective and Policies . . . . . . . . . . . . B-2
Investment Restrictions . . . . . . . . . . . . . . . . . B-6
Distributions and Tax Information . . . . . . . . . . . . B-8
Management . . . . . . . . . . . . . . . . . . . . . . . B-11
Execution of Portfolio Transactions . . . . . . . . . . . B-14
Additional Purchase and Redemption Information . . . . . B-17
Determination of Share Price . . . . . . . . . . . . . . B-18
Performance Information . . . . . . . . . . . . . . . . . B-18
General Information . . . . . . . . . . . . . . . . . B-19
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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 Harris Bretall Sullivan
& Smith Growth Equity Fund series (the "Fund").
INVESTMENT OBJECTIVE AND POLICIES
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 15% 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, however, 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 event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the U.S. Government security before its repurchase under a repurchase
agreement, the Fund may encounter delays and incur costs before being able to
sell the security.
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Delays may involve loss of interest or a decline in value 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, or that the seller will fail to meet its contractual obligation to
do so.
When-Issued Securities
The Fund may from time to time purchase securities on a "when-issued" basis. The
price of such securities is fixed at the time the commitment to purchase is
made, but delivery and payment for the when-issued securities take place at a
later date. Normally, the settlement date occurs within one month of the
purchase; during the period between purchase and settlement, no payment is made
by the Fund to the issuer and no interest accrues to the Fund. To the extent
that assets of the Fund are held in cash pending the settlement of a purchase of
securities, the Fund would earn no income; however, it is the Fund's intention
to be fully invested to the extent practicable and subject to the policies
stated above. While when-issued securities may be sold prior to the settlement
date, the Fund intends to purchase such securities with the purpose of actually
acquiring them unless a sale appears desirable for investment reasons. At the
time the Fund makes the commitment to purchase a security on a when-issued
basis, it will record the transaction and reflect the value of the security in
determining its net asset value. The market value of the when-issued
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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.
Short-Term Investments; U.S. Government and Mortgage Related
Securities
As indicated in the prospectus, the Advisor expects that under normal market
conditions, the Fund will stay fully invested and cash levels typically will not
exceed 5% of total assets. However, at times the Fund may invest in short-term
cash equivalent securities either for temporary, defensive purposes or when the
Advisor views the market as significantly overvalued.
These securities may include U.S. Government securities. U.S. Government
securities include direct obligations issued by the U.S. Treasury, such as
Treasury bills, certificates of indebtedness, notes and bonds. U.S. Government
agencies and instrumentalities that issue or guarantee securities include, but
are not limited to, the Federal National Mortgage Association ("FNMA"), Federal
Home Loan Banks, Federal Financing Bank and Student Loan Marketing Association.
All Treasury securities are backed by the full faith and credit of the United
States. Obligations of U.S. Government agencies and instrumentalities may or may
not be supported by the full faith and credit of the United States. Some, such
as the Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as securities issued
by the FNMA, are supported only by the credit of the instrumentality and not by
the Treasury. If the securities are not backed by the full faith and credit of
the United States, the owner of the securities must look principally to the
agency issuing the obligation for repayment and may not be able to assert a
claim against the United States in the event that the agency or instrumentality
does not meet its commitment.
Short-term securities may also include mortgage pass-through securities.
Mortgage pass-through securities are securities representing interests in pools
of mortgages in which payments of both interest and principal on the securities
are generally made monthly, in effect "passing through" monthly payments made by
the individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities).
Early repayment of principal on mortgage pass-through securities (arising from
prepayments of principal due to the sale of underlying property, refinancing, or
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foreclosure, net of fees and costs which may be incurred) may expose the Fund to
a lower rate of return upon reinvestment of principal. Also, if a security
subject to repayment has been purchased at a premium, in the event of prepayment
the value of the premium would be lost.
As noted above, payment of principal and interest on some mortgage-related
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U. S. Government (in the case of
securities guaranteed by the Government National Mortgage Association ("GNMA")
or by agencies or instrumentalities of the U.S. Government (in the case of
securities guaranteed by FNMA or the Federal Home Loan Mortgage Corporation
("FHLMC"), which are supported only by the discretionary authority of the U.S.
Government to purchase the agency's obligations). Mortgage pass-through
securities created by non-governmental issuers (such as commercial banks,
savings and loan institutions, private mortgage insurance companies, mortgage
bankers and other secondary market issuers) may be supported by various forms of
insurance or guarantees, including individual loan, title, pool and hazard
insurance, and letters of credit, which may be issued by governmental entities,
private insurers or the mortgage poolers.
Collateralized mortgage obligations ("CMO's") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, semi-annually. CMO's may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMO's are structured
into multiple classes, with each class bearing a different stated maturity.
Monthly payments of principal, including prepayments, are first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes receive principal only after the first class has been retired.
Other mortgage-related securities include those that directly or indirectly
represent a participation in or are secured by and payable from mortgage loans
on real property, such as CMO residuals or stripped mortgage-backed securities,
and may be structured in classes with rights to receive varying proportions of
principal and interest.
In certain mortgage-related securities, all interest payments go to one class of
holders--"interest only" or "IO"--and all of the principal goes to a second
class of holders--"principal only" or "PO". The yield to maturity on an IO class
is extremely sensitive to the rate of principal prepayments on the related
underlying mortgage assets, and a rapid rate of principal payments will have a
material adverse effect on yield to maturity. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, the Fund may fail
to fully recoup its initial investment in these securities, even when the
securities are rated AA or the
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equivalent. Conversely, if the underlying mortgage assets experience less than
anticipated prepayments of principal, the yield on a PO class would be
materially adversely affected. As interest rates rise and fall, the value of
IO's tends to move in the same direction as interest rates. The value of the
other mortgage-related securities described herein, like other debt instruments,
will tend to move in the opposite direction from interest rates. In general, the
Fund treats IO's and PO's as subject to the restriction on investments in
illiquid instruments except that IO's and PO's issued by the U.S. Government,
its agencies and instrumentalities and backed by fixed-rate mortgages may be
excluded from this limit if, in the judgment of the Advisor and subject to the
oversight of the Trustees such IO's and PO's are readily marketable.
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 and (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 borrowing.
(b) Mortgage, pledge or hypothecate any of its assets except
in connection with any such borrowing.
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 (however the Fund
reserves the right in the future to engage in futures contracts and options on
futures contracts upon authorization by the Board of Trustees and notification
to shareholders).
5. Invest 25% or more 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.)
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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 borrowing, mortgages or pledges, or (b) entering into options, futures
or repurchase transactions.
7. 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:
8. 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 Advisor owns
beneficially more than 1/2 of 1%, and all such Trustees or officers holding more
than 1/2 of 1% together own beneficially more than 5% of the issuer's
securities.
9. 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.
10. Invest, in the aggregate, more than 15% of its net 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.
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.)
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. 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 the Fund's policies on borrowing and on illiquid securities, or
as otherwise noted.
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DISTRIBUTIONS AND TAX INFORMATION
Distributions
Any dividends from net investment income (including realized short term capital
gains) are declared and paid at least annually, typically at the end of the
Fund's fiscal year (March 31). Any undistributed long term net capital gains
realized during the 12- month period ended each October 31, as well as any
additional undistributed long term capital gains realized during the Fund's
fiscal year, will also be distributed to shareholders on or about 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, as amended (the
"Code"). In order to so 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. In addition, 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 carry forward of the Fund.
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
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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 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.
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.
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Under the Code, the Fund will be required to report to the Internal Revenue
Service all distributions of taxable income and capital gains and gross proceeds
from the redemption or exchange of Fund shares, except in the case of exempt
shareholders (including 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 backup 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 certify the person's taxpayer identification number.
The Fund will not be subject to tax in The Commonwealth of Massachusetts as long
as it qualifies as a regulated investment company for federal income tax
purposes. Distributions and the transactions referred to in the preceding
paragraphs may be subject to state and local income taxes, and the tax treatment
thereof may differ from the federal income tax treatment. Moreover, the above
discussion is not intended to be a complete discussion of all applicable tax
consequences of an investment in the Fund. Shareholders are advised to consult
with their own tax advisers concerning the application of federal, state and
local taxes to an investment in the Fund.
The foregoing discussion of the Code relates solely to the application of
that law to U.S. citizens or residents and U.S. domestic corporations,
partnerships, trusts and estates. Each shareholder who is not a U.S. person
should consider the U.S. and foreign tax consequences of ownership of shares of
the Fund, including the possibility that such a shareholder may be subject to a
U.S. withholding tax at a rate of 30 percent (or at a lower rate under an
applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the prospectus have been prepared
by Fund management, and counsel to the Fund has expressed no opinion in respect
thereof.
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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 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
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 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 Drive, Malvern, PA 19355. Managing Director, Premier
Solutions, Ltd. Formerly 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.
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(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.
The Trustees of the Trust who are not interested persons receive a total annual
retainer from all series of the Trust at the following rate:
Retirement or
Trustee Total annual fees Other Benefits
Dorothy Berry $10,000 None
Wallace Cook $10,000 None
Carl Froebel $10,000 None
Rowley W.P. Redington $10,000 None
Trustees are also reimbursed for expenses incurred in attending each Board
meeting. These amounts are allocated among all series of the Trust. The Fund has
not yet paid any such trustees' fees or expenses; it is estimated that the
Fund's portion of such fees and expenses during its initial fiscal year will not
exceed $3,000. 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
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Statement of Additional Information, the Trustees and officers of the Trust as a
group did not own more than 1% of the outstanding shares of any Fund. Trustees
receive no retirement benefits or deferred compensation from the Trust.
The Fund receives investment advisory services pursuant to agreements with the
Advisor and the Trust. Each such agreement, after its initial term, continues in
effect for successive annual periods so long as such continuation is approved at
least annually by the vote of (1) the Board of Trustees of the Trust (or a
majority of the outstanding shares of the Fund to which the agreement applies),
and (2) a majority of the Trustees who are not interested persons of any party
to the Agreement, in each case cast in person at a meeting called for the
purpose of voting on such approval. Any such agreement may be terminated at any
time, without penalty, by either party to the agreement upon 60 days' written
notice and is automatically terminated in the event of its "assignment," as
defined in the 1940 Act.
Investment Advisor
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund. The Advisor is located at One
Sansome Street, Suite 3300, San Francisco, CA 94104. The Advisor provides
investment advisory services to individual and institutional investors with
assets of approximately $2.8 billion. Mr. John J. Sullivan, Executive Vice
President, Treasurer and Director of the Advisor and Mr. Gordon J. Ceresino,
Executive Vice President and Director of the Advisor are responsible for
management of the Fund's portfolio.
Under the Investment Advisory Agreement with the Fund, the Advisor provides the
Fund with advice on buying and selling securities, manages the investments of
the Fund, furnishes the Fund with office space and certain administrative
services, and provides most of the personnel needed by the Fund. As
compensation, the Fund pays the Advisor a monthly management fee (accrued daily)
based upon the average daily net assets of the Fund at the rate of 0.75%
annually.
The Investment Advisory Agreement continues in effect from year to year so long
as such continuation is approved at least annually by (1) the Board of Trustees
of the Trust or the vote of a majority of the outstanding shares of the Fund,
and (2) a majority of the Trustees who are not interested persons of any party
to the Agreement, in each case cast in person at a meeting called for the
purpose of voting on such approval. The Agreement may be terminated at any time,
without penalty, by either the Fund or the Advisor upon 60 days' written notice
and is automatically terminated in the event of its assignment as defined in the
1940 Act.
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Administrator
The Fund has entered into an Administrative Agreement with ICAC, a corporation
owned in part and controlled by Messrs. Banhazl, Paggioli and Wadsworth. The
Agreement provides that ICAC will prepare and coordinate reports and other
materials supplied to the Trustees; prepare and/or supervise the preparation and
filing of all securities filings, periodic financial reports, prospectuses,
statements of additional information, marketing materials, tax returns,
shareholder reports and other regulatory reports or filings required of the
Fund; prepare all required filings necessary to maintain the Fund's
qualification and/or registration to sell shares in all states where the Fund
currently does, or intends to do, business; coordinate the preparation, printing
and mailing of all materials (e.g., Annual Reports) required to be sent to
shareholders; coordinate the preparation and payment of Fund related expenses;
monitor and oversee the activities of the Fund's servicing agents (i.e.,
transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary the Fund's daily expense accruals; and perform such additional
services as may be agreed upon by the Fund and the Manager. For its services,
ICAC receives an annual fee equal to 0.12% of the Fund's average daily net
assets up to $25 million, 0.07% of the next $25 million of net assets, 0.05% of
the next $50 million of net assets and 0.03% on assets over $100 million, with a
minimum fee of $30,000.
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 60 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 Advisory, 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
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"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 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
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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 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 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
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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.
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 an Automatic
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Investment Plan for the convenience of investors who wish to purchase shares of
the Fund on a regular basis. All record keeping and custodial costs of this 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, an
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.
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 the Fund are valued in such manner as the Board of Trustees in good
faith deems appropriate to reflect their fair value.
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
(which includes accrued but undistributed income); the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
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
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return over the most recent four calendar quarters and the period from the
Fund's inception of operations. The Fund may also advertise aggregate and
average total return information over different periods of time.
The Fund's average annual compounded rate of return is determined by reference
to a hypothetical $1,000 investment that includes capital appreciation and
depreciation for the stated period, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial purchase order of $1,000
from which the maximum sales load is deducted
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000
purchase at the end of the period.
Aggregate total return is calculated in a similar manner, except that the
results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period and gives effect to the maximum applicable sales charge.
The Fund's total return may be compared to relevant indices, including Standard
& Poor's 500 Composite Stock Index and indices published by Lipper Analytical
Services, Inc. From time to time, evaluations of the Fund's performance by
independent sources may also be used in advertisements and in information
furnished to
present or prospective investors in the Fund.
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.
Star Bank N.A., 425 Walnut Street, Cincinnati, OH 45202 acts as Custodian
of the securities and other assets of the Fund. The Custodian does not
participate in decisions relating to the purchase and sale of securities by the
Fund. American Data
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Services, Inc., 24 West Carver St., Huntington, NY 11743 is the Fund's Transfer
and Dividend Disbursing Agent.
Ernst & Young, 515 S. Flower St., Los Angeles, CA 90071 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 by the SEC. 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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