Titan Financial Services Fund
9672 Pennsylvania Avenue
Upper Marlboro, Maryland 20772
STATEMENT OF ADDITIONAL INFORMATION
Titan Financial Services Fund (the "Fund"), a diversified,
professionally managed portfolio, is a separate series of Professionally Managed
Portfolios, an open-end management investment company. This Statement of
Additional Information ("SAI") is not a prospectus and should be read only in
conjunction with the Funds' current Prospectus, dated May 20, 1996. A copy of
the Prospectus may be obtained by calling toll-free at 1-800-385-7003. This SAI
is dated May 20, 1996.
INVESTMENT POLICIES AND RESTRICTIONS
The following supplements the information contained in the Prospectus
concerning the Funds' investment policies and limitations.
Yield Factors and Ratings. Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's ("S&P") and other nationally recognized statistical rating
organization ("NRSROs") are private services that provide rating of the credit
quality of debt obligations. A description of the ratings assigned to corporate
debt obligations by Moody's and S&P is included in the Appendix to this SAI. The
Fund may use these ratings in determining whether to purchase, sell or hold a
security. It should be emphasized, however, that ratings are general and are not
absolute standards of quality. Consequently, securities with the same maturity,
interest rate and rating may have different market prices.
Special Considerations Concerning the Banking Industry and the Savings and
Loan Industry.
-- The Banking Industry. In the United States, the deposits of
commercial banks are insured by the Federal Deposit Insurance Corporation (the
"FDIC"). Many of these banks are subsidiaries of bank holding companies.
Commercial banks accept deposits, make commercial and other loans, and engage in
a variety of other investments. The Fund normally intends to invest in the
securities of those bank holding companies which receive a substantial portion
of their income from one or more commercial bank subsidiaries, as well as in the
securities of banking institutions.
Despite some measure of deregulation, commercial banks and their
holding companies are also subject to extensive government regulation that
significantly affects their activities, earnings, and competitive environment.
The Office of the Comptroller of the Currency is the primary federal regulator
of national banks. The FDIC is the primary federal regulatory of most
state-chartered commercial banks with FDIC-insured deposits. State-chartered
commercial banks are also subject to primary supervision and regulation by state
banking
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authorities. The Board of Governors of the Federal Reserve System ("FRB") is the
primary federal regulator of bank holding companies and also has regulatory
authority over state-chartered banks which are members of the Federal Reserve
System. Federal regulators receive comprehensive reports on and conduct
examinations of a number of aspects of a federally regulated commercial bank's
operations and financial condition, including capital adequacy, liquidity,
earnings, dividends, investments, management practice and loan loss reserves.
Federal regulators also require that commercial banks maintain minimum levels of
capital and liquidity, require the establishment of loan loss reserves, and may
limit the bank's ability to pay dividends in certain circumstances.
Bank holding companies must file regular reports with the FRB and are
subject to examinations of certain aspects of their own and their subsidiaries'
operations. The activities of a bank holding company are restricted by federal
regulations which, among other things, generally prohibit a bank holding company
from controlling banks in more than one state, except where specifically
permitted by state law, and restrict the types of non-banking activities in
which the holding company directly or indirectly may engage.
Certain economic factors are of particular importance to commercial
banks. The availability and cost of funds to commercial banks and other finance
companies is important to their profitability. This factor has increased in
importance with the deregulation of interest rates. The quality of a bank's
portfolio of loans can be adversely affected by depressed market conditions in
certain industries. Recent examples of such industries that have affected the
loan portfolios of some banks include commercial real estate, international
sovereign credits, energy and agriculture. Smaller banks can be particularly
affected by such conditions if the economic base of the area in which they are
located is closely tied to a depressed industry, such as agriculture.
-- The Savings and Loan Industry. The principal business of
savings and loan institutions traditionally has consisted of attracting deposits
from the general public and originating or purchasing mortgage loans secured by
liens on residential real estate. In addition to long-term, fixed-rate
residential mortgage loans, savings institutions recently have begun to extend a
greater number of loans with shorter terms and/or adjustable interest rates,
including consumer and commercial loans, and construction loans on both
residential and commercial real estate developments. These types of loans may
involve greater risks of default than residential mortgage loans.
Historically, many savings institutions were organized primarily as
mutual companies and as such were owned by their depositors and did not issue
common stock. However, in recent years, the need for equity capital and
deregulation of the industry have encouraged conversion to stock ownership.
Securities of newly converted savings institutions may not be readily
marketable, due to the lack of a public trading market or certain restrictions
on transfer. Some savings institutions are controlled by holding companies. The
Fund normally intends to invest in the securities of those savings institution
holding companies, the savings
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institution subsidiaries of which comprise a significant percentage of their
total assets and provide a significant percentage of their income.
Savings institutions and their holding companies are subject to
extensive government regulation. Savings institutions with FDIC-insured deposits
are subject to periodic FDIC examination and to FDIC regulation and supervision
of their operations. A state-chartered savings institution is also regulated by
the laws and bank regulatory authority of the state in which it has its
principal office. Savings institutions with federally insured deposits are
subject to certain minimum net worth or capital requirements and to other
requirements limiting the types of investments they may make. In addition,
holding companies of savings institutions which are federally chartered may be
subject in certain cases to restrictions on the activities in which they may
engage.
The results of operations of savings institutions may be materially
affected by general economic conditions, the monetary and fiscal policies of the
federal government and the regulatory policies of governmental authorities.
Although in recent years savings institutions have derived an increased portion
of their income from receipt of fees, the results of operations of savings
institutions continue to depend to a large extent on the level of their "net
interest income" (the difference between the interest earned on loans and
investments and the interest paid on deposits and borrowings). During the period
between the late 1970s and mid- 1982, general market interest rates rose to, and
remained at, historically high levels as a result of inflationary pressures and
governmental policies. During the same period, savings institutions generally
experienced a shift in the composition of their deposits form relatively
long-term, low-rate certificate accounts or low-rate passbook accounts to
certificates of deposit and accounts bearing rates determined by market
conditions, often with short maturities. Competition from alternative
investments such as money market mutual funds affected savings flows, causing
reduced inflows to (or actual net outflows from) savings institutions, thus
limiting their ability to make new loans or investments. As a result, the
average cost of funds of most savings institutions increased faster than the
average yield earned on their assets, which consisted principally of long-term
real estate loans at fixed rates of interest. These factors had a severe adverse
impact on the earnings of most of the savings industry, with the large majority
of savings institutions reporting operating losses for 1991 and 1992. Although
interest rates have since declined, there can be no assurance that interest
rates will remain at current levels.
Beginning in the early 1980s a substantial number of savings
institutions significantly expanded the amount of their investments in
construction lending, real estate development projects, and secured and
unsecured commercial and consumer loans. These investments generally entail more
risk than mortgage loans secured by residential real estate and may result in
losses for certain institutions. Many institutions have also initiated asset and
liability management programs designed to minimize vulnerability to interest
rate changes. These programs have included such activities as increasing use of
adjustable rate mortgages, origination of a higher proportion of shorter-term
commercial and consumer loans, and the
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lengthening of maturities for deposits and borrowings. By including such
investments, the assets of savings institutions have begun to match the
maturities of their liabilities more closely. In addition, some savings
institutions are conducting hedging transactions to reduce their exposure to
interest rate risk. The Fund's investments in savings institutions will be
affected by changes in the levels of interest rates, national and local cycles
in real estate and other economic factors.
Federal and state regulations do not insure the solvency or
profitability of savings and banking institutions or their holding companies,
nor do they insure against risk any investments in securities issued by such
institutions. The FDIC insure the deposits of member institutions but in no way
protect or insure investments in the securities of these institutions.
--Legislative Concerns. Legislation has been enacted which has
altered the regulatory structure and capital requirements of the banking and
savings and loan institution industries. This legislation was enacted as a
response to financial problems experienced by a number of banks and savings and
loan institutions relating to inadequate capital, adverse economic conditions
and alleged fraud and mismanagement. This legislation also strengthened the
civil sanctions and criminal penalties for defrauding or otherwise damaging
depository institutions and their depositors and curtailed the authority of
savings and loan institutions to engage in real estate investment and certain
other activities. In addition, the legislation has given federal regulators
substantial authority to use all of the assets of a bank or savings and loan
institution holding company to satisfy federal claims against an insolvent
savings and loan institution or bank owned by the holding company and mandated
regulatory action against institutions with inadequate capital levels.
Legislative and regulatory actions have also increased the capital requirements
applicable to commercial banks and savings and loan institutions. These changes
have extended the risk to holding company shareholders in the event of the
insolvency of any depository institution owned by the holding company.
There are currently pending legislative proposals that could expose
bank holding companies to well-established competitors, such as securities firms
and insurance companies, as well as companies engaged in other areas of
business. Increased competition may also result from the broadening of
interstate banking powers, which has already lead to a reduction in the number
of publicly traded regional banks. Although the costs of insurance premiums have
been reduced, these rates can be increased in the future which may adversely
affect the Fund.
Special Considerations Concerning Other Financial Services Industries.
Many of the investment considerations discussed in connection which banks and
savings associations also apply to financial services companies. These companies
are all subject to extensive regulation, rapid business changes, value
fluctuations due to the concentration of loans in particular industries
significantly affected by economic conditions, volatile performance dependent
upon the availability and cost of capital and prevailing interest rates, and
significant competition. General economic conditions significantly affect these
companies. Credit and
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other losses resulting from the financial difficulty of borrowers or other third
parties have a potentially adverse effect on companies in this industry.
Investment banking, securities brokerage and investment advisory companies are
particularly subject to government regulation and rate setting, potential
anti-trust and tax law changes, and industry-wide pricing and competition
cycles. Property and casualty insurance companies may be affected by weather and
other catastrophes. Life and health insurance companies may be affected by
mortality and morbidity rates, including the effects of epidemics, and by
possible future changes in the health care industries. Individual insurance
companies may be exposed to reserve inadequacies, problems in investment
portfolios (for example, due to real estate or "junk" bond holdings) and
failures of reinsurance carriers. Proposed or potential anti-trust or tax law
changes also may affect adversely insurance companies' policy sales, tax
obligations and profitability. In addition, several significant companies have
recently reported liquidity or solvency difficulties and credit rating
downgrades.
The financial services industries currently are changing relatively
rapidly as existing distinctions between various financial services industries
become less clear. For example, recent business combinations have included
different financial services industries such as insurance, finance and
securities brokerage under single ownership. In addition, changes in
governmental regulation have permitted companies traditionally active in one
area to expand into other areas. The effect of these changes in particular
segments of the financial services industries is difficult to predict.
Repurchase Agreements. Repurchase agreements are transactions in which
the Fund purchases securities from a bank or recognized securities dealer and
simultaneously commits to resell the securities to the bank or dealer at an
agreed-upon date and price reflecting a market rate of interest unrelated to the
coupon rate or maturity of the purchased securities. The Fund maintains custody
of the underlying securities prior to their repurchase; thus, the obligation of
the bank or dealer to pay the repurchase price on the date agreed to is, in
effect, secured by such securities. If the value of such securities is less than
the repurchase price, plus any agreed-upon additional amount, the other party to
the agreement must provide additional collateral so that at all times the
collateral is at least equal to the repurchase price, plus any agreed-upon
additional amount. The difference between the total amount to be received upon
repurchase of the securities and the price that was paid by the Fund upon their
acquisition is accrued as interest and included in the Fund's net investment
income.
Repurchase agreements carry certain risks not associated with direct
investments in securities, including possible declines in the market value of
the underlying securities and delays and costs to the Fund if the other party to
a repurchase agreement becomes bankrupt. The Fund intends to enter into
repurchase agreements only with banks and dealers in transactions believed by
Titan Investment Advisers, LLC (the "Investment Adviser") to present minimal
credit risks in accordance with guidelines established by the Fund's Board of
Directors. The Investment Adviser will review and monitor the creditworthiness
of those institutions under the Board's general supervision.
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Lending of Fund Securities. Although it has no present intention of
doing so during the coming year, the Fund may lend up to 331/3% of the total
value of its portfolio securities to broker-dealers or institutional investors
that the Investment Adviser deems qualified, but only when the borrower
maintains with the Fund's custodian collateral either in cash or money market
instruments in an amount at least equal to the market value of the securities
loaned, plus accrued interest and dividends, determined on a daily basis and
adjusted accordingly. In determining whether to lend securities to a particular
broker-dealer or institutional investor, the Investment Adviser will consider,
and during the period of the loan will monitor, all relevant facts and
circumstances, including the creditworthiness of the borrower. The Fund will
retain authority to terminate any loans at any time. The Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the interest earned on the cash or money market
instruments held as collateral to the borrower or placing broker. The Fund will
receive reasonable interest on the loan or a flat fee from the borrower and
amounts equivalent to any dividends, interest or other distributions on the
securities loaned. The Fund will retain record ownership of loaned securities to
exercise beneficial rights, such as voting and subscription rights and rights to
dividends, interest or other distributions, when retaining such rights is
considered to be in the Fund's interest.
Reverse Repurchase Agreements. Although it has no intention of doing so
during the coming year, the Fund may enter into reverse repurchase agreements
with banks up to an aggregate value of not more than 5% of its total assets.
Such agreements involve the sale of securities held by the Fund subject to the
Fund's agreement to repurchase the securities at an agreed-upon date and price
reflecting a market rate of interest. Such agreements are considered to be
borrowings and may be entered into only for temporary or emergency purposes.
While a reverse repurchase agreement is outstanding, the Fund will maintain with
its custodian, in a segregated account, cash, U.S. government securities or
other liquid, high-grade debt obligations, marked to market daily, in an amount
at least equal to the Fund's obligations under the reverse repurchase agreement.
Illiquid Securities. As indicated in the Prospectus, the Fund may
invest up to 15% of its net assets in illiquid securities. The term "illiquid
securities" for this purpose means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at
which the Fund has valued the securities and includes, among other things,
purchased over-the-counter ("OTC") options, repurchase agreements maturing in
more than seven days and restricted securities other than those the Investment
Adviser has determined are liquid pursuant to guidelines established by the
Funds's board of Directors. The assets used as cover for OTC options written by
the Fund will be considered illiquid unless the OTC options are sold to
qualified dealers who agree that the Fund may repurchase any OTC option it
writes at a maximum price to be calculated by a formula set forth in the option
agreement. The cover for an OTC option written subject to this procedure would
be considered illiquid only to the extent that the maximum repurchase price
under the formula exceeds the intrinsic value of the option. Illiquid restricted
securities may be sold only in privately negotiated transactions or in public
offerings with respect to which a registration
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statement is in effect under the Securities Act of 1933 ("1933 Act"). Where
registration is required, the Fund may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to sell.
Not all restricted securities are illiquid. In recent years a large
institutional market has developed for certain securities that are not
registered under the 1933 Act, including private placements, repurchase
agreements, commercial paper, foreign securities and corporate bonds and notes.
These instruments are often restricted securities because the securities are
sold in transactions not requiring registration. Institutional investors
generally will not seek to sell these instruments to the general public, but
instead will often depend either on an efficient institutional market in which
such unregistered securities can be readily resold or on an issuer's ability to
honor a demand for repayment. Therefore, the fact that there are contractual or
restrictions on resale to the general public or certain institutions is not
dispositive of the liquidity of such investments.
Rule 144A under the 1933 Act established a "safe harbor" from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
that might develop as a result of Rule 144A could provide both readily
ascertainable values for restricted securities and the ability to liquidate an
investment to satisfy share redemption orders. Such markets might include
automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. ("NASD"). An
insufficient number of qualified buyers interested in purchasing Rule
144A-eligible restricted securities held by the Fund, however, could affect
adversely the marketability of such portfolio and the Fund might be unable to
dispose of such securities promptly or at favorable prices.
The Board of Trustees has delegated the function of making day-to-day
determinations of liquidity to the Investment Adviser, pursuant to guidelines
approved by the Board. The Investment Adviser takes into account a number of
factors in reaching liquidity decisions, including (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the security,
(4) the number of other potential purchasers and (5) the nature of the security
and how trading is effected (e.g., the time needed to sell the security, how
offers are solicited and the mechanics of transfer). The Investment Adviser will
monitor the liquidity of restricted securities in the Fund's portfolio and
report periodically on such decisions to the Board of Directors.
When-Issued and Delayed Delivery Securities. A security purchased on a
when- issued or delayed delivery basis is recorded as an asset on the commitment
date and is subject
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to changes in market value, generally based upon changes in the level of
interest rates. Thus, fluctuation in the value of the security from the time of
the commitment date will affect the Fund's net asset value. When the Fund
commits to purchase securities on a when-issued or delayed delivery basis, its
custodian will set aside in a segregated account cash, U.S. government
securities, or other liquid high-grade debt securities with a market value equal
to the amount of the commitment. If necessary, additional assets will be placed
in the account daily so that the value of the account will equal or exceed the
amount of the Fund's purchase commitment. The Fund purchases when-issued
securities only with the intention of taking delivery, but may sell the right to
acquire the security prior to delivery if the Investment Adviser deems it
advantageous to do so, which may result in capital gain or loss to the Fund.
Short Sales "Against the Box." The Fund may engage in short sales of
securities it owns or has the right to acquire at no added cost through
conversion or exchange of other securities it owns (short sales "against the
box") to defer realization of gains or losses for tax or other purposes. To make
delivery to the purchaser in a short sales, the executing broker borrows the
securities being sold short on behalf of the Fund, and the Fund is obligated to
replace the securities borrowed at a date in the future. When the Fund sells
short, it will establish a margin account with the broker effecting the short
sales and will deposit collateral with the broker. In addition, the Fund will
maintain with its custodian, in a segregated account, the securities that could
be used to cover the short sale. The Fund will incur transaction costs,
including interest expenses, in connection with opening, maintaining and closing
short sales against the box. The Fund currently does not intend to have
obligations under short sales that at any time during the coming year exceed 5%
of the Fund's net assets.
The Fund might make a short sale "against the box" in order to hedge
against market risks when the Investment Adviser believes that the price of a
security may decline, thereby causing a decline in the value of a security owned
by the Fund or a security convertible into or exchangeable for a security owned
by the Fund, or when the Investment Adviser wants to sell a security that the
Fund owns at a current price, but also wishes to defer recognition of gain or
loss for federal income tax purposes. In such case, any loss in the Fund's long
position after the short sales should be reduced by a gain in the short
position. Conversely, any gain in the long position should be reduced by a loss
in the short position. The extent to which gains or losses in the long position
are reduced will depend upon amount of the securities sold short relative to the
amount of the securities the Fund owns, either directly or indirectly, and in
the case where the Fund owns convertible securities, changes in the investment
values or conversion premiums of such securities.
Special Considerations Relating to Foreign Securities. To the extent that
the Fund invests in U.S. dollar-denominated securities of foreign issuers,
theses securities may not be registered with the SEC, nor may the issuers
thereof by subject to its reporting requirements. Accordingly, there may be less
publicly available information concerning foreign issuers of securities held by
the Funds than is available concerning U.S. companies. Foreign companies
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are not generally subject to uniform accounting, auditing and financial
reporting standards or other regulatory requirements comparable to those
applicable to U.S. companies.
The Funds may invest in foreign securities by purchasing American
Depository Receipts ("ADRs"), which are securities convertible into securities
of corporations based in foreign countries. These securities may not necessarily
be denominated in the same currency as the securities into which they may be
converted. Generally, ADRs, in registered form, are denominated in U.S. dollars
and are designed for use in the U.S. securities markets. ADRs are receipts
typically issued by a U.S. bank or Fund company evidencing ownership of the
underlying securities. For purposes of the Fund's investment policies, ADRs are
deemed to have the same classification as the underlying securities they
represent. Thus, an ADR representing ownership of common stock will be treated
as common stock.
The Fund anticipates that their brokerage transactions involving
securities of companies headquartered in countries other than the United States
will be conducted primarily on the principal exchanges of such countries.
Foreign security trading practices, including those involving securities
settlement where assets of the Fund may be released prior to receipt of payment,
may expose the Fund to increased risk in the event of a failed trade or the
insolvency of a foreign broker-dealer. Transactions on foreign exchanges are
usually subject to fixed commissions that are generally higher than negotiated
commissions on U.S. transactions, although the Fund will endeavor to achieve the
best net results in effecting its portfolio transactions. There is generally
less government supervision and regulation of exchanges and brokers in foreign
countries than in the United States.
The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed in dealings between
nations. Costs are also incurred in connection with conversions between various
currencies. In addition, foreign brokerage commissions are generally higher than
those charged in the United States, and foreign securities markets may be less
liquid, more volatile and subject to lessen governmental supervision than in the
United States. Investments in foreign countries could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations, and could be subject to
extended clearance and settlement periods.
Investment income on certain foreign securities in which the Fund may
invest may be subject to foreign withholding or other taxes that could reduce
the return on these securities. Tax treaties between the United States and
foreign countries, however, may reduce or eliminate the amount of foreign taxes
to which the Fund would be subject.
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Segregated Accounts. When the Fund enters into certain transactions
that involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis or reverse
repurchase agreements, the Fund will maintain with an approved custodian in a
segregated account cash, U.S. government securities or other liquid high-grade
debt securities, marked to market daily, in an amount at least equal to the
Fund's obligation or commitment under such transactions. As described below
under "Special Risks of Hedging Strategies," segregated accounts may also be
required in connection with certain transactions involving options.
Special Risks of Hedging Strategies. The use of options involves
special considerations and risks, as described below. Risks pertaining to
particular instruments are described in the sections that follow.
(1) Successful use of options depends upon the Investment Adviser's
ability to predict movements of the overall securities, currency and interest
rate markets, which require different skills than predicting changes in the
prices of individual securities.
(2) There might be imperfect correlation, or even no correlation,
between price movements of an instrument and price movements of the investments
being hedged. For example, if the value of a an instrument used in a short hedge
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which instruments are traded.
The effectiveness of hedges using instruments on indices will depend on the
degree of correlation between price movements in the index and price movements
in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by
wholly or partially offsetting the negative effect of unfavorable price
movements in the investments being hedged. However, hedging strategies can also
reduce opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered in a short
hedge because the Investment Adviser projected a decline in the price of a
security in the Fund's portfolio, and the price of that security increased
instead, the gain from that increase might be wholly or partially offset by a
decline in the price of the instrument. Moreover, if the price of the instrument
declined by more than the increase in the price of the security, the Fund could
suffer a loss. In either such case, the Fund would have been in a better
position had it not hedged at all.
(4) As described below, the Fund might be required to maintain assets
as "cover," maintain segregated accounts or make margin payments when it takes
positions in an instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or accounts or make such payments until the
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position expired or matured. These requirements might impair the Fund's ability
to sell a portfolio security or make an investment at a time when it would
otherwise be favorable to do so, or require that the Fund sell a portfolio
security at a disadvantageous time. The Fund's ability to close out a position
in an instrument prior to expiration or maturity depends on the existence of a
liquid secondary market or, in the absence of such a market, the ability and
willingness of a contra party to enter into a transaction closing out the
position. Therefore, there is no assurance that any hedging position can be
closed out at a time and price that is favorable to the Fund.
Writing Call Options. The Fund may write (sell) call options on
securities and indices. Call options generally will be written on securities
that, in the opinion of the Investment Adviser, are not expected to make any
major price moves in the near future but that, over the long term, are deemed to
be attractive investments for the Fund.
A call option gives the holder (buyer) the right to purchase a security
at a specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he or she may be assigned an exercise notice, requiring him or her to
deliver the underlying security against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by purchasing an
option identical to that previously sold.
Portfolio securities on which call options may be written will be
purchase solely on the basis of investment considerations consistent with the
Fund's investment objective. When writing a call option, the Fund, in return for
the premium, gives up the opportunity for profit from a price increase in the
underlying security above the exercise price, and retains the risk of loss
should the price of the security decline. Unlike one who owns securities not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities, since most options may be exercised at any time
prior to the option's expiration. If a call option that the Fund has written
expires, the Fund will realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value of the underlying
security during the option period. If the call option is exercised, the Fund
will realize a gain or loss from the sale of underlying security, which will be
increased or offset by the premium received. The Fund does not consider a
security covered by a call option to be "pledged" as that term is used in the
Fund's policy that limits the pledging or mortgaging of its assets.
Writing call options can serve as a limited short hedge because
declines in the value of the hedged investment would be offset to the extent of
the premium received for writing the option. However, if the security
appreciates to a price higher than the exercise price of the call option, it can
be expected that the option will be exercised and the Fund will be obligated to
sell the security at less than its market value.
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The premium that the Fund receives for writing a call option is deemed
to constitute the market value of an option. The premium the Fund will receive
from writing a call option will reflect, among other things, the current market
price of the underlying investment, the relationship of the exercise price to
such market price, the historical price volatility of the underlying investment,
and the length of the option period. In determining whether a particular call
option should be written, the Investment Adviser will consider the
reasonableness of the anticipated premium and the likelihood that a liquid
secondary market will exist for those options.
Closing transactions will be effected in order to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
or to permit the sale of the underlying security. Furthermore, effecting a
closing transaction will permit the Fund to write another call option on the
underlying security with either a different exercise price or expiration date or
both.
The Fund will pay transaction costs in connection with the writing of
options and in entering into closing purchase contracts. Transaction costs
relating to options activity normally are higher than those applicable to
purchases and sales of portfolio securities.
The exercise price of the options may be below, equal to or above the
current market values of the underlying securities at the time the options are
written. From time to time, the Fund may purchase an underlying security for
delivery in accordance with the exercise of an option, rather than delivering
such security from its portfolio. In such cases, additional costs will be
incurred.
The Fund will realize a profit or loss from a closing purchase
transaction is less or more, respectively, than the premium received from
writing the option. Because increases in the market price of a call option
generally will reflect increases in the market price of the underlying security,
any loss resulting from the repurchase of a call option is likely to be offset
in whole or in part by appreciation of the underlying security owned by the
Fund.
Writing Put Options. The Fund may write put options on securities and
indices. A put option gives the purchases of the option the right to sell, and
the writer (seller) the obligation to buy, the underlying security at the
exercise price at any time until the expiration date. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
The Fund generally would write put options in circumstances where
Investment Adviser wishes to purchase the underlying security for the Fund's
portfolio at a price lower than the current market price of the security. In
such event, the Fund would write a put option at an exercise price that, reduced
by the premium received on the option, reflects the lower price it is willing to
pay. Since the Fund also would receive interest on debt securities maintained to
cover the exercise price of the option, this technique could be used to enhance
current return
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during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security would decline below the
exercise price, less the premium received.
Writing put options can serve as a limited long hedge because increases
in the value of the hedged investment would be offset to the extent of the
premium received for writing the option. However, if the security depreciates to
a price lower than the exercise price of the put option, it can be expected that
the put option will be exercised and the Fund will be obligated to purchase the
security at more than its market value.
Purchasing Put Options. The Fund may purchase put options on securities
and indices. As the holder of a put option, the Fund would have the right to
sell the underlying security at the exercise price at any time until the
expiration date. The Fund may enter into closing sale transactions with respect
to such options, exercise such options or permit such options to expire.
The Fund may purchase a put option on an underlying security
("protective put") owned by the Fund in order to protect against an anticipated
decline in the value of the security. Such hedge protection is provided only
during the life of the put option when the Fund, as the holder of the put
option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. For
example, a put option may be purchased in order to protect unrealized
appreciation of a security when the Investment Adviser deems it desirable to
continue to hold the security because of tax considerations. The premium paid
for the put option and any transaction costs would reduce any profit otherwise
available for distribution when the security eventually is sold.
The Fund also may purchase put options at a time when the Fund does not
own the underlying security. By purchasing put options on a security it does not
own, the Fund seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price during the life of the put option, the Fund will lose
its entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
declines sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale transaction.
Purchasing Call Options. The Fund may purchase call options on
securities and indices. As the holder of a call option, the Fund would have the
right to purchase the underlying security at the exercise price at any time
until the expiration date. The Fund may enter into closing sale transactions
with respect to such options, exercise such options or permit such options to
expire.
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The Fund also may purchase call options on underlying securities it
owns in order to protect unrealized gains on call options previously written by
it. A call option could be purchased for this purpose where tax considerations
make it inadvisable to realize such gains through a closing purchase
transaction. Call options also may be purchased at times to avoid realizing
losses that would result in a reduction of the Fund's current return. For
example, where the Fund has written a call option on an underlying security
having a current market value below the price at which such security was
purchased by the Fund, an increase in the market price could result in the
exercise of the call option written by the Fund and the realization of a loss on
the underlying security. Accordingly, the Fund could purchase a call option on
the same underlying security, which could be exercised to fulfill the Fund's
delivery obligations under its written call (if it is exercised). This strategy
could allow the Fund to avoid selling the Fund security at a time when it has an
unrealized loss; however, the Fund would have to pay a premium to purchase the
call option plus transaction costs.
Aggregate premiums paid for put and call options will not exceed 5% of
such Fund's total assets at the time of purchase.
Options may be either listed on an exchange or traded over-the-counter
("OTC"). Listed options are third-party contracts (i.e., performance of the
obligations of the purchase and seller is guaranteed by the exchange or clearing
corporation), and have standardized strike prices and expiration dates. OTC
options are two-party contracts with negotiated strike prices and expiration
dates. OTC options differ from exchange-traded options in that OTC options are
transacted with dealers directly and not through a corporation (which guarantees
performance). Consequently, there is a risk of non-performance by the dealer.
Since no exchange is involved, OTC options are valued on the basis of a quote
provided by the dealer. In the case of OTC options, there can be no assurance
that a liquid secondary market will exist for any particular option at any
specific time.
The staff of the SEC considers purchased OTC options to be illiquid
securities. A Fund may also sell OTC options and, in connection therewith,
segregate assets or cover its obligations with respect to OTC options written by
the Fund. The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option its writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
The Fund's ability to establish and close out positions in
exchange-listed options depends on the existence of a liquid market. The Fund
intends to purchase or write only those exchange-traded options for which there
appears to be liquid secondary market. However, there can be no assurance that
such a market will exist at any particular time. Closing transactions can be
made for OTC options only be negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will
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enter into OTC options only with contra parties that are expected to be capable
of entering into closing transactions with the Fund, there is no assurance that
the Fund will in fact be able to close out an OTC option position at a favorable
price prior to expiration. In the event of insolvency of the contra party, the
Fund might be unable to close out an OTC option position at any time prior to
its expiration.
Investment Restrictions
The following investment restrictions are fundamental policies of the
Fund. Under the 1940 Act, a fundamental policy may not be changed without the
vote of a majority of the outstanding voting securities of a Fund, which is
defined in the 1940 Act as the lesser of (1) 67% or more of the shares present
at a Fund meeting, if the holders of more than 50% of the outstanding shares of
the Fund are present or represented by proxy or (2) more than 50% of the
outstanding shares of the Fund.
Under the investment restrictions adopted by the Fund:
1. The Fund may not purchase securities of any one issuer, if as a
result, more than 5% of the Fund's total assets would be invested in
securities of that issuer or the Fund would own or hold more than 10%
of the outstanding voting securities of that issuer, except that up to
25% of the Fund's total assets may be invested without regard to this
limitation, and except that this limitation does not apply to
securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment
companies.
2. The Fund may not issue senior securities or borrow money, except as
permitted under the Investment Company Act of 1940 (the "1940 Act") and
then not in excess of 33-1/3% of the Fund's total assets (including the
amount of the senior securities issued but reduced by any liabilities
not constituting senior securities) at the time of the issuance or
borrowing, except that the Fund may borrow up to an additional 5% of
its total assets (not including the amount borrowed) for temporary or
emergency purposes.
3. The Fund may not purchase or sell physical commodities unless
acquired as a result of owning securities or other instruments, except
that the Fund may purchase, sell or enter into financial options.
4. The Fund may not purchase or sell real estate, except that
investments in securities of issuers that invest in real estate and
investments in mortgage-backed securities, mortgage participations or
other instruments supported by interests in real estate are not
subject to this limitation, and except that the Fund may exercise
rights under agreements relating to such securities, including the
right to enforce security interests
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and to hold real estate acquired by reason of such enforcement until
that real estate can be liquidated in an orderly manner.
5. The Fund may not engage in the business of underwriting securities
of other issuers, except to the extent that the Fund might be
considered an underwriter under the federal securities laws in
connection with its disposition of portfolio securities.
6. The Fund may not make loans, except through loans of portfolio
securities, or through repurchase agreements, provided that for
purposes of this restriction, the acquisition of bonds, debentures or
other debt securities and investments in government obligations,
commercial paper, certificates of deposit, bankers' acceptances or
similar instruments will not be considered the making of a loan.
The following investment restrictions may be changed by the Board of
Directors without shareholder approval:
1. The Fund may not purchase any securities of other investment
companies, except to the extent permitted by the 1940 Act and except
that this limitation does not apply to securities received or acquired
as dividends, through offers or exchange, or as a result of
reorganization, consolidation, or merger.
2. The Fund may not purchase any security if as a result the Fund would
then have more than 5% of its total assets invested in securities of
companies (including predecessors) that have been in continuous
operation for fewer than three years.
3. The Fund may not purchase or retain securities of any company if, to
the knowledge of the Fund, any of the Fund's Officers or Directors or
any officer or director of the Investment Adviser for the Fund
individually owns more than 1/2 of 1% of the outstanding securities of
the company and together they own beneficially more than 5% of the
securities.
4. The Fund may not invest in warrants, valued at the lower of cost or
market, in excess of 5% of the value of its net assets, which amount
may include warrants that not listed on the New York or American Stock
Exchange, provided that those unlisted warrants, valued at the lower or
cost or market, do not exceed 2% of the Fund's net assets, and further
provided that this restriction does not apply to warrants attached to,
or sold as a unit with, other securities.
5. The Fund may not purchase securities on margin, except for
short-term credit necessary for clearance of portfolio transactions and
except that the Fund may make margin deposits in connection with its
use of financial options.
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6. The Fund may not make short sales of securities or maintain a short
position, except that a Fund may (a) sell short "against the box" and
(b) maintain short positions in connections with its use of financial
options.
7. The Fund may not invest in oil, gas or other mineral exploration or
development programs or leases, except that investments in securities
of issuers that invest in such programs or leases and investments in
asset-backed securities supported by receivables generated from such
programs or leases are not subject to this prohibition.
8. The Fund may not mortgage, pledge, or hypothecate any assets except in
connection with permitted borrowings or the issuance or senior securities.
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 and the Fund's administrator), and Vice President of First Fund
Distributors, Inc. ("FFD"; registered broker-dealer and the Fund's Distributor)
since 1990.
Dorothy A. Berry, 52 Trustee
Wildflower Hill, Ancram New York 12502. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment advisor and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
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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. (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
since 1990.
*Indicates an "interested person" of the Trust as defined in the 1940 Act.
The Trustees of the Trust who are not interested persons receive a total
annual retainer of $10,000 paid quarterly, and fees and expenses for each Board
meeting attended. These
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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 will not exceed $3,000 during its first year of
operation. The officers of the Trust receive no compensation directly from it
for performing the duties of their offices. However, those officers and Trustees
of the Trust who are officers and/or stockholders of those companies that render
administrative services to the Trust as noted below may receive remuneration
indirectly because of fees that these companies receive from the Trust. As of
the date of this Statement of Additional Information, the Trustees and officers
of the Trust as a group did not own more than 1% of the outstanding shares of
any Fund. Trustees receive no retirement benefits or deferred compensation from
the Trust.
The Fund receives investment advisory services pursuant to agreements
with the Advisor and the Trust. Each such agreement, after its initial term,
continues in effect for successive annual periods so long as such continuation
is approved at least annually by the vote of (1) the Board of Trustees of the
Trust (or a majority of the outstanding shares of the Fund to which the
agreement applies), and (2) a majority of the Trustees who are not interested
persons of any party to the Agreement, in each case cast in person at a meeting
called for the purpose of voting on such approval. Any such agreement may be
terminated at any time, without penalty, by either party to the agreement upon
60 days' written notice and is automatically terminated in the event of its
"assignment," as defined in the 1940 Act.
INVESTMENT MANAGEMENT, ADMINISTRATION AND DISTRIBUTION
ARRANGEMENTS
Investment Advisory Arrangements. Titan Investment Advisers, LLC (the
"Investment Adviser") acts as the investment adviser to the Fund pursuant to a
an investment advisory agreement with the Fund ("Advisory Agreement") dated May
20, 1996.
For its services, the Investment Adviser receives, pursuant to the
Advisory Agreement, a fee at an annual rate of 1.00% of the Fund's average daily
net assets. The fee is computed daily and payable monthly.
As required by state regulation, the Investment Adviser will reimburse
the Fund if and to the extent that the aggregate operating expenses of the Fund
exceed applicable limits in any fiscal year. Currently, the most restrictive
such limit applicable to the Fund is 2.5% of the first $30 million of the Fund's
average daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
Certain expenses, such as brokerage commissions, taxes, interest, distribution
fees, certain expenses attributable to investing outside the United States and
extraordinary items, are excluded from this limitation.
Under the terms of the Advisory Agreement, the Fund bears all expenses
incurred in its operation that are not specifically assumed by the Fund's
Adviser. General expenses of the Fund
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not readily identifiable as belonging to the Fund are allocated among series by
or under the direction of the board of directors in such manner as the board
deems to be fair and equitable. Expenses borne by the Fund include the following
(or the Fund's share of the following): (1) the cost (including brokerage
commissions) of securities purchased or sold by the Fund and any losses incurred
in connection therewith, (2) fees payable to and expenses incurred on behalf of
the Fund by the Investment Adviser, (3) organizational expenses, (4) filing fees
and expenses relating to the registration and qualification of the Fund's shares
under federal and state securities laws and maintenance of such registrations
and qualifications, (5) fees and salaries payable to directors who are not
interested persons (as defined in the 1940 Act) of the Fund, Investment Adviser,
(6) all expenses incurred in connection with directors' services, including
travel expenses, (7) taxes (including any income or franchise taxes) and
governmental fees, (8) costs of any liability, uncollectible items of deposit
and other insurance or fidelity bonds, (9) any costs, expenses or losses arising
out of a liability of or claim for damages or other relief asserted against the
Fund for violation of any law, (10) legal, accounting and auditing expenses,
including legal fees of special counsel for the independent directors, (11)
charges of custodians, transfer agents and other agents, (12) costs of preparing
share certificates, (13) expenses of setting in type and printing prospectuses
and supplements thereto, statements of additional information and supplements
thereto, reports and proxy materials for existing shareholders, and costs of
mailing such materials to existing shareholders, (14) any extraordinary expenses
(including fees and disbursements of counsel) incurred by the Fund, (15) fees,
voluntary assessments and other expenses incurred in connection with membership
in investment company organizations, (16) costs of mailing and tabulating
proxies and costs of meetings of shareholders, the board and any committees
thereof, (17) the cost of investment company literature and other publications
provided to directors and officers and (18) costs of mailing, stationery and
communications equipment.
Under the Advisory Agreement, the Investment Adviser will not be liable
for any error or judgment or mistake of law or for any loss suffered by the Fund
in connection with the performance of the contract, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the Investment
Adviser in the performance of its duties or from reckless disregard of its
duties and obligations thereunder. The Advisory Agreement terminates
automatically upon its assignment and is terminable at any time without penalty
by the Fund's board of directors or by vote of the holders of a majority of a
Fund's outstanding voting securities, on 60 days' written notice to the
Investment Adviser or by the Investment Adviser on 60 days' written notice to
the Fund.
Administration Arrangements. Pursuant to an Administration Agreement
with the Fund, Investment Company Administration Corporation ("ICAC or "the
Administrator") will serve as the Fund's Administrator. The duties of the
Administrator include, but are not limited to, overseeing maintenance of books
and records of the Fund required by Rule 31a-1(b)(4) under the 1940 Act;
preparation of the Fund's federal, state and local tax returns, preparation of
financial information for the Fund's proxy statements and quarterly and annual
reports to shareholders; preparation of the Fund's periodic financial reports to
the SEC.
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The Administrator shall not be liable for any error of judgment or for
any loss suffered by the Fund in connection with performance of its obligations
under the Administration Agreement except a loss resulting from willful
misfeasance, bad faith, or gross negligence on its part in the performance of,
or from reckless disregard by it of its duties under the Administration
Agreement. The services of the Administrator to the Fund are not deemed to be
exclusive, and nothing in the Administration Agreement prevents the
Administrator, or any affiliates thereof, from providing similar services to
other investment companies and other clients (whether or not their investment
objectives and policies are similar to those of the Fund) or from engaging in
other activities.
Distribution Arrangements. First Fund Distributors, Inc. acts as the
distributor of the shares of the Fund under a distribution contract with the
Fund dated May 20, 1996 ("Distribution Contract").
Plan of Distribution
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1
under the Act (the "Plan"), under which, the fund pays the Distributor a fee,
which is accrued daily and paid monthly, at the annual rate of 0.25% of the
Fund's average daily assets. Among other things, the Plan provides that (1) the
Investment Adviser will submit to the Fund's Board of Directors at least
quarterly, and the Directors will review, reports regarding all amounts expended
under the Plan and the purposes for which such expenditures were made, (2) the
Plan will continue in effect only so long as it is approved at least annually,
and any material amendment thereto is approved, by the Fund's Board of
Directors, including those who are not "interested persons" of the Fund and who
have no direct or indirect financial interest in operation of the plan or any
agreement related to the Plan, acting in person at a meeting called for that
purpose, (3) payments by the Fund under the Plan shall not be materially
increased without the affirmative vote of the holders of a majority of the
outstanding shares of the Fund and (4) while the Plans remains in effect, the
selection and nomination of Directors who are not "interested persons" of the
Fund shall be committed to the discretion of the Directors who are not
interested persons of the Fund.
PORTFOLIO TRANSACTIONS
Subject to policy established by the Board of Directors of the Fund,
the Investment Adviser will arrange for the execution of the Fund's portfolio
transactions and the allocation of brokerage. In executing portfolio
transactions the Investment Adviser will seek to obtain the best net results for
the Fund, taking into account such factors as price (including the applicable
brokerage commission or dealer spread), size of order, difficulty of execution
and operational facilities of the firm involved. The Fund may invest in
securities traded in the over-the-counter markets and deal directly with the
dealers who make markets in the securities involved, unless a better price or
execution could be obtained by using a broker. While the Investment Adviser
generally will sell reasonably competitive commission rates, payment of the
lowest commission or spread is not necessarily consistent with best results in
particular transactions.
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In placing orders with brokers and dealers, the Investment Adviser will
attempt to obtain the best net price and the most favorable execution for
orders; however, the Investment Adviser may, in its discretion, purchase and
sell portfolio securities through brokers and dealers who provide the Investment
Adviser or the Fund with research, analysis, advice and similar services. The
Investment Adviser may, in return for research and analysis, pay brokers a
higher commission than may be charged by other brokers, provided that the
Investment Adviser determines in good faith that such commission is reasonable
in terms either of that particular transaction or of the overall responsibility
of the Investment Adviser to the Fund and its other clients and that the total
commission paid by the Fund will be reasonable in relation to the benefits to
the Fund over the long term. Information and research received from such brokers
and dealers will be in addition to, and not in lieu of, the services required to
be performed by the Investment Adviser under its Advisory Agreement with the
Fund. The Fund has no obligation to deal with any broker or group of brokers in
the execution of transactions.
Investment decisions for the Fund and for other investment accounts
managed by the Investment Adviser are made independently of each other in the
light off differing considerations for the various accounts. However, the same
investment decision may occasionally be made for two or more such accounts. In
such cases, simultaneous transactions are inevitable. Purchases or sales are
then averaged as to price and allocated to accounts according to a formula
deemed equitable to each account. While in some cases this practice could have a
detrimental effect upon the price or value of the security as far as the Fund is
concerned, in other cases it is believed to be beneficial to the Fund.
Portfolio Turnover
Because the Fund's primary objective is long-term capital appreciation,
the Fund anticipates that its annual portfolio turnover rate generally will not
exceed 100%. The turnover rate will not be a limiting factor if the Investment
Adviser deems portfolio changes appropriate. The turnover rate may vary greatly
form year to year. Portfolio turnover rate is calculated by dividing the lesser
of the Fund's annual sales or purchases of portfolio securities (exclusive of
purchases or sales of all securities the maturities of which at the time of
acquisition were one year or less) by the monthly average value of securities in
the portfolio during the year (exclusive of portfolio securities the maturities
of which at the time of acquisition were one year or less).
VALUATION OF SHARES
The Fund determines its net asset value per share as of the close of
regular trading (currently 4:00 p.m., eastern time) on the NYSE on each Monday
through Friday when the NYSE is open. Currently, the NYSE is closed on the
observance of the following holidays: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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Each security will be valued on the basis of the last sales price on
the valuation date on the principal exchange on which the security is traded.
Where securities are traded on one or more exchanges and also over-the-counter,
the securities will generally be valued using the quotations the Board of
Directors or its delegate believes reflect most closely the value of such
securities. With respect to those securities for which no trades have taken
place that day and unlisted securities for which market quotations are readily
available, the value shall be determined by taking the latest "bid" prices.
Short-term securities which mature in more than 60 days will be valued at
current market quotations. Short-term securities which mature in 60 days or less
will be valued at amortized cost, if their term to maturity from date of
purchase is 60 days or less, or by amortizing their value on the 61st day prior
to maturity, if their term to maturity from date of purchase exceeds 60 days.
Securities for which market quotations are not readily available, including
restricted securities, and other assets will be valued at fair value as
determined in good faith according to a pricing procedure developed by the
Investment Adviser and approved by the Board of Directors.
In the calculation of the Fund's net asset value; (1) an equity
portfolio security listed or traded on the New York or American Stock Exchange
or other domestic or foreign stock exchange or quoted by NASDAQ is valued at its
latest sale price on that exchange or quotation service prior to the time assets
are valued; if there were no sales that day, the security is valued at the
latest bid price (in cases where a security is traded on more than one exchange,
the security is valued on the exchange designated as the primary market by the
Fund's Board of Directors); (2) an option is valued at the mean between the
latest bid and asked prices; (3) a futures contract is valued at the latest
sales price on the commodities exchange on which it trades unless the Board
determines that such price does not reflect its market value, in which case it
will be valued at its fair value as determined by the Board of Directors; (4)
all other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest bid price; (5) when market quotations
are not readily available, including circumstances under which it is determined
by the Investment Adviser that sale or bid prices are not reflective of a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Fund's Board of Directors (valuation of debt securities for
which market quotations are not readily available may be used upon current
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors); (6) the value of short-term
debt securities which mature at a date less than sixty days subsequent to
valuation date will be determined on an amortized cost or amortized value basis;
and (7) the value of other assets will be determined in good faith at fair value
under procedures established by and under the general supervision of the Fund's
Board. For valuation purposes, quotations of foreign portfolio securities, other
assets and liabilities and forward contracts stated in foreign currency are
translated into U.S. dollar equivalents at the prevailing market ratings prior
to the close of the New York Stock Exchange. Dividends receivable are accrued as
the ex-dividend date or as of the time that the relevant ex-dividend date and
amounts become known. Interest income is accrued daily except when collection is
uncertain. Certain securities in the Fund's portfolio may be valued by an
outside pricing service approved by the Fund's Board of Directors. The pricing
service may utilize a matrix system incorporating security
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quality, maturity and coupon as the evaluation model parameters, and/or research
evaluations by its staff, including review of broker-dealer market price
quotations, in determining what it believes is the fair valuation of the
portfolio securities valued by such pricing service.
PERFORMANCE INFORMATION
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Total Return Calculations. Average annual total return quotes
("Standardized Return") used in the Fund's Performance Advertisements are
calculated according to the following formula:
P(1 + T)n = ERV
where:
P = a hypothetical initial payment of $1,000 to purchase shares of a Fund
T = average annual total return of shares of that Fund
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
computed by finding the average annual change in the value of an initial $1,000
investment over the period. All dividends and other distributions are assumed to
have been reinvested at net asset value.
The Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). A Fund calculates Non-Standardized Return for
specified periods of time by assuming an investment of $1,000 in Fund shares and
assuming the reinvestment of all dividends and other distributions. The rate of
return is determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the initial value.
Yield. Yields used in the Fund's Performance Advertisements are calculated
by dividing the Fund's interest income attributable to the Fund's shares for a
30-day period ("Period"), net of expenses attributable to the Fund, by the
average number of shares of such Fund entitled to receive dividends during the
Period and expressing the result as an annualized percentage (assuming
semi-annual compounding) of the net asset value per share at the end of the
Period.
Yield quotations are calculated according to the following formula:
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YIELD = 2 [ (a - b + 1)6 - 1 ]
-----
cd
where:
a = interest earned during the period attributable to the Fund
b = expenses accrued for the Period attributable to the Fund (net of
reimbursements)
c = the average daily number of shares of the Fund outstanding during the
period that were entitled to receive dividends
d = the net asset value per share on the last day of the Period
Except as noted below, in determining interest income earned during the
Period (variable in the above formula), the Fund calculates interest earned on
each debt obligation held by it during the Period by (1) computing the
obligation's yield to maturity, based on the market value of the obligation
(including actual accrued interest) on the last Business Day of the Period or,
if the obligation was purchased during the Period, the purchase price plus
accrued interest and (2) dividing the yield to maturity by 360, and multiplying
the resulting quotient by the market value of the obligation (including actual
accrued interest) to determine the interest income on the obligation for each
day of the period that the obligation is in the portfolio. Once interest earned
is calculated in this fashion for each debt obligation held by the Fund,
interest earned during the Period is then determined by totaling the interest
earned on all debt obligations. For purposes of these calculations, the maturity
of an obligation with one or more call provisions is assumed to be the next date
on which the obligation reasonably can be expected to be called or, if none, the
maturity date.
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of the Fund fluctuates, it cannot be compared
with yields on savings accounts or other investment alternatives that provide an
agreed-to or guaranteed fixed yield for a stated period of time. However, yield
information may be useful to an investor considering temporary investments in
money market instruments. In comparing the yield of one money market fund to
another, consideration should be given to each Fund's investment policies,
including the types of investments made, the average maturity of the portfolio
securities and whether there are any special account charges that may reduce the
yield.
Other Information. In Performance Advertisements, the Fund may compare its
Standardized Return and/or their Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper"), CDA Investment Technologies, Inc.
("CDA"), Wiesenberger Investment Companies Services ("Wiesenberger"), Investment
Company Data, Inc. ("ICD"), or Morningstar Mutual Funds ("Morningstar") or with
the performance of recognized stock and other indices, including (but not
limited to) the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average and the Wilshire 5000 Index. The Fund also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD, Bloomberg Financial Markets Service or
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Morningstar. Performance Advertisements also may refer to discussions of the
Fund and comparative mutual fund data and ratings reported in independent
periodicals, including (but not limited to) THE WALL STREET JOURNAL, MONEY
Magazine, FORBES, BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW
YORK TIMES, THE CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS.
Ratings may include criteria relating to portfolio characteristics in addition
to performance information. In connection with a ranking, a Fund may also
provide additional information with respect to the ranking, such as the
particular category to which it relates, the number of funds in the category,
the criteria on which the ranking is based, and the effect of sales charges, fee
waivers and/or expense reimbursements.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
The Fund may also compare its performance with the performance of bank
certificates of deposit (CDS) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDS of major banks published by Banxquote (TM) Money
Markets. In comparing the Fund's performance to CD performance, investors should
keep in mind that bank CDS are insured in whole or in part by an agency of the
U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Shares of the Fund
are not insured or guaranteed by the U.S. government and returns thereon and net
asset value will fluctuate. The securities held by the Fund generally have
longer maturities than most CDS and may reflect interest rate fluctuations for
longer term securities.
TAXES
In order to qualify for treatment as a regulated investment company ("RIC")
under the Internal Revenue Code, the Fund must distribute to its shareholders
for each taxable year at least 90% of its investment company taxable income
(consisting generally of taxable net investment income and net short-term
capital gain and must meet several additional requirements. With respect to the
Fund, these requirements include the following: (1) the Fund must derive at
least 90% of its gross income each taxable year from dividends, interest,
payments with respect to securities loans, and gains from the sale or other
disposition of securities or foreign currencies, or other income (including
gains from options, futures, or forward currency contracts) derived with respect
to its business of investing securities or those currencies ("Income
Requirement"); (2) the Fund must derive less than 30% of its gross income each
taxable year from the sale or other disposition of
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<PAGE>
securities, or any of the following, that were held for less than three months
- -- options, or futures (other than those on foreign currencies), or foreign
currencies (or options, futures, or forward contracts thereon) that are not
directly related to the Fund's principal business of investing in securities (or
options and futures with respect to securities) ("Short-Short Limitation"); (3)
at the close of each quarter of the Fund's taxable year, at least 50% of the
value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities, with these
other securities limited, in respect of any one issuer, to an amount that does
not exceed 5% of the value of the Fund's total assets and that does not
represent more than 10% of the issuer's outstanding voting securities; and (4)
at the close of each quarter of the Fund's taxable year, not more than 25% of
the value of its total assets may be invested in securities (other than U.S.
government securities or the securities of other RICs) of any one issuer.
Dividends and other distributions declared by the Fund in October, November
or December of any year and payable to shareholders of record on a date in any
of those months will be deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the distributions are paid by the
Fund during the following January. Accordingly, those distributions will be
taxed to shareholders for the year in which that December 31 falls.
A portion of the dividends from the Fund's investment company taxable
income (whether paid in cash or reinvested in additional Fund shares) may be
eligible for the dividends-received deduction allowed to corporations. The
eligible portion may not exceed the aggregate dividends received by the Fund
from U.S. corporations. However, dividends received by a corporate shareholder
and deducted by it pursuant to the dividends-received deduction are subject
indirectly to the alternative minimum tax.
If shares of the Fund are sold at a loss after being held for six months or
less, the loss will be treated as long-term, instead of short-term, capital loss
to the extent of any capital gain distributions received on those shares.
Investors also should be aware that if shares are purchased shortly before the
record date for any distribution, the shareholder will pay full price for the
shares and receive some portion of the price back as a taxable dividend or
capital gain distribution.
The Fund will be subject to a nondeductible 4% excise tax ("Excise Tax") to
the extent it fails to distribute by the end of any calendar year substantially
all of its ordinary income for that year and capital gain net income for the
one-year period ending on December 31 of that year, plus certain other amounts.
The use of certain option strategies, such as writing (selling) and
purchasing options, involves complex rules that will determine for income tax
purposes the character and timing of recognition of the gains and losses the
Fund realizes in connection therewith. Income from the disposition of foreign
currencies (except certain gains therefrom that may be excluded by future
regulations), and income from transactions in options, futures, and forward
contracts derived by the Fund with respect to its business of investing in
securities or foreign currencies, will qualify as permissible income under the
Income Requirement. However, income from the disposition of options and
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<PAGE>
futures (other than those on foreign currencies) will be subject to the
Short-Short Limitation if they are held for less than three months. Income from
the disposition of foreign currencies, and options, futures, and forward
contracts on foreign currencies, that are not directly related to a Fund's
principal business of investing in securities (or options and futures with
respect to securities) also will be subject to the Short-Short Limitation if
they are held for less than three months.
If the Fund satisfies certain requirements, any increase in value of a
position that is part of a "designated hedge" will be offset by an decrease in
value (whether realized or not) of the offsetting hedging position during the
period of the hedge for purposes of determining whether the Fund satisfies the
Short-Short Limitation. Thus, only the net gain (if any) from the designated
hedge will be concluded in gross income for purposes of that limitation. Each
Fund will consider whether it should seek to qualify for this treatment for its
hedging transactions. To the extent the Fund does not qualify for this
treatment, it may be forced to defer the closing out of certain options,
futures, and forward currency contracts beyond the time when it otherwise would
be advantageous to do so, in order for the Fund to continue to qualify as a RIC.
OTHER INFORMATION
Counsel. Heller, Ehrman, White & McAuliffe, 333 Bush St., San Francisco,
Ca, 94104 is counsel to the Trust. Kirkpatrick & Lockhart LLP, 1800 M St., NW,
Washington, D.C. 20036- 5891 is counsel to the Fund.
Independent Accountants. Tait, Weller & Baker, 2 Penn Center Plaza,
Philadelphia, PA 19102-1707 serves as the Fund's independent accountants.
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APPENDIX
Description of Moody's Long-Term Debt Ratings
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 fluctuation of protective elements may be of greater
amplitude, or there may be other elements present which make the long-term risks
appear somewhat greater than the "Aaa" securities; A. Bonds which are rated "A"
possess many favorable investment attributes and are 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 some time 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.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from "Aa" through "B" in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Description of S&P Corporate Debt Ratings
AAA. Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong; AA. Debt rated "AA" has a
very strong capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree; A. Debt rated "A" has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories; BBB. Debt rated "BBB" is
regarded as having an adequate capacity to
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pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than in higher rated categories; BB, B. Debt rated
"BB" and "B" is regarded, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation. "BB" indicates the lowest degree of speculation. While such debt
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions;
BB. Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB--" rating; B. Debt rated "B" has a greater
vulnerability to default but currently has the capacity to meet interest
payments and principal repayments. Adverse business, financial or economic
conditions will likely impair capacity or willingness to pay interest and repay
principal. The "B" rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied "BB" or "BB--" rating.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
categories.
NR indicates that no public rating has been requested, that there is
insufficient information in which to base a rating or that S&P does not rate a
particular type of obligation as matter of policy.
Description of Moody's Preferred Stock Ratings
"aaa". An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks; "aa". An issue
which is rated "aa" is considered a high-grade preferred stock. This rating
indicates that there is reasonable assurance that earnings and asset protection
will remain relatively well maintained in the foreseeable future; "a". An issue
which is rated "a" is considered to be an upper-medium grade preferred stock.
While risks are judged to be somewhat greater than in the "aaa" and "aa"
classification, earnings and asset protection are nevertheless expected to be
maintained at adequate levels; "baa". An issue which is rated "baa" is
considered to be medium grade preferred stock, neither highly protected nor
poorly secured. Earnings and asset protection appear adequate at present but may
be questionable over any great length of time; "ba". An issue which is rated
"ba" is considered to have speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very moderate and
not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this class; "b". An issue which is rated "b"
generally lacks the characteristics of a desirable investment. Assurance of
dividend payments and maintenance of other terms of the issue over any long
period of time may be small; "caa". An issue which is rated "caa" is likely to
be in arrears on dividend payments. This rating designation does not purport to
indicate the future status of payments; "ca". An issue which is rated "ca" is
speculative in a high degree and
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<PAGE>
is likely to be in arrears on dividends with little likelihood of eventual
payments; "c". This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking
and the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
Description of S&P Preferred Stock Ratings
"AAA". This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations. "AA". A preferred stock issue rated "AA" also
qualifies as a high-quality fixed income security. The capacity to pay preferred
stock obligations is very strong, although not as overwhelming as for issues
rated "AAA"; "A". An issue rated "A" is backed by a sound capacity to pay the
preferred stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions; "BBB". An
issue rated "BBB" is regarded as backed by an adequate capacity to pay the
preferred stock obligations. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to make payments for a preferred stock in
this category than for issues in the "A" category; "BB", "B", "CCC". Preferred
stocks rated "BB", "B" and "CCC" are regarded, on balance, as predominantly
speculative with respect to the issuer's capacity to pay preferred stock
obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
Plus (+) or Minus (-): To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
Description of Moody's Short-Term Debt Ratings
Prime-1. Issuers (or supporting institutions) rated Prime-1 (P-1) have a
superior capacity for repayment of short-term promissory obligations. P-1
repayment capacity will normally be evidenced by many of the following
characteristics: Leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity. Prime-2. Issuers (or supporting institutions) rated Prime-2
(P-2) have a strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited above, but
to a lesser degree.
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Earnings trends and coverage ratios, while sound will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Description of S&P Commercial Paper Ratings
A. Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety. A-1. This
designation indicates that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation. A-2. Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated "A-1". A-3. Issues carrying this designation have a satisfactory
capacity for timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the higher
designations. B. Issues rated "B" are regarded as having only an adequate
capacity for timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
Description of S&P Ratings of State and Municipal Notes and Other
Short-Term Loans
S&P tax exempt note ratings are generally given to such notes that mature
in three years or less. The two higher rating categories are as follows:
SP-1. Very strong or strong capacity to pay principal and interest.
These issues determined to possess overwhelming safety characteristics will
be given a plus (+) designation.
SP-2. Satisfactory capacity to pay principal and interest.
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TABLE OF CONTENTS
INVESTMENT POLICIES AND RESTRICTIONS..................................... 16
DIRECTORS AND OFFICERS.................................................. 17
INVESTMENT MANAGEMENT, ADMINISTRATION AND DISTRIBUTION
ARRANGEMENTS............................................................ 17
PORTFOLIO TRANSACTIONS.................................................. 20
VALUATION OF SHARES.................................................... 21
PERFORMANCE INFORMATION................................................ 22
TAXES................................................................. 25
OTHER INFORMATION...................................................... 26
APPENDIX ............................................................... 29
33
