<PAGE>
AVONDALE TOTAL RETURN FUND
1105 Holliday
Wichita Falls, Texas 76301
(817) 761-3777
The AVONDALE TOTAL RETURN FUND (the "Fund") is a mutual fund with the
investment objective of seeking the combination of income and capital
appreciation that will produce the maximum total return consistent with
reasonable risk. The Fund seeks to achieve its objective by investing primarily
in higher quality fixed income obligations and equity securities (common and
preferred stocks). The balance between debt and equity securities will be
adjusted based upon the market interpretation of the Manager of the Fund.
This Prospectus sets forth basic information about the Fund that
prospective investors should know before investing. It should be read and
retained for future reference. The Fund is a series of Professionally Managed
Portfolios. A Statement of Additional Information dated August 1, 1998, as may
be amended from time to time, has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of Additional
Information is available without charge upon written request to the Fund at the
address given above. The SEC maintains an internet site (http://www.sec.gov)
that contains the SAI, other material incorporated by reference and information
about other companies that file electronically with the SEC.
TABLE OF CONTENTS
Expense Table 2
Financial Highlights 3
Objective and Investment Approach of the Fund 4
Management of the Fund 5
How To Invest in the Fund 7
How To Redeem an Investment in the Fund 8
Services Available to the Fund's Shareholders 9
How the Fund's Per Share Value Is Determined 10
Distributions and Taxes 10
General Information 11
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated August 1, 1998
The AVONDALE TOTAL RETURN FUND (the "Fund") is a diversified series of
Professionally Managed Portfolios (the "Trust"), an open-end management
investment company offering redeemable shares of beneficial interest. Shares of
the Fund may be purchased at their net asset value per share. The minimum
initial investment is $1,000, with subsequent investments of $250 or more ($500
and $100, respectively, for retirement plans). Shares will be redeemed at net
asset value per share.
EXPENSE TABLE
Expenses are one of several factors to consider when investing in the Fund.
The purpose of the following fee table is to provide an understanding of the
various costs and expenses which may be borne directly or indirectly by an
investment in the Fund.
Actual expenses may be more or less than those shown.
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Management Fees 0.70%
Other Expenses 0.89%
Total Fund Operating Expenses 1.59%
Example 1 Year 3 Years 5 Years 10 Years
$16 $50 $87 $189
This table illustrates the net transaction and operating expenses that would be
incurred by an investment in the Fund over different time periods assuming a
$1,000 investment, a 5% annual return, and redemption at the end of each time
period
The Example shown above should not be considered a representation of past
or future expenses and actual expenses may be greater or less than those shown.
In addition, federal regulations require the example to assume a 5% annual
return, but the Fund's actual return may be higher or lower. See "Management of
the Fund."
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period.
The following information has been audited by Tait, Weller & Baker,
independent accountants, whose unqualified report covering the fiscal period
ended March 31, 1998 is incorporated by reference herein and appears in the
annual report to shareholders. This information should be read in conjunction
with the financial statements and accompanying notes which appear in the annual
report and are incorporated by reference into the Statement of Additional
Information. Further information about the Fund's performance is contained in
its annual report, which may be obtained without charge by writing or calling
the address or telephone number on the Prospectus cover.
<TABLE>
<CAPTION>
October 12, 1988*
Year Ended March 31, to March 31,
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $26.13 $27.76 $23.58 $22.93 $24.78 $24.19 $22.44 $20.76 $19.84 $20.00
Income from Investment Operations:
Net investment income 0.16 0.18 0.27 0.23 0.26 0.46 0.51 0.75 0.88 0.48
Net realized and unrealized (loss) gain
on investments 9.61 0.14 6.00 1.49 (0.44) 1.62 1.92 1.46 1.13 (0.14)
Total from investment operations 9.77 0.32 6.27 1.72 (0.18) 2.08 2.43 2.21 2.01 0.34
Less Distributions:
Dividends (from net investment income) (0.15) (0.28) (0.27) (0.23) (0.35) (0.49) (0.68) (0.53) (0.79) (0.50)
Distributions (from net capital gains) (0.49) (1.67) (1.82) (0.84) (1.32) (1.00) -0- -0- (0.30) -0-
Total distributions (0.64) (1.95 (2.09) (1.07) (1.67) (1.49) (0.68) (0.53) (1.09) (0.50)
Net Asset Value, end of period $35.26 $26.13 $27.76 $23.58 $22.93 $24.78 $24.19 $22.44 $20.76 $19.84
Total Return 37.65% 1.10% 26.67% 7.82% (0.82)% 9.19% 11.07% 10.90% 10.13% 1.72%
Net Assets, end of period (millions) $10.9 $ 9.9 $ 9.8 $ 6.9 $ 7.4 $ 7.6 $ 7.8 $ 5.4 $ 2.4 $ 0.7
Ratios/Supplemental Data:
Ratios of expenses to average net assets:
Before expense reimbursement 1.59% 1.83% 1.69% 1.77% 1.83% 1.78% 2.13% 2.58% 4.27% 9.33%+
After expense reimbursement 1.59% 1.83% 1.69% 1.77% 1.83% 1.78% 1.96% 1.98% 1.92% 1.30%+
Ratios of net income (loss) to
average net assets:
Before expense reimbursement 0.48% 0.62% 1.03% 0.96% 1.09% 1.97% 2.00% 3.02% 1.81% (2.63)%+
After expense reimbursement 0.48% 0.62% 1.03% 0.96% 1.09% 1.97% 2.17% 3.62% 4.16% 5.40%+
Portfolio turnover rate 9.38% 40.87% 52.25% 52.24% 73.65% 157.64% 59.58% 65.51% 99.50% 60.82%+
Average commission rate paid per share0 $ .1000 $ .1000 - - - - - - - -
</TABLE>
* Effective date of the Fund's initial registration under the Securities Act of
1933.
0For fiscal years beginning on or after September 1, 1995, a fund is required to
disclose its average commission rate per share for security trades on which
commissions are charged. This amount may vary from period to period and fund to
fund depending on the mix of trades executed in various markets where trading
practices and commission rate structures may differ.
+ Annualized.
OBJECTIVE AND INVESTMENT APPROACH OF THE FUND
The investment objective of the Fund is to realize the combination of
income and capital appreciation that will produce the maximum total return
consistent with reasonable risk. The Fund seeks to achieve its objective by
investing primarily in higher quality fixed income debt securities and equity
securities. There is, of course, no assurance that the Fund's objective will be
achieved, and the Fund's net asset value per share will fluctuate as the market
value of its investment portfolio fluctuates.
General Policies. The Fund will normally invest in fixed income debt
securities, common stocks, securities convertible into common stocks, and
preferred stocks.
The Fund's investment manager, Herbert R. Smith, Incorporated, (the
"Manager") has the flexibility to select among different types of investments
for growth and income and to alter the composition of the portfolio as economic
and market trends change. The Fund may invest up to 100% of the value of its
total assets in higher quality debt securities which, at the time of purchase,
are rated A or better by either Moody's Investors service ("Moody's") or by
Standard & Poor's Corporation ("S&P") or, if unrated, are judged by the Manager
to be of comparable quality to such rated securities. An Appendix in the
Statement of Additional Information contains a complete description of the
applicable ratings of Moody's and S&P.
Up to 85% of the Fund's total assets at any time may be invested in equity
securities (common and preferred stocks). For defensive purposes or pending
longer-term investment, the Fund also may temporarily invest any amount of its
assets in high quality short-term money market instruments rated in the top two
grades by Moody's or S&P or, if unrated, instruments deemed to be of comparable
quality by the Fund's Manager.
The average dollar-weighted effective maturity of the Fund's debt security
portfolio will not exceed 10 years, and no debt security will have an effective
maturity exceeding 15 years.
The Fund is diversified, which under applicable federal law means that as
to 75% of its total assets, no more than 5% may be invested in securities of a
single issuer and that it may hold no more than 10% of the voting securities of
such issuer.
Investment Approach. The Manager is a risk-averse investor. The Manager
follows a dual screen process it has developed that uses a combination of
fundamental and technical analysis.
Fundamental analysis with respect to debt securities is concerned with the
present and future state of the economy, monetary conditions, the outlook for
interest rates and the creditworthiness of the issuer. Technical analysis
studies and tracks various economic data as well as supply and demand factors
such as price movements and trading volume. From this dual analysis, the Manager
develops its policy regarding maturity and duration of debt securities. It pays
close attention to the yield curve, i.e., the yields to be earned by investing
in various maturities.
Fundamental analysis with respect to equity securities is concerned with
the business value of the individual company as well as the economy and factors
relating to the company's prospects for increased earnings and a higher stock
price. In the equity area, technical analysis focuses on supply and demand
conditions for a stock, or the stock market as a whole, as revealed by price
movements, money flow, trading volume and other factors. Using this dual
analysis, the Manager is able to identify individual stocks, industries and
industry groups whose statistical patterns are weakening or strengthening.
Foreign Securities. The Fund may invest up to 15% of its assets in foreign
securities. These include U.S. Dollar denominated securities of foreign issuers,
securities of foreign issuers that are listed and traded on a domestic national
securities exchange, and American Depositary Receipts ("ADR's"). ADR's are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of underlying foreign securities.
There are risks associated with investing in foreign securities. There may
be less publicly available information about these issuers than is available
about companies in the U.S., and foreign auditing requirements may not be
comparable to those in the U.S. Interest or dividends on foreign securities may
be subject to foreign withholding taxes. Investments in foreign countries may be
subject to the possibility of expropriation or confiscatory taxation, exchange
controls, political or social instability or diplomatic developments that could
adversely affect the value of those investments. In addition, the value of the
foreign securities may be adversely affected by movements in the exchange rates
between foreign currencies and the U.S. dollar, as well as other political and
economic developments.
Securities Lending. In order to generate additional income, the Fund may
lend up to 30% of its portfolio securities to broker-dealers, major banks or
other recognized domestic institutional borrowers of securities who are not
affiliated with the Fund's Manager or Distributor and whose creditworthiness is
acceptable to the Manager. The borrower must deliver to the Fund cash or cash
equivalent collateral, or provide to the Fund an irrevocable letter of credit
equal in value to at least 100% of the value of the securities loaned at all
times during the loan. During the time the portfolio securities are on loan, the
borrower pays the Fund any interest paid on such securities. The Fund may invest
the cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income if the borrower has delivered equivalent collateral or
a letter of credit.
Repurchase Agreements. The Fund may enter into repurchase agreements in
order to earn additional income on available cash, or as a defensive investment
in periods when the Fund is primarily in short-term maturities. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a U.S. Government security (which may be of any maturity)
and the seller agrees to repurchase the obligation at a future time at a set
price, thereby determining the yield during the purchaser's holding period
(usually not more than seven days from the date of purchase). Any repurchase
transaction in which the Fund engages will require full collateralization of the
seller's obligation during the entire term of the repurchase agreement. In the
event of a bankruptcy or other default of the seller, the Fund could experience
both delays in liquidating the underlying security and losses in value. However,
the Fund intends to enter into repurchase agreements only with banks with assets
of $500 million or more that are insured by the Federal Deposit Insurance
Corporation and the most creditworthy registered securities dealers pursuant to
procedures adopted and reviewed by the Trust's Board of Trustees. The Manager
monitors the creditworthiness of the banks and securities dealers with whom the
Fund engages in repurchase transactions, and the Fund will not invest more than
15% of its total assets in illiquid securities, including repurchase agreements
maturing in more than seven days.
Portfolio Turnover. The annual rate of portfolio turnover is anticipated to
be less than 100%. However, under certain market conditions, the Fund may
experience a higher rate of portfolio turnover. In general, the Manager will not
consider the rate of portfolio turnover to be a limiting factor in determining
when or whether to purchase or sell securities in order to achieve the Fund's
objective. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which are borne directly by the Fund,
and may increase realized capital gains which are taxable to Fund shareholders
when distributed.
Investment Restrictions. The Fund has adopted certain investment
restrictions, which are described fully in the Statement of Additional
Information. Like the Fund's investment objective, certain of these restrictions
are fundamental and may be changed only by a majority vote of the Fund's
outstanding shares.
MANAGEMENT OF THE FUND
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund. Herbert R. Smith,
Incorporated, 1105 Holliday, Wichita Falls, Texas 76301, the Fund's Manager, has
been in the investment advisory business since 1970 and manages private and
institutional accounts with aggregate assets of approximately $1.5 billion as of
the date of this Prospectus. Mr. Herbert R. Smith, who has been associated with
the Manager since its inception, is principally responsible for management of
the Fund's portfolio.
The Manager provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Manager a monthly management fee
(accrued daily) based upon the average daily net assets of the Fund at the
following annual rates: 0.70% on the first $200 million of net assets; 0.60% on
the next $300 million of net assets; and 0.50% on net assets exceeding $500
million.
The Manager has informed the Board of Trustees that it intends to resign as
investment adviser to the Fund effective August 31, 1998. The Manager has
recommended to the Trustees that the Fund engage Hester Capital Management,
L.L.C., ("Hester") to act as investment advisor to the Fund, and Herbert R.
Smith, the Fund's portfolio manager has entered into an agreement with Hester
whereby Mr. Smith will consult with Hester with respect to its assumption of
management of the Fund, in the event Hester is approved by the Board of Trustees
and Fund shareholders as the Fund's investment advisor under a new investment
advisory agreement. At a meeting held on July 23, 1998, the Board of Trustees of
the Trust approved Hester as investment advisor to the Fund commencing September
1, 1998 and has authorized a special meeting of shareholders to be held to
consider a new investment advisory agreement between the Fund and Hester, which
will be identical in all material respects to the current agreement. In the
event that shareholder approval of the new advisory agreement has not occurred
by September 1, 1998 Hester will perform all investment advisory services for
the Fund under the current investment advisory agreement at no fee, pending
approval of the new agreement. No change in the investment advisory fee will be
proposed to shareholders under the new agreement.
Hester is a registered investment advisor located at 100 Congress Avenue,
Austin, TX 78701, and provides investment advisory service to individuals and
institutions with assets of approximately $500 million. Hester is a
majority-owned subsidiary of Morgan Asset Management, Inc., which is owned by
Morgan Keegan & Co., a New York Stock Exchange listed, brokerage and investment
firm headquartered in Memphis, Tennessee. Mr. I. Craig Hester, President, and
Mr. John Gunthrop, Executive Vice President, will be responsible for the
management of the Fund's portfolio. Each has been associated with the Advisor
for more than the past five years.
The Trustees have approved a change in the Fund's name to "Hester Total
Return Fund," contingent upon shareholder approval of a new investment advisory
agreement with Hester.
Investment Company Administration Corporation (the "Administrator") acts as
the Fund's administrator. The Administrator prepares various federal and state
regulatory filings, reports and returns for the Fund, prepares reports and
materials to be supplied to the trustees, monitors the activities of the Fund's
custodian, transfer agent and accountants, and coordinates the preparation and
payment of Fund expenses and reviews the Fund's expense accruals. For its
services, the Administrator receives an annual fee equal to the greater of 0.20
of 1% of the Fund's average daily net assets or $30,000.
The Fund is responsible for its own operating expenses. The Manager has
agreed to limit the Fund's operating expenses to assure that the Fund's ratio of
operating expenses to average net assets does not exceed 2.50%. The Manager also
may reimburse additional amounts to the Fund at any time in order to reduce the
Fund's expenses. To the extent the Manager performs a service for which the Fund
is obligated to pay, the Fund shall reimburse the Manager for its costs incurred
in rendering such service.
The Manager may consider a number of factors in determining which brokers
or dealers to use for the Fund's portfolio transactions. While these are more
fully discussed in the Statement of Additional Information, the factors include,
but are not limited to, the reasonableness of commissions, quality of services
and execution, and the availability of research which the Manager may lawfully
and appropriately use in its investment management and advisory capacities.
Provided the Fund receives prompt execution at competitive prices, the Manager
may also consider the sale of Fund shares as a factor in selecting
broker-dealers for the Fund's portfolio transactions. The Fund will not effect
portfolio transactions with, nor pay commissions to, any broker-dealer
affiliated with the Manager. HOW TO INVEST IN THE FUND
The minimum initial investment is $1,000. Subsequent investments must be at
least $250. Investments in retirement plans may be for minimums of $500 and
$100, respectively. The Distributor may, at its discretion, waive the minimum
investment requirements for purchases in conjunction with certain group or
periodic plans. In addition to cash purchases, shares may be purchased by
tendering payment in kind in the form of shares of stock, provided that any such
tendered stock is readily marketable, its acquisition is consistent with the
Fund's investment objective, the tendered stock is otherwise acceptable to the
Fund's Manager, and the investor agrees to pay the brokerage commissions on any
sale of stock so tendered if it is sold by the Fund within 90 days of
acquisition.
Investors may purchase shares of the Fund by check or by wire:
By check
Initial Investment. Complete the Fund's Account Application (included with
this Prospectus). Make your check payable to "Avondale Total Return Fund." Mail
or deliver the completed Account Application and your check to the Fund:
Avondale Total Return Fund
P.O. Box 640856
Cincinnati, Ohio 45264-0856
For purchase orders sent by overnight mail, please contact the Transfer
Agent at (800) 282-2340 for instructions.
Subsequent Investments. Detach and complete the stub attached to your
account statement. Make your check payable to "Avondale Total Return Fund."
Write your shareholder account number on the check. Mail or deliver the check
and reinvestment form to the Fund in the envelope provided or send to the Fund
at the address indicated above.
By wire
Initial Investment. Before wiring funds, call the Transfer Agent at (800)
282-2340 between the hours of 9:00 a.m. and 4:00 p.m. Eastern time, on a day the
New York Stock Exchange is open for trading in order to receive an account
number. If the funds are received by the Transfer Agent prior to the time that
the Fund's net asset value is calculated, the funds will be invested on that
day; otherwise they will be invested on the next business day. Provide the
Transfer Agent with your name, and the dollar amount to be invested. Complete
the Fund's Account Application (included with this Prospectus). Be sure to
include the date and the order confirmation number. Mail or deliver the
completed Application to the appropriate address shown at the top of the Account
Application. The investor should also ensure that the wiring bank includes the
name of the Fund and the account number with the wire. Request your bank to
transmit immediately available funds by wire for purchase of shares in your name
to the Fund's Custodian, as follows:
Star Bank, N.A.
ABA Routing Number: 0420-0001-3
Avondale Total Return Fund
DDA # 483897914
(Account name and number)
Subsequent Investments. For subsequent investments, an investor should call
the Transfer Agent at (800) 282-2340 before the wire is sent. Failure to do so
will cause the purchase to be credited the next day, when the Transfer Agent
receives notice of the wire. The investor's bank should wire the funds as
indicated above. It is essential that complete information regarding the
investor's account be included in all wire instructions in order to facilitate
prompt and accurate handling of investments. Investors may obtain further
information about remitting funds in this manner from the Transfer Agent, and
any fees that may be imposed from their own banks.
General. Investors will not be permitted to redeem any shares purchased
with an initial investment made by wire until one business day after the
completed Account Application is received by the Fund. All investments must be
made in U.S. dollars and, to avoid fees and delays, checks should be drawn only
on U.S. banks and should not be made by third party check. A charge may be
imposed if any check used for investment does not clear. The Fund and its
Distributor, First Fund Distributors, Inc. (the "Distributor"), reserve the
right to reject any purchase order.
If an order, together with payment in proper form, is received by the
Transfer Agent by the close of trading on the New York Stock Exchange (currently
4:00 p.m., New York City time), Fund shares will be purchased at the offering
price determined as of the close of trading on that day. Otherwise, Fund shares
will be purchased at the offering price determined as of the close of trading on
the New York Stock Exchange on the next business day.
Federal tax regulations require that investors provide a certified Taxpayer
Identification Number and certain other required certifications upon opening or
reopening an account in order to avoid backup withholding of taxes at the rate
of 31% on taxable distributions and proceeds of redemptions. See the Fund's
Account Application for further information concerning this requirement.
The Fund does not issue share certificates. All shares are held in
non-certificated form registered on the books of the Fund and the Fund's
Transfer Agent for the account of the shareholder.
HOW TO REDEEM AN INVESTMENT IN THE FUND
Shareholders have the right to have the Fund redeem all or any portion of
their outstanding shares at their current net asset value on each day the New
York Stock Exchange is open for trading. The redemption price is the net asset
value per share next determined after the shares are validly tendered for
redemption.
Direct Redemption
A written request for redemption must be received by the Fund's Transfer
Agent in order to constitute a valid tender for redemption. Redemption requests
should be sent to: Avondale Total Return Fund, American Data Services, P. O. Box
5536, Hauppauge, NY 11788-0132. To protect the Fund and its shareholders, a
signature guarantee is required for certain transactions, including redemptions.
Signature(s) on the redemption request must be guaranteed by an "eligible
guarantor institution" as defined in the federal securities laws; these
institutions include banks, broker-dealers, credit unions and savings
institutions. A broker-dealer guaranteeing signatures must be a member of a
clearing corporation or maintain net capital of at least $100,000. Credit unions
must be authorized to issue signature guarantees. Signature guarantees will be
accepted from any eligible guarantor institution which participates in a
signature guarantee program. A notary public is not an acceptable guarantor.
Telephone Redemption.
Shareholders who complete the Redemption by Telephone portion of the Fund's
Account Application may redeem shares on any business day the New York Stock
Exchange is open by calling the Fund's Transfer Agent at (800) 282-2340 before
4:00 p.m. Eastern time. Redemption proceeds will be mailed or wired at the
shareholder's direction the next business day to the predesignated account. The
minimum amount that may be wired is $1,000 (wire charges, if any, will be
deducted from redemption proceeds).
By establishing telephone redemption privileges, a shareholder authorizes
the Fund and its Transfer Agent to act upon the instruction of any person by
telephone to redeem from the account for which such service has been authorized
and transfer the proceeds to the bank account designated in the Authorization.
The Fund and the Transfer Agent will use procedures to confirm that redemption
instructions received by telephone are genuine, including recording of telephone
instructions and requiring a form of personal identification before acting on
such instructions. Neither the Fund nor the Transfer Agent will be liable for
any loss, expense, or cost arising out of any telephone redemption request,
including any fraudulent or unauthorized requests that are reasonably believed
to be genuine, provided that such procedures are followed. The Fund may change,
modify, or terminate these privileges at any time upon at least 60 days' notice
to shareholders.
Shareholders may request telephone redemption after an account is opened;
however, the authorization form will require a separate signature guarantee.
Shareholders may experience delays in exercising telephone redemption during
periods of abnormal market activity.
General
Payment of the redemption proceeds will be made promptly, but not later
than seven days after the receipt of all documents in proper form, including a
written redemption order with appropriate signature guarantee in cases where
telephone redemption privileges are not being utilized. The Fund may suspend the
right of redemption under certain extraordinary circumstances in accordance with
the rules of the Securities and Exchange Commission. In the case of shares
purchased by check and redeemed shortly after purchase, the Fund will not mail
redemption proceeds until it has been notified that the check used for the
purchase has been collected, which may take up to 15 days from the purchase
date. To minimize or avoid such delay, investors may purchase shares by
certified check or federal funds wire. A redemption may result in recognition of
a gain or loss for federal income tax purposes.
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares in any account, other than retirement plan
or Uniform Gifts/Transfers to Minors Acts accounts, if at any time, due to
redemptions by the shareholder, the total value of a shareholder's account does
not equal at least $1,000. If the Fund determines to make such an involuntary
redemption, the shareholder will first be notified that the value of his account
is less than $1,000 and will be allowed 30 days to make an additional investment
to bring the value of the account to at least $1,000 before the Fund takes any
action.
SERVICES AVAILABLE TO THE FUND'S SHAREHOLDERS
Retirement Plans. The minimum initial investment for such plans is $500,
with minimum subsequent investments of $100. The Fund also offers a prototype
Individual Retirement Account ("IRA") plan. Investors should consult a tax
adviser before establishing an IRA plan.
Check-A-Matic Plan. For the convenience of shareholders, the Fund offers a
preauthorized check service under which a check is automatically drawn on the
shareholder's personal checking account each month for a predetermined amount
(but not less than $25), as if the shareholder had written it directly. Upon
receipt of the check, the Fund automatically invests the money in additional
shares of the Fund at the current net asset value. Applications for this service
are available from the Distributor. There is no charge by the Fund for this
service. The Distributor may terminate or modify this privilege at any time, and
shareholders may terminate their participation by notifying the Transfer Agent
in writing.
Systematic Withdrawal Program. As another convenience, the Fund offers a
Systematic Withdrawal Program whereby shareholders may request that a check
drawn in a predetermined amount be sent to them each month or calendar quarter.
A shareholder's account must have Fund shares with a value of at least $10,000
in order to start a Systematic Withdrawal Program, and the minimum amount that
may be withdrawn each month or quarter under the Systematic Withdrawal Program
is $100. This Program may be terminated or modified by a shareholder or the Fund
at any time without charge or penalty.
A withdrawal under the Systematic Withdrawal Program involves a redemption
of shares, and may result in a gain or loss for federal income tax purposes. In
addition, if the amount withdrawn exceed the dividends credited to the
shareholder's account, the account ultimately may be depleted.
HOW THE FUND'S PER SHARE VALUE IS DETERMINED
The net asset value of a Fund share is determined once daily as of the
close of public trading on the New York Stock Exchange (currently 4:00 p.m.
Eastern time) on each day the New York Stock Exchange is open for trading. Net
asset value per share is calculated by dividing the value of the Fund's total
assets, less its liabilities, by the number of Fund shares outstanding.
Portfolio securities are valued using current market values, if available.
Securities for which market quotations are not readily available are valued at
fair values as determined in good faith by or under the supervision of the
Trust's officers in accordance with methods which are specifically authorized by
the Board of Trustees. Short-term obligations with maturities of sixty days or
less are valued at amortized cost as reflecting fair value.
DISTRIBUTIONS AND TAXES
Dividends and Distributions. Dividends from net investment income are
declared and paid quarterly, shortly before the end of each calendar quarter.
Any net realized long-term capital gains not previously distributed and any
undistributed short-term capital gains earned during the Fund's fiscal year will
be distributed to shareholders following the conclusion of the Fund's fiscal
year (March 31), with a supplemental distribution on or about December 31 of any
additional undistributed capital gains earned during the 12-month period ended
October 31.
Dividends and capital gains distributions (net of any required tax
withholding) are automatically reinvested in additional shares of the Fund at
the net asset value per share on the reinvestment date unless the shareholder
has previously requested in writing to the Transfer Agent that payment be made
in cash.
Any dividend or distribution paid by the Fund has the effect of reducing
the net asset value per share on the reinvestment date by the amount of the
dividend or distribution. Investors should note that a dividend or distribution
paid on shares purchased shortly before such dividend or distribution was
declared will be subject to income taxes as discussed below even though the
dividend or distribution represents, in substance, a partial return of capital
to the shareholder.
Taxes. The Fund has qualified and elected to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 (the
"Code"). As long as the Fund continues to qualify, and as long as the Fund
distributes all of its net investment income and net realized capital gains in
accordance with the timing requirements of the Code, the Fund will not be
subject to any federal income or excise taxes. However, distributions made by
the Fund will be taxable to shareholders (other than tax-exempt entities),
whether received in shares (through dividend reinvestment ) or in cash.
Distributions derived from net investment income and short-term capital gains
are taxable to shareholders as ordinary income. A portion of such distributions
may qualify for the intercorporate dividends-received deduction. Distributions
derived from long-term capital gains are taxable as such regardless of the
length of time shares of the fund have been held. Although distributions are
generally taxable when received, certain distributions made in January are
taxable as if received the prior December. Shareholders will be informed
annually of the amount and nature of the Fund's distributions.
Additional information about taxes is set forth in the Statement of
Additional Information. Shareholders should consult their own advisers
concerning federal, state and local taxation of distributions from the Fund.
GENERAL INFORMATION
The Trust. The Trust was organized as a Massachusetts business trust on
February 17, 1987. The Agreement and Declaration of Trust permits the Board of
Trustees to issue an unlimited number of full and fractional shares of
beneficial interest, without par value, which may be issued in any number of
series. The Board of Trustees may from time to time issue other series, the
assets and liabilities of which will be separate and distinct from any other
series.
Shareholder Rights. Shares issued by the Fund have no preemptive,
conversion, or subscription rights. Shareholders have equal and exclusive rights
as to dividends and distributions as declared by the Fund and to the net assets
of the Fund upon liquidation or dissolution. The Fund, as a separate series of
the Trust, votes separately on matters affecting only the Fund (e.g., approval
of the Management Agreement); all series of the Trust vote as a single class on
matters affecting all series jointly or the Trust as a whole (e.g., election or
removal of Trustees). Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in any election of Trustees can, if they so
choose, elect all of the Trustees. While the Trust is not required and does not
intend to hold annual meetings of shareholders, such meetings may be called by
the Trustees in their discretion, or upon demand by the holders of 10% or more
of the outstanding shares of the Trust for the purpose of electing or removing
Trustees.
Performance Information. From time to time, the Fund may publish its total
return in advertisements and communications to investors. Total return
information will include the Fund's average annual compounded rate of return
over the most recent year, the past five years and from the Fund's inception of
operations. The Fund may also advertise aggregate and average total return
information over different periods of time. The Fund's total return will be
based upon the value of the shares acquired through a hypothetical $1,000
investment (at the maximum public offering price) at the beginning of the
specified period and the net asset value of such shares at the end of the
period, assuming reinvestment of all distributions at net asset value. Total
return figures will reflect all recurring charges against Fund income. Investors
should note that the investment results of the Fund will fluctuate over time,
and any presentation of the Fund's total return for any prior period should not
be considered as a representation of what an investor's total return may be in
any future period.
Year 2000. Like other business organizations around the world, the Fund
could be adversely affected if the computer systems used by its Advisor and
other service providers do not properly process and calculate information
related to dates beginning January 1, 2000. This is commonly known as the "Year
2000 Issue." The Fund's Advisor is taking steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to its own computer
systems, and it has obtained assurances from the Fund's other service providers
that they are taking comparable steps. However, there can be no assurance that
these actions will be sufficient to avoid any adverse impact on the Fund.
Shareholder Inquiries. Shareholder inquiries should be directed to the
Transfer Agent at (800) 282-2340.
This Prospectus is not an offering of the securities herein described in any
state in which the offering is unauthorized. No salesman, dealer or other person
is authorized to give any information or make any representation other than
those contained in this Prospectus or in the Statement of Additional
Information.
Investment Manager
Herbert R. Smith, Incorporated
1105 Holliday
Wichita Falls, Texas 76301
Distributor
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261E
Phoenix, AZ 85018
Custodian
Star Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
Transfer Agent
American Data Services
P. O. Box 5536
Hauppauge, New York 11788-0132
(800) 282-2340
Auditors
Tait, Weller & Baker
8 Penn Center Plaza, Suite 800
Philadelphia, Pennsylvania 19103
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
A fully managed mutual fund investing in equity and higher quality
fixed-income securities, seeking the combination of income and capital
appreciation that will produce maximum total return
PROSPECTUS
August 1, 1998
<PAGE>
Harris Bretall Sullivan & Smith Growth Equity Fund
Harris Bretall Sullivan & Smith L.L.C.
One Sansome Street, Suite 3300
San Francisco, CA 94104
800-282-2340
The Harris Bretall Sullivan & Smith Growth Equity Fund (the "Fund") is a
mutual fund with the investment objective of seeking growth of capital. The Fund
seeks to achieve its objective by investing primarily in equity securities
(common and preferred stocks). Harris Bretall Sullivan & Smith L.L.C. (the
"Advisor") serves as investment advisor to the Fund.
This Prospectus sets forth basic information about the Fund that
prospective investors should know before investing. It should be read and
retained for future reference. A Statement of Additional Information dated
August 1, 1998, as may be amended from time to time, has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. The
Statement of Additional Information is available without charge by calling or
writing the Fund at the number or address given above. Th e SEC maintains an
internet site (http://www.sec.gov) that contains the SAI, other material
incorporated by reference and information about other companies that file
electronically with the SEC.
TABLE OF CONTENTS
Expense Table 2
Financial Highlights 3
Objective and Investment Approach of the Fund 4
Management of the Fund 6
Distribution Plan 7
How To Invest in the Fund 7
How To Redeem an Investment in the Fund 9
Services Available to the Fund's Shareholders 10
How the Fund's Per Share Value Is Determined 10
Distributions and Taxes 11
General Information 11
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated August 1, 1998
EXPENSE TABLE
Expenses are one of several factors to consider when investing in the Fund.
The purpose of the following fee table is to provide an understanding of the
various costs and expenses which may be borne directly or indirectly by an
investment in the Fund. Actual expenses may be more or less than those shown.
The Fund has adopted a plan of distribution under which the fund will pay the
Advisor as Distribution Coordinator a fee at the annual rate of up to 0.25% of
the Fund's net assets. A long-term sharehol der may pay more, directly and
indirectly, in such fees than the maximum sales charge permitted under the rules
of the National Association of Securities Dealers. Shares will be redeemed at
net asset value per share.
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested None
Dividends None
Deferred Sales Load None
Redemption Fees None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Advisory Fees 0.75%
12b-1 Expenses 0.25%
Other Expenses (after waiver) 0.29%*
Total Fund Operating Expenses (after waiver) 1.29%*
*The Advisor has undertaken to reduce its fees or make payments to assure
that the Fund's ratio of operating expenses to average net assets will not
exceed 1.29% for the current fiscal year. In the absence of the Advisor's
undertaking, the Fund's ratio of expenses to average net assets would have been
2.39% for the fiscal year ended March 31, 1998.
Example
This table illustrates the net transaction and operating expenses that
would be incurred for an investment in the Fund over different time periods
assuming a $1,000 investment, a 5% annual return, and redemption at the end of
each time period.
The Example shown above should not be considered a representation of past
or future expenses and actual expenses may be greater or less than shown. In
addition, federal regulations require the Example to assume a 5% annual return,
but the Fund's actual return may be higher or lower. See "Management of the
Fund."
The Fund is a diversified series of Professionally Managed Portfolios (the
"Trust"), an open-end management investment company offering redeemable shares
of beneficial interest. Shares of the Fund may be purchased at their net asset
value per share. The minimum initial investment is $10,000 with subsequent
investments of $1,000 or more. Shares will be redeemed at net asset value per
share.
FINANCIAL HIGHLIGHTS
For a capital share outstanding througout the period
The following information has been audited by Ernst & Young LLP,
independent accountants, whose unqualified report covering the fiscal period
ended March 31, 1998 is incorporated by reference herein and appears in the
annual report to shareholders. This information should be read in conjunction
with the financial statements and accompanying notes thereto which appear in the
annual report and are incorporated by reference into the Statement of Additional
Information. Further information about the Fund's p erformance is included in
its annual report to shareholders, which may be obtained without charge by
writing or calling the address or telephone number on the Prospectus cover page.
Year May 1, 1996*
Ended through
March 31, 1998 March 31, 1997
Net asset value, beginning of period $11.03 $10.00
Income from investment
operations:
Net investment loss (0.02) 0.00
Net realized and unrealized gain on investments 5.20 1.04
Total from investment operations 5.18 1.04
Less distributions:
From net investment income 0.00 (0.01)
From net capital gains (0.01) 0.00
Total distributions (0.01) (0.01)
Net asset value, end of period $16.20 $11.03
Total return 47.02% 10.36%
Ratios/supplemental data:
Net assets, end of period (millions) $ 12.0 $ 3.5
Ratio of expenses to average net assets:
Before expense reimbursement and waiver 2.39% 4.97%+
After expense reimbursement and waiver 1.29% 1.28%+
Ratio of net investment loss to average net assets:
Before expense reimbursement and waiver (1.42)% (3.69)%+
After expense reimbursement and waiver (0.31)% 0.00%+
Portfolio turnover rate 40.96% 14.62%
Average commission rate paid per share $.0700 $.0688
*Commencement of operations.
+Annualized.
OBJECTIVE AND INVESTMENT APPROACH OF THE FUND; RISK FACTORS
The investment objective of the Fund is to seek growth of capital. The Fund
seeks to achieve its objective by investing primarily in equity securities, and
under normal circumstances at least 65% of the Fund's total assets will be
invested in equity securities with capital growth potential. Equity securities
in which the Fund invests include common stocks and securities having the
characteristics of common stocks, such as convertible preferred stocks,
convertible debt securities and warrants. There is , of course, no assurance
that the Fund's objective will be achieved. Because prices of securities held by
the Fund fluctuate, the value of an investment in the Fund will vary as the
market value of its investment portfolio changes, and when shares are redeemed,
they may be worth more or less than their original cost. The Fund is
diversified, which under applicable federal law means that as to 75% of its
total assets, no more than 5% may be invested in the securities of a single
issuer and that it may hold
no more than 10% of the voting securities of a single issuer.
In selecting equity securities for purchase by the Fund, the Advisor
focuses on successful companies with consistently superior growth in revenues
and earnings, strong product lines and proven management ability demonstrated
over a variety of business cycles.
The Advisor's investment process is based on the establishment of an
economic framework within which fundamental analyses and strict quantitative
disciplines are consistently implemented. The Advisor views successful companies
as those with consistently superior growth in revenues and earnings, strong
product lines and proven management ability demonstrated in a variety of
business cycles. The process begins with a review of various overall investment
factors, such as the state of the economy, inflati on, earnings and interest
rate trends and momentum, valuation/volatility of stocks and bonds, Federal
Reserve policy, the international and political environments and supply and
demand. Evaluating these factors creates a common economic framework to use when
reviewing individual companies.
The Advisor then develops a universe of high quality growth stocks by
screening companies for fundamental characteristics such as revenue growth,
financial strength, market leadership and quality management. The screening
process encompasses four broad areas. Qualitative screens such as organizational
depth, success of management, stability versus cyclical characteristics, and
competitive positions are applied. Balance sheet and income statement aspects
are also screened, involving an evaluation of fa ctors such as book value,
debt/equity ratios, current assets and their condition, capital structure, cash
flow, earnings per share growth, dividend record, return on equity.
Characteristics of the stocks are also screened by examining stock volatility,
trading characteristics, market capitalization and institutional ownership. This
screening process yields a stock universe of approximately 300 successful
companies with attractive fundamental characteristics and a minimum market
capitalization of $1 billion .
Companies within the universe are then ranked for selection from three
analytical vantage points. First, companies are ranked based on their intrinsic
present value using the Advisor's proprietary earnings and growth rate outlook.
Second, recent quarterly earnings experience is evaluated. Finally, companies
are ranked based on relative price performance of their stocks against all the
stocks in the universe and the general market. Once an overall ranking based on
these factors is determined, stocks ar e selected for purchase from the upper
range of the universe.
In general, securities held by the Fund become sell candidates if they
become fundamentally overvalued versus other companies in the Advisor's universe
due to rapid appreciation or suffer changes in their long-term fundamentals
(growth rates deteriorate or earnings expectations fall short of expectations).
Short-Term Investments. At times, the Fund may invest all or a portion of its
assets in short-term cash-equivalent securities for temporary, defensive
purposes; short-term securities also may be pur chased when the Adviser views
the market as significantly overvalued. These consist of high quality debt
obligations maturing in one year or less from the date of purchase, such as
securities issued by the U.S. Government, its agencies and instrumentalities,
certificates of deposit, bankers' acceptances, mortgage related securities and
commercial paper. High quality means that the obligations have been rated at
least A-1 by Standard & Poor's Corporation ("S&P") or Prime-1 by Moody's
Investor's Service, Inc . ("Moody's"), have an outstanding issue of debt
securities rated at least AA by S&P or Aa by Moody's, or are of comparable
quality in the opinion of the Advisor. The Advisor expects that under normal
market conditions, the Fund will stay fully invested, and cash levels typically
would not exceed 5% of total assets.
Repurchase Agreements. The Fund may enter into repurchase agreements in
order to earn additional income on available cash, or as a defensive investment
in periods when the Fund is primarily in short-term securities. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a U.S. Government security (which may be of any maturity)
and the seller agrees to repurchase the obligation at a future time at a set
price, thereby determining the yield during the purchaser's holding period
(usually not more than seven days from the date of purchase). Any repurchase
transaction in which the Fund engages will require full collateralization of the
seller's obligation during the entire term of the repurchase agreement. In the
event of a bankruptcy or other default of the seller, the Fund could experience
both delays in liquidating the underlying security and losses in value. However,
the Fund intends to enter into repurchase agreements only with banks with assets
of $500 million or more that are insured by the Federal Deposit Insurance
Corporation and the most creditworthy registered securities dealers pursuant to
procedures adopted and regularly reviewed by the Trust's Board of Trustees. The
Advisor monitors the creditworthiness of the banks and securities dealers with
whom the Fund engages in repurchase transactions.
Portfolio Turnover. The annual rate of portfolio turnover is anticipated to
be approximately 30%. In general, the Advisor will not consider the rate of
portfolio turnover to be a limiting factor in determining when or whether to
purchase or sell securities in order to achieve the Fund's objective.
Risk Factors. Securities in which the Fund invests, and its share price and
returns, are subject to fluctuation. Investments in equity securities in general
are subject to market risks that may cause their prices to fluctuate over time.
In addition, there may be a substantial time period before stocks held by the
Fund realize the appreciation potential the Advisor believes them to have. An
investment in the Fund therefore is more suitable for longer term investors who
can bear the risk of short-term f luctuation in principal and net asset value
that are inherent in investing in equity securities for a growth objective.
The Fund has adopted certain investment restrictions, which are described
fully in the Statement of Additional Information. Like the Fund's investment
objective, certain of these restrictions are fundamental and may be changed only
by a majority vote of the Fund's outstanding shares.
Advisor Investment Returns. Set forth in the table below are certain
performance data provided by the Advisor relating to its individually managed
equity accounts. These accounts had substantially the same investment objective
as the Fund and were managed using substantially similar investment strategies
and techniques as those contemplated for use by the Fund. See "Objective and
Investment Approach of the Fund" above. The Portfolio Managers for these
accounts also manage the Fund. The results present ed are not intended to
predict or suggest the return to be experienced by the Fund or the return an
investor might achieve by investing in the Fund. Results may differ because of,
among other things, differences in brokerage commissions paid, account expenses,
including investment advisory fees (which expenses and fees may be higher for
the Fund than for the accounts), the size of positions taken in relation to
account size, diversification of securities, timing of purchases and sales,
timing of cash addit ions and withdrawals, the private character of the
composite accounts compared with the public character of the Fund, and the
tax-exempt status of some of the account holders compared with shareholders in
the Fund. Investors should be aware that the use of different methods of
determining performance could result in different performance results. Investors
should not rely on the following performance data as an indication of future
performance of the Advisor or the Fund.
Average Annual Total Returns (%)
(for periods ended June 30, 1998)
Advisor Growth HBSS Growth
Equity Accounts Equity Fund
One year 29.91% One year 28.73%
Five years 20.72% Inception 5/1/96 26.12%
Ten years 17.39%
1. Results account for both income and capital appreciation or depreciation
(Total Return). Returns are time-weighted and reduced for investment advisory
fees.
2. Investors should note that the Fund will compute and disclose its average
annual compounded rate of return using the standard formula set forth in SEC
rules, which differs in certain respects from returns calculated under the
method noted above. Unlike the performance presentation standards that link
quarterly rates of return, the SEC total return calculation method calls for
computation and disclosure of an average annual compounded rate of return for
one, five and ten year periods or shorter periods f rom inception. The
calculation provides a rate of return that equates a hypothetical initial
investment of $1,000 to an ending redeemable value. While the returns shown for
the Advisor are net of advisory fees, the SEC calculation formula requires that
returns to be shown for the Portfolios will be net of advisory fees as well as
any maximum applicable sales charges and all other Portfolio operating expenses.
See "Performance Information" at page 12.
3. The Growth Equity Account Composite shown includes all accounts managed by
the Advisor that meet the criteria for inclusion in the composite for each
period presented.
MANAGEMENT OF THE FUND
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund. The Advisor is located at One
Sansome Street, Suite 3300, San Francisco, CA 94104. The Advisor was founded in
1971 and is a majority-owned affiliate of Value Asset Management, Inc. ("VAM").
VAM is a Connecticut-based holding company owned by Banc Boston Ventures, Inc.,
which is a subsidiary of Bank Boston, N.A. VAM invests in privately-owned asset
management firms. The Advisor prov ides investment advisory and sub-advisory
services to individual and institutional investors and investment companies with
assets of approximately $3.3 billion. Mr. John J. Sullivan, Executive Vice
President and Partner, and Mr. Gordon J. Ceresino, Executive Vice President and
Partner, are responsible for management of the Fund's portfolio. Each has held
his current position with the Advisor for over five years.
The Advisor provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Advisor a monthly management fee
(accrued daily) based upon the average daily net assets of the Fund at the rate
of 0.75% annually. Investment Company Administration Corporation (the
"Administrator") acts as the Fund's Administra tor under an Administration
Agreement. Under that agreement, the Administrator prepares various federal and
state regulatory filings, reports and returns for the Fund, prepares reports and
materials to be supplied to the trustees, monitors the activities of the Fund's
custodian, transfer agent and accountants, and coordinates the preparation and
payment of Fund expenses and reviews the Fund's expense accruals. For its
services, the Administrator receives an annual fee equal to 0.12% of the Fund's
average d aily net assets up to $25 million, 0.07% of the next $25 million of
net assets, 0.05% of the next $50 million of net assets and 0.03% on assets over
$100 million, with a minimum fee of $30,000.
The Fund is responsible for its own operating expenses. The Advisor is
undertaking to limit the Fund's ratio of operating expenses to average net
assets to 1.29% for the Fund's current fiscal year. The Advisor may reimburse
additional amounts to the Fund at any time in order to reduce the Fund's
expenses. Reductions made by the Advisor in its fees or payments or
reimbursement of expenses which are the Fund's obligation are subject to
reimbursement by the Fund provided the Fund is able to do so and rem ain in
compliance with applicable expense limitations. The Advisor generally seeks
reimbursement for the oldest reductions and waivers before payment by the Fund
for fees and expenses for the current year.
The Advisor considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. While these are more fully
discussed in the Statement of Additional Information, the factors include, but
are not limited to, the reasonableness of commissions, quality of services and
execution, and the availability of research which the Advisor may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt executio n at competitive prices, the Advisor may also
consider the sale of Fund shares as a factor in selecting broker-dealers for the
Fund's portfolio transactions.
DISTRIBUTION PLAN
The Fund has adopted a distribution plan pursuant to Rule 12b-1. The Plan
provides that the Fund may pay for distribution and related expenses at an
annual rate of up to 0.25% of the Fund's average net assets to the Advisor as
Distribution Coordinator. Expenses permitted to be paid by the Fund under its
Plan include: preparation, printing and mailing of prospectuses; shareholder
reports such as semi-annual and annual reports, performance reports and
newsletters; sales literature and other promotional material to prospective
investors; direct mail solicitation; advertising; public relations; compensation
of sales personnel, advisors or other third parties for their assistance with
respect to the distribution of the Fund's shares; payments to financial
intermediaries for shareholder support; administrative and accounting services
with respect to the shareholders of the Fund; and such other expenses as may be
approved from time to time by the Board of Trustees.
The Rule 12b-1 Distribution Plan allows excess distribution expenses to be
carried forward by the Advisor, as Distribution Coordinator, and resubmitted in
a subsequent fiscal year provided that (i) distribution expenses cannot be
carried forward for more than three years following initial submission; (ii) the
Board of Trustees has made a determination at the time of initial submission
that the distribution expenses are appropriate to be carried forward; and (iii)
the Board of Trustees makes a further determination, at the time any
distribution expenses which have been carried forward are resubmitted for
payment, to the effect that payment at the time is appropriate, consistent with
the objectives of the Plan and in the current best interests of shareholders.
HOW TO INVEST IN THE FUND
The minimum initial investment in the Fund is $10,000. Subsequent
investments must be at least $1,000. First Fund Distributors, Inc. (the
"Distributor"), acts as Distributor of the Fund's shares. The Distributor may,
at its discretion, waive the minimum investment requirements for purchases in
conjunction with certain group or periodic plans. In addition to cash purchases,
shares may be purchased by tendering payment in kind in the form of shares of
stock, bonds or other securities, provided that any such tendered security is
readily marketable, its acquisition is consistent with the Fund's objective and
it is otherwise acceptable to the Advisor.
Shares of the Fund are offered continuously for purchase at their net asset
value per share next determined after a purchase order is received. The public
offering price is effective for orders received by the Fund prior to the time of
the next determination of the Fund's net asset value. Orders received after the
time of the next determination of the applicable Fund's net asset value will be
entered at the next calculated public offering price. Investors may be charged a
fee if they effect transactio ns through a broker or agent.
Investors may purchase shares of the Fund by check or wire:
By Check: For initial investments, an investor should complete the Fund's
Account Application (included with this Prospectus). The completed application,
together with a check payable to "Harris Bretall Sullivan & Smith Growth Equity
Fund," should be mailed to the Fund's Transfer Agent: Harris Bretall Sullivan &
Smith Growth Equity Fund, P.O. Box 640856, Cincinnati, OH 45264-0856. For
purchases by overnight mail, please contact the Transfer Agent at (800) 282-2340
for instructions.
A stub is attached to the account statement sent to shareholders after each
transaction. For subsequent investments the stub should be detached from the
statement and, together with a check payable to "Harris Bretall Sullivan & Smith
Growth Equity Fund," mailed to the Fund in the envelope provided at the address
indicated above. The investor's account number should be written on the check.
By Wire: For initial investments, before wiring funds, an investor should
call the Fund at (800) 282-2340 between the hours of 9:00 a.m. and 4:00 p.m.
Eastern time, on a day when the New York Stock Exchange ("NYSE") is open for
trading in order to receive an account number. It is necessary to notify the
Fund prior to each wire purchase. Wires sent without notifying the Fund will
result in a delay of the effective date of your purchase. The Transfer Agent
will request the investor's name, address, taxp ayer identification number,
amount being wired and wiring bank. The investor should then instruct the wiring
bank to transfer funds by wire to: Star Bank, N.A. Cinti/Trust ABA #0420-0001-3,
for credit to Harris Bretall Sullivan & Smith Growth Equity Fund, DDA
#485773071, for further credit to [investor's name and account number]. The
investor should also ensure that the wiring bank includes the name of the Fund
and the account number with the wire. If the funds are received by the Transfer
Agent prior to t he time that the Fund's net asset value is calculated, the
funds will be invested on that day; otherwise they will be invested on the next
business day. Finally, the investor should write the account number provided by
the Transfer Agent on the Application Form and mail the Form promptly to the
Transfer Agent.
For subsequent investments, the investor should first notify the Fund and
then the investor's bank should wire funds as indicated above. It is essential
that complete information regarding the investor's account be included in all
wire instructions in order to facilitate prompt and accurate handling of
investments. Investors may obtain further information from the Transfer Agent
about remitting funds in this manner and from their own banks about any fees
that may be imposed.
General. Payment of proceeds from redemption of shares purchased with an
initial investment made by wire may be delayed until one business day after the
completed Account Application is received by the Fund. All investments must be
made in U.S. dollars and, to avoid fees and delays, checks should be drawn only
on U.S. banks and should not be made by third party check. A charge may be
imposed if any check used for investment does not clear. The Fund and the
Distributor reserve the right to reject any p urchase order in whole or in part.
If an order, together with payment in proper form, is received by the Transfer
Agent by the close of trading on the NYSE (currently 4:00 p.m., New York City
time), Fund shares will be purchased at the offering price determined as of the
close of trading on that day. Otherwise, Fund shares will be purchased at the
offering price determined as of the close of trading on the NYSE on the next
business day. Federal tax law requires that investors provide a certified
taxpayer i dentification number and certain other required certifications upon
opening or reopening an account in order to avoid backup withholding of taxes at
the rate of 31% on taxable distributions and proceeds of redemptions. See the
Fund's Account Application for further information concerning this requirement.
The Fund is not required to issue share certificates. All shares are
normally held in non-certificated form registered on the books of the Fund and
the Fund's Transfer Agent for the account of the shareholder.
HOW TO REDEEM AN INVESTMENT IN THE FUND
Shareholders have the right to have the Fund redeem all or any portion of
their outstanding shares at their current net asset value on each day the NYSE
is open for trading. The redemption price is the net asset value per share next
determined after the shares are validly tendered for redemption.
Direct Redemption. A written request for redemption must be received by the
Fund's Transfer Agent in order to constitute a valid tender for redemption.
Redemption requests should be sent to Harris Bretall Sullivan & Smith Growth
Equity Fund at P. O. Box 5536, Hauppauge, NY 11788-0132. To protect the Fund and
its shareholders, a signature guarantee is required for certain transactions,
including redemptions. Signature(s) on the redemption request must be guaranteed
by an "eligible guarantor institution " as defined in the federal securities
laws. These institutions include banks, broker-dealers, credit unions and
savings institutions. A broker-dealer guaranteeing signatures must be a member
of a clearing corporation or maintain net capital of at least $100,000. Credit
unions must be authorized to issue signature guarantees. Signature guarantees
will be accepted from any eligible guarantor institution which participates in a
signature guarantee program. A notary public is not an acceptable guarantor.
Telephone Redemption. Shareholders who complete the Redemption by Telephone
portion of the Fund's Account Application may redeem shares on any business day
the NYSE is open by calling the Fund's Transfer Agent at (800) 282-2340 between
the hours of 9:00 a.m. and 4:00 p.m. Eastern time. Redemption proceeds will be
mailed to the address of record or wired at the shareholder's direction the next
business day to the predesignated account. The minimum amount that may be wired
is $1,000 (wire charges, if an y, will be deducted from redemption proceeds). By
establishing telephone redemption privileges, a shareholder authorizes the Fund
and its Transfer Agent to act upon the instruction of any person by telephone to
redeem from the account for which such service has been authorized and send the
proceeds to the address of record on the account or transfer the proceeds to the
bank account designated in the Authorization. The Fund and the Transfer Agent
will use procedures to confirm that redemption instructions r eceived by
telephone are genuine, including recording of telephone instructions and
requiring a form of personal identification before acting on such instructions.
If these identification procedures are followed, neither the Fund nor its agents
will be liable for any loss, liability or cost which results from acting upon
instructions of a person believed to be a shareholder with respect to the
telephone redemption privilege. The Fund may change, modify, or terminate these
privileges at any time upon at lea st 60 days notice to shareholders.
Shareholders may request telephone redemption after an account is opened;
however, the authorization form will require a separate signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of abnormal market activity.
General. Payment of redemption proceeds will be made promptly, but not
later than seven days after the receipt of all documents in proper form,
including a written redemption order with appropriate signature guarantee in
cases where telephone redemption privileges are not being utilized. The Fund may
suspend the right of redemption under certain extraordinary circumstances in
accordance with the Rules of the SEC. In the case of shares purchased by check
and redeemed shortly after purchase, the Fund wi ll not mail redemption proceeds
until it has been notified that the check used for the purchase has been
collected, which may take up to 15 days from the purchase date. To minimize or
avoid such delay, investors may purchase shares by certified check or federal
funds wire. A redemption may result in recognition of a gain or loss for federal
income tax purposes. Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in any account, other
than retirement
plan or Uniform Gift to Minors Act accounts, if at any time, due to redemptions
by the shareholder, the total value of a shareholder's account does not equal at
least $5,000. If the Fund determines to make such an involuntary redemption, the
shareholder will first be notified that the value of the account is less than
$5,000 and will be allowed 30 days to make an additional investment to bring the
value of the account to at least $5,000 before the Fund takes any action.
SERVICES AVAILABLE TO THE FUND'S SHAREHOLDERS
Retirement Plans. The Fund offers a prototype Individual Retirement Account
("IRA") plan and information is available from the Distributor or from your
securities dealer with respect to other retirement plans offered. Investors
should consult a tax adviser before establishing any retirement plan.
Automatic Investment Plan. For the convenience of shareholders, the Fund
offers a preauthorized check service under which a check is automatically drawn
on the shareholder's personal checking account each month for a predetermined
amount (but not less than $100), as if the shareholder had written it directly.
Upon receipt of the withdrawn funds, the Fund automatically invests the money in
additional shares of the Fund at the current offering price. Applications for
this service are available from the Distributor. There is no charge by the Fund
for this service. The Distributor may terminate or modify this privilege at any
time, and shareholders may terminate their participation by notifying the
Transfer Agent in writing, sufficiently in advance of the next scheduled
withdrawal.
Automatic Withdrawals. As another convenience, the Fund offers a Systematic
Withdrawal Program whereby shareholders may request that a check drawn in a
predetermined amount be sent to them each month or calendar quarter. A
shareholder's account must have Fund shares with a value of at least $10,000 in
order to start a Systematic Withdrawal Program, and the minimum amount that may
be withdrawn each month or quarter under the Systematic Withdrawal Program is
$100. This Program may be terminated or modif ied by a shareholder or the Fund
at any time without charge or penalty.
A withdrawal under the Systematic Withdrawal Program is treated as a
redemption of shares, and may result in a gain or loss for federal income tax
purposes. In addition, if the amounts withdrawn exceed the dividends credited to
the shareholder's account, the account ultimately may be depleted.
HOW THE FUND'S PER SHARE VALUE IS DETERMINED
The net asset value of a Fund share is determined once daily as of the
close of public trading on the NYSE (currently 4:00 p.m. Eastern time) on each
day the NYSE is open for trading. Net asset value per share is calculated by
dividing the value of the Fund's total assets, less its liabilities, by the
number of Fund shares outstanding.
Portfolio securities are valued using current market values, if available.
Securities for which market quotations are not readily available are valued at
fair values as determined in good faith by or under the supervision of the
Trust's officers in accordance with methods which are specifically authorized by
the Board of Trustees. Short-term obligations with remaining maturities of 60
days or less are valued at amortized cost as reflecting fair value.
DISTRIBUTIONS AND TAXES
Dividends and Distributions. Any dividends from net investment income
(which includes realized short term capital gains) are declared and paid at
least annually, typically at the end of the Fund's fiscal year (March 31). Any
undistributed long term net capital gains realized during the 12-month period
ended each October 31, as well as any additional undistributed capital gains
realized during the Fund's fiscal year, will also be distributed to shareholders
on or about December 31 of each year.
Dividends and capital gain distributions (net of any required tax
withholding) are automatically reinvested in additional shares of the Fund at
the net asset value per share on the reinvestment date unless the shareholder
has previously requested in writing to the Transfer Agent that distributions be
made in cash. Any dividend or distribution paid by the Fund has the effect of
reducing the net asset value per share on the reinvestment date by the amount of
the dividend or distribution. Investors shoul d note that a dividend or
distribution paid on shares purchased shortly before such dividend or
distribution was declared will be subject to income taxes as discussed below
even though the dividend or distribution represents, in substance, a partial
return of capital to the shareholder.
Taxes. The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). As long as the fund continues to so qualify, and
as long as the Fund distributes all of its income each year to the shareholders,
the Fund will not be subject to any federal income tax or excise taxes based on
net income. Distributions made by the Fund will be taxable to shareholders
whether received in shares (throug h dividend reinvestment) or in cash.
Distributions derived from net investment income, including net short-term
capital gains, are taxable to shareholders as ordinary income. A portion of
these distributions may qualify for the intercorporate dividends-received
deduction. Distributions designated as capital gains dividends are taxable as
long-term capital gains regardless of the length of time shares of the Fund have
been held. Although distributions are generally taxable when received, certain
distributio ns made in January are taxable as if received the prior December.
Shareholders will be informed annually of the amount and nature of the Fund's
distributions. Additional information about taxes is set forth in the Statement
of Additional Information. Shareholders should consult their own advisers
concerning federal, state and local tax consequences of investing in the Fund.
GENERAL INFORMATION
The Trust. The Trust was organized as a Massachusetts business trust on
February 17, 1987. The Agreement and Declaration of Trust permits the Board of
Trustees to issue an unlimited number of full and fractional shares of
beneficial interest, without par value, which may be issued in any number of
series. The Board of Trustees may from time to time issue other series, the
assets and liabilities of which will be separate and distinct from any other
series.
Shareholder Rights. Shares issued by the Fund have no preemptive,
conversion, or subscription rights. Shareholders have equal and exclusive rights
as to dividends and distributions as declared by the Fund and to the net assets
of the Fund upon liquidation or dissolution. The Fund, as a separate series of
the Trust, votes separately on matters affecting only the Fund (e.g., approval
of the Management Agreement); all series of the Trust vote as a single class on
matters affecting all series jointly or t he Trust as a whole (e.g., election or
removal of Trustees). Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in any election of Trustees can, if they so
choose, elect all of the Trustees. While the Trust is not required and does not
intend to hold annual meetings of shareholders, such meetings may be called by
the Trustees in their discretion, or upon demand by the holders of 10% or more
of the outstanding shares of the Trust for the purpose of electing or removi ng
Trustees. Performance Information. From time to time, the Fund may publish its
total return in advertisements and communications to investors. Total return
information will include the Fund's average annual compounded rate of return
over the most recent year and over the period from the Fund's inception of
operations. The Fund may also advertise aggregate and average total return
information over different periods of time. The Fund's total return will be
based upon the value of the shares acquired throu gh a hypothetical $1,000
investment at the beginning of the specified period and the net asset value of
such shares at the end of the period, assuming reinvestment of all
distributions. Total return figures will reflect all recurring charges against
Fund income. Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
prior period should not be considered as a representation of what an investor's
total return may be in a ny future period.
Year 2000. Like other business organizations around the world, the Fund
could be adversely affected if the computer systems used by its Advisor, and
other service providers do not properly process and calculate information
related to dates beginning January 1, 2000. This is commonly known as the "Year
2000 Issue." The Fund's Advisor is taking steps that it believes are reasonably
designed to address the Year 2000 Issue with respect to its own computer
systems, and it has obtained assurances from the F und's other service providers
that they are taking comparable steps. However, there can be no assurance that
these actions will be sufficient to avoid any adverse impact on the Fund.
Custodian and Transfer Agent. Star Bank, N.A., 425 Walnut St., Cincinnati,
OH 45202, serves as custodian of the Fund's assets. American Data Services,
Inc., P. O. Box 5536, Hauppauge, NY 11788-0132, is the Fund's Transfer and
Dividend Disbursing Agent. Shareholder inquiries should be directed to the
Transfer Agent at (800) 282-2340.
Advisor
Harris Bretall Sullivan & Smith L.L.C.
One Sansome Street, Suite 3300
San Francisco, CA 94104
(415) 765-8300
Account Inquiries (800) 282-2340
Distributor
First Fund Distributors, Inc.
4455 E. Camelback Rd., Suite 261E
Phoenix, AZ 85018
Custodian
Star Bank, N.A.
425 Walnut St.
Cincinnati, OH 45202
Transfer and Dividend Disbursing Agent
American Data Services, Inc.
P. O. Box 5536
Hauppauge, NY 11788-0132
(800) 282-2340
Auditors
Ernst & Young LLP
515 South Flower St.
Los Angeles, CA 90071
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California St.
San Francisco, CA 94104
Harris Bretall Sullivan & Smith
Growth Equity Fund
Prospectus
August 1, 1998
<PAGE>
2905 Maple Avenue
Dallas, Texas 75201
(800) 388-8512
The HODGES FUND (the "Fund") is a mutual fund with the investment objective of
seeking long-term capital appreciation. The Fund seeks to achieve its objective
by investing principally in common stocks. Hodges Capital Management, Inc. (the
"Advisor"), serves as investment advisor to the Fund.
This Prospectus sets forth basic information about the Fund that prospective
investors should know before investing. It should be read and retained for
future reference. The Fund is a series of Professionally Managed Portfolios. A
Statement of Additional Information dated August 1, 1998, as may be amended from
time to time, has been filed with the Securities and Exchange Commission and is
incorporated herein by reference. This Statement of Additional Information is
available without charge upon request to the Fund at the address or telephone
number given above. The SEC maintains an internet site (http://www.sec.gov) that
contains the SAI, other material incorporated by reference and information about
other companies that file electronically with the SEC.
TABLE OF CONTENTS
Expense Table 2
Financial Highlights 3
Objective and Investment Approach of the Fund 4
Management of the Fund 7
How To Invest in the Fund 8
How To Redeem an Investment in the Fund 10
Services Available to the Fund's Shareholders 12
How the Fund's Per Share Value Is Determined 13
Distributions and Taxes 13
General Information 14
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated August 1, 1998
The HODGES FUND (the "Fund") is a non-diversified series of Professionally
Managed Portfolios (the "Trust"), an open-end management investment company
offering redeemable shares of beneficial interest. Shares may be purchased at a
public offering price which includes a maximum sales charge of 2.50% of the
offering price, or less depending on the amount invested. The minimum initial
investment is $500, with subsequent investments of $50 or more. Shares will be
redeemed at net asset value per share.
EXPENSE TABLE
Expenses are one of several factors to consider when investing in the Fund. The
purpose of the following fee table is to provide an understanding of the various
costs and expenses which may be borne directly or indirectly by an investment in
the Fund. Actual expenses may be more or less than those shown.
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases 2.50%
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses
(As a percentage of average net assets)
Investment Advisory Fees 0.85%
12b-1 Fees 0.50%
Other Expenses 0.61%
Total Fund Operating Expenses 1.96%
This table illustrates the net transaction and operating expenses that would be
incurred by an investment in the Fund over different time periods assuming a
$1,000 investment, a 5% annual return, and redemption at the end of:
Example 1 Year 3 Years 5 Years 10 Years
$44 $85 $128 $248
The Example shown above should not be considered a representation of past or
future expenses and actual expenses may be greater or less than those shown. In
addition, federal regulations require the Example to assume a 5% annual return,
but the Fund's actual return may be higher or lower. The Fund has adopted a plan
of distribution under which it will pay the distributor a fee at an annual rate
of up to 0.50% of the Fund's net assets. Over an extended period of time,
shareholders may pay more, directly and indirectly, in sales charges and such
fees than the maximum sales charge under the rules of the National Association
of Securities Dealers, Inc. ("NASD"). This is recognized and permitted by the
NASD.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period.
The following information has been audited by Tait, Weller & Baker, independent
accountants, whose unqualified report covering the period ended March 31, 1998
below is incorporated by reference herein and appears in the annual report to
shareholders. This information should be read in conjunction with the financial
statements and accompanying notes which appear in the annual report and are
incorporated by reference into the Statement of Additional Information. Further
information about the Fund's performance is contained in its annual report,
which may be obtained without charge by writing or calling the address or
telephone number on the Prospectus cover.
<TABLE>
<CAPTION>
Years Ended March 31, Oct. 9, 1992
1998 1997 1996 1995 1994 through March 31, 1993
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $13.20 $12.87 $11.55 $10.80 $11.78 $10.25
Income from investment operations:
Net investment loss (0.09) (0.11) (0.07) (0.08) (0.03) 0.02
Net realized and unrealized
gain on investments 4.79 1.85 3.42 1.09 0.07 1.51
Total from investment operations 4.70 1.74 3.35 1.01 0.04 1.53
Less distributions:
From net investment income 0.00 0.00 0.00 0.00 (0.01) -0-
From net capital gains (3.46) (1.41) (2.03) (0.26) (1.01) -0-
Total distributions (3.46) (1.41) (2.03) (0.26) (1.02) -0-
Net asset value, end of year $14.44 $13.20 $12.87 $11.55 $10.80 $11.78
Total return 41.21% 14.18% 32.33% 9.60% 0.22% 25.59%+
Ratios/supplemental data:
Net assets, end of year (millions) $ 32.4 $ 19.4 $ 13.3 $ 9.3 $ 8.5 $ 6.9
Ratio of expenses to
average net assets:
Before expense reimbursement 1.96% 2.14% 2.08% 2.31% 2.63% 2.17%+
After expense reimbursement 1.96% 2.14% 2.08% 2.31% 2.07% 2.17%+
Ratio of net investment loss
to average net assets:
Before expense reimbursement (0.76%) (0.95%) (0.61%) (0.75%) (0.84%) 0.41%+
After expense reimbursement (0.76%) (0.95%) (0.61%) (0.75%) (0.29%) 0.41%+
Portfolio turnover rate 94.05% 115.77% 124.89% 73.65% 192.03% 26.23%
Average commission rate
paid per share0 $ .0303 $ .0331 - - - -
</TABLE>
*Commencement of operations.
+Annualized.
0For fiscal years beginning on or after September 1, 1995, a fund is required to
disclose its average commission rate paid per share for security trades on which
commissions are charged. This amount may vary from period to period and fund to
fund depending on the mix of trades executed in various markets where trading
practices and commission rate structures may differ.
OBJECTIVE AND INVESTMENT APPROACH OF THE FUND
The investment objective of the Fund is capital appreciation. The primary
approach of the Fund is to seek investments which the Advisor believes to be
attractive investments with capital appreciation potential on an individual
issuer basis. There is, of course, no assurance that the Fund's objective will
be achieved, and the Fund's net asset value per share will fluctuate as the
market value of its investment portfolio fluctuates.
Investment Approach and Risk Considerations. The Fund emphasizes the purchase of
common stocks of both domestic and foreign companies (U.S. dollar denominated)
with rapidly growing earnings per share, other companies whose earnings growth
is slower but which appear to have a predictable track record and are
undervalued by other criteria of their fundamental net worth in the opinion of
the Advisor, as well as companies whose shares are out of favor, but appear to
have good prospects for a turnaround. The Fund also will invest in low-priced
common stocks that the Advisor believes have appreciation potential that could
be substantial. Although not an objective of the Fund, growth of income may
accompany growth of capital, and the Fund may invest in some moderate growth
stocks whose shares offer a high dividend yield.
Some of the companies in the Fund's portfolio may be unseasoned, although others
may be well-known and established. Many of the companies in the Fund's portfolio
will have a small capitalization (i.e., less than $500 million). The volatility
of its investment portfolio is likely to be greater than that of the Standard &
Poor's 500 Stock Index.
The Fund may invest in securities of unseasoned companies. The Advisor regards a
company as unseasoned when, for example, it is relatively new to or not yet well
established in its primary line of business. Such companies are generally
smaller and younger than companies whose shares are traded on the major stock
exchanges. Accordingly, their shares are often traded over-the-counter and their
share prices may be more volatile than those of larger, exchange listed
companies. Developments such as new or improved products and methods may have a
substantial impact on the earnings and revenues of these companies, and such
positive and negative developments can result in a correspondingly positive or
negative impact on the value of their shares. Such companies also may be more
dependent on key personnel and may have more limited financing resources. For
these reasons, the net asset value per share of the Fund may fluctuate
substantially, and the Fund may not be appropriate for short-term investors.
The Fund invests principally in common stocks, and under normal market
conditions, at least 55% of the value of its total assets will be invested in
common stocks selected for their growth potential, although the Fund normally
invests a greater percentage of its total assets in common stocks and expects to
continue to do so. The Fund's investments may also include preferred stocks,
warrants, convertible debt obligations and other debt obligations that, in the
Advisor's opinion, offer the possibility of capital growth.
During those times when equity securities cannot be found that meet the
Advisor's investment criteria, for temporary defensive purposes or pending
longer-term investment, the Fund may invest any amount of its assets in
short-term money market instruments, including securities issued by the U.S.
Government, its agencies and instrumentalities or other such instruments rated
in the top two grades by Moody's Investors Service or Standard & Poor's
Corporation or, if unrated, instruments deemed to be of comparable quality by
the Fund's Advisor.
The Fund may also invest in securities of foreign companies (U.S. dollar
denominated), and special situations. Such securities often involve greater
risks than investments in more established domestic companies, primarily because
they may be more likely to experience unexpected fluctuations in price. See
below for a further discussion of the policies regarding investments in foreign
companies, and special situations. Because prices of common stocks and other
securities fluctuate, the value of an investment in the Fund will vary, as the
market value of its investment portfolio changes.
Repurchase Agreements. The Fund may enter into repurchase agreements in order to
earn additional income on available cash, or as a defensive investment in
periods when the Fund is primarily in short-term maturities. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a U.S. Government security (which may be of any maturity)
and the seller agrees to repurchase the obligation at a future time at a set
price, thereby determining the yield during the purchaser's holding period
(usually not more than seven days from the date of purchase). Any repurchase
transaction in which the Fund engages will require full collateralization of the
seller's obligation during the entire term of the repurchase agreement. In the
event of a bankruptcy or other default of the seller, the Fund could experience
both delays in liquidating the underlying security and losses in value. However,
the Fund intends to enter into repurchase agreements only with banks with assets
of $500 million or more that are insured by the Federal Deposit Insurance
Corporation and the most creditworthy registered securities dealers pursuant to
procedures adopted and reviewed by the Trust's Board of Trustees. The Advisor
monitors the creditworthiness of the banks and securities dealers with whom the
Fund engages in repurchase transactions, and the Fund will not invest more than
15% of its total assets in illiquid securities, including repurchase agreements
maturing in more than seven days.
Illiquid and Restricted Securities. The Fund may not invest more than 15% of its
net assets in illiquid securities, including (i) securities for which there is
no readily available market; (ii) securities the disposition of which would be
subject to legal restrictions (so-called "restricted securities"); and (iii)
repurchase agreements having more than seven days to maturity. A considerable
period of time may elapse between the Fund's decision to dispose of such
securities and the time when the Fund is able to dispose of them, during which
time the value of the securities could decline. Securities which meet the
requirements of Securities Act Rule 144A are restricted but may be determined to
be liquid by the Trustees based on an evaluation of the applicable trading
markets.
Foreign Securities. The Fund may invest up to 10% of its assets in U.S. dollar
denominated securities of foreign issuers. There may be less publicly available
information about these issuers than is available about companies in the U.S.
and foreign auditing requirements may not be comparable to those in the U.S. In
addition, the value of the foreign securities may be adversely affected by
movements in the exchange rates between foreign currencies and the U.S. dollar,
as well as other political and economic developments, including the possibility
of expropriation, confiscatory taxation, exchange controls or other foreign
governmental restrictions. The Fund may also invest in American Depositary
Receipts with respect to foreign companies which are listed and traded on a
domestic national securities exchange.
Short Sales. The Fund may engage in short sales of securities, provided the
securities are fully listed on a national securities exchange. In a short sale,
the Fund sells stock which it does not own, making delivery with securities
"borrowed" from a broker. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. This
price may or may not be less than the price at which the security was sold by
the Fund. Until the security is replaced, the Fund is required to pay to the
lender any dividends or interest which accrue during the period of the loan. In
order to borrow the security, the Fund may also have to pay a premium which
would increase the cost of the security sold. The proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.
The Fund also must segregate liquid assets equal to the difference between (a)
the market value of the securities sold short at the time they were sold short
and (b) the value of the collateral deposited with the broker in connection with
the short sale (not including the proceeds from the short sale). While the short
position is open, the Fund must maintain segregated assets at such a level that
the amount segregated plus the amount deposited with the broker as collateral
equals the current market value of the securities sold short.
The Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and date on which the Fund
replaces the borrowed security. The Fund will realize a gain if the security
declines in price between those dates. The amount of any gain will be decreased
and the amount of any loss will be increased by any interest the Fund may be
required to pay in connection with a short sale.
The dollar amount of short sales at any one time (not including short sales
against the box) may not exceed 25% of the net assets of the Fund, and it is
expected that normally the dollar amount of such sales will not exceed 10% of
the net assets of the Fund.
Special Situations. As a matter of operating policy, the Fund may invest in
special situations which the Advisor believes present opportunities for capital
growth. A special situation arises when, in the opinion of the Advisor, the
securities of a particular company will, within a reasonable period of time, be
accorded market recognition at an appreciated value solely by reason of a
development particularly or uniquely applicable to that company and regardless
of general business conditions or movements of the market as a whole.
Developments creating special situations might include, among others, the
following: liquidations, reorganizations, recapitalizations, mergers or tender
offers; material litigation or resolution thereof; technological breakthroughs;
and new management or management policies. Investments by the Fund in special
situations may not exceed 30% of the Fund's total assets.
Options Transactions. The Fund may write (sell) covered call options on
individual securities and on stock indices and engage in related closing
transactions. A covered call option on a security is an agreement by the Fund in
exchange for a premium, to sell a particular portfolio security if the option is
exercised at a specified price or before a set date. An option on a stock index
gives the option holder the right to receive, upon exercising the option, a cash
settlement amount based on the difference between the exercise price and the
value of the underlying stock index. Risks associated with writing covered
options include the possible inability to effect closing transactions at
favorable prices and an appreciation limit on the securities set aside for
settlement. The Fund may also purchase call options in closing transactions.
There is no assurance of liquidity in the secondary market for purposes of
closing out covered call option positions.
The Fund may purchase put and call options on stock indices for the purpose of
hedging against the risk of unfavorable price movements adversely affecting the
value of the Fund's securities or securities the Fund intends to buy. The Fund
may also sell put and call options in closing transactions.
Portfolio Turnover. The annual rate of portfolio turnover may exceed 100%. In
general, the Advisor will not consider the rate of portfolio turnover to be a
limiting factor in determining when or whether to purchase or sell securities in
order to achieve the Fund's objective. Although the Fund anticipates that it
will be able to effect transactions at discounted brokerage commission rates or
spreads, high portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which are borne directly by the Fund,
and may increase realized capital gains which are taxable to Fund shareholders
when distributed.
Non-Diversification. The Fund is a non-diversified investment company portfolio,
which means that the Fund is required to comply only with the diversification
requirements of the Internal Revenue Code (the "Code") so that the Fund will not
be subject to U.S. taxes on its net investment income. These provisions, among
others, require that at the end of each calendar quarter, (1) not more than 25%
of the value of the Fund's total assets can be invested in the securities of a
single issuer, and (2) with respect to 50% of the value of the Fund's total
assets, no more than 5% of the value of its total assets can be invested in the
securities of a single issuer and the Fund may not own more than 10% of the
outstanding voting securities of a single issuer.
Since the Fund, as a non-diversified investment company portfolio, could invest
in a smaller number of individual issuers than a diversified investment company,
the value of the Fund's investments could be more affected by any single adverse
occurrence than would the value of the investments of a diversified investment
company. However, it is the policy of the Fund to attempt to reduce its overall
exposure to risk from declines in individual securities by spreading its
investments over many different companies and a variety of industries.
The Fund has adopted certain investment restrictions, which are described in the
Statement of Additional Information. Like the Fund's investment objective,
certain of these restrictions are fundamental and may be changed only by a
majority vote of the Fund's outstanding shares.
MANAGEMENT OF THE FUND
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund. Hodges Capital Management,
Inc., 2905 Maple Avenue, Dallas, Texas 75201, the Fund's Advisor, has been in
the investment advisory business since 1989. Mr. Don W. Hodges manages the
Fund's investment portfolio. The Advisor is owned by First Dallas Holdings,
Inc., a corporation controlled by Mr. Hodges. Mr. Hodges has over 38 years of
experience in the securities brokerage industry and previously served as
President of a large regional brokerage firm.
The Advisor provides the Fund with advice on buying and selling securities,
manages the investment of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Advisor a monthly investment
advisory fee (accrued daily) based upon the average daily net assets of the Fund
at the rate of 0.85% annually.
Investment Company Administration Corporation (the "Administrator") acts as the
Fund's Administrator. The Administrator prepares various federal and state
regulatory filings, reports and returns for the Fund, prepares reports and
materials to be supplied to the trustees, monitors the activities of the Fund's
custodian, transfer agent and accountants, and coordinates the preparation and
payment of the Fund expenses and reviews the Fund's expense accruals. For its
services, the Administrator receives a monthly fee at the following annual rate:
Average daily net assets of the Fund Fee or fee rate
Under $15 million $30,000
$15 to $50 million 0.20% of average daily net assets
$50 to $100 million 0.15% of average daily net assets
$100 to $150 million 0.10% of average daily net assets
Over $150 million 0.05% of average daily net assets
The Fund is responsible for its own operating expenses. At times the Advisor may
waive a portion of its fee, and the Advisor also may reimburse additional
amounts to the Fund at any time in order to reduce the Fund's expenses. To the
extent the Advisor performs a service for which the Fund is obligated to pay,
the Fund shall reimburse the Advisor for its costs incurred in rendering such
service.
The Advisor considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. While these are more fully
discussed in the Statement of Additional Information, the factors include, but
are not limited to, the reasonableness of commissions, quality of services and
execution, and the availability of research which the Advisor may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Advisor may also
consider the sale of Fund shares as a factor in selecting broker-dealers for the
Fund's portfolio transactions. Subject to overall requirements of obtaining the
best combination of price and execution on a particular transaction, the Fund
places eligible portfolio transactions through the Distributor, which is an
affiliate of the Advisor, in accord with procedures adopted by the Board of
Trustees pursuant to the requirements of the Investment Company Act of 1940 (the
"1940 Act").
HOW TO INVEST IN THE FUND
The minimum initial investment is $500. Subsequent investments must be at least
$50. First Dallas Securities, Inc., 2905 Maple Avenue, Dallas, Texas 75201 (the
"Distributor"), an affiliate of the Advisor, acts as Distributor and may, at its
discretion, waive the minimum investment requirements. Shares of the Fund are
offered continuously for purchase at the public offering price next determined
after a purchase order is received. The public offering price is effective for
orders received by the Fund or investment dealers prior to the time of the next
determination of the Fund's net asset value and, in the case of orders placed
with dealers, transmitted promptly to the Transfer Agent. Orders received after
the time of the next determination of the applicable Fund's net asset value will
be entered at the next calculated public offering price.
The public offering price per share is equal to the net asset value per share,
plus a sales charge, which is reduced on purchases involving amounts of $25,000
or more, as set forth in the table below. The reduced sales charges apply to
quantity purchases made at one time by a "person," which means (i) an
individual, (ii) members of a family (i.e., an individual, spouse children under
age 21), or (iii) a trustee or fiduciary of a single trust estate or a single
fiduciary account. In addition, purchases of shares made during a thirteen month
period pursuant to a written Letter of Intent are eligible for a reduced sales
charge. Reduced sales charges are also applicable to subsequent purchases by a
"person," based on the aggregate of the amount being purchased and the value, at
offering price, of shares owned at the time of investment.
Sales Charge as percent of: Portion of sales
offering net asset charge retained
Amount of Purchase price value by dealers
Less than $25,000 2.50% 2.56% 2.00%
$25,000 but less than $200,000 2.00% 2.04% 1.60%
$200,000 but less than $350,000 1.50% 1.52% 1.20%
$350,000 but less than $500,000 1.00% 1.01% 0.80%
$500,000 but less than $1,500,000 0.75% 0.76% 0.60%
$1,500,000 but less than $3,000,000 0.60% 0.60% 0.48%
$3,000,000 or more 0.30% 0.30% 0.24%
Purchase Order Placed with Investment Dealers
Dealers who have a sales agreement with the Distributor may place orders for
shares of the Fund on behalf of clients at the offering price next determined
after receipt of the client's order by calling the Distributor. If the order is
placed by the client with the dealer by 4:00 p.m. Eastern time and forwarded to
the Transfer Agent any day that the New York Stock Exchange is open for trading,
it will be confirmed at the applicable offering price on that day. The dealer is
responsible for placing orders promptly with the Transfer Agent and for
forwarding payment promptly.
Purchase Sent to the Transfer Agent
Investors may purchase shares by sending an Application Form directly to the
Fund, with payment made either by check or by wire.
By check. For initial investments, complete the Fund's Account Application
(included with this Prospectus). Make your check payable to "Hodges Fund." Mail
or deliver the completed Account Application and your check to: Hodges Fund,
P.O. Box 640856, Cincinnati, OH 45264-0856. For investments sent by overnight
delivery services, please contact the Transfer Agent at (800) 282-2340 for
instructions.
For subsequent investments, detach and complete the stub attached to an account
statement you have received from the Transfer Agent. Make your check payable to
"Hodges Fund." Write your shareholder account number on the check. Mail or
deliver the check and reinvestment form to the Fund in the envelope provided or
send to the address indicated above.
By wire. For initial investments, before wiring funds, call the Transfer Agent
at (800) 282-2340 between the hours of 9:00 a.m. and 4:00 p.m. Eastern time on a
day when the New York Stock Exchange is open for trading to advise the Fund that
you intend to make an initial investment by wire and to receive an account
number. Provide the Fund with your name, and the dollar amount to be invested.
Complete the Fund's Account Application (included with this Prospectus). Be sure
to include the date and the order confirmation number. Mail or deliver the
completed Application to the appropriate address shown at the top of the Account
Application. Request your bank to transmit immediately available funds by wire
for purchase of shares in your name to the Fund, as follows:
Star Bank, N.A. Cinti/Trust
ABA Routing Number: 0420-0001-3
Hodges Fund
DDA # 483897948
(Account name and number)
For subsequent investments, the investor should first notify the Fund and then
the investor's bank should wire funds as indicated above. It is essential that
complete information regarding your account be included in all wire instructions
in order to facilitate prompt and accurate handling of investments. Investors
may obtain further information about remitting funds in this manner from the
Transfer Agent and should obtain from their own banks information about any fees
that may be imposed.
Purchase at Net Asset Value
Shares of the Fund may be purchased at net asset value by officers, Trustees,
directors and full time employees of the Trust, the Advisor, the Administrator,
the Distributor and affiliates of such companies, by their family members, by
persons and their family members who are direct investment advisory clients of
the Advisor, registered representatives and employees of firms which have sales
agreements with the Distributor, investment advisors, financial planners or
other intermediaries who place trades for their own accounts or the accounts of
their clients and who charge a management, consulting or other fee for their
services; clients of such investment advisors, financial planners or other
intermediaries who place trades for their own accounts if the accounts are
linked to the master account of such investment advisor, financial planner or
other intermediaries on the books and records of the broker or agent; and
retirement and deferred compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Section 401(a), 403(b) or 457 of
the Internal Revenue Code and "rabbi trusts" and by such other persons who are
determined to have acquired shares under circumstances not involving any sales
expense to the Fund or Distributor. Investors may be charged a fee if they
effect transactions in fund shares through a broker or agent.
Investors may purchase shares of the Fund at net asset value to the extent that
the investment represents the proceeds from the redemption, within the previous
sixty days, of shares (the purchase price of which included a sales charge) of
another mutual fund. When making a purchase at net asset value pursuant to this
provision, the investor should forward to the Transfer Agent either (i) the
redemption check representing the proceeds of the shares redeemed, endorsed to
the order of Hodges Fund, or (ii) a copy of the confirmation from the other
fund, showing the redemption transaction.
General
Payment of proceeds from redemption of shares purchased with an initial
investment made by wire may be delayed until one business day after the
completed Account Application is received by the Fund. All investments must be
made in U.S. dollars and, to avoid fees and delays, checks should be drawn only
on U.S. banks and should not be made by third party check. A charge may be
imposed if any check used for investment does not clear. The Fund and the
Distributor reserve the right to reject any purchase order in whole or in part.
If an order, together with payment in proper form, is received by the Transfer
Agent by the close of trading on the New York Stock Exchange (currently 4:00
p.m., Eastern time), Fund shares will be purchased at the offering price
determined as of the close of trading on that day. Otherwise, Fund shares will
be purchased at the offering price determined as of the close of trading on the
New York Stock Exchange on the next business day.
Federal tax regulations require that investors provide a certified Taxpayer
Identification Number and certain other required certifications upon opening or
reopening an account in order to avoid backup withholding of taxes at the rate
of 31% on taxable distributions and proceeds of redemptions. (See the Fund's
Account Application for further information concerning this requirement.) The
Fund is not required to issue share certificates. All shares are normally held
in non-certificated form registered on the books of the Fund and the Fund's
Transfer Agent for the account of the shareholder.
HOW TO REDEEM AN INVESTMENT IN THE FUND
Shareholders have the right to have the Fund redeem all or any portion of their
outstanding shares at their current net asset value on each day the New York
Stock Exchange is open for trading. The redemption price is the net asset value
per share next determined after the shares are validly tendered for redemption.
Direct Redemption
A written request for redemption must be received by the Fund's Transfer Agent
in order to constitute a valid tender for redemption. Redemption requests should
be sent to Hodges Fund, American Data Services, P. O. Box 5536, Hauppauge, NY
11788-0132. To protect the Fund and its shareholders, a signature guarantee is
required for certain transactions, including redemptions. Signature(s) on the
redemption request must be guaranteed by an "eligible guarantor institution" as
defined in the federal securities laws; these institutions include banks,
broker-dealers, credit unions and savings institutions. A broker-dealer
guaranteeing signatures must be a member of a clearing corporation or maintain
net capital of at least $100,000. Credit unions must be authorized to issue
signature guarantees. Signature guarantees will be accepted from any eligible
guarantor institution which participates in a signature guarantee program. A
notary public is not an acceptable guarantor.
Telephone Redemption.
Shareholders who complete the Redemption by Telephone portion of the Fund's
Account Application may redeem shares on any business day the New York Stock
Exchange is open by calling the Fund's Transfer Agent at (800) 282-2340 before
4:00 p.m. Eastern time. Redemption proceeds will be mailed or wired at the
shareholder's direction the next business day to the predesignated account. The
minimum amount that may be wired is $1,000 (wire charges, if any, will be
deducted from redemption proceeds).
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and its Transfer Agent to act upon the instruction of any person by
telephone to redeem from the account for which such service has been authorized
and transfer the proceeds to the bank account designated in the Authorization.
The Fund and the Transfer Agent will use procedures to confirm that redemption
instructions received by telephone are genuine, including recording of telephone
instructions and requiring a form of personal identification before acting on
such instructions. Neither the Fund nor the Transfer Agent will be liable for
any loss, expense, or cost arising out of any telephone redemption request,
including any fraudulent or unauthorized requests that are reasonably believed
to be genuine, provided that such procedures are followed. The Fund may change,
modify, or terminate these privileges at any time upon at least 60 days' notice
to shareholders.
Shareholders may request telephone redemption after an account is opened;
however, the authorization form will require a separate signature guarantee.
Shareholders may experience delays in exercising telephone redemption during
periods of abnormal market activity.
General
Payment of the redemption proceeds will be made promptly, but not later than
seven days after the receipt of all documents in proper form, including a
written redemption order with appropriate signature guarantee in cases where
telephone redemption privileges are not being utilized. The Fund may suspend the
right of redemption under certain extraordinary circumstances in accordance with
the rules of the Securities and Exchange Commission. In the case of shares
purchased by check and redeemed shortly after purchase, the Fund will not mail
redemption proceeds until it has been notified that the check used for the
purchase has been collected, which may take up to 15 days from the purchase
date. To minimize or avoid such delay, investors may purchase shares by
certified check or federal funds wire. A redemption may result in recognition of
a gain or loss for Federal income tax purposes.
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares in any account, other than retirement plan
or Uniform Gifts/Transfer to Minors Act accounts, if at any time, due to
redemptions by the shareholder, the total value of a shareholder's account does
not equal at least $1,500. If the Fund determines to make such an involuntary
redemption, the shareholder will first be notified that the value of his account
is less than $1,500 and will be allowed 30 days to make an additional investment
to bring the value of his account to at least $1,500 before the Fund takes any
action. Distribution Agreement
The Distributor is the principal underwriter of shares of the Fund and is an
affiliate of the Advisor. The Distributor makes a continuous offering of the
Fund's shares and bears the costs and expenses of printing and distributing to
selected dealers and prospective investors any copies of any prospectuses,
statements of additional information and annual and interim reports of the Fund
other than to existing shareholders (after such items have been prepared and set
in type by the Fund) which are used in connection with the offering of shares,
and the costs and expenses of preparing, printing and distributing any other
literature used by the Distributor or furnished by it for use by selected
dealers in connection with the offering of the shares for sale to the public.
All or a part of the expenses borne by the Distributor may be reimbursed
pursuant to the Distribution and Shareholder Servicing Plan discussed below.
Distribution and Shareholder Servicing Plan
The Fund has adopted a Distribution and Shareholder Servicing Plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Plan") under which the
Fund pays the Distributor an amount which is accrued daily and paid monthly, at
an annual rate of up to 0.50% of the average daily net assets of the Fund.
Amounts paid under the Plan by the Fund are paid to the Distributor to reimburse
it for costs of the services it provides and the expenses it bears in the
distribution of the Fund's shares, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of the Fund's shares to prospective investors; and preparation,
printing and distribution of sales literature and advertising materials. Such
fee is paid to the Distributor each year only to the extent of such costs and
expenses of the Distributor under the Plan actually incurred in that year. In
addition, payments to the Distributor under the Plan reimburse the Distributor
for payments it makes to selected dealers and administrators which have entered
into Service Agreements with the Distributor of periodic fees for services
provided to shareholders of the Fund. The services provided by selected dealers
pursuant to the Plan are primarily designed to promote the sale of shares of the
Fund and include the furnishing of office space and equipment, telephone
facilities, personnel and assistance to the Fund in servicing such shareholders.
The services provided by administrators pursuant to the Plan are designed to
provide support services to the Fund and include establishing and maintaining
shareholders' accounts and records, processing purchase and redemption
transactions, answering routine client inquiries regarding the Fund, and
providing other services to the Fund as may be requested.
SERVICES AVAILABLE TO THE FUND'S SHAREHOLDERS
Retirement Plans
The Fund offers a prototype Individual Retirement Account ("IRA") plan and
information is available from the Distributor and Transfer Agent or from your
securities dealer with respect to Keogh, Section 403(b) and other retirement
plans offered. Investors should consult a tax adviser before establishing any
retirement plan.
Check-A-Matic Plan
For the convenience of shareholders, the Fund offers a preauthorized check
service under which a check is automatically drawn on the shareholder's personal
checking account each month for a predetermined amount (but not less than $250),
as if the shareholder had written it directly. Upon receipt of the check, the
Fund automatically invests the money in additional shares of the Fund at the
current offering price. Applications for this service are available from the
Distributor. There is no charge by the Fund for this service. The Distributor
may terminate or modify this privilege at any time, and shareholders may
terminate their participation by notifying the Transfer Agent in writing.
Systematic Withdrawal Program
As another convenience, the Fund offers a Systematic Withdrawal Program whereby
shareholders may request that a check drawn in a predetermined amount be sent to
them each month or calendar quarter. A shareholder's account must have Fund
shares with a value of at least $10,000 in order to start a Systematic
Withdrawal Program, and the minimum amount that may be withdrawn each month or
quarter under the Systematic Withdrawal Program is $100. This Program may be
terminated or modified by a shareholder or the Fund at any time without charge
or penalty.
A withdrawal under the Systematic Withdrawal Program involves a redemption of
shares, and may result in a gain or loss for federal income tax purposes. In
addition, if the amount withdrawn exceeds the dividends credited to the
shareholder's account, the account ultimately may be depleted.
HOW THE FUND'S PER SHARE VALUE IS DETERMINED
The net asset value of a Fund share is determined once daily as of the close of
public trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time)
on each day the New York Stock Exchange is open for trading. Net asset value per
share is calculated by dividing the value of the Fund's total assets, less its
liabilities, by the number of Fund shares outstanding.
Portfolio securities are valued using current market values, if available.
Securities for which market quotations are not readily available are valued at
fair values as determined in good faith by or under the supervision of the
Trust's officers in accordance with methods which are specifically authorized by
the Board of Trustees. Short-term obligations with remaining maturities of sixty
days or less are valued at amortized cost as reflecting fair value.
DISTRIBUTIONS AND TAXES
Dividends and Distributions
Dividends from net investment income are declared and paid at least annually,
typically after the end of the Fund's fiscal year (March 31). Any net realized
long- term capital gains not previously distributed and any undistributed
short-term capital gains earned during the Fund's fiscal year will also be
distributed to shareholders following the conclusion of the Fund's fiscal year,
with a supplemental distribution on or about December 31 of any additional
undistributed capital gains earned during the 12-month period ended October 31.
Dividends and capital gains distributions (net of any required tax withholding)
are automatically reinvested in additional shares of the Fund at the net asset
value per share on the reinvestment date unless the shareholder has previously
requested in writing to the Transfer Agent that payment be made in cash.
Any dividend or distribution paid by the Fund has the effect of reducing the net
asset value per share on the reinvestment date by the amount of the dividend or
distribution. Investors should note that a dividend or distribution paid on
shares purchased shortly before such dividend or distribution was declared will
be subject to income taxes as discussed below even though the dividend or
distribution represents, in substance, a partial return of capital to the
shareholder.
Taxes
The Fund intends to continue to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 (the
"Code"). As long as the Fund continues to qualify, and as long as the Fund
distributes all of its net investment company income and net realized capital
gains in accordance with the timing requirements of the Code, the Fund will not
be subject to any federal income or excise taxes. However, distributions made by
the Fund will be taxable to shareholders (other than tax-exempt entities),
whether received in shares (through dividend reinvestment ) or in cash.
Distributions derived from net investment income and short-term capital gains
are taxable to shareholders as ordinary income. A portion of such distributions
may qualify for the intercorporate dividends-received deduction. Distributions
derived from long-term capital gains are taxable as such regardless of the
length of time shares of the Fund have been held.
Although distributions are generally taxable when received, certain
distributions made in January are taxable as if received the prior December.
Shareholders will be informed annually of the amount and nature of the Fund's
distributions.
Additional information about taxes is set forth in the Statement of Additional
Information. Shareholders should consult their own advisers concerning federal,
state and local taxation of distributions from the Fund.
GENERAL INFORMATION
The Trust
The Trust was organized as a Massachusetts business trust on February 17, 1987.
The Agreement and Declaration of Trust permits the Board of Trustees to issue an
unlimited number of full and fractional shares of beneficial interest, without
par value, which may be issued in any number of series. The Board of Trustees
may from time to time issue other series, the assets and liabilities of which
will be separate and distinct from any other series. The fiscal year end of the
Fund is March 31.
Shareholder Rights
Shares issued by the Fund have no preemptive, conversion, or subscription
rights. Shareholders have equal and exclusive rights as to dividends and
distributions as declared by the Fund and to the net assets of the Fund upon
liquidation or dissolution. The Fund, as a separate series of the Trust, votes
separately on matters affecting only the Fund (e.g., approval of the Management
Agreement); all series of the Trust vote as a single class on matters affecting
all series jointly or the Trust as a whole (e.g., election or removal of
Trustees). Voting rights are not cumulative, so that the holders of more than
50% of the shares voting in any election of Trustees can, if they so choose,
elect all of the Trustees. While the Trust is not required and does not intend
to hold annual meetings of shareholders, such meetings may be called by the
Trustees in their discretion, or upon demand by the holders of 10% or more of
the outstanding shares of the Trust for the purpose of electing or removing
Trustees.
Performance Information
From time to time, the Fund may publish its total return in advertisements and
communications to investors. Total return information will include the Fund's
average annual compounded rate of return over the most recent one and five year
periods and over the period from the Fund's inception of operations. The Fund
may also advertise aggregate and average total return information over different
periods of time. The Fund's total return will be based upon the value of the
shares acquired through a hypothetical $1,000 investment (at the maximum public
offering price) at the beginning of the specified period and the net asset value
of such shares at the end of the period, assuming reinvestment of all
distributions and after giving effect to the maximum applicable sales charge.
Total return figures will reflect all recurring charges against Fund income.
Investors should note that the investment results of the Fund will fluctuate
over time, and any presentation of the Fund's total return for any prior period
should not be considered as a representation of what an investor's total return
may be in any future period.
Year 2000
Like other business organizations around the world, the Fund could be adversely
affected if the computer systems used by its service providers do not properly
process and calculate information related to dates beginning January 1, 2000.
This is commonly known as the "Year 2000 Issue." The Fund's service providers
are taking steps that they believe are reasonably designed to address the Year
2000 Issue with respect to their computer systems. However, there can be no
assurance that these actions will be sufficient to avoid any adverse impact on
the Fund.
Shareholder Inquiries
Shareholder inquiries should be directed to the Fund at (800) 388-8512.
Advisor
Hodges Capital Management, Inc.
2905 Maple Avenue
Dallas, Texas 75201
(800) 388-8512
Distributor
First Dallas Securities, Inc.
2905 Maple Avenue
Dallas, Texas 75201
Custodian
Star Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
Transfer Agent
American Data Services
P. O. Box 5536
Hauppauge, New York 11788-0132
Auditors
Tait, Weller & Baker
8 Penn Center Plaza , Suite 800
Philadelphia, Pennsylvania 19103
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, CA 94104
Designed
To Make
Capital Grow
Prospectus
August 1, 1998
<PAGE>
One Maritime Plaza, Suite 1201
San Francisco, CA 94111
(415) 434-4441
THE OSTERWEIS FUND (the "Fund") is a mutual fund with the investment objective
of attaining long term total returns. The Fund seeks to achieve its objective by
investing primarily in equity securities (common and preferred stocks).
Osterweis Capital Management, Inc. (the "Advisor"), serves as investment advisor
to the Fund.
This Prospectus sets forth basic information about the Fund that prospective
investors should know before investing. It should be read and retained for
future reference. The Fund is one of a series of Professionally Managed
Portfolios. A Statement of Additional Information dated August 1, 1998, as may
be amended from time to time, has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. This Statement of Additional
Information is available without charge by calling the number listed above or
(800) 282-2340. The SEC maintains an internet site (http://www.sec.gov) that
contains the SAI, other material incorporated by reference and information about
other companies that file electronically with the SEC.
TABLE OF CONTENTS
Expense Table 2
Financial Highlights 3
Objective and Investment
Approach of the Fund 4
Management of the Fund 7
How To Invest in the Fund 8
How To Redeem an
Investment in the Fund 10
Services Available to the
Fund's Shareholders 11
How the Fund's Per Share Value
Is Determined 12
Distributions and Taxes 12
General Information 13
Appendix 14
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated August 1, 1998
THE OSTERWEIS FUND (the "Fund") is a diversified series of Professionally
Managed Portfolios (the "Trust"), an open-end management investment company
offering redeemable shares of beneficial interest. Shares are purchased and
redeemed at their net asset value per share, without a sales charge. The minimum
initial investment is $100,000, with subsequent investments of $1,000 or more.
EXPENSE TABLE
Expenses are one of several factors to consider when investing in the Fund.
The purpose of the following fee table is to provide an understanding of the
various costs and expenses which may be borne directly or indirectly by an
investment in the Fund.
Actual expenses may be more or less than those shown.
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases None
Maximum Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
Annual Fund Operating Expenses (after waiver)*
(As a percentage of average net assets)
Management Fees 1.00%
12b-1 Fees None
Other Expenses 0.75%
Total Fund Operating Expenses (after recoupment) 1.75%*
*The Advisor has undertaken to limit the operating expenses of the Fund to
1.75% of average net assets until a date following advance notice to
shareholders. During the fiscal year ended March 31, 1998, the Fund repaid the
Advisor for expenses it had previously paid for the Fund. Without such
repayment, total fund operating expenses would have been 1.67%.
Example
This table illustrates the net transaction and operating expenses that would be
incurred by an investment in the Fund over different time periods assuming a
$1,000 investment, a 5% annual return, and redemption at the end of:
One year $ 18
Three years $ 55
Five years $ 95
Ten years $206
The Example shown above should not be considered a representation of past
or future expenses and actual expenses may be greater or less than those shown.
In addition, Federal regulations require the Example to assume a 5% annual
return, but the Fund's actual return may be higher or lower. See "Management of
the Fund."
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period.
The following information has been audited by Ernst & Young L.L.P.,
independent accountants, whose unqualified report covering the fiscal period
ended March 31, 1998 is incorporated by reference herein and appears in the
annual report to shareholders. This information shoud be read in conjunction
with the financial statements and accompanying notes thereto which appear in the
annual report and are incorporated by reference into the Statement of Additional
Information. Further information about the Fund's performance may be included in
its annual report, which may be obtained without charge by writing or calling
the address or telephone number on the Prospectus cover page.
<TABLE>
<CAPTION>
Year Ended March 31, October 1, 1993*
through
1998 1997 1996 1995 March 31, 1994
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.88 $11.74 $10.33 $10.28 $10.00
Income from investment operations:
Net investment income 0.02 0.08 0.12 0.28 0.08
Net realized and unrealized
gain on investments 5.61 1.27 1.48 0.11 0.22
Total from investment operations 5.63 1.35 1.60 0.39 0.30
Less distributions:
From net investment income (0.05) (0.08) (0.19) (0.25) (0.02)
From net capital gains (1.47) (0.13) 0.00 (0.09) 0.00
Total distributions (1.52) (0.21) (0.19) (0.34) (0.02)
Net asset value, end of period $16.99 $12.88 $11.74 $10.33 $10.28
Total return 45.77% 11.60% 15.59% 3.91% 3.04%
Ratios/supplemental data:
Net assets, end of period (millions) $ 22.4 $ 16.5 $ 16.9 $ 9.8 $ 5.1
Ratio of expenses to average net assets:
Before expense reimbursement/
recoupment 1.67% 1.75% 1.77% 2.32% 3.73%+
After expense reimbursement/
recoupment 1.75% 1.75% 1.75% 1.74% 1.75%+
Ratio of net investment income to
average net assets:
Before expense reimbursement/
recoupment 0.21% 0.63% 1.47% 2.74% 0.42%+
After expense reimbursement/
recoupment 0.13% 0.63% 1.49% 3.32% 2.40%+
Portfolio turnover rate 26.27% 41.30% 57.32% 28.65% 34.97%
Average commission rate paid
per share0 $.0709 $.0551 - - -
</TABLE>
*Commencement of operations.
+Annualized.
0For fiscal years beginning on or after September 1, 1995, a fund is required to
disclose its average commission rate paid per share for security trades on which
commissions are charged. This amount may vary from period to period and fund to
fund depending on the mix of trades executed in various markets where trading
practices and commission rate structures may differ.
OBJECTIVE AND INVESTMENT APPROACH OF THE FUND
The investment objective of the Fund is to attain long-term total returns. The
Fund seeks to achieve its objective by investing primarily in equity securities.
There is, of course, no assurance that the Fund's objective will be achieved.
Because prices of the securities held by the Fund will fluctuate, the value of
an investment in the Fund will vary as the market value of its investment
portfolio changes. In addition to common stocks, equity securities purchased for
the Fund may include preferred stocks, convertible preferred stocks and
warrants.
Investment Approach. The Advisor selects equity securities for the Fund which it
believes offer superior investment value. The Advisor focuses on the securities
of companies which it believes to be undervalued or otherwise out-of-favor in
the market. The stock prices of such companies may be depressed by visible
near-term problems and not reflective of the companies' longer term prospects.
The Advisor places particular emphasis on the analysis of a company's ability to
generate cash and its management's deployment of this cash.
The Advisor also seeks under-researched, high growth situations that it believes
can be purchased for modest multiples as well as companies with substantial
unrecognized assets and improving earnings prospects. As such companies achieve
greater visibility and their stocks are accorded valuations more in line with
their growth rates, the Advisor is inclined to regard them as candidates for
sale, in order to reduce the risk of future earnings disappointments.
Although equity securities are the primary focus for the Fund, the Advisor may
also purchase fixed income securities and convertible bonds for the Fund's
portfolio in pursuing its goal of long-term total return. The Advisor prefers to
purchase fixed income securities during times of high real interest rates or
when it believes that the outlook for the equity markets is sufficiently
unsettled to warrant building yield into the Fund's portfolio.
Fixed income securities eligible for purchase by the Fund include investment
grade corporate debt securities, those rated BBB or better by Standard & Poor's
Corporation ("S&P") or Baa or better by Moody's Investors Service ("Moody's").
Securities rated BBB by S&P are considered investment grade, but Moody's
considers securities rated Baa to have speculative characteristics. The Fund
also may invest up to 5% of its assets in mortgage-related securities. See the
Statement of Additional Information.
The Fund may invest in corporate debt securities that are rated below investment
grade, but will limit that investment to no more than 30% of its total assets.
Such securities, sometimes referred to as junk bonds, typically carry higher
coupon rates than investment grade securities but also are described as
speculative by both Moody's and S&P. They may be subject to greater market price
fluctuations, less liquidity, and greater risk of income or principal, including
a greater possibility of default or bankruptcy of the issuer of such securities,
than are more highly rated debt securities. Lower rated fixed income securities
also are likely to be more sensitive to adverse economic or company
developments. During periods of economic downturn or rising interest rates,
highly leveraged issuers of lower rated securities may experience financial
stress which could adversely affect their ability to make payments of interest
and principal and increase the possibility of default. In addition, the market
for lower rated debt securities has expanded rapidly in recent years, and its
growth paralleled a long economic expansion. At times in recent years, the
prices of many lower rated debt securities declined substantially, reflecting an
expectation that many issuers of such securities might experience financial
difficulties. There can be no assurance that such declines will not recur. The
market for lower rated debt issues generally is thinner and less active than
that for higher quality securities, which may limit the Fund's ability to sell
such securities at fair value in response to changes in the economy or financial
markets. Adverse publicity and investor perception, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower rated
securities, especially in a thinly traded market.
The Advisor seeks to reduce the risks associated with investing in such
securities by limiting the Fund's holdings in such securities and by the depth
of its own credit analysis. The Fund will not invest in such securities rated
below B by S&P or Moody's. In selecting below investment grade securities, the
Advisor seeks securities in companies with improving cash flows and balance
sheet prospects and whose credit ratings the Advisor views as likely to be
upgraded. The Advisor believes that such securities can produce returns similar
to equities, but with less risk. See the Appendix for a description of Moody's
and S&P ratings.
Repurchase Agreements. The Fund may enter into repurchase agreements in order to
earn additional income on available cash, or as a defensive investment in
periods when the Fund is invested primarily in short-term maturities. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires ownership of a U.S. Government security (which may be of any
maturity) and the seller agrees to repurchase the obligation at a future time at
a set price, thereby determining the yield during the purchaser's holding period
(usually not more than seven days from the date of purchase). Any repurchase
transaction in which the Fund engages will require full collateralization of the
seller's obligation during the entire term of the repurchase agreement. In the
event of a bankruptcy or other default of the seller, the Fund could experience
both delays in liquidating the underlying security and losses in value. However,
the Fund intends to enter into repurchase agreements only with banks with assets
of $500 million or more that are insured by the Federal Deposit Insurance
Corporation and the most creditworthy registered securities dealers pursuant to
procedures adopted and reviewed by the Trust's Board of Trustees. The Advisor
monitors the creditworthiness of the banks and securities dealers with whom the
Fund engages in repurchase transactions. Illiquid and Restricted Securities. The
Fund may not invest more than 15% of its net assets in illiquid securities,
including (i) securities for which there is no readily available market; (ii)
securities the disposition of which would be subject to legal restrictions
(so-called "restricted securities"); and (iii) repurchase agreements having more
than seven days to maturity. A considerable period of time may elapse between
the Fund's decision to dispose of such securities and the time when the Fund is
able to dispose of them, during which time the value of the securities could
decline. Securities which meet the requirements of Securities Act Rule 144A are
restricted, but may be determined to be liquid by the Trustees, based on an
evaluation of the applicable trading markets.
Foreign Securities. The Fund may invest up to 20% of its total assets in
securities of foreign issuers. The Advisor usually buys securities of leading
foreign companies that have well recognized franchises and are selling at a
discount to the securities of similar domestic businesses. There may be less
publicly available information about these issuers than is available about
companies in the U.S., and foreign auditing requirements may not be comparable
to those in the U.S. In addition, the value of the foreign securities may be
adversely affected by movements in the exchange rates between foreign currencies
and the U.S. dollar, as well as other political and economic developments,
including the possibility of expropriation, confiscatory taxation, exchange
controls or other foreign governmental restrictions. Dividends and interest on
foreign securities may be subject to foreign withholding taxes. The Fund may
also invest without limit in securities of foreign issuers which are listed and
traded on a U.S.
national securities exchange.
Options and Futures. The Fund has the ability to invest up to 5% of its assets
in options, futures and options on futures, but has no present intention of
using such instruments. See the Statement of Additional Information for further
information regarding characteristics of and risks involved in the use of these
instruments.
U.S. Government Securities. The Fund may invest in U.S. Government securities.
U.S. Government securities include direct obligations issued by the U.S.
Treasury, such as Treasury bills, certificates of indebtedness, notes and bonds.
U.S. Government agencies and instrumentalities that issue or guarantee
securities include, but are not limited to, the Federal National Mortgage
Association ("FNMA"), Government National Mortgage Association ("GNMA"), Federal
Home Loan Banks, Federal Financing Bank, and Student Loan Marketing Association.
All Treasury securities are backed by the full faith and credit of the United
States.
Obligations of U.S. Government agencies and instrumentalities may or may not be
supported by the full faith and credit of the United States. Some, such as the
Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the U.S. Treasury. Others, such as securities
issued by FNMA, are supported only by the credit of the instrumentality and not
by the U.S. Treasury. If the securities are not backed by the full faith and
credit of the United States, the owner of the securities must look principally
to the agency issuing the obligation for repayment and may not be able to assert
a claim against the United States in the event that the agency or
instrumentality does not meet its commitment.
Investment Restrictions. The Fund has adopted certain investment restrictions,
which are described fully in the Statement of Additional Information. Like the
Fund's investment objective, certain of these restrictions are fundamental and
may be changed only by a majority vote of the Fund's outstanding shares.
MANAGEMENT OF THE FUND
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund. Osterweis Capital Management,
Inc., acts as the Fund's Advisor, and has been in the investment advisory
business since 1983. The Advisor provides investment advisory services to
individual and institutional accounts with a value in excess of $1 billion. Mr.
John S. Osterweis, President and Director of the Advisor, is principally
responsible for the management of the Fund's portfolio. He has over twenty-five
years of securities analysis and portfolio management experience.
The Advisor provides the Fund with advice on buying and selling securities,
manages the investments of the Fund, furnishes the Fund with office space and
certain administrative services, and provides most of the personnel needed by
the Fund. As compensation, the Fund pays the Advisor a monthly management fee
(accrued daily) based upon the average daily net assets of the Fund at the rate
of 1.00% annually. Investment Company Administration Corporation (the
"Administrator") acts as the Fund's Administrator under an Administration
Agreement. Under that agreement, the Administrator prepares various federal and
state regulatory filings, reports and returns for the Fund, prepares reports and
materials to be supplied to the Trustees, monitors the activities of the Fund's
custodian, transfer agent and accountants, and coordinates the preparation and
payment of Fund expenses and reviews the Fund's expense accruals. For its
services, the Administrator receives a monthly fee based on average daily net
assets at the following annual rate:
Average Daily Net Assets Fee or Fee Rate
Under $15 million $30,000
$15 to $50 million 0.20%
$50 to $100 million 0.15%
$100 to $150 million 0.10%
Over $150 million 0.05%
The Fund is responsible for its own operating expenses, including, but not
limited to, the advisory and administrative fees, custody and transfer agent
fees, legal and auditing expenses, federal and state registration fees, and fees
to the Trust's disinterested Trustees. The Advisor has agreed to reduce its fees
or reimburse the Fund for its annual operating expenses which exceed 1.75%. The
Advisor also may reduce its fees, make payments on behalf of the Fund for
expenses which are the Fund's obligation under the Advisory agreement, or
reimburse additional amounts to the Fund at any time in order to reduce the
Fund's expenses. Any such reductions made by the Advisor in its fees or payments
or reimbursement of expenses which are the Fund's obligation are subject to
reimbursement by the Fund within the following three years provided the Fund is
able to effect such reimbursement and remain in compliance with applicable
expense limitations.
The Advisor considers a number of factors in determining which brokers or
dealers to use for the Fund's portfolio transactions. While these are more fully
discussed in the Statement of Additional Information, the factors include, but
are not limited to, the reasonableness of commissions, quality of services and
execution, and the availability of research which the Advisor may lawfully and
appropriately use in its investment management and advisory capacities. Provided
the Fund receives prompt execution at competitive prices, the Advisor may also
consider the sale of Fund shares as a factor in selecting broker-dealers for the
Fund's portfolio transactions.
HOW TO INVEST IN THE FUND
The minimum initial investment is $100,000. Subsequent investments must be at
least $1,000. First Fund Distributors, Inc. (the "Distributor"), acts as
Distributor of the Fund's shares. The Distributor may, at its discretion, waive
the minimum investment requirements. In addition to cash purchases, shares may
be purchased by tendering payment in kind in the form of shares of stock, bonds
or other securities, provided that any such tendered security is readily
marketable, its acquisition is consistent with the Fund's investment objective
and the tendered security is otherwise acceptable to the Fund's Advisor.
Purchasing shares in this manner will cause the investor to realize a capital
gain or loss on each security tendered. The investor must also agree to pay the
brokerage commissions on the sale of any security so tendered if it is sold by
the Fund within 90 days of acquisition. Investors may purchase shares of the
Fund by check or wire:
By check:
Initial Investment. Complete the Fund's Account Application (included with this
Prospectus). Make your check payable to "The Osterweis Fund." Mail or deliver
the completed Account Application and your check to:
The Osterweis Fund
P.O. Box 640856
Cincinnati, OH 45264-0856
For purchase orders sent by overnight mail, please contact the transfer Agent at
(800) 282-2340 for instructions.
Subsequent Investments. Detach and complete the stub attached to your account
statement. Make your check payable to "The Osterweis Fund." Write your
shareholder account number on the check. Mail or deliver the check and
reinvestment form to the Fund in the envelope provided or send to the Fund at
the address indicated above.
By wire:
Initial Investment. Before wiring funds, call the Transfer Agent at (800)
282-2340 between the hours of 9:00 a.m. to 4:00 p.m. Eastern time on a day when
the New York Stock Exchange is open for trading to advise the Transfer Agent
that you intend to make an initial investment by wire and to receive an account
number. Provide the Transfer Agent with your name, and the dollar amount to be
invested.
Complete the Fund's Account Application (included with this Prospectus). Be sure
to include the date and the order confirmation number. Mail or deliver the
completed Application to the address shown at the top of the Account
Application.
Request your bank to transmit immediately available funds by wire for purchase
of shares in your name to the Fund's Custodian, as follows:
Star Bank, N.A. Cinti/Trust
ABA Routing Number: 0420-0001-3
The Osterweis Fund DDA #483898003
(Account name and number)
Subsequent Investments. For subsequent investments an investor should call the
Transfer Agent at (800) 282-2340 before the wire is sent. Failure to do so will
cause the purchase to be credited the next day, when the Transfer Agent receives
notice of the wire. Instruct your bank to wire funds as indicated above. It is
not necessary to contact the Transfer Agent prior to making subsequent
investments by wire. It is essential that complete information regarding your
account be included in all wire instructions in order to facilitate prompt and
accurate handling of investments. Investors may obtain further information about
remitting funds in this manner from the Transfer Agent, and any fees that may be
imposed by their own banks.
General. Payment of proceeds from redemption of shares purchased with an initial
investment made by wire may be delayed until one business day after the
completed Account Application is received by the Fund. All investments must be
made in U.S. dollars and, to avoid fees and delays, checks should be drawn only
on U.S. banks and should not be made by third party check. A charge may be
imposed if any check used for investment does not clear. The Fund and the
Distributor reserve the right to reject any purchase order in whole or in part.
If an order to purchase shares, together with payment in proper form, is
received by the Transfer Agent by the close of trading on the New York Stock
Exchange (currently 4:00 p.m., Eastern time), Fund shares will be purchased at
the offering price determined as of the close of trading on that day. Otherwise,
Fund shares will be purchased at the offering price determined as of the close
of trading on the New York Stock Exchange on the next business day.
Federal tax law requires that investors provide a certified Taxpayer
Identification Number and certain other required certifications upon opening or
reopening an account in order to avoid backup withholding of taxes at the rate
of 31% on taxable distributions and proceeds of redemptions. See the Fund's
Account Application for further information concerning this requirement.
The Fund does not issue share certificates. All shares are held in
non-certificated form registered on the books of the Fund and the Fund's
Transfer Agent for the account of the shareholder.
HOW TO REDEEM AN INVESTMENT IN THE FUND
Shareholders have the right to redeem all or any portion of their outstanding
shares at their current net asset value on each day the New York Stock Exchange
is open for trading. Redemption requests should be sent to The Osterweis Fund,
P. O. Box 5536, Hauppauge, NY 11788-0132. The redemption price is the net asset
value per share next determined after the shares are validly tendered for
redemption.
Direct Redemption. A written request for redemption must be received by the
Fund's Transfer Agent in order to constitute a valid tender for redemption. To
protect the Fund and its shareholders, a signature guarantee is required for
certain transactions, including redemptions. Signature(s) on the redemption
request must be guaranteed by an "eligible guarantor institution" as defined in
the federal securities laws; these institutions include banks, broker-dealers,
credit unions and savings institutions. A broker-dealer guaranteeing signatures
must be a member of a clearing corporation or maintain net capital of at least
$100,000. Credit unions must be authorized to issue signature guarantees.
Signature guarantees will be accepted from any eligible guarantor institution
which participates in a signature guarantee program. A notary public is not an
acceptable guarantor.
Telephone Redemption. Shareholders who complete the Redemption by Telephone
portion of the Fund's Account Application may redeem shares on any business day
the New York Stock Exchange is open by calling the Fund's Transfer Agent at
(800) 282-2340 before 4:00 p.m. Eastern time. Redemption proceeds will be mailed
or wired at the shareholder's direction the next business day to the
predesignated account. The minimum amount that may be wired is $1,000 (wire
charges, if any, will be deducted from redemption proceeds).
By establishing telephone redemption privileges, a shareholder authorizes the
Fund and its Transfer Agent to act upon the instruction of any person by
telephone to redeem from the account for which such service has been authorized
and transfer the proceeds to the bank account designated in the Authorization.
The Fund and the Transfer Agent will use procedures to confirm that redemption
instructions received by telephone are genuine, including recording of telephone
instructions and requiring a form of personal identification before acting on
such instructions. Neither the Fund nor the Transfer Agent will be liable for
any loss, expense, or cost arising out of any telephone redemption request,
including any fraudulent or unauthorized requests that are reasonably believed
to be genuine, provided that such procedures are followed. The Fund may change,
modify, or terminate these privileges at any time upon at least 60 days' notice
to shareholders.
Shareholders may request telephone redemption after an account is opened;
however, the authorization form will require a separate signature guarantee.
Shareholders may experience delays in exercising telephone redemption during
periods of abnormal market activity.
General. Payment of the redemption proceeds will be made promptly, but not later
than seven days after the receipt of all documents in proper form, including a
written redemption order with appropriate signature guarantee in cases where
telephone redemption privileges are not being utilized. The Fund may suspend the
right of redemption under certain extraordinary circumstances in accordance with
the rules of the Securities and Exchange Commission. In the case of shares
purchased by check and redeemed shortly after purchase, the Fund will not mail
redemption proceeds until it has been notified that the check used for the
purchase has been collected, which may take up to 15 days from the purchase
date. To minimize or avoid such delay, investors may purchase shares by
certified check or federal funds wire. A redemption may result in recognition of
a gain or loss for federal income tax purposes.
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves the right to redeem shares in any account, other than retirement plan
or Uniform Gifts/Transfers to Minors Acts accounts, if at any time, due to
redemptions by the shareholder, the total value of a shareholder's account does
not equal at least $1,500. If the Fund determines to make such an involuntary
redemption, the shareholder will first be notified that the value of the account
is less than $1,500 and will be allowed 30 days to make an additional investment
to bring the value of the account to at least $1,500 before the Fund takes any
action.
SERVICES AVAILABLE TO THE FUND'S SHAREHOLDERS
Retirement Plans. The minimum initial investment for such plans is $100,000,
with minimum subsequent investments of $1,000. The Fund offers prototype
Individual Retirement Account ("IRA") and Keogh plans, and information is
available from the Distributor with respect to other retirement plans offered.
Investors should consult a tax advisor before establishing any retirement plan.
Check-A-Matic Plan. For the convenience of shareholders, the Fund offers a
preauthorized check service under which a check is automatically drawn on the
shareholder's personal checking account each month for a predetermined amount
(but not less than $250). Upon receipt of the check, the Fund automatically
invests the money in additional shares of the Fund at the current offering
price. Applications for this service are available from the Distributor. There
is no charge by the Fund for this service. The Distributor may terminate or
modify this privilege at any time, and shareholders may terminate their
participation by notifying the Transfer Agent in writing.
Systematic Withdrawal Program. As another convenience, the Fund offers a
Systematic Withdrawal Program whereby shareholders may request that a check
drawn in a predetermined amount be sent to them each month or calendar quarter.
A shareholder's account must have Fund shares with a value of at least $100,000
in order to start a Systematic Withdrawal Program, and the minimum amount that
may be withdrawn each month or quarter under the Systematic Withdrawal Program
is $100. This Program may be terminated or modified by a shareholder or the Fund
at any time without charge or penalty.
A withdrawal under the Systematic Withdrawal Program involves a redemption of
shares, and may result in a gain or loss for federal income tax purposes. In
addition, if the amounts withdrawn exceed the dividends credited to the
shareholder's account, the account ultimately may be depleted. HOW THE FUND'S
PER SHARE VALUE IS DETERMINED
The net asset value of a Fund share is determined once daily as of the close of
public trading on the New York Stock Exchange (currently 4:00 p.m., Eastern
time) on each day the New York Stock Exchange is open for trading. Net asset
value per share is calculated by dividing the value of the Fund's total assets,
less its liabilities, by the number of Fund shares outstanding. Portfolio
securities are valued using current market values, if available. Securities for
which market quotations are not readily available are valued at fair values as
determined in good faith by or under the supervision of the Trust's officers in
accordance with methods which are specifically authorized by the Board of
Trustees. Short-term obligations with remaining maturities of sixty days or less
are valued at amortized cost as reflecting fair value. DISTRIBUTIONS AND TAXES
Dividends and Distributions. Dividends from net income are declared and paid at
least annually, typically after the end of the Fund's fiscal year. Any net
capital gains realized during the Fund's fiscal year will also be distributed to
shareholders in June, with a supplemental distribution in December of any
undistributed net capital gains earned during the 12-month period ended each
October 31.
Dividends and capital gain distributions (net of any required tax withholding)
are automatically reinvested in additional shares of the Fund at the net asset
value per share on the reinvestment date unless the shareholder has previously
requested in writing to the Transfer Agent that payment be made in cash.
Any dividend or distribution paid by the Fund has the effect of reducing the net
asset value per share on the reinvestment date by the amount of the dividend or
distribution. Investors should note that a dividend or distribution paid on
shares purchased shortly before such dividend or distribution was declared will
be subject to income taxes as discussed below even though the dividend or
distribution represents, in substance, a partial return of capital to the
shareholder.
Taxes. The Fund intends to continue to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986 (the "Code"). As long as the Fund continues to qualify, and as long as the
Fund distributes all of its income each year to the shareholders, the Fund will
not be subject to any federal income or excise taxes. The distributions made by
the Fund will be taxable to shareholders whether received in shares (through
dividend reinvestment) or in cash. Distributions derived from net investment
income, including net short-term capital gains, are taxable to shareholders as
ordinary income. A portion of these distributions may qualify for the
dividends-received deduction. Distributions designated as capital gains
dividends are taxable as long-term capital gains regardless of the length of
time shares of the Fund have been held. Although distributions are generally
taxable when received, certain distributions made in January are taxable as if
received the prior December. Shareholders will be informed annually of the
amount and nature of the Fund's distributions.
Additional information about taxes is set forth in the Statement of Additional
Information. Shareholders should consult their own advisers concerning federal,
state and local taxation of distributions from the Fund.
GENERAL INFORMATION
The Trust. The Trust was organized as a Massachusetts business trust on February
17, 1987. The Agreement and Declaration of Trust permits the Board of Trustees
to issue an unlimited number of full and fractional shares of beneficial
interest, without par value, which may be issued in any number of series. The
Board of Trustees may from time to time issue other series, the assets and
liabilities of which will be separate and distinct from any other series. The
fiscal year of the Fund ends on March 31.
Shareholder Rights. Shares issued by the Fund have no preemptive, conversion or
subscription rights. Shareholders have equal and exclusive rights as to
dividends and distributions as declared by the Fund and to the net assets of the
Fund upon liquidation or dissolution. The Fund, as a separate series of the
Trust, votes separately on matters affecting only the Fund (e.g., approval of
the Advisory Agreement); all series of the Trust vote as a single class on
matters affecting all series jointly or the Trust as a whole (e.g., election or
removal of Trustees). Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in any election of Trustees can, if they so
choose, elect all of the Trustees. While the Trust is not required and does not
intend to hold annual meetings of shareholders, such meetings may be called by
the Trustees in their discretion, or upon demand by the holders of 10% or more
of the outstanding shares of the Trust for the purpose of electing or removing
Trustees.
Performance Information. From time to time, the Fund may publish its total
return in advertisements and communications to investors. Total return
information will include the Fund's average annual compounded rate of return
over the most recent year and over the period from the Fund's inception of
operations. The Fund may also advertise cumulative and average total return
information over different periods of time. The Fund's total return will be
based upon the value of the shares acquired through a hypothetical $1,000
investment at the beginning of the specified period and the net asset value of
such shares at the end of the period, assuming reinvestment of all
distributions. Total return figures will reflect all recurring charges against
Fund income. Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
prior period should not be considered as a representation of what an investor's
total return may be in any future period. Year 2000. Like other business
organizations around the world, the Fund could be adversely affected if the
computer systems used by its Advisor, and other service providers do not
properly process and calculate information related to dates beginning January 1,
2000. This is commonly known as the "Year 2000 Issue." The Fund's Advisor is
taking steps that it believes are reasonably designed to address the Year 2000
Issue with respect to its own computer systems, and it has obtained assurances
from the Fund's other service providers that they are taking comparable steps.
However, there can be no assurance that these actions will be sufficient to
avoid any adverse impact on the Fund.
Shareholder Inquiries. Shareholder inquiries should be directed to the Fund at
the number shown on the cover of the Prospectus.
APPENDIX
Description of Bond Ratings*
Moody's Investors Service
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk. 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 rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuations or protective elements may be
of greater amplitude or there may be other elements present which make long-term
risks appear somewhat larger than in Aaa securities.
A: Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future. Baa: Bonds 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 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. Uncertainly of position characterizes bonds in
this class.
B: Bonds 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.
Standard & Poor's Corporation
AAA: Bonds rated AAA are highest grade debt obligations. This rating indicates
an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of change in circumstances and
economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category. BB and B: Bonds rated BB and B
are regarded, on balance, as predominately speculative with respect to the
issuer's capacity to pay interest and principal in accordance with the terms of
the obligation. BB indicates a lower degree of speculation than B. While such
bonds will likely have some quality of protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
The ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time-to-time revise such ratings, they undertake no
obligation to do so.
Advisor
Osterweis Capital Management, Inc.
One Maritime Plaza, Suite 1201
San Francisco, California 94111
Distributor
First Fund Distributors, Inc.
4455 E. Camelback Road, Suite 261E
Phoenix, Arizona 85018
Custodian
Star Bank, N.A.
425 Walnut Street
Cincinnati, Ohio 45202
Transfer Agent
American Data Services
P. O. Box 5536
Hauppauge, New York 11788-0132
Auditors
Ernst & Young LLP
515 South Flower Street
Los Angeles, California 90071
Legal Counsel
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
Prospectus
August 1, 1998
<PAGE>
THE PERKINS DISCOVERY FUND
THE PERKINS OPPORTUNITY FUND
730 East Lake Street
Wayzata, Minnesota 55391-1769
(612) 473-8367
(800) 998-3190
THE PERKINS DISCOVERY FUND (the "Discovery Fund") and THE PERKINS
OPPORTUNITY FUND (the "Opportunity Fund") are mutual funds with the investment
objective of seeking capital appreciation. Perkins Capital Management, Inc.
("the Advisor") is investment advisor to the Funds.
The Discovery Fund seeks to achieve its objective by investing principally
in common stocks of small companies believed to have appreciation potential. A
substantial portion of the Discovery Fund's assets will be invested in common
stocks of companies with market capitalizations of less than $100 million.
Due to investment considerations, it is presently intended that the
Discovery Fund will close to new investors when it reaches $50 million in total
assets. If the Discovery Fund closes at $50 million in total assets as currently
expected, the Trustees may determine to reopen the Discovery Fund at some point
based on market conditions and other factors.
The Opportunity Fund seeks to achieve its objective by investing principally
in common stocks. The Opportunity Fund may own a mix of companies with large,
medium and small market capitalizations, although the Advisor believes that the
greatest opportunities are often found in small to medium capitalization
companies.
Neither Fund is a complete investment program and is appropriate only for
those investors who understand and can bear the risks of investing in smaller
companies. Shares of such smaller companies and each Fund's net asset value may
be very volatile. The Funds may borrow for investment purposes, and engage in
short sales of securities, which may be regarded as speculative techniques. The
Funds are not appropriate for short-term investors and should be considered only
for the aggressive portion of an investor's portfolio. See "Investment
Objectives, Policies and Risks," at page 5.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
Expense Table 2 How To Redeem an Investment in the Funds 12
Financial Highlights 4 Services Available to Shareholders 14
Investment Objectives, Policies How the Funds' Per Share Value is Determined 15
and Risks 5 Distributions and Taxes 15
Management of the Funds 8 General Information 16
How To Invest in the Funds 10
</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Prospectus dated August 1, 1998
This Prospectus sets forth basic information about the Funds that
prospective investors should know before investing. It should be read and
retained for future reference. The Funds are series of Professionally Managed
Portfolios. A separate Statement of Additional Information for each Fund dated
August 1, 1998 and as may be amended from time to time, has been filed with the
Securities and Exchange Commission and is incorporated herein by reference. Each
Statement of Additional Information is available without charge upon request to
the Funds at the address or telephone number given above. The SEC maintains an
internet site (http://www.sec.gov) that contains the SAI, other material
incorporated by reference and information about other companies that file
electronically with the SEC.
EXPENSE TABLE
Expenses are one of several factors to consider when investing in the Funds.
The purpose of the following fee table is to provide an understanding of the
various costs and expenses which may be borne directly or indirectly by an
investment in the Funds. Actual expenses may be more or less than those shown.
<TABLE>
<CAPTION>
Discovery Opportunity
Fund Fund
Shareholder Transaction Expenses
<S> <C> <C>
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) 4.75% 4.75%
Maximum Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fees None None
Annual Fund Operating Expenses (As a percentage of average net assets)
Investment Advisory Fees 1.00% 1.00%
12b-1 Fees 0.20% 0.20%
Shareholder Service Fee 0.25% 0.25%
Other Expenses 1.05%* 0.82%
Total Fund Operating Expenses 2.50%* 2.27%
</TABLE>
* The Advisor has agreed to reduce its fees or reimburse the Funds for expenses
to insure that the expenses for each Fund will not exceed 2.50% of average net
assets annually. In the absence of the Advisor's undertaking, it is estimated
that "Other Expenses" for the Discovery Fund would be 1.85% and "Total Fund
Operating Expenses" would be 3.35%.
Example:
This table illustrates the net transaction and operating expenses that would be
incurred by an investment in the Funds over different time periods assuming a
$1,000 investment, a 5%annual return, and redemption at the end of each time
period:
Discovery Fund Opportunity Fund
1 Year $ 72 $ 69
3 Years $122 $115
5 Years N/A $163
10 Years N/A $296
The Example shown above should not be considered a representation of
past or future expenses and actual expenses may be greater or less than those
shown. In addition, federal regulations require the example to assume a 5%
annual return, but a Fund's actual return may be higher or lower. See
"Management of the Funds."
Each Fund is a diversified series of Professionally Managed Portfolios (the
"Trust"), an open-end registered management investment company offering
redeemable shares of beneficial interest. Shares of each Fund may be purchased
at the public offering price which includes a maximum sales charge of 4.75% of
the offering price, or less depending on the amount invested. The minimum
initial investment is $2,500, with subsequent minimum investments of $100 or
more ($1,000 and $100, respectively, for retirement plans). Each Fund has
adopted a plan of distribution under which each Fund will pay the Distributor a
fee at an annual rate of up to a maximum of 0.25% of its net assets. A long-term
shareholder may pay more, directly and indirectly, in sales charges and such
fees than the maximum sales charge permitted under the rules of the National
Association of Securities Dealers ("NASD"). This is recognized and permitted by
NASD. Shares will be redeemed at net asset value per share.
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period for the Opportunity Fund.
The following information has been audited by Tait, Weller & Baker,
independent accountants, whose unqualified report covering the period ended
March 31, 1998 is incorporated by reference herein and appears in the annual
report to shareholders. This information should be read in conjunction with the
financial statements and accompanying notes which appear in the annual report to
shareholders and are incorporated by reference into the Statement of Additional
Information. Further information about the Opportunity Fund's performance is
contained in its annual report, which may be obtained without charge by writing
or calling the Advisor at the number on the Prospectus cover page. The Discovery
Fund commenced operation on April 7, 1998, therefore no per share data has been
provided.
<TABLE>
<CAPTION>
Feb. 18, 1993*
Year Ended March 31, through
1998 1997 1996++ 1995++ 1994++ March 31, 1993++
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $12.58 $18.78 $13.03 $10.37 $7.96 $7.50
Income from investment operations:
Net investment loss (0.34) (0.24) (0.12) (0.13) (0.13) (0.01)
Net realized and unrealized gain (loss)
on investments 2.00 (4.98) 6.66 3.79 2.70 0.47
Total from investment operations 1.66 (5.22) 6.54 3.66 2.57 0.46
Less distributions:
From net capital gains 0.00 (0.98) (0.79) (1.00) (0.16) 0
Net asset value, end of year $14.24 $12.58 $18.78 $13.03 $10.37 $ 7.96
Total return 13.20% (28.94)% 51.29% 38.72% 32.22% 28.37%+
Ratios/supplemental data:
Net assets, end of year (millions) $56.1 $75.3 $92.3 $12.5 $ 3.3 $ 1.0
Ratio of expenses to average net assets:
Before expense reimbursement 2.27% 1.90% 1.97% 3.08% 5.14% 13.15%+
After expense reimbursement 2.27% 1.90% 1.97% 2.63% 2.49% 2.42%+
Ratio of net investment loss to average net assets:
Before expense reimbursement (1.85%) (1.25%) (1.16%) (2.76%) (4.93%) (12.38%)+
After expense reimbursement (1.85%) (1.25%) (1.16%) (2.31%) (2.28%) (1.65%)+
Portfolio turnover rate 53.37% 86.88% 92.45% 124.86% 90.63% 15.15%
Average commission rate paid per share0 $.0496 $.0608 - - - -
</TABLE>
*Commencement of operations.
+Annualized.
++Per share data has been restated to give effect to a 2-for-1 stock split to
shareholders of record as of the close on June 3, 1996.
0For fiscal years beginning on or after September 1, 1995, a fund is required to
disclose its average commission rate paid per share for security trades on which
commissions are charged. This amount may vary from period to period and fund to
fund depending on the mix of trades executed in various markets where trading
practices and commission rate structures may differ.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
Investment Objectives
The investment objective of each Fund is capital appreciation. The primary
approach of the Discovery Fund is to purchase common stocks of companies with
individual market capitalizations of less than $100 million at the time of
purchase, as described below, which the Advisor believes to be attractive
investments with capital appreciation potential on an individual issuer basis.
The primary approach of the Opportunity Fund is also to purchase common stocks
of attractive companies with capital appreciation potential, although there is
no limitation on the capitalization of companies it may purchase. This may
result in the Opportunity Fund's ownership of a mix of companies with large,
medium and small market capitalizations, although the Advisor believes that the
greatest opportunities are often found in small to medium capitalization
companies.
There is, of course, no assurance that either Fund's objective will be
achieved. Because prices of common stocks and other securities fluctuate, the
value of an investment in each of the Funds will vary, as the market value of
its investment portfolio changes. Each Fund is diversified, which under
applicable federal law means that as to 75% of its total assets, no more than 5%
may be invested in the securities of a single issuer and it may hold no more
than 10% of the voting securities of any issuer. The Funds may make use of
investment techniques which involve higher than average risk, such as leveraging
and short sales. As indicated below, there are special risks associated with
investing in newer and smaller companies.
Investment Approach. The Advisor's approach to equity investments is to seek
opportunities for growth by investing in companies which it believes will
appreciate in value. The Advisor seeks to discover investment opportunities
primarily by searching for companies which it believes are in the process of
undergoing some type of fundamental change. Stocks are purchased when it is
believed that change will result in higher earnings and/or a higher
price/earnings ratio, and thus a higher share price when that change is
discovered by others. Companies undergoing change may have new products,
processes, strategies, management, or may be subjected to change by external
forces. Such companies located in the upper midwest states often predominate in
the Funds' portfolios, although there is no regional or geographical limit to
the location of portfolio companies. In its investment selection process, the
Advisor visits companies, reads a variety of reports and publications and
utilizes computer programs to derive fundamental selection criteria. The Advisor
also uses technical chart analysis as an aid in selecting those companies which
appear to offer the best investment opportunities at a particular time, and as
an aid in selecting what the Advisor believes to be the best purchase or sale
point for a particular security.
The Funds invest principally in common stocks. The Funds' investments may
also include preferred stocks, warrants, convertible debt obligations and other
debt obligations that, in the Advisor's opinion, offer the possibility of
capital growth.
During those times when equity securities that meet the Advisor's investment
criteria cannot be found, for temporary defensive purposes or pending
longer-term investment, the Funds may invest any amount of their assets in
short-term money market instruments, including securities issued by the U.S.
Government, its agencies and instrumentalities or other such instruments rated
in the top two rating categories by Moody's Investors Service or Standard &
Poor's Corporation or, if unrated, in instruments deemed to be of comparable
quality by the Fund's Advisor.
Newer and Smaller Companies. Under normal circumstances a substantial portion of
the Discovery Fund's assets will be invested in securities of companies with
individual market capitalizations of less than $100 million at the time of
purchase, and the Opportunity Fund may also invest a substantial portion of its
assets in such companies and other smaller and newer companies with
capitalizations greater than $100 million. The Advisor believes that such
companies provide an opportunity for superior returns because they are not as
well-known to the investing public, have less investor following and a limited
dissemination of information about them or their industry and therefore may
provide the potential for investment gains due to the inefficiencies in this
sector of the marketplace. These companies also may offer unique products,
services or technologies and often serve special or expanded market niches that
can contribute to their gain potential. If the market capitalization of a
company held by the Discovery Fund increases to over $100 million, the Discovery
Fund is not required to dispose of such holding. While the Funds invest
principally in common stocks, they may also hold preferred stocks, warrants,
convertible debt obligations and other debt obligations that, in the Advisor's
opinion, offer the possibility of capital growth.
Risks of Investing in Smaller Companies
Investments in smaller companies may be speculative and volatile and involve
greater risks than are customarily associated with larger companies. Many
smaller companies are more vulnerable than larger companies to adverse business
or economic developments. They may have limited product lines, markets or
financial resources. New and improved products or methods of development may
have a substantial impact on the earnings and revenues of such companies and any
such positive or negative developments could have a corresponding positive or
negative impact on the value of their shares.
Small company shares, which trade on the over-the counter market, may have
fewer market makers, wider spreads between their quoted bid and asked prices and
lower trading volumes, resulting in comparatively greater price volatility and
less liquidity than the securities of companies that have larger market
capitalizations and/or that are traded on the major stock exchanges or than the
market averages in general. In addition, the Funds and other client accounts of
the Advisor, on a collective basis, may hold a significant percentage of a
company's outstanding shares. When making larger sales, the Funds might have to
sell assets at discounts from quoted prices or may have to make a series of
small sales over an extended period of time.
For these reasons, each Fund's net asset value may be very volatile and the
Funds may not be appropriate for short-term investors. The Funds should be
considered only for the aggressive portion of the portfolio of an investor who
understands and can bear the risks of investing in smaller companies. There can
be no assurance that the Funds' objectives will be attained or that the value of
their portfolios will not decline.
Repurchase Agreements. The Funds may enter into repurchase agreements in order
to earn additional income on available cash, or as a defensive investment in
periods when a Fund is primarily invested in instruments with short-term
maturities. A repurchase agreement is a short-term investment in which the
purchaser (i.e., a Fund) acquires ownership of a U.S. Government security (which
may be of any maturity) and the seller agrees to repurchase the obligation at a
future time at a set price, thereby determining the yield during the purchaser's
holding period (usually not more than seven days from the date of purchase). Any
repurchase transaction in which a Fund engages will require full
collateralization of the seller's obligation during the entire term of the
repurchase agreement. In the event of a bankruptcy or other default of the
seller, a Fund could experience both delays in liquidating the underlying
security and losses in value. However, the Funds intend to enter into repurchase
agreements only with banks with assets of $500 million or more that have
deposits insured by the Federal Deposit Insurance Corporation and the most
creditworthy registered U.S. Government securities dealers pursuant to
procedures adopted and regularly reviewed by the Trust's Board of Trustees.
Creditworthiness of the banks and securities dealers with whom a Fund engages in
repurchase transactions is monitored under procedures adopted by the Board of
Trustees. A Fund will not invest more than 15% of its total assets in illiquid
securities, including repurchase agreements maturing in more than seven days.
Illiquid and Restricted Securities. Neither Fund may invest more than 15% of its
net assets in illiquid securities, including (i) securities for which there is
no readily available market; (ii) securities the disposition of which would be
subject to legal restrictions (so-called "restricted securities"); and (iii)
repurchase agreements having more than seven days to maturity. A considerable
period of time may elapse between a Fund's decision to dispose of such
securities and the time when a Fund is able to dispose of them, during which
time the value of the securities could decline. Securities which meet the
requirements of Securities Act Rule 144A are restricted, but may be determined
to be liquid by the Trustees based on an evaluation of the applicable trading
markets.
Foreign Securities. Each Fund may invest up to 10% of its total assets in U.S.
dollar-denominated securities of foreign issuers, including American Depositary
Receipts with respect to securities of foreign issuers. There may be less
publicly available information about these issuers than is available about
companies in the U.S. and foreign auditing requirements may not be comparable to
those in the U.S. In addition, the value of the foreign securities may be
adversely affected by movements in the exchange rates between foreign currencies
and the U.S. dollar, as well as other political and economic developments,
including the possibility of expropriation, confiscatory taxation, exchange
controls or other foreign governmental restrictions. The Funds may also invest
without limit in securities of foreign issuers which are listed and traded on a
domestic national securities exchange.
Short Sales. The Funds may engage in short sales of securities. In a short sale,
a Fund sells stock which it does not own, making delivery with securities
"borrowed" from a broker. A Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. This
price may or may not be less than the price at which the security was sold by a
Fund. Until the security is replaced, a Fund is required to pay to the lender
any dividends or interest which accrue during the period of the loan. In order
to borrow the security, a Fund may also have to pay a premium which would
increase the cost of the security sold. The proceeds of the short sale will be
retained by the broker to the extent necessary to meet margin requirements,
until the short position is closed out.
The Funds also must segregate liquid assets equal to the difference between
(a) the market value of the securities sold short at the time they were sold
short and (b) the value of the collateral deposited with the broker in
connection with the short sale (not including the proceeds from the short sale).
While the short position is open, a Fund must maintain daily the segregated
assets at such a level that the amount segregated plus the amount deposited
with the broker as collateral equals the current market value of the securities
sold short.
A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and date on which a Fund
replaces the borrowed security. A Fund will realize a gain if the security
declines in price between those dates. The amount of any gain will be decreased
and the amount of any loss will be increased by any interest a Fund may be
required to pay in connection with a short sale.
The dollar amount of short sales at any one time (not including short sales
against the box) may not exceed 25% of the net assets of a Fund and it is
expected that normally the dollar amount of such sales will not exceed 10% of
the net assets of a Fund.
Leverage Through Borrowing. The Funds may borrow for investment purposes. This
borrowing, which is known as leveraging, generally will be unsecured, except to
the extent a Fund enters into reverse repurchase agreements described below. The
Investment Company Act of 1940 (the "1940 Act") requires a Fund to maintain
continuous asset coverage (that is, total assets including borrowings, less
liabilities exclusive of borrowings) of 300% of the amount borrowed. If the 300%
asset coverage should decline as a result of market fluctuations or other
reasons, a Fund may be required to sell some of its portfolio holdings within
three days to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. Leveraging may exaggerate the effect on the net asset value of any
increase or decrease in the market value of a Fund's portfolio. Money borrowed
for leveraging will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
Options Transactions. The Funds may buy call and put options on individual
equity securities and write covered call and put options, and engage in related
closing transactions. A call option gives the purchaser of the option the right
to buy, and obligates the writer to sell, the underlying security at the
exercise price at any time during the option period. Conversely, a put option
gives the purchaser of the option the right to sell, and obligates the writer to
buy, the underlying security at the exercise price at any time during the option
period. A covered call option sold by a Fund, which is a call option with
respect to which a Fund owns the underlying security, exposes a Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or to possible continued holding of
a security which might otherwise have been sold to protect against depreciation
in the market price of the security. A covered put option sold by a Fund exposes
the Fund during the term of the option to a decline in the price of the
underlying security. A put option sold by a Fund is covered when, among other
things, liquid assets are segregated by the Fund's custodian to fulfill the
obligation undertaken.
To close out a position when writing covered options, a Fund may make a
"closing purchase transaction," which involves purchasing an option on the same
security with the same exercise price and expiration date as the option which it
has previously written on the security. To close out a position as a purchaser
of an option, a Fund may make a "closing sale transaction," which involves
liquidating a Fund's position by selling the option previously purchased. A Fund
will realize a profit or loss from a closing purchase or sale transaction
depending upon the difference between the amount paid to purchase an option and
the amount received from the sale thereof. See the Statement of Additional
Information for the applicable Fund.
Portfolio Turnover. Each Fund's annual rate of portfolio turnover is not
expected to exceed 100%. In general, the Advisor will not consider the rate of
portfolio turnover to be a normally limiting factor in determining when or
whether to purchase or sell securities in order to achieve a Fund's objective.
Year 2000. Like other business organizations around the world, the Funds could
be adversely affected if the computer systems used by the Advisor and other
service providers do not properly process and calculate information related to
dates beginning January 1, 2000. This is commonly known as the "Year 2000
Issue." The Advisor is taking steps that it believes are reasonably designed to
address the Year 2000 Issue with respect to its own computer systems, and it is
obtaining assurances from the Funds' other service providers that they are
taking comparable steps. However, there can be no assurance that these actions
will be sufficient to avoid any adverse impact on the Funds.
The Funds have adopted certain investment restrictions, which are described
fully in each Fund's Statement of Additional Information. Like the Funds'
investment objective, certain of these restrictions are fundamental and may be
changed only by the vote of a majority of a Fund's outstanding securities (as
defined in the 1940 Act).
MANAGEMENT OF THE FUNDS
The Board of Trustees of the Trust establishes each Fund's policies and
supervises and reviews the management of the Funds. Perkins Capital Management,
Inc., 730 East Lake Street, Wayzata, MN 55391-1769, the Funds' Advisor, has been
in the investment advisory business since 1984. The Advisor provides investment
advisory services to individual and institutional accounts with a value in
excess of $300 million. The Funds' portfolios will typically contain many of the
same stocks that are owned by the Advisor's other accounts. However, investment
decisions for the Funds are made independently of investment decisions for the
Advisor's other accounts and reflect certain restrictions that apply to the
Funds. Mr. Richard W. Perkins and Mr. Daniel S. Perkins, who have been
associated with the Advisor since its inception, are principally responsible for
the management of each Fund's portfolio.
Under separate Advisory Agreements, the Advisor provides each Fund with
advice on buying and selling securities, manages the investments of each Fund,
furnishes each Fund with office space and certain administrative services, and
provides most of the personnel needed by the Funds. As compensation, each Fund
pays the Advisor a monthly management fee (accrued daily) based upon the average
daily net assets of each Fund at the rate of 1.00% annually.
Under an Administration Agreement, Investment Company Administration
Corporation (the "Administrator") prepares various federal and state regulatory
filings, reports and returns for the Funds, prepares reports and materials to be
supplied to the Trustees, monitors the activities of the Funds' custodian,
transfer agent and accountants, and coordinates the preparation and payment of
each Fund's expenses and reviews each Funds' expense accruals. For its services,
the Administrator receives an annual fee from each Fund based on the following
table:
Assets Fee As a Percentage of Net Assets
Less than $12,000,000 $30,000
$12,000,000 - $50,000,000 .25%
$50,000,000 - $100,000,000 .20%
$100,000,000 - $200,000,000 .15%
$200,000,000 - And Above .10%
Each Fund pays a monthly shareholder service fee at the annual rate of 0.25 of
1% of its average daily net assets to the Advisor, selected broker-dealers and
other agents for providing certain ongoing services to shareholders.
Each Fund is responsible for its own operating expenses. The Advisor has
agreed to reduce its fees or reimburse a Fund for its annual operating expenses
which exceed 2.50%. The Advisor also may reimburse additional amounts to a Fund
at any time in order to reduce a Fund's expenses. Reductions made by the Advisor
in its fees or payments or reimbursements of expenses which are a Fund's
obligation are subject to reimbursement within the following three years by the
Fund provided the Fund is able to do so and remain in compliance with any
applicable expense limitations then in effect.
The Advisor considers a number of factors in determining which brokers or
dealers to use for a Fund's portfolio transactions. While these are more fully
discussed in each Fund's Statement of Additional Information, the factors
include, but are not limited to, the reasonableness of commissions, quality of
services and execution, the Advisor's relationship with the broker or dealer,
the broker or dealer's ability to handle low volume, small capitalization stocks
and the availability of research which the Advisor may lawfully and
appropriately use in its investment management and advisory capacities. Provided
a Fund receives prompt execution at competitive prices, the Advisor may also
consider the sale of a Fund's shares by broker-dealers as a factor in selecting
broker-dealers for a Fund's portfolio transactions.
HOW TO INVEST IN THE FUNDS
The minimum initial investment for each Fund is $2,500. Subsequent
investments must be at least $100. Investments in retirement plans may be for
minimums of $1,000 and $100, respectively. First Fund Distributors, Inc., acts
as Distributor of the Funds' shares. The Distributor may, at its discretion,
waive the minimum investment requirements for purchases in conjunction with
certain group or periodic plans. Shares of the Funds are offered continuously
for purchase at the public offering price next determined after a purchase order
is received. The public offering price is effective for orders received by a
Fund or investment dealers prior to the time of the next determination of a
Fund's net asset value and, in the case of orders placed with dealers,
transmitted properly to the Transfer Agent. Orders received after the time of
the next determination of the applicable Fund's net asset value will be entered
at the next calculated public offering price.
The public offering price per share is equal to the net asset value per
share, plus a sales charge, which is reduced on purchases involving amounts of
$50,000 or more, as set forth in the table below. The reduced sales charges
apply to quantity purchases made at one time by a "person," which means (i) an
individual, (ii) members of a family (i.e., an individual, spouse and children
under age 21), or (iii) a trustee or fiduciary of a single trust estate or a
single fiduciary account. In addition, purchases of shares made during a
thirteen month period pursuant to a written Letter of Intent are eligible for a
reduced sales charge. Reduced sales charges are also applicable to subsequent
purchases by a "person," based on the aggregate of the amount being purchased
and the value, at offering price, of shares owned at the time of investment.
Sales Charge as percent of: Portion of sales
charge retained offering net asset
Amount of Purchase price value by dealers
Less than $50,000 4.75% 4.99% 4.50%
$50,000 but less than $100,000 4.00% 4.17% 3.75%
$100,000 but less than $250,000 3.00% 3.09% 2.80%
$250,000 but less than $500,000 2.00% 2.04% 1.85%
$500,000 but less than $1,000,000 1.00% 1.01% 0.90%
$1,000,000 or more None None None
Purchase Orders Placed with Investment Dealers
Dealers who have a sales agreement with the Distributor may place orders for
shares of the Funds on behalf of clients at the offering price next determined
after receipt of the client's order by calling PFPC, Inc., the Transfer Agent,
at (800) 280-4779. Shares are also available for purchase by financial
intermediaries through brokers or dealers which have service or sales agreements
with the Funds or the Distributor. The Distributor or its affiliates, at their
expense, may provide additional compensation to dealers in connection with sales
of shares of the Funds. If the order is placed by 4:00 p.m. New York City time
on any day that the New York Stock Exchange is open for trading and forwarded
promptly to the Transfer Agent or other service agent, it will be confirmed at
the applicable offering price on that day. The dealer is responsible for placing
orders promptly with the Transfer Agent and for forwarding payment within five
business days.
Purchases Sent to the Transfer Agent
Investors may purchase shares by sending an Application Form directly to the
Transfer Agent, with payment made either by check or by wire.
By Check.
For initial investments, an investor should complete the Account Application
(included with this Prospectus). Complete the appropriate sections of the
Account Application following the instructions set forth on the form and mail
it, together with a check payable to "The Perkins Discovery Fund" or "The
Perkins Opportunity Fund" to the Funds' Transfer Agent: PFPC, Inc., P.O. Box
8813, Wilmington, DE 19899-9752. A purchase order sent by overnight mail should
be sent to The Perkins Funds, c/o PFPC, Inc., 400 Bellevue Parkway, Wilmington,
DE 19890.
For subsequent investments, a stub is attached to the account statement sent
to shareholders after each transaction. The stub should be detached from the
statement and, together with a check payable to "The Perkins Discovery Fund" or
"The Perkins Opportunity Fund," mailed to the Transfer Agent in the envelope
provided at the address indicated above. The investor's account number should be
written on the check.
By Wire. For initial investments, before wiring funds, an investor should
call the Transfer Agent at (800) 280-4779 between the hours of 9:00 a.m. and
4:00 p.m. Eastern time, on a day when the New York Stock Exchange is open for
trading in order to receive an account number. The Transfer Agent will request
the investor's name, address, tax identification number, Fund name, amount being
wired and the wiring bank. The investor should then instruct the wiring bank to
transfer funds by wire to: PNC Bank, Philadelphia, PA, ABA #031-0000-53, DDA
#86-0179-1166, for credit to Perkins (Name of Fund), for further credit to
[investor's name and account number]. The investor should also ensure that the
wiring bank includes the name of the Fund and the account number with the wire.
If the funds are received by the Transfer Agent prior to the time that a Fund's
net asset value is calculated, the funds will be invested on that day; otherwise
they will be invested on the next business day. Finally, the investor should
write the account number provided by the Transfer Agent on the Application Form
and mail the Form promptly to the Transfer Agent.
For all wire investments, the investor must call the Transfer Agent at (800)
280-4779 when the wire is sent. Failure to do so may cause the purchase not to
be credited. Investors may obtain further information from the Transfer Agent
about remitting funds in this manner and from their own banks about any fees
that may be imposed.
Purchase at Net Asset Value
Shares of the Funds may be purchased at net asset value by officers,
Trustees, directors and full time employees of the Trust, the Advisor, the
Administrator, the Distributor and affiliates of such companies, by their family
members, by persons and their family members who are direct investment advisory
clients of the Advisor, registered representatives and employees of firms which
have sales agreements with the Distributor, investment advisors, financial
planners or other intermediaries who place trades for their own accounts or the
accounts of their clients and who charge a management, consulting or other fee
for their services; clients of such investment advisors, financial planners or
other intermediaries who place trades for their own accounts if the accounts are
linked to the master account of such investment advisor, financial planner or
other intermediaries on the books and records of the broker or agent; and
retirement and deferred compensation plans and trusts used to fund those plans,
including, but not limited to, those defined in Section 401(a), 403(b) or 457 of
the Internal Revenue Code and "rabbi trusts" and by such other persons who are
determined to have acquired shares under circumstances not involving any sales
expense to the Funds or the Distributor. Investors may be charged a fee if they
effect transactions in a Fund's shares through a broker or agent.
Investors may purchase shares of the Funds at net asset value to the extent
that the investment represents the proceeds from the redemption, within the
previous sixty days, of shares (the purchase price of which included a sales
charge) of another mutual fund. When making a purchase at net asset value
pursuant to this provision, the investor should forward to the Transfer Agent
either (i) the redemption check representing the proceeds of the shares
redeemed, endorsed to the order of The Perkins Funds, or (ii) a copy of the
confirmation from the other fund, showing the redemption transaction.
General
Payment of proceeds from redemption of shares purchased with an initial
investment made by wire may be delayed until one business day after the
completed Account Application is received by a Fund. All investments must be
made in U.S. dollars and, to avoid fees and delays, checks should be drawn only
on U.S. banks and should not be made by third party check. A charge may be
imposed if any check used for investment does not clear. The Funds and the
Distributor reserve the right to reject any purchase order in whole or in part.
If an order, together with payment in proper form, is received by the
Transfer Agent by the close of public trading on the New York Stock Exchange
(currently 4:00 p.m., New York City time), Fund shares will be purchased at the
offering price determined as of the close of trading on that day. Otherwise,
Fund shares will be purchased at the offering price determined as of the close
of trading on the New York Stock Exchange on the next business day.
Federal tax regulations require that investors provide a certified Taxpayer
Identification Number and certain other required certifications upon opening or
reopening an account in order to avoid backup withholding of taxes at the rate
of 31% on taxable distributions and proceeds of redemptions. See Account
Application for further information concerning this requirement.
The Funds are not required to issue share certificates. All shares are
normally held in non-certificated form registered on the books of each Fund and
the Funds' Transfer Agent for the account of the shareholder.
HOW TO REDEEM AN INVESTMENT IN THE FUNDS
A shareholder has the right to have a Fund redeem all or any portion of his
outstanding shares at their current net asset value on each day the New York
Stock Exchange is open for trading. The redemption price is the net asset value
per share next determined after the shares are validly tendered for redemption.
Direct Redemption
A written request for redemption must be received by the Funds' Transfer
Agent in order to constitute a valid tender for redemption. Redemption requests
should (a) indicate the Fund name, (b) state the number of shares to be
redeemed, (c) identify the shareholder's account number and (d) be signed by
each registered owner exactly as recorded on the account registration. To
protect the Funds and their shareholders, a signature guarantee is required for
certain transactions, including redemptions of amounts over $5,000. Signature(s)
on the redemption request must be guaranteed by an "eligible guarantor
institution" as defined in the federal securities laws; these institutions
include banks, broker-dealers, credit unions and savings institutions. A
broker-dealer guaranteeing signatures must be a member of a clearing corporation
or maintain net capital of at least $100,000. Credit unions must be authorized
to issue signature guarantees. Signature guarantees will be accepted from any
eligible guarantor institution which participates in a signature guarantee
program. A notary public is not an acceptable guarantor.
Telephone Redemption
Shareholders who complete the Redemption by Telephone portion of the Account
Application may redeem shares on any business day the New York Stock Exchange is
open by calling the Funds' Transfer Agent at (800) 280-4779 before 4:00 p.m.
Eastern time. Redemption proceeds will be mailed or wired at the shareholder's
direction the next business day to the predesignated account. The minimum amount
that may be wired is $1,000 (wire charges, if any, will be deducted from
redemption proceeds). By establishing telephone redemption privileges, a
shareholder authorizes the Funds and the Transfer Agent to act upon the
instruction of any person by telephone to redeem from the account for which such
service has been authorized and transfer the proceeds to the bank account
designated in the Authorization. The Funds and the Transfer Agent will use
procedures to confirm that redemption instructions received by telephone are
genuine, including recording of telephone instructions and requiring a form of
personal identification before acting on such instructions. If these normal
identification procedures are followed, neither the Funds nor their agents will
be liable for any loss, liability or cost which results from acting upon
instructions of a person believed to be a shareholder with respect to the
telephone redemption privilege. The Funds may change, modify, or terminate these
privileges at any time upon at least 60 days' notice to shareholders.
Shareholders may request telephone redemption after an account is opened;
however, the Authorization Form will require a separate signature guarantee.
Shareholders may experience delays in exercising telephone redemption during
periods of abnormal market activity.
Exchange Privilege
You may exchange shares of one Fund for shares of the other Fund without
additional sales charges by mailing or delivering written instructions to the
Transfer Agent at the address set forth above. Please specify the Fund, number
of shares or dollar amount to be exchanged, and your name and account number.
You may also exchange shares by telephoning the Transfer Agent at (800)
280-4779, between the hours of 9:00 AM and 4:00 PM Eastern time on a day when
the New York Stock Exchange is open for normal trading. The Funds reserve the
right to limit the number of exchanges a shareholder may make in any year to
avoid excessive Fund expenses, and may terminate or modify the exchange
privilege at any time.
General
Payment of the redemption proceeds will be made promptly, but not later than
seven days after the receipt of all documents in proper form, including a
written redemption order with the appropriate signature guarantee in cases where
the telephone redemption privileges are not being utilized. The Funds may
suspend the right of redemption under certain extraordinary circumstances in
accordance with the rules of the Securities and Exchange Commission. In the case
of shares purchased by check and redeemed shortly after purchase, a Fund will
not mail redemption proceeds until it has been notified that the check used for
the purchase has been collected, which may take up to 15 days from the purchase
date. To minimize or avoid such delay, investors may purchase shares by
certified check or federal funds wire. A redemption may result in recognition of
a gain or loss for federal income tax purposes.
Due to the relatively high cost of maintaining smaller accounts, the Funds
reserve the right to redeem shares in any account, other than retirement plan or
Uniform Gift to Minors Act accounts, if at any time, due to redemptions by the
shareholder, the total value of a shareholder's account does not equal at least
$1,500. If a Fund determines to make such an involuntary redemption, the
shareholder will first be notified that the value of the account is less than
$1,500 and will be allowed 30 days to make an additional investment to bring the
value of the account to at least $1,500 before a Fund takes any action.
Distribution Agreement
The Distributor is the principal underwriter and distributor of shares of
the Funds and is an affiliate of the Administrator. The Distributor makes a
continuous offering of each Fund's shares and may bear certain costs and
expenses of printing and distributing to selected dealers and prospective
investors any copies of any prospectuses, Statements of Additional Information
and annual and interim reports of the Funds other than to existing shareholders
(after such items have been prepared and set in type by the Funds) which are
used in connection with the offering of shares, and the costs and expenses of
preparing, printing and distributing any other literature used by the
Distributor or furnished by it for use by selected dealers in connection with
the offering of the shares for sale to the public. All or a part of the expenses
borne by the Distributor may be reimbursed pursuant to the Distribution Plan.
Distribution Plan; Shareholder Servicing Plan
Each Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
1940 Act (the "Plan") under which the Funds pay the Advisor as Distribution
Coordinator an amount which is accrued daily and paid monthly, at an annual rate
of up to 0.25% of the average daily net assets of each Fund. Amounts paid under
the Plan by the Funds are paid to the Distribution Coordinator to reimburse it
for costs of the services it provides and the expenses it bears in the
distribution of a Fund's shares, including overhead and telephone expenses;
printing and distribution of prospectuses and reports used in connection with
the offering of a Fund's shares to prospective investors; and preparation,
printing and distribution of sales literature and advertising materials. Such
fees are paid each year only to the extent of such costs and expenses of the
Distribution Coordinator under the Plans actually incurred in that year, up to
0.25% (currently 0.20% for the Funds) of the average daily net assets of each
Fund for that year.
Plan payments will be reviewed by the Trustees. However, it is possible that
at times the amount of the Distribution Coordinator's compensation could exceed
its Distribution Expenses, resulting in a profit. If a Plan is terminated, a
Fund will not be required to make payments for expenses incurred after the
termination.
In addition, the Funds have entered into Shareholder Servicing Agreements
with the Distribution Coordinator, under which the Funds pay servicing fees at
an annual rate of up to 0.25% of 1% of each Fund's average daily net assets.
Payments to the Advisor under the Shareholder Servicing Agreement reimburse the
Distribution Coordinator for payments it makes to selected brokers, dealers and
administrators which have entered into Service Agreements for services provided
to shareholders of the Funds. The services provided by such intermediaries are
primarily designed to assist shareholders of the Funds and include the
furnishing of office space and equipment, telephone facilities, personnel and
assistance to the Funds in servicing such shareholders. Services provided by
such intermediaries also include the provision of support services to the Funds
and include establishing and maintaining shareholders' accounts and records,
processing purchase and redemption transactions, answering routine client
inquiries regarding the Funds, and providing such other personal services to
shareholders as the Funds may reasonably request.
SERVICES AVAILABLE TO SHAREHOLDERS
Retirement Plans
The minimum initial investment for such plans is $1,000, with minimum
subsequent investments of $100. The Funds offer a prototype Individual
Retirement Account ("IRA") plan, and information is available from the
Distributor or from securities dealers with respect to Keogh, Section 403(b) and
other retirement plans offered. Investors should consult a tax advisor before
establishing any retirement plan.
Automatic Investment Plan
For the convenience of shareholders, the Funds offer a preauthorized check
service under which a check is automatically drawn on the shareholder's personal
checking account each month for a predetermined amount (but not less than $100),
as if the shareholder had written it directly. Upon receipt of the withdrawn
funds, a Fund automatically invests the money in additional shares of the Fund
at the current offering price. Applications for this service are available from
the Distributor. There is no charge by the Funds for this service. The
Distributor may terminate or modify this privilege at any time, and shareholders
may terminate their participation by notifying the Transfer Agent in writing,
sufficiently in advance of the next scheduled withdrawal.
Systematic Withdrawal Program
As another convenience, the Funds offer a Systematic Withdrawal Program
whereby shareholders may request that a check drawn in a predetermined amount be
sent to them each month or calendar quarter. A shareholder's account must have
Fund shares with a value of at least $10,000 in order to start a Systematic
Withdrawal Program, and the minimum amount that may be withdrawn each month or
quarter under the Systematic Withdrawal Program is $100. This Program may be
terminated or modified by a shareholder or the Funds at any time without charge
or penalty.
A withdrawal under the Systematic Withdrawal Program involves a redemption
of shares, and may result in a gain or loss for federal income tax purposes. In
addition, if the amount withdrawn exceeds the dividends credited to the
shareholder's account, the account ultimately may be depleted.
HOW THE FUNDS' PER SHARE VALUE IS DETERMINED
The net asset value of a Fund's share is determined once daily as of the
close of public trading on the New York Stock Exchange (currently 4:00 p.m., New
York City time) on each day the New York Stock Exchange is open for trading. Net
asset value per share is calculated by dividing the value of a Fund's total
assets, less its liabilities, by the number of Fund shares outstanding.
Portfolio securities are valued using current market values, if available.
Securities for which market quotations are not readily available are valued at
fair values as determined in good faith by or under the supervision of the
Trust's officers in accordance with methods which are specifically authorized by
the Board of Trustees. Short-term obligations with remaining maturities of 60
days or less are valued at amortized cost as reflecting fair value.
DISTRIBUTIONS AND TAXES
Dividends and Distributions
Dividends from net investment income are expected to be paid in June and
December. Any net capital gains realized during a Fund's fiscal year will also
be distributed to shareholders in June, with a supplemental distribution in
December of any undistributed capital gains earned during the 12-month period
ended each October 31.
Dividends and capital gain distributions (net of any required tax
withholding) are automatically reinvested in additional shares of a Fund at the
net asset value per share on the reinvestment date unless the shareholder has
previously requested in writing to the Transfer Agent that payment be made in
cash.
Any dividend or distribution paid by a Fund has the effect of reducing the
net asset value per share on the reinvestment date by the amount of the dividend
or distribution. Investors should note that a dividend or distribution paid on
shares purchased shortly before such dividend or distribution was declared will
be subject to income taxes as discussed below even though the dividend or
distribution represents, in substance, a partial return of capital to the
shareholder.
Taxes
Each Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986 (the "Code"). As
long as the Funds continue to qualify, and as long as each Fund distributes all
of its income each year to the shareholders, the Funds will not be subject to
any federal income or excise taxes. The distributions made by each Fund will be
taxable to shareholders whether received in shares (through dividend
reinvestment ) or in cash. Distributions derived from net investment income,
including net short-term capital gains, are taxable to shareholders as ordinary
income. A portion of these distributions may qualify for the intercorporate
dividends-received deduction. Distributions designated as capital gains
dividends are taxable as long-term capital gains regardless of the length of
time shares of a Fund have been held. Although distributions are generally
taxable when received, certain distributions made in January are taxable as if
received the prior December. Shareholders will be informed annually of the
amount and nature of a Fund's distributions. Additional information about taxes
is set forth in each Fund's Statement of Additional Information. Shareholders
should consult their own advisers concerning federal, state and local taxation
of distributions from a Fund.
GENERAL INFORMATION
The Trust
The Trust was organized as a Massachusetts business trust on February 17,
1987. The Agreement and Declaration of Trust permits the Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial interest,
without par value, which may be issued in any number of series. The Board of
Trustees may from time to time issue other series, the assets and liabilities of
which will be separate and distinct from any other series. The fiscal year of
each Fund ends on March 31.
Shareholder Rights
Shares issued by a Fund have no preemptive, conversion or subscription
rights. Shareholders have equal and exclusive rights as to dividends and
distributions as declared by a Fund and to the net assets of a Fund upon
liquidation or dissolution. Each Fund, as separate series of the Trust, votes
separately on matters affecting only that Fund (e.g., approval of the Management
and Advisory Agreements); all series of the Trust vote as a single class on
matters affecting all series jointly or the Trust as a whole (e.g., election or
removal of Trustees). Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in any election of Trustees can, if they so
choose, elect all of the Trustees. While the Trust is not required and does not
intend to hold annual meetings of shareholders, such meetings may be called by
the Trustees in their discretion, or upon demand by the holders of 10% or more
of the outstanding shares of the Trust for the purpose of electing or removing
Trustees.
Performance Information
From time to time, a Fund may publish its total return in advertisements and
communications to investors. Total return information will include a Fund's
average annual compounded rate of return over the most recent year and over the
period from a Fund's inception of operations. A Fund may also advertise
aggregate and average total return information over different periods of time. A
Fund's total return will be based upon the value of the shares acquired through
a hypothetical $1,000 investment (at the maximum public offering price) at the
beginning of the specified period and the net asset value of such shares at the
end of the period, assuming reinvestment of all distributions and after giving
effect to the maximum applicable sales charge. Total return figures will reflect
all recurring charges against a Fund's income. Investors should note that the
investment results of a Fund will fluctuate over time, and any presentation of a
Fund's total return for any prior period should not be considered as a
representation of what an investor's total return may be in any future period.
Shareholder Inquiries
Shareholder inquiries should be directed to the Transfer Agent at (800)
280-4779.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
AVONDALE TOTAL RETURN FUND
a series of
PROFESSIONALLY MANAGED PORTFOLIOS
1105 Holliday
Wichita Falls, Texas 76301
(817) 761-3777
(800) 282-2340
This Statement of Additional Information is not a prospectus, and it
should be read in conjunction with the prospectus of the Avondale Total Return
Fund (the "Fund"). A copy of the prospectus of the Fund dated August 1, 1998 is
available by calling either of the numbers listed above.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
The Trust.......................................................................................................B-2
Investment Objective And Policies...............................................................................B-2
Investment Restrictions.........................................................................................B-4
Distributions and Tax Information...............................................................................B-5
Trustees and Executive Officers.................................................................................B-8
The Fund's Investment Advisor..................................................................................B-10
The Fund's Administrator.......................................................................................B-11
The Fund's Distributor.........................................................................................B-11
Execution of Portfolio Transactions............................................................................B-12
Additional Purchase and Redemption Information.................................................................B-14
Determination of Share Price...................................................................................B-14
Performance Information........................................................................................B-15
General Information............................................................................................B-16
Financial Statements...........................................................................................B-17
Appendix.......................................................................................................B-18
</TABLE>
Avondale SAI B-1
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of various series which represent separate investment portfolios.
This Statement of Additional Information relates only to the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Avondale Total Return Fund is a mutual fund with the investment
objective of seeking the combination of income and capital appreciation that
will produce the maximum total return consistent with reasonable risk. The Fund
seeks to achieve its objective by investing primarily in equity securities
(common and preferred stocks) and higher quality fixed income obligations. The
balance between debt and equity securities may be adjusted based upon the market
interpretation of the Investment Advisor of the Fund. The following discussion
supplements the discussion of the Fund's investment objective and policies as
set forth in the Prospectus. There can be no assurance the objective of the Fund
will be attained.
Repurchase Agreements
The Fund may enter into repurchase agreements as discussed in the
Prospectus. Under such agreements, the seller of the security agrees to
repurchase it at a mutually agreed upon time and price. The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Fund together with the repurchase price on repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the U.S.
Government security itself. Such repurchase agreements will be made only with
banks with assets of $500 million or more that are insured by the Federal
Deposit Insurance Corporation or with Government securities dealers recognized
by the Federal Reserve Board and registered as broker-dealers with the
Securities and Exchange Commission ("SEC") or exempt from such registration. The
Fund will generally enter into repurchase agreements of short durations, from
overnight to one week, although the underlying securities generally have longer
maturities. The Fund may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 10% of the value of the Fund's
total assets would be invested in illiquid securities including such repurchase
agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government security subject to the repurchase agreement. In the event of
the insolvency or default of the seller, the Fund could encounter delays and
incur costs before being able to sell the security. Delays may involve loss of
interest or a decline in price of the U.S. Government security. As with any
unsecured debt instrument purchased for the Fund, the Investment Advisor seeks
to minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the U.S.
Government security.
Avondale SAI B-2
<PAGE>
There is also the risk that the seller may fail to repurchase the
security. However, the Fund will always receive as collateral for any repurchase
agreement to which it is a party securities acceptable to it, the market value
of which is equal to at least 100% of the amount invested by the Fund plus
accrued interest, and the Fund will make payment against such securities only
upon physical delivery or evidence of book entry transfer to the account of its
Custodian. If the market value of the U.S. Government security subject to the
repurchase agreement becomes less than the repurchase price (including
interest), the Fund will direct the seller of the U.S. Government security to
deliver additional securities so that the market value of all securities subject
to the repurchase agreement will equal or exceed the repurchase price. It is
possible that the Fund will be unsuccessful in seeking to impose on the seller a
contractual obligation to deliver additional securities.
Lending of Portfolio Securities
As noted in the Prospectus, the Fund may lend up to 30% of its
portfolio securities in order to generate additional income. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the income earned on the cash to the borrower or
placing broker. Loans are subject to termination at the option of the Fund or
the borrower at any time.
When-Issued Securities
The Fund is authorized to purchase securities on a "when-issued" basis.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase; during the period between purchase and
settlement, no payment is made by the Fund to the issuer and no interest accrues
to the Fund. To the extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, the Fund would earn no income; however,
it is the Fund's intention to be fully invested to the extent practicable and
subject to the policies stated above. While when-issued securities may be sold
prior to the settlement date, any purchase of such securities would be made with
the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The market value of
the when-issued securities may be more or less than the purchase price. The Fund
does not believe that its net asset value or income will be adversely affected
by its purchase of securities on a when-issued basis. The Fund will segregate
liquid assets with its Custodian equal in value to commitments for when-issued
securities. Such segregated assets either will mature or, if necessary, be sold
on or before the settlement date.
Foreign Securities
The Fund may invest up to 15% of its total assets in foreign securities.
Foreign economies may differ from the U.S. economy; individual foreign companies
may differ from domestic companies
Avondale SAI B-3
<PAGE>
in the same industry and foreign currencies may be stronger or weaker than the
U.S. dollar. An investment may be affected by changes in currency rates and in
exchange control regulations, and the Fund may incur transaction charges in
exchanging currencies. Foreign companies are frequently not subject to the
accounting and financial reporting standards applicable to domestic companies,
and there may be less information available about foreign issuers. Foreign stock
markets may have substantially less volume than the New York Stock Exchange, and
securities of foreign issuers may be generally less liquid and more volatile
than those of comparable domestic issuers. There is frequently less government
regulation of exchanges, broker-dealers and issuers than in the United States.
In addition, investments in foreign countries are subject to the possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments that could adversely affect the value of those
investments.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the 1940 Act. The Fund may not:
1. With respect to 75% of its total assets: (a) invest more than 5% of
its total assets (taken at market value at the time of investment) in the
securities of any one issuer, or (b) acquire more than 10% of the outstanding
voting securities of any one issuer (at the time of acquisition); except that
this restriction does not apply to securities issued or guaranteed by the United
States Government or its agencies or instrumentalities.
2. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b)
through the lending of its portfolio securities as described above and in its
Prospectus, or (c) to the extent the entry into a repurchase agreement is deemed
to be a loan.
3. (a) Borrow money, except temporarily for extraordinary or emergency
purposes from a bank and then not in excess of 10% of its total assets (at the
lower of cost or fair market value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least 300% of all
borrowings, and no additional investments may be made while any such borrowings
are in excess of 5% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
4. Purchase securities on margin, sell securities short, participate on
a joint or joint and several basis in any securities trading account, or
underwrite securities. (Does not preclude the Fund from obtaining such
short-term credit as may be necessary for the clearance of purchases and sales
of its portfolio securities.)
Avondale SAI B-4
<PAGE>
5. Buy or sell interests in oil, gas or mineral exploration or
development programs, or real estate. (Does not preclude investments in
marketable securities of issuers engaged in such activities.)
6. Purchase or hold securities of any issuer, if, at the time of
purchase or thereafter, any of the Trustees or officers of the Trust or the
Fund's Investment Advisor owns beneficially more than 1/2 of 1%, and all such
Trustees or officers holding more than 1/2 of 1% together own beneficially more
than 5% of the issuer's securities.
7. Purchase or sell real estate, commodities or commodity contracts or
invest in put, call, straddle or spread options. (As a matter of operating
policy, the Board of Trustees may authorize the Fund to engage in certain
activities involving options and/or futures for bona fide hedging purposes; any
such authorization will be accompanied by appropriate notification to
shareholders.)
8. Invest, in the aggregate, more than 10% of its total assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable and repurchase agreements with more than seven days
to maturity.
9. Invest in any issuer for purposes of exercising control or
management.
10. Invest 25% or more of the market value of its assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
11. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into repurchase
transactions.
The Fund observes the following policies, which are not deemed
fundamental and which may be changed without shareholder vote.
12. Invest in securities of other investment companies which would
result in the Fund owning more than 3% of the outstanding voting securities of
any one such investment company, the Fund owning securities of another
investment company having an aggregate value in excess of 5% of the value of the
Fund's total assets, or the Fund owning securities of investment companies which
in the aggregate would exceed 10% of the value of the Fund's total assets.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions
Avondale SAI B-5
<PAGE>
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually. Also, the Fund expects
to distribute any undistributed net investment income on or about December 31 of
each year. Any net capital gains realized through the period ended October 31 of
each year will also be distributed by December 31 of each year.
Each distribution by the Fund is accompanied by a brief explanation of
the form and character of the distribution. In January of each year the Fund
will issue to each shareholder a statement of the federal income tax status of
all distributions.
Tax Information
Each series of the Trust is treated as a separate entity for federal
income tax purposes. The Fund intends to continue to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), provided it complies with all
applicable requirements regarding the source of its income, diversification of
its assets and timing of distributions. The Fund's policy is to distribute to
its shareholders all of its investment company taxable income and any net
realized long-term capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes. To comply with the requirements,
the Fund must also distribute (or be deemed to have distributed) by December 31
of each calendar year (i) at least 98% of its ordinary income for such year,
(ii) at least 98% of the excess of its realized capital gains over its realized
capital losses for the 12-month period ending on October 31 during such year and
(iii) any amounts from the prior calendar year that were not distributed and on
which the Fund paid no federal income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains
are taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent the Fund designates the amount
distributed as a qualifying dividend. The aggregate amount so designated cannot,
however, exceed the aggregate amount of qualifying dividends received by the
Fund for its taxable year. In view of the Fund's investment policy, it is
expected that dividends from domestic corporations will be part of the Fund's
gross income and that, accordingly, part of the distributions by the Fund may be
eligible for the dividends-received deduction for corporate shareholders.
However, the portion of the Fund's gross income attributable to qualifying
dividends is largely dependent on that Fund's investment activities for a
particular year and therefore cannot be predicted with any certainty. The
deduction may be reduced or eliminated if the Fund shares held by a corporate
investor are treated as debt-financed or are held for less than 46 days during
the 90-day period that begins 45 days before the stock becomes ex-dividend with
respect to the dividend.
Avondale SAI B-6
<PAGE>
Any long-term or mid-term capital gain distributions are taxable to
shareholders as long-term or mid-term capital gains, respectively, regardless of
the length of time shares have been held. Capital gains distributions are not
eligible for the dividends-received deduction referred to in the previous
paragraph. Distributions of any net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date. Distributions
are generally taxable when received. However, distributions declared in October,
November or December to shareholders of record on a date in such a month and
paid the following January are taxable as if received on December 31.
Distributions are includable in alternative minimum taxable income in computing
a shareholder's liability for the alternative minimum tax.
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. Any loss realized upon a redemption or exchange of shares
within six months from the date of their purchase will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gains during such six-month period. Any loss realized upon a redemption
or exchange may be disallowed under certain wash sale rules to the extent shares
of the same Fund are purchased (through reinvestment of distributions or
otherwise) within 30 days before or after the redemption or exchange.
Under the Code, the Fund will be required to report to the Internal
Revenue Service ("IRS") all distributions of taxable income and capital gains as
well as gross proceeds from the redemption or exchange of Fund shares, except in
the case of exempt shareholders, which includes most corporations. Pursuant to
the backup withholding provisions of the Internal Revenue Code, distributions of
any taxable income and capital gains and proceeds from the redemption of Fund
shares may be subject to withholding of federal income tax at the rate of 31
percent in the case of non-exempt shareholders who fail to furnish the Fund with
their taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld. Corporate and other exempt shareholders should provide the Fund with
their taxpayer identification numbers or certify their exempt status in order to
avoid possible erroneous application of backup withholding. The Fund reserves
the right to refuse to open an account for any person failing to provide a
certified taxpayer identification number.
The Fund will not be subject to tax in the Commonwealth of
Massachusetts as long as it qualifies as a regulated investment company for
federal income tax purposes. Distributions and the transactions referred to in
the preceding paragraphs may be subject to state and local income taxes, and the
tax treatment thereof may differ from the federal income tax treatment.
Moreover, the above discussion is not intended to be a complete discussion of
all applicable federal tax consequences of an investment in the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of federal, state and local taxes to an investment in the Fund.
Avondale SAI B-7
<PAGE>
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the prospectus have been
prepared by Fund management, and counsel to the Fund has expressed no opinion in
respect thereof.
TRUSTEES AND EXECUTIVE OFFICERS
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, their
affiliations, dates of birth and principal occupations for the past five years
are set forth below.
Steven J. Paggioli,* 04/03/50 President and Trustee
479 West 22nd Street, New York, NY 10011. Executive Vice President, The
Wadsworth Group (consultants) since 1986; Executive Vice President of Investment
Company Administration Corporation ("ICAC") (mutual fund administrator and the
Trust's Administrator), and Vice President of First Fund Distributors, Inc.
("FFD") (a registered broker-dealer and the Fund's Distributor) since 1990.
Dorothy A. Berry, 08/12/43 Trustee
14 Five Roses East, Ancram, NY 12517. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment advisor and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
Wallace L. Cook, 09/10/39 Trustee
One Peabody Lane, Darien, CT 06820. Retired. Formerly Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
Avondale SAI B-8
<PAGE>
Carl A. Froebel, 05/23/38 Trustee
2 Crown Cove Lane, Savannah, GA 31411. Private Investor. Formerly Managing
Director, Premier Solutions, Ltd. (asset management computer and software
products). Formerly President and Founder, National Investor Data Services, Inc.
(investment related computer software).
Rowley W.P. Redington, 06/01/44 Trustee
1191 Valley Road, Clifton, NJ 07103. President, Intertech (consumer electronics
and computer service and marketing); formerly Vice President, PRS of New Jersey,
Inc. (management consulting), and Chief Executive Officer, Rowley Associates
(consultants).
Eric M. Banhazl*, 08/05/57 Treasurer
2020 E. Financial Way, Glendora, CA 91741. Senior Vice President, The Wadsworth
Group, Senior Vice President of ICAC and Vice President of FFD since 1990.
Robin Berger*, 11/17/56 Secretary
479 West 22nd St., New York, NY 10011. Vice President, The Wadsworth Group since
June, 1993.
Robert H. Wadsworth*, 01/25/40 Vice President
4455 E. Camelback Road, Suite 261E, Phoenix, AZ 85018. President of The
Wadsworth Group since 1982, President of ICAC and FFD since 1990.
*Indicates an "interested person" of the Trust as defined in the 1940 Act.
Set forth below is the rate of compensation received by the following
Trustees from the Fund and all other portfolios of the Trust. This total amount
is allocated among the portfolios. Disinterested trustees receive an annual
retainer of $7,500 and a fee of $2,500 for each regularly scheduled meeting.
These trustees also receive a fee of $1000 for any special meeting attended. The
Chairman of the Board of Trustees receives an additional annual retainer of
$4,500. Disinterested trustees are also reimbursed for expenses in connection
with each Board meeting attended. No other compensation or retirement benefits
were received by any Trustee or officer from the Fund or any other portfolios of
the Trust.
Name of Trustee Total Annual Compensation
Dorothy A. Berry $22,000
Wallace L. Cook $17,500
Carl A. Froebel $17,500
Rowley W.P. Redington $17,500
Avondale SAI B-9
<PAGE>
During the fiscal year ended March 31, 1998, trustees' fees and
expenses in the amount of $5,221 were allocated to the Fund. 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 the Fund.
THE FUND'S INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided
to the Fund by Herbert R. Smith, Incorporated, the Advisor, pursuant to an
Investment Advisory Agreement.
For the fiscal years ended March 31, 1996, March 31, 1997 and March 31,
1998, the Advisor received investment advisory fees of $58,529, $71,531 and
$75,323, respectively, under the Investment Advisory Agreement.
Herbert R. Smith, Incorporated is independently owned by its officers.
Herbert R. Smith is the Chairman, Chief Executive Officer and a Director of the
Advisor and owns a controlling interest in the Investment Advisor.
The Advisor informed the Board of Trustees that it intends to cease
acting as an investment adviser with respect to equity securities and will
resign as investment adviser to the Fund effective August 31, 1998. The Advisor
recommended to the Trustees that they engage Hester Capital Management, L.L.C.,
("Hester") to act as investment advisor to the Fund and has entered into an
agreement with Hester whereby the Adviser will consult with Hester with respect
to its assumption of management of the Fund, in the event that Hester is
approved by the Board of Trustees and Fund shareholders as the Fund's investment
advisor under a new investment advisory agreement. At a meeting held on July 23,
1998, the Board of Trustees of the Trust approved Hester as investment advisor
to the Fund commencing September 1, 1998 and has authorized a special meeting of
shareholders to be held to consider a new investment advisory agreement between
the Fund and Hester, which will be identical in all material respects to the
current agreement. In the event that shareholder approval of the new advisory
agreement has not occurred by September 1, 1998 Hester will perform all
investment advisory services for the Fund under the current investment advisory
agreement at no fee, pending approval of the new agreement. No change in the
investment advisory fee will be proposed to shareholders under the new
agreement.
Hester is a registered investment advisor located at 100 Congress
Avenue, Austin, TX 78701, and provides investment advisory service to
individuals and institutions with assets of approximately $500 million. Hester
is a majority-owned subsidiary of Morgan Asset Management, Inc., which is owned
by Morgan Keegan & Co., a New York Stock Exchange listed, brokerage and
investment firm headquartered in Memphis, Tennessee. Mr. I. Craig Hester,
President, and Mr. John Gunthorp, Executive Vice President, will be responsible
for the management of the Fund's portfolio. Each has been associated with the
Advisor for more than the past five years.
Avondale SAI B-10
<PAGE>
The Trustees have approved a change in the Fund's name to "Hester Total
Return Fund," contingent upon shareholder approval of a new investment advisory
agreement with Hester.
The Investment Advisory Agreement continues in effect for successive
annual periods so long as such continuation is approved at least annually by the
vote of (1) the Board of Trustees of the Trust (or a majority of the outstanding
shares of the Fund to which the agreement applies), and (2) a majority of the
Trustees who are not interested persons of any party to the Agreement, in each
case cast in person at a meeting called for the purpose of voting on such
approval. Any such agreement may be terminated at any time, without penalty, by
either party to the agreement upon sixty days' written notice and is
automatically terminated in the event of its "assignment," as defined in the
1940 Act.
THE FUND'S ADMINISTRATOR
The Fund has an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"), a corporation owned and
controlled by Messrs. Banhazl, Paggioli and Wadsworth with offices at 4455 E.
Camelback Rd., Ste. 261-E, Phoenix, AZ 85018. The Administration Agreement
provides that the Administrator will prepare and coordinate reports and other
materials supplied to the Trustees; prepare and/or supervise the preparation and
filing of all securities filings, periodic financial reports, prospectuses,
statements of additional information, marketing materials, tax returns,
shareholder reports and other regulatory reports or filings required of the
Fund; prepare all required filings necessary to maintain the Fund's
qualification and/or registration to sell shares in all states where the Fund
currently does, or intends to do business; coordinate the preparation, printing
and mailing of all materials (e.g., Annual Reports) required to be sent to
shareholders; coordinate the preparation and payment of Fund related expenses;
monitor and oversee the activities of the Fund's servicing agents (i.e.,
transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary the Fund's daily expense accruals; and perform such additional
services as may be agreed upon by the Fund and the Administrator. For its
services, the Administrator receives an annual fee equal to the greater of .15%
of the Fund's average daily net assets or $30,000, provided that if the Fund's
annual operating expenses exceed $90,000 after waiver of the Investment
Advisor's fee, and if the net assets of the Fund are $5 million or less, the
Administrator will waive its fee in an amount equal to such excess.
During each of the fiscal years ended March 31, 1996, March 31, 1997
and March 31, 1998, respectively, the Administrator received fees of $30,000.
THE FUND'S DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a corporation owned
by Messrs. Banhazl, Paggioli and Wadsworth, acts as the Fund's principal
underwriter in a continuous public offering of the Fund's shares. The
Distribution Agreement between the Fund and the Distributor continues in effect
for periods not exceeding one year if approved at least annually by (i) the
Board of Trustees
Avondale SAI B-11
<PAGE>
or the vote of a majority of the outstanding shares of the Fund (as defined in
the 1940 Act) and (ii) a majority of the Trustees who are not interested persons
of any such party, in each case cast in person at a meeting called for the
purpose of voting on such approval. The Distribution Agreement may be terminated
without penalty by the parties thereto upon sixty days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement, the Advisor determines
which securities are to be purchased and sold by the Fund and which
broker-dealers will be used to execute the Fund's portfolio transactions.
Purchases and sales of securities in the over-the-counter market will be
executed directly with a "market-maker" unless, in the opinion of the Advisor, a
better price and execution can otherwise be obtained by using a broker for the
transaction.
Purchases of portfolio securities for the Fund also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Fund will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principal for their own account. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one broker, dealer or underwriter are comparable, the
order may be allocated to a broker, dealer or underwriter that has provided
research or other services as discussed below.
In placing portfolio transactions, the Advisor will use its best
efforts to choose a broker-dealer capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the most favorable price
and execution available, consideration may be given to those broker-dealers
which furnish or supply research and statistical information to the Advisor that
it may lawfully and appropriately use in its investment advisory capacities, as
well as provide other services in addition to execution services. The Advisor
considers such information, which is in addition to and not in lieu of the
services required to be performed by it under its Agreement with the Fund, to be
useful in varying degrees, but of indeterminable value. Portfolio transactions
may be placed with broker-dealers who sell shares of the Fund subject to rules
adopted by the National Association of Securities Dealers, Inc.
While it is the Fund's general policy to seek first to obtain the most
favorable price and execution available, in selecting a broker-dealer to execute
portfolio transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Advisor, even if the specific services are not directly useful to the Fund and
may be useful
Avondale SAI B-12
<PAGE>
to the Advisor in advising other clients. In negotiating commissions with a
broker or evaluating the spread to be paid to a dealer, the Fund may therefore
pay a higher commission or spread than would be the case if no weight were given
to the furnishing of these supplemental services, provided that the amount of
such commission or spread has been determined in good faith by the Advisor to be
reasonable in relation to the value of the brokerage and/or research services
provided by such broker-dealer. The standard of reasonableness is to be measured
in light of the Advisor's overall responsibilities to the Fund. In this regard,
during the fiscal year ended March 31, 1998, substantially all of the brokerage
commissions paid by the Fund were directed to the selected brokers because of
research services provided and were effected at rates believed by the Advisor to
be higher than otherwise obtainable, but reasonable in relation to the services
provided. The services obtained by this allocation of brokerage included the
Bridge Trading System software and data access fees and research reports from
William O'Neil & Co.
Investment decisions for the Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts. In such
event, the position of the Fund and such client account(s) in the same issuer
may vary and the length of time that each may choose to hold its investment in
the same issuer may likewise vary. However, to the extent any of these client
accounts seeks to acquire the same security as the Fund at the same time, the
Fund may not be able to acquire as large a portion of such security as it
desires, or it may have to pay a higher price or obtain a lower yield for such
security. Similarly, the Fund may not be able to obtain as high a price for, or
as large an execution of, an order to sell any particular security at the same
time. If one or more of such client accounts simultaneously purchases or sells
the same security that the Fund is purchasing or selling, each day's
transactions in such security will be allocated between the Fund and all such
client accounts in a manner deemed equitable by the Advisor, taking into account
the respective sizes of the accounts and the amount being purchased or sold. It
is recognized that in some cases this system could have a detrimental effect on
the price or value of the security insofar as the Fund is concerned. In other
cases, however, it is believed that the ability of the Fund to participate in
volume transactions may produce better executions for the Fund.
The Fund does not effect securities transactions through brokers solely
for selling shares of the Fund, although the Fund may consider the sale of
shares as a factor in allocating brokerage. However, as stated above,
broker-dealers who execute brokerage transactions may effect purchases of shares
of the Fund for their customers.
The Fund does not use the Distributor to execute its portfolio
transactions. For the fiscal years ended March 31, 1996, March 31, 1997 and
March 31, 1998, respectively, the aggregate brokerage commissions paid by the
Fund were $15,895, $16,852 and $7,960.
Of the total commissions paid by the Fund during the fiscal year ended
March 31, 1998, $4,830 (60.68%) was paid to firms for research, statistical or
other services provided to the Advisor.
Avondale SAI B-13
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Fund's shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Fund, and (iii) to reduce or waive the minimum
for initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
Payments to shareholders for shares of the Fund redeemed directly from
the Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable; or (c) for such other period as the SEC may permit for the
protection of the Fund's shareholders. At various times, the Fund may be
requested to redeem shares for which it has not yet received confirmation of
good payment; in this circumstance, the Fund may delay the redemption until
payment for the purchase of such shares has been collected and confirmed to the
Fund.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions which make payment in cash unwise, the Fund may
make payment partly in securities with a current market value equal to the
redemption price. Although the Fund does not anticipate that it will make any
part of a redemption payment in securities, if such payment were made, an
investor may incur brokerage costs in converting such securities to cash. The
Fund has elected to be governed by the provisions of Rule 18f-1 under the 1940
Act, which contains a formula for determining the minimum redemption amounts
that must be paid in cash.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Fund will be determined once daily as of the close of public
trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on
each day that the Exchange is open for trading. It is expected that the Exchange
will be closed on Saturdays and Sundays and on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. The Fund does not expect to
determine the net asset value
Avondale SAI B-14
<PAGE>
of its shares on any day when the Exchange is not open for trading even if there
is sufficient trading in its portfolio securities on such days to materially
affect the net asset value per share.
In valuing the Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each Fund are valued in such manner as the Board of Trustees in
good faith deems appropriate to reflect their fair value.
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
From time to time, the Fund may state its total return in
advertisements and investor communications. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return will be accompanied by information on the Fund's
average annual compounded rate of return over the most recent four calendar
quarters and the period from the Fund's inception of operations. The Fund may
also advertise aggregate and average total return information over different
periods of time.
The Fund's total return may be compared to relevant indices, including
Standard & Poor's 500 Composite Stock Index and indices published by Lipper
Analytical Services, Inc. From time to time, evaluations of a Fund's performance
by independent sources may also be used in advertisements and in information
furnished to present or prospective investors in the Funds.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
The Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
P(1+T)n = ERV
Avondale SAI B-15
<PAGE>
Where: P = a hypothetical initial purchase order of $1,000 from which the
maximum sales load is deducted
T = average annual total return n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at
the end of the period
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period .
The average annual compounded rate of returns, or total return, for the
Fund for the one year and five year periods and from the period from inception
of the Fund on October 12, 1988 through March 31, 1998 were 37.65%, 13.51% and
11.65%, respectively.
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
Star Bank N.A., 425 Walnut Street, Cincinnati, OH 45202 acts as
Custodian of the securities and other assets of the Fund. American Data
Services, Inc., P.O. Box 5536, Hauppauge, NY 11788- 0132 is the Fund's transfer
and shareholder service agent. The Custodian and Transfer Agent do not
participate in decisions relating to the purchase and sale of securities by the
Fund.
Tait, Weller & Baker, Eight Penn Center Plaza, Philadelphia, PA 19103,
are the independent auditors for the Fund.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th
Floor, San Francisco, California 94104, are legal counsel to the Fund.
The following persons are beneficial owners of more than 5% of the
Fund's outstanding voting securities as of July 1, 1998. An asterisk (*) denotes
an account affiliated with the Fund's investment advisor, officers or trustees:
Westwood Trust, Trustee, Humphrey Printing Co. Profit Sharing Trust;
200 Crescent Ct., Dallas, TX 75201; 6.57%
E. Paul Helen Buck Waggoner Foundation; P.O. Box 2271, Vernon, TX
76385; 5.99%
Avondale SAI B-16
<PAGE>
Herbert R. Smith, Inc. Employee Benefit Plan; 1105 Holliday St.,
Wichita Falls, TX 76301; 5.27%
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Agreement and Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Fund's assets for any shareholder held
personally liable for obligations of the Fund or Trust. The Agreement and
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Fund. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Furthermore, the activities of the Trust as
an investment company would not likely give rise to liabilities in excess of the
Trust's total assets. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to the unlikely circumstances in
which both inadequate insurance exists and the Fund itself is unable to meet its
obligations.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Fund. The Prospectus of the Fund and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee, or may be accessed via
the world wide web at http://www.sec.gov.
FINANCIAL STATEMENTS
The annual report to shareholders for the Fund for its most recent
fiscal year end is a separate document supplied with this Statement of
Additional Information and the financial statements, accompanying notes and
report of independent accountants appearing therein are incorporated by
reference in this Statement of Additional Information.
Avondale SAI B-17
<PAGE>
APPENDIX
Description of Bond Ratings*
Moody's Investors Service
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations or protective elements
may be of greater amplitude or there may be other elements present which make
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements: their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Avondale SAI B-18
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Standard & Poor's Corporation
AAA: Bonds rated AAA are highest grade debt obligations. This rating indicates
an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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.
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
Avondale SAI B-19
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
HARRIS BRETALL SULLIVAN & SMITH GROWTH EQUITY FUND
a series of Professionally Managed Portfolios
One Sansome Street, Suite 3300
San Francisco, CA 94104
(800) 282-2340
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the prospectus of the Harris Bretall Sullivan &
Smith Growth Equity Fund (the "Fund"). A copy of the prospectus of the Fund
dated August 1, 1998 is available by calling the number listed above.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
The Trust.......................................................................................................B-2
Investment Objective And Policies ..............................................................................B-2
Investment Restrictions.........................................................................................B-5
Distributions and Tax Information...............................................................................B-6
Trustees and Executive Officers.................................................................................B-9
The Fund's Investment Advisor..................................................................................B-11
The Fund's Administrator.......................................................................................B-11
The Fund's Distributor.........................................................................................B-12
Execution of Portfolio Transactions............................................................................B-12
Additional Purchase and Redemption Information.................................................................B-14
Determination of Share Price...................................................................................B-15
Performance Information........................................................................................B-16
General Information............................................................................................B-17
Financial Statements...........................................................................................B-18
</TABLE>
HBSS SAI B-1
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of various series which represent separate investment portfolios.
This Statement of Additional Information relates only to the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund is a mutual fund with the investment objective of seeking
growth of capital. The following discussion supplements the discussion of the
Fund's investment objective and policies as set forth in the Prospectus. There
can be no assurance the objective of the Fund will be attained.
Repurchase Agreements
The Fund may enter into repurchase agreements as discussed in the
Prospectus. Under such agreements, the seller of the security agrees to
repurchase it at a mutually agreed upon time and price. The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Fund together with the repurchase price on repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the U.S.
Government security itself. Such repurchase agreements will be made only with
banks with assets of $500 million or more that are insured by the Federal
Deposit Insurance Corporation or with Government securities dealers recognized
by the Federal Reserve Board and registered as broker-dealers with the
Securities and Exchange Commission ("SEC") or exempt from such registration. The
Fund will generally enter into repurchase agreements of short durations, from
overnight to one week, although the underlying securities generally have longer
maturities. The Fund may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 15% of the value of the Fund's
total assets would be invested in illiquid securities including such repurchase
agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government security subject to the repurchase agreement. In the event of
the insolvency or default of the seller, the Fund could encounter delays and
incur costs before being able to sell the security. Delays may involve loss of
interest or a decline in price of the U.S. Government security. As with any
unsecured debt instrument purchased for the Fund, the Investment Advisor seeks
to minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the U.S.
Government security.
There is also the risk that the seller may fail to repurchase the
security. However, the Fund will always receive as collateral for any repurchase
agreement to which it is a party securities acceptable to it, the market value
of which is equal to at least 100% of the amount invested by the
HBSS SAI B-2
<PAGE>
Fund plus accrued interest, and the Fund will make payment against such
securities only upon physical delivery or evidence of book entry transfer to the
account of its Custodian. If the market value of the U.S. Government security
subject to the repurchase agreement becomes less than the repurchase price
(including interest), the Fund will direct the seller of the U.S. Government
security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to impose on the seller a contractual obligation to deliver additional
securities.
When-Issued Securities
The Fund is authorized to purchase securities on a "when-issued" basis.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase; during the period between purchase and
settlement, no payment is made by the Fund to the issuer and no interest accrues
to the Fund. To the extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, the Fund would earn no income; however,
it is the Fund's intention to be fully invested to the extent practicable and
subject to the policies stated above. While when-issued securities may be sold
prior to the settlement date, any purchase of such securities would be made with
the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The market value of
the when-issued securities may be more or less than the purchase price. The Fund
does not believe that its net asset value or income will be adversely affected
by its purchase of securities on a when-issued basis. The Fund will segregate
liquid assets with its Custodian equal in value to commitments for when-issued
securities. Such segregated assets either will mature or, if necessary, be sold
on or before the settlement date.
Short-Term Investments; U.S. Government and Mortgage Related Securities
As indicated in the prospectus, the Advisor expects that under normal
market conditions, the Fund will stay fully invested and cash levels typically
will not exceed 5% of total assets. However, at times the Fund may invest in
short-term cash equivalent securities either for temporary, defensive purposes
or when the Advisor views the market as significantly overvalued.
These securities may include U.S. Government securities. U.S.
Government securities include direct obligations issued by the U.S. Treasury,
such as Treasury bills, certificates of indebtedness, notes and bonds. U.S.
Government agencies and instrumentalities that issue or guarantee securities
include, but are not limited to, the Federal National Mortgage Association
("FNMA"), Federal Home Loan Banks, Federal Financing Bank and Student Loan
Marketing Association.
All Treasury securities are backed by the full faith and credit of the
United States. Obligations of U.S. Government agencies and instrumentalities may
or may not be supported by the full faith and
HBSS SAI B-3
<PAGE>
credit of the United States. Some, such as the Federal Home Loan Banks, are
backed by the right of the agency or instrumentality to borrow from the
Treasury. Others, such as securities issued by the FNMA, are supported only by
the credit of the instrumentality and not by the Treasury. If the securities are
not backed by the full faith and credit of the United States, the owner of the
securities must look principally to the agency issuing the obligation for
repayment and may not be able to assert a claim against the United States in the
event that the agency or instrumentality does not meet its commitment.
Short-term securities may also include mortgage pass-through
securities. Mortgage pass-through securities are securities representing
interests in pools of mortgages in which payments of both interest and principal
on the securities are generally made monthly, in effect "passing through"
monthly payments made by the individual borrowers on the residential mortgage
loans which underlie the securities (net of fees paid to the issuer or guarantor
of the securities). Early repayment of principal on mortgage pass-through
securities (arising from prepayments of principal due to the sale of underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose the Fund to a lower rate of return upon reinvestment of
principal. Also, if a security subject to repayment has been purchased at a
premium, in the event of prepayment the value of the premium would be lost.
As noted above, payment of principal and interest on some
mortgage-related securities (but not the market value of the securities
themselves) may be guaranteed by the full faith and credit of the U. S.
Government (in the case of securities guaranteed by the Government National
Mortgage Association ("GNMA") or by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or the Federal Home
Loan Mortgage Corporation ("FHLMC"), which are supported only by the
discretionary authority of the U.S. Government to purchase the agency's
obligations). Mortgage pass-through securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance, and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.
Collateralized mortgage obligations ("CMO's") are hybrid instruments
with characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, semi-annually. CMO's may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMO's are structured
into multiple classes, with each class bearing a different stated maturity.
Monthly payments of principal, including prepayments, are first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes receive principal only after the first class has been retired.
Other mortgage-related securities include those that directly or indirectly
represent a participation in or are secured by and payable from mortgage loans
on real property, such as CMO residuals or stripped mortgage-backed securities,
and may be structured in classes with rights to receive varying proportions of
principal and interest.
HBSS SAI B-4
<PAGE>
In certain mortgage-related securities, all interest payments go to one
class of holders--"interest only" or "IO"--and all of the principal goes to a
second class of holders--"principal only" or "PO". The yield to maturity on an
IO class is extremely sensitive to the rate of principal prepayments on the
related underlying mortgage assets, and a rapid rate of principal payments will
have a material adverse effect on yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of principal, the Fund
may fail to fully recoup its initial investment in these securities, even when
the securities are rated AA or the equivalent. Conversely, if the underlying
mortgage assets experience less than anticipated prepayments of principal, the
yield on a PO class would be materially adversely affected. As interest rates
rise and fall, the value of IO's tends to move in the same direction as interest
rates. The value of the other mortgage-related securities described herein, like
other debt instruments, will tend to move in the opposite direction from
interest rates. In general, the Fund treats IO's and PO's as subject to the
restriction on investments in illiquid instruments except that IO's and PO's
issued by the U.S. Government, its agencies and instrumentalities and backed by
fixed-rate mortgages may be excluded from this limit if, in the judgment of the
Advisor and subject to the oversight of the Trustees such IO's and PO's are
readily marketable.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the 1940 Act. The Fund may not:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies and (b) to
the extent the entry into a repurchase agreement is deemed to be a loan.
2. (a) Borrow money, except as stated in the Prospectus and this
Statement of Additional Information. Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least 300% of all
borrowing.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowing.
3. Purchase securities on margin, participate on a joint or joint and
several basis in any securities trading account, or underwrite securities. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
4. Purchase or sell real estate, commodities or commodity contracts
(however the Fund reserves the right in the future to engage in futures
contracts and options on futures contracts upon authorization by the Board of
Trustees and notification to shareholders).
HBSS SAI B-5
<PAGE>
5. Invest 25% or more of the market value of its assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
6. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowing, mortgages or pledges, or (b) entering into options, futures
or repurchase transactions.
7. Invest in any issuer for purposes of exercising control or
management.
The Fund observes the following policies, which are not deemed fundamental and
which may be changed without shareholder vote. The Fund may not:
8. Invest in securities of other investment companies which would
result in the Fund owning more than 3% of the outstanding voting securities of
any one such investment company, the Fund owning securities of another
investment company having an aggregate value in excess of 5% of the value of the
Fund's total assets, or the Fund owning securities of investment companies which
in the aggregate would exceed 10% of the value of the Fund's total assets.
9. Invest, in the aggregate, more than 15% of its net assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable and repurchase agreements with more than seven days
to maturity.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except
with respect to the Fund's policies on borrowing and on illiquid securities, or
as otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually. Also, the Fund expects
to distribute any undistributed net investment income on or about December 31 of
each year. Any net capital gains realized through the period ended October 31 of
each year will also be distributed by December 31 of each year.
Each distribution by the Fund is accompanied by a brief explanation of
the form and character of the distribution. In January of each year the Fund
will issue to each shareholder a statement of the federal income tax status of
all distributions.
Tax Information
HBSS SAI B-6
<PAGE>
Each series of the Trust is treated as a separate entity for federal
income tax purposes. The Fund intends to continue to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), provided it complies with all
applicable requirements regarding the source of its income, diversification of
its assets and timing of distributions. The Fund's policy is to distribute to
its shareholders all of its investment company taxable income and any net
realized long-term capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes. To comply with the requirements,
the Fund must also distribute (or be deemed to have distributed) by December 31
of each calendar year (i) at least 98% of its ordinary income for such year,
(ii) at least 98% of the excess of its realized capital gains over its realized
capital losses for the 12-month period ending on October 31 during such year and
(iii) any amounts from the prior calendar year that were not distributed and on
which the Fund paid no federal income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains
are taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent the Fund designates the amount
distributed as a qualifying dividend. The aggregate amount so designated cannot,
however, exceed the aggregate amount of qualifying dividends received by the
Fund for its taxable year. In view of the Fund's investment policy, it is
expected that dividends from domestic corporations will be part of the Fund's
gross income and that, accordingly, part of the distributions by the Fund may be
eligible for the dividends-received deduction for corporate shareholders.
However, the portion of the Fund's gross income attributable to qualifying
dividends is largely dependent on that Fund's investment activities for a
particular year and therefore cannot be predicted with any certainty. The
deduction may be reduced or eliminated if the Fund shares held by a corporate
investor are treated as debt-financed or are held for less than 46 days during
the 90-day period that begins 45 days before the stock becomes ex-dividend with
respect to the dividend.
Any long-term or mid-term capital gain distributions are taxable to
shareholders as long-term or mid-term capital gains, respectively, regardless of
the length of time shares have been held. Capital gains distributions are not
eligible for the dividends-received deduction referred to in the previous
paragraph. Distributions of any net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date. Distributions
are generally taxable when received. However, distributions declared in October,
November or December to shareholders of record on a date in such a month and
paid the following January are taxable as if received on December 31.
Distributions are includable in alternative minimum taxable income in computing
a shareholder's liability for the alternative minimum tax.
HBSS SAI B-7
<PAGE>
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. Any loss realized upon a redemption or exchange of shares
within six months from the date of their purchase will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gains during such six-month period. Any loss realized upon a redemption
or exchange may be disallowed under certain wash sale rules to the extent shares
of the same Fund are purchased (through reinvestment of distributions or
otherwise) within 30 days before or after the redemption or exchange.
Under the Code, the Fund will be required to report to the Internal
Revenue Service ("IRS") all distributions of taxable income and capital gains as
well as gross proceeds from the redemption or exchange of Fund shares, except in
the case of exempt shareholders, which includes most corporations. Pursuant to
the backup withholding provisions of the Internal Revenue Code, distributions of
any taxable income and capital gains and proceeds from the redemption of Fund
shares may be subject to withholding of federal income tax at the rate of 31
percent in the case of non-exempt shareholders who fail to furnish the Fund with
their taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld. Corporate and other exempt shareholders should provide the Fund with
their taxpayer identification numbers or certify their exempt status in order to
avoid possible erroneous application of backup withholding. The Fund reserves
the right to refuse to open an account for any person failing to provide a
certified taxpayer identification number.
The Fund will not be subject to tax in the Commonwealth of
Massachusetts as long as it qualifies as a regulated investment company for
federal income tax purposes. Distributions and the transactions referred to in
the preceding paragraphs may be subject to state and local income taxes, and the
tax treatment thereof may differ from the federal income tax treatment.
Moreover, the above discussion is not intended to be a complete discussion of
all applicable federal tax consequences of an investment in the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of federal, state and local taxes to an investment in the Fund.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
HBSS SAI B-8
<PAGE>
This discussion and the related discussion in the prospectus have been
prepared by Fund management, and counsel to the Fund has expressed no opinion in
respect thereof.
TRUSTEES AND EXECUTIVE OFFICERS
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, their
affiliations, dates of birth and principal occupations for the past five years
are set forth below.
Steven J. Paggioli,* 04/03/50 President and Trustee
479 West 22nd Street, New York, NY 10011. Executive Vice President, The
Wadsworth Group (consultants) since 1986; Executive Vice President of Investment
Company Administration Corporation ("ICAC") (mutual fund administrator and the
Trust's Administrator), and Vice President of First Fund Distributors, Inc.
("FFD") (a registered broker-dealer and the Fund's Distributor) since 1990.
Dorothy A. Berry, 08/12/43 Trustee
14 Five Roses East, Ancram, NY 12517. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment advisor and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
Wallace L. Cook, 09/10/39 Trustee
One Peabody Lane, Darien, CT 06820. Retired. Formerly Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
Carl A. Froebel, 05/23/38 Trustee
2 Crown Cove Lane, Savannah, GA 31411. Private Investor. Formerly Managing
Director, Premier Solutions, Ltd. (asset management computer and software
products). Formerly President and Founder, National Investor Data Services, Inc.
(investment related computer software).
HBSS SAI B-9
<PAGE>
Rowley W.P. Redington, 06/01/44 Trustee
1191 Valley Road, Clifton, NJ 07103. President, Intertech (consumer electronics
and computer service and marketing); formerly Vice President, PRS of New Jersey,
Inc. (management consulting), and Chief Executive Officer, Rowley Associates
(consultants).
Eric M. Banhazl*, 08/05/57 Treasurer
2020 E. Financial Way, Glendora, CA 91741. Senior Vice President, The Wadsworth
Group, Senior Vice President of ICAC and Vice President of FFD since 1990.
Robin Berger*, 11/17/56 Secretary
479 West 22nd St., New York, NY 10011. Vice President, The Wadsworth Group since
June, 1993.
Robert H. Wadsworth*, 01/25/40 Vice President
4455 E. Camelback Road, Suite 261E, Phoenix, AZ 85018. President of The
Wadsworth Group since 1982, President of ICAC and FFD since 1990.
*Indicates an "interested person" of the Trust as defined in the 1940 Act.
Set forth below is the rate of compensation received by the following
Trustees from the Fund and all other portfolios of the Trust. This total amount
is allocated among the portfolios. Disinterested trustees receive an annual
retainer of $7,500 and a fee of $2,500 for each regularly scheduled meeting.
These trustees also receive a fee of $1000 for any special meeting attended. The
Chairman of the Board of Trustees receives an additional annual retainer of
$4,500. Disinterested trustees are also reimbursed for expenses in connection
with each Board meeting attended. No other compensation or retirement benefits
were received by any Trustee or officer from the Fund or any other portfolios of
the Trust.
Name of Trustee Total Annual Compensation
Dorothy A. Berry $22,000
Wallace L. Cook $17,500
Carl A. Froebel $17,500
Rowley W.P. Redington $17,500
During the fiscal year ended March 31, 1998, trustees' fees and
expenses in the amount of $4,026 were allocated to the Fund. 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 the Fund.
HBSS SAI B-10
<PAGE>
THE FUND'S INVESTMENT ADVISOR
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund. The Advisor is located at One
Sansome Street, Suite 3300, San Francisco, CA 94104. The Advisor provides
investment advisory services to individual and institutional investors with
assets of approximately $3.3 billion. Mr. John J. Sullivan, Executive Vice
President and Partner and Mr. Gordon J. Ceresino, also Executive Vice President
and Partner are responsible for management of the Fund's portfolio.
Under the Investment Advisory Agreement with the Fund, the Advisor
provides the Fund with advice on buying and selling securities, manages the
investments of the Fund, furnishes the Fund with office space and certain
administrative services, and provides most of the personnel needed by the Fund.
As compensation, the Fund pays the Advisor a monthly management fee (accrued
daily) based upon the average daily net assets of the Fund at the rate of 0.75%
annually.
The Advisor has undertaken to limit the Fund's operating expenses to an
annual level of 1.29% of the Fund's average net assets. For the fiscal period
ended March 31, 1997, the Advisor waived its fees of $15,020 and reimbursed the
Fund in the amount of $74,252; for the fiscal year ended March 31, 1998, the
Advisor waived its fees of $57,487 and reimbursed the Fund in the amount of
$27,348.
The Investment Advisory Agreement continues in effect for successive
annual periods so long as such continuation is approved at least annually by the
vote of (1) the Board of Trustees of the Trust (or a majority of the outstanding
shares of the Fund to which the agreement applies), and (2) a majority of the
Trustees who are not interested persons of any party to the Agreement, in each
case cast in person at a meeting called for the purpose of voting on such
approval. Any such agreement may be terminated at any time, without penalty, by
either party to the agreement upon sixty days' written notice and is
automatically terminated in the event of its "assignment," as defined in the
1940 Act.
THE FUND'S ADMINISTRATOR
The Fund has an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"), a corporation owned and
controlled by Messrs. Banhazl, Paggioli and Wadsworth with offices at 4455 E.
Camelback Rd., Ste. 261-E, Phoenix, AZ 85018. The Administration Agreement
provides that the Administrator will prepare and coordinate reports and other
materials supplied to the Trustees; prepare and/or supervise the preparation and
filing of all securities filings, periodic financial reports, prospectuses,
statements of additional information, marketing materials, tax returns,
shareholder reports and other regulatory reports or filings required of the
Fund; prepare all required filings necessary to maintain the Fund's
qualification and/or registration to sell shares in all states where the Fund
currently does, or intends to do business; coordinate the preparation, printing
and mailing of all materials (e.g., Annual Reports) required to
HBSS SAI B-11
<PAGE>
be sent to shareholders; coordinate the preparation and payment of Fund related
expenses; monitor and oversee the activities of the Fund's servicing agents
(i.e., transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary the Fund's daily expense accruals; and perform such additional
services as may be agreed upon by the Fund and the Administrator. For its
services, the Administrator receives an annual fee equal to 0.12% of the Fund's
average daily net assets up to $25 million, 0.07% of the next $25 million of net
assets, 0.05% of the next $50 million of net assets and 0.03% on assets over
$100 million, with a minimum fee of $30,000. For the fiscal period ended March
31, 1997 and the fiscal year ended March 31, 1998, the Administrator received
fees of $28,351 and $30,000, respectively, from the Fund.
THE FUND'S DISTRIBUTOR
First Fund Distributors, Inc., (the "Distributor"), a corporation owned
by Messrs. Banhazl, Paggioli and Wadsworth, acts as the Fund's principal
underwriter in a continuous public offering of the Fund's shares. The
Distribution Agreement between the Fund and the Distributor continues in effect
for periods not exceeding one year if approved at least annually by (i) the
Board of Trustees or the vote of a majority of the outstanding shares of the
Fund (as defined in the 1940 Act) and (ii) a majority of the Trustees who are
not interested persons of any such party, in each case cast in person at a
meeting called for the purpose of voting on such approval. The Distribution
Agreement may be terminated without penalty by the parties thereto upon sixty
days' written notice, and is automatically terminated in the event of its
assignment as defined in the 1940 Act.
The Fund has adopted a Distribution Plan in accordance with Rule 12b-1
under the 1940 Act. The Plan provides that the Fund will pay a fee to the
Distributor at an annual rate of up to 0.25% of the average daily net assets of
the Fund. The fee is paid to the Distributor as reimbursement for, or in
anticipation of expenses incurred for distribution related activities. During
the year ended March 31, 1998, the Fund paid fees of $19,162 to the Distributor,
of which $10,817 was for compensation to sales personnel, $5,859 was for costs
relating to advertising and marketing materials, and $2,485 was for printing,
postage and office expenses.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement, the Advisor determines
which securities are to be purchased and sold by the Fund and which
broker-dealers are eligible to execute the Fund's portfolio transactions.
Purchases and sales of securities in the over-the-counter market will generally
be executed directly with a "market-maker" unless, in the opinion of the
Advisor, a better price and execution can otherwise be obtained by using a
broker for the transaction.
Purchases of portfolio securities for the Fund also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Fund will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principal for their
HBSS SAI B-12
<PAGE>
own accounts. Purchases from underwriters will include a concession paid by the
issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter that has provided research or other services as discussed
below.
In placing portfolio transactions, the Advisor will use its reasonable
efforts to choose broker-dealers capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers which furnish or supply research and statistical
information to the Advisor that it may lawfully and appropriately use in its
investment advisory capacities, as well as provide other services in addition to
execution services. The Advisor considers such information, which is in addition
to and not in lieu of the services required to be performed by it under its
Agreement with the Fund, to be useful in varying degrees, but of indeterminable
value. Portfolio transactions may be placed with broker-dealers who sell shares
of the Fund subject to rules adopted by the National Association of Securities
Dealers, Inc.
While it is the Fund's general policy to seek first to obtain the most
favorable price and execution available in selecting a broker-dealer to execute
portfolio transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Advisor, even if the specific services are not directly useful to the Fund and
may be useful to the Advisor in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, the
Fund may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Advisor to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer. The standard of reasonableness
is to be measured in light of the Advisor's overall responsibilities to the
Fund.
Investment decisions for the Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts or Funds.
In such event, the position of the Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or Funds seeks to acquire the same security as the Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such security. Similarly, the Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts
HBSS SAI B-13
<PAGE>
or Funds simultaneously purchases or sells the same security that the Fund is
purchasing or selling, each day's transactions in such security will be
allocated between the Fund and all such client accounts or Funds in a manner
deemed equitable by the Advisor, taking into account the respective sizes of the
accounts and the amount being purchased or sold. It is recognized that in some
cases this system could have a detrimental effect on the price or value of the
security insofar as the Fund is concerned. In other cases, however, it is
believed that the ability of the Fund to participate in volume transactions may
produce better executions for the Fund.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
brokers solely for selling shares of the Fund, although the Fund may consider
the sale of shares as a factor in allocating brokerage. However, as stated
above, broker-dealers who execute brokerage transactions may effect purchase of
shares of the Fund for their customers. The Fund does not use the Distributor to
execute its portfolio transactions.
For the fiscal period ended March 31, 1997 and for the fiscal year
ended March 31, 1998, the aggregate brokerage commissions paid by the Fund were
$4,429 and $7,583, respectively.
Of the total commissions paid by the Fund during the fiscal year ended
March 31, 1998, $4,940 (65.15%) was paid to firms for research, statistical or
other services provided to the Advisor.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Fund's shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Fund, and (iii) to reduce or waive the minimum
for initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
Payments to shareholders for shares of the Fund redeemed directly from
the Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable; or (c) for such other period as the SEC may permit for the
protection of the Fund's shareholders. At various times, the Fund may be
requested to redeem shares for which it has not yet received confirmation of
good payment; in this circumstance, the Fund may delay the redemption until
payment for the purchase of such shares has been collected and confirmed to the
Fund.
HBSS SAI B-14
<PAGE>
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions which make payment in cash unwise, the Fund may
make payment partly in securities with a current market value equal to the
redemption price. Although the Fund does not anticipate that it will make any
part of a redemption payment in securities, if such payment were made, an
investor may incur brokerage costs in converting such securities to cash. The
Fund has elected to be governed by the provisions of Rule 18f-1 under the 1940
Act, which contains a formula for determining the minimum redemption amounts
that must be paid in cash.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
Check-A-Matic
As discussed in the Prospectus, the Fund provides a Check-A-Matic Plan
for the convenience of investors who wish to purchase shares of the Fund on a
regular basis. All record keeping and custodial costs of the Check-A-Matic Plan
are paid by the Fund. The market value of the Fund's shares is subject to
fluctuation, so before undertaking any plan for systematic investment, the
investor should keep in mind that this plan does not assure a profit nor protect
against depreciation in declining markets.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Fund will be determined once daily as of the close of public
trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on
each day that the Exchange is open for trading. It is expected that the Exchange
will be closed on Saturdays and Sundays and on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. The Fund does not expect to
determine the net asset value of its shares on any day when the Exchange is not
open for trading even if there is sufficient trading in its portfolio securities
on such days to materially affect the net asset value per share.
In valuing the Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each Fund are valued in such manner as the Board of Trustees in
good faith deems appropriate to reflect their fair value.
HBSS SAI B-15
<PAGE>
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
From time to time, the Fund may state its total return in
advertisements and investor communications. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return will be accompanied by information on the Fund's
average annual compounded rate of return over the most recent four calendar
quarters and the period from the Fund's inception of operations. The Fund may
also advertise aggregate and average total return information over different
periods of time.
The Fund's total return may be compared to relevant indices, including
Standard & Poor's 500 Composite Stock Index and indices published by Lipper
Analytical Services, Inc. From time to time, evaluations of a Fund's performance
by independent sources may also be used in advertisements and in information
furnished to present or prospective investors in the Funds.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
The Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial purchase order of $1,000 from which the
maximum sales load is deducted
T = average annual total return n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at
the end of the period
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period.
HBSS SAI B-16
<PAGE>
The average annual compounded rate of returns, or total return, for the
Fund for the one year period and from the period from inception of the Fund on
May 1, 1996 through March 31, 1998 were 47.02% and 28.75%, respectively.
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
Star Bank N.A., 425 Walnut Street, Cincinnati, OH 45202 acts as
Custodian of the securities and other assets of the Fund. The Custodian does not
participate in decisions relating to the purchase and sale of securities by the
Fund. American Data Services, Inc., P.O. Box 5536, Hauppauge, NY 11788-0132 is
the Fund's Transfer and Dividend Disbursing Agent.
Ernst & Young LLP, 515 S. Flower St., Los Angeles, CA 90071 are the
independent auditors for the Fund.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th
Floor, San Francisco, California 94104, are legal counsel to the Fund.
The following persons are beneficial owners of more than 5% of the
Fund's outstanding voting securities as of July 1, 1998. An asterisk (*) denotes
an account affiliated with the Fund's investment advisor, officers or trustees:
Fidelity Investments Operations Co. as agent for certain benefit plans,
Covington, KY 41015; 35.37%
Charles Schwab & Co., Inc., Special Custody Account FBO Customers, San
Francisco, CA 94104; 31.80%
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Agreement and Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Fund's assets for any shareholder held
personally liable for obligations of the Fund or Trust. The Agreement and
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Fund. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Furthermore, the activities of the Trust as
an investment company would not likely give
HBSS SAI B-17
<PAGE>
rise to liabilities in excess of the Trust's total assets. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to the unlikely circumstances in which both inadequate insurance exists
and the Fund itself is unable to meet its obligations.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Fund. The Prospectus of the Fund and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee, or may be accessed via
the world wide web at http://www.sec.gov.
FINANCIAL STATEMENTS
The annual report to shareholders for the Fund for its most recent
fiscal year end is a separate document supplied with this Statement of
Additional Information and the financial statements, accompanying notes and
report of independent accountants appearing therein are incorporated by
reference in this Statement of Additional Information.
HBSS SAI B-18
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
HODGES FUND
a series of
PROFESSIONALLY MANAGED PORTFOLIOS
2905 Maple Avenue
Dallas, Texas 75201
(800) 388-8512
(800) 282-2340
This Statement of Additional Information is not a prospectus and it
should be read in conjunction with the prospectus of the Hodges Fund (the
"Fund"). A copy of the prospectus of the Fund dated August 1, 1998 is available
by calling either of the numbers listed above.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
The Trust.......................................................................................................B-2
Investment Objective And Policies...............................................................................B-2
Investment Restrictions.........................................................................................B-7
Distributions and Tax Information...............................................................................B-8
Trustees and Executive Officers................................................................................B-11
The Fund's Investment Advisor..................................................................................B-13
The Fund's Administrator.......................................................................................B-13
The Fund's Distributor.........................................................................................B-14
Execution of Portfolio Transactions............................................................................B-15
Additional Purchase and Redemption Information.................................................................B-16
Determination of Share Price...................................................................................B-17
Performance Information........................................................................................B-18
General Information............................................................................................B-19
Financial Statements...........................................................................................B-20
</TABLE>
Hodges SAI B-1
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of various series which represent separate investment portfolios.
This Statement of Additional Information relates only to the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Hodges Fund is a mutual fund with the investment objective of
seeking capital appreciation. The following discussion supplements the
discussion of the Fund's investment objective and policies as set forth in the
Prospectus. There can be no assurance the objective of the Fund will be
attained.
Repurchase Agreements
The Fund may enter into repurchase agreements as discussed in the
Prospectus. Under such agreements, the seller of the security agrees to
repurchase it at a mutually agreed upon time and price. The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Fund together with the repurchase price on repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the U.S.
Government security itself. Such repurchase agreements will be made only with
banks with assets of $500 million or more that are insured by the Federal
Deposit Insurance Corporation or with Government securities dealers recognized
by the Federal Reserve Board and registered as broker-dealers with the
Securities and Exchange Commission ("SEC") or exempt from such registration. The
Fund will generally enter into repurchase agreements of short durations, from
overnight to one week, although the underlying securities generally have longer
maturities. The Fund may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 15% of the value of the Fund's
total assets would be invested in illiquid securities including such repurchase
agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government security subject to the repurchase agreement. In the event of
the insolvency or default of the seller, the Fund could encounter delays and
incur costs before being able to sell the security. Delays may involve loss of
interest or a decline in price of the U.S. Government security. As with any
unsecured debt instrument purchased for the Fund, the Investment Advisor seeks
to minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the U.S.
Government security.
There is also the risk that the seller may fail to repurchase the
security. However, the Fund will always receive as collateral for any repurchase
agreement to which it is a party securities acceptable to it, the market value
of which is equal to at least 100% of the amount invested by the
Hodges SAI B-2
<PAGE>
Fund plus accrued interest, and the Fund will make payment against such
securities only upon physical delivery or evidence of book entry transfer to the
account of its Custodian. If the market value of the U.S. Government security
subject to the repurchase agreement becomes less than the repurchase price
(including interest), the Fund will direct the seller of the U.S. Government
security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to impose on the seller a contractual obligation to deliver additional
securities.
When-Issued Securities
The Fund is authorized to purchase securities on a "when-issued" basis.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase; during the period between purchase and
settlement, no payment is made by the Fund to the issuer and no interest accrues
to the Fund. To the extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, the Fund would earn no income; however,
it is the Fund's intention to be fully invested to the extent practicable and
subject to the policies stated above. While when-issued securities may be sold
prior to the settlement date, any purchase of such securities would be made with
the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The market value of
the when-issued securities may be more or less than the purchase price. The Fund
does not believe that its net asset value or income will be adversely affected
by its purchase of securities on a when-issued basis. The Fund will segregate
liquid assets with its Custodian equal in value to commitments for when-issued
securities. Such segregated assets either will mature or, if necessary, be sold
on or before the settlement date.
U. S. Government Securities
U.S. Government securities in which the Fund may invest include direct
obligations issued by the U.S. Treasury, such as Treasury bills, certificates of
indebtedness, notes and bonds. U.S. Government agencies and instrumentalities
that issue or guarantee securities include, but are not limited to, the Federal
Housing Administration, Federal National Mortgage Association, Federal Home Loan
Banks, Government National Mortgage Association, International Bank for
Reconstruction and Development and Student Loan Marketing Association.
All Treasury securities are backed by the full faith and credit of the
United States. Obligations of U.S. Government agencies and instrumentalities may
or may not be supported by the full faith and credit of the United States. Some,
such as the Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as securities issued
by the Federal National Mortgage Association, are supported only by the credit
of the instrumentality and not by the Treasury. If the securities are not backed
by the full faith and credit of the United States,
Hodges SAI B-3
<PAGE>
the owner of the securities must look principally to the agency issuing the
obligation for repayment and may not be able to assert a claim against United
States in the event that the agency or instrumentality does not meet its
commitment.
Among the U.S. Government securities that may be purchased by the Fund
are "mortgage-backed securities" of the Government National Mortgage Association
("Ginnie Mae"), the Federal Home Loan Mortgage Association ("Freddie Mac") and
the Federal National Mortgage Association ("Fannie Mae"). These mortgage-backed
securities include "pass-through" securities and "participation certificates,"
both of which represent pools of mortgages that are assembled, with interests
sold in the pool. Payments of principal (including prepayments) and interest by
individual mortgagors are "passed through" to the holders of interests in the
pool; thus each payment to holders may contain varying amounts of principal and
interest. Prepayments of the mortgages underlying these securities may result in
the Fund's inability to reinvest the principal at comparable yields.
Mortgage-backed securities also include "collateralized mortgage obligations,"
which are similar to conventional bonds in that they have fixed maturities and
interest rates and are secured by groups of individual mortgages. Timely payment
of principal and interest on Ginnie Mae pass-throughs is guaranteed by the full
faith and credit of the United States. Freddie Mac and Fannie Mae are both
instrumentalities of the U.S. Government, but their obligations are not backed
by the full faith and credit of the United States.
Securities Lending
Although the Fund's objective is capital appreciation, the Fund
reserves the right to lend its portfolio securities in order to generate
additional income. Securities may be loaned to broker-dealers, major banks or
other recognized domestic institutional borrowers of securities who are not
affiliated with the Advisor or Distributor and whose creditworthiness is
acceptable to the Advisor. The borrower must deliver to the Fund cash or cash
equivalent collateral, or provide to the Fund an irrevocable letter of credit
equal in value to at least 100% of the value of the loaned securities at all
times during the loan. During the time the portfolio securities are on loan, the
borrower pays the Fund any interest paid on such securities. The Fund may invest
the cash collateral and earn additional income, or it may receive an agreed-upon
amount of interest income if the borrower has delivered equivalent collateral or
a letter of credit. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the income
earned on the cash to the borrower or placing broker. Loans are subject to
termination at the option of the Fund or the borrower at any time. It is not
anticipated that more than 5% of the value of the Fund's portfolio securities
will be subject to lending.
Options on Securities
The Fund may write (sell) covered call options to a limited extent on
its portfolio securities ("covered options") in an attempt to enhance gain.
Hodges SAI B-4
<PAGE>
When the Fund writes a covered call option, it gives the purchaser of
the option the right, upon exercise of the option, to buy the underlying
security at the price specified in the option (the "exercise price") at any time
during the option period, generally ranging up to nine months. If the option
expires unexercised, the Fund will realize income to the extent of the amount
received for the option (the "premium"). If the call option is exercised, a
decision over which the Fund has no control, the Fund must sell the underlying
security to the option holder at the exercise price. By writing a covered
option, the Fund forgoes, in exchange for the premium less the commission ("net
premium") the opportunity to profit during the option period from an increase in
the market value of the underlying security above the exercise price.
The Fund may terminate its obligation as writer of a call option by
purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction."
Closing sale transactions enable the Fund immediately to realize gains
or minimize losses on its options positions. There is no assurance that a liquid
secondary market on an options exchange will exist for any particular option, or
at any particular time, and for some options no secondary market may exist. In
addition, stock index prices may be distorted by interruptions in the trading of
securities of certain companies or of issuers in certain industries, which could
disrupt trading in option positions on such indices and preclude the Fund from
closing out its options positions. If the Fund is unable to effect a closing
purchase transaction with respect to options it has written, it will not be able
to terminate its obligations or minimize its losses under such options prior to
their expiration. If the Fund is unable to effect a closing sale transaction
with respect to options that it has purchased, it would have to exercise the
option in order to realize any profit.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements may take place in the underlying markets that cannot be
reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions.
Options on Securities Indices
The Fund may write (sell) covered call options on securities indices in
an attempt to increase gain. A securities index option written by the Fund would
obligate it, upon exercise of the options, to pay a cash settlement, rather than
to deliver actual securities, to the option holder. Although the Fund will not
ordinarily own all of the securities comprising the stock indices on which it
writes call options, such options will usually be written on those indices which
correspond most closely to the composition of the Fund's portfolio. As with the
writing of covered call options on securities, the Fund will realize a gain in
the amount of the premium received upon writing an option if the value of the
underlying index increases above the exercise price and the option is exercised,
the Fund will be required to pay a cash settlement that may exceed the amount of
the premium received by the
Hodges SAI B-5
<PAGE>
Fund. The Fund may purchase call options in order to terminate its obligations
under call options it has written.
The Fund may purchase call and put options on securities indices for
the purpose of hedging against the risk of unfavorable price movements adversely
affecting the value of the Fund's securities or securities the Fund intends to
buy. Securities index options will not be purchased for speculative purposes.
Unlike an option on securities, which gives the holder the right to purchase or
sell specified securities at a specified price, an option on a securities index
gives the holder the right, upon the exercise of the option, to receive a cash
"exercise settlement amount" equal to (i) the difference between the exercise
price of the option and the value of the underlying securities index on the
exercise date multiplied by (ii) a fixed "index multiplier."
A securities index fluctuates with changes in the market value of the
securities included in the index. For example, some securities index options are
based on a broad market index such as the Standard & Poor's 500 or the Value
Line Composite Index, or a narrower market index such as the Standard & Poor's
100. Indices may also be based on industry or market segments.
The Fund may purchase put options in order to hedge against an
anticipated decline in stock market prices that might adversely affect the value
of the Fund's portfolio securities. If the Fund purchases a put option on a
stock index, the amount of payment it receives on exercising the option depends
on the extent of any decline in the level of the stock index below the exercise
price. Such payments would tend to offset a decline in the value of the Fund's
portfolio securities. If, however, the level of the stock index increases and
remains above the exercise price while the put option is outstanding, the Fund
will not be able to profitably exercise the option and will lose the amount of
the premium and any transaction costs. Such loss may be partially offset by an
increase in the value of the Fund's portfolio securities. The Fund may write put
options on stock indices in order to close out positions in stock index put
options which it has purchased.
The Fund may purchase call options on stock indices in order to
participate in an anticipated increase in stock market prices or to lock in a
favorable price on securities that it intends to buy in the future. If the Fund
purchases a call option on a stock index, the amount of the payment it receives
upon exercising the option depends on the extent of any increase in the level of
the stock index above the exercise price. Such payments would in effect allow
the Fund to benefit from stock market appreciation even though it may not have
had sufficient cash to purchase the underlying stocks. Such payments may also
offset increases in the price of stocks that the Fund intends to purchase. If,
however, the level of the stock index declines and remains below the exercise
price while the call option is outstanding, the Fund will not be able to
exercise the option profitably and will lose the amount of the premium and
transaction costs. Such loss may be partially offset by a reduction in the price
the Fund pays to buy additional securities for its portfolio. The Fund may write
call options on stock indices in order to close out positions in stock index
call options which it has purchased.
The effectiveness of hedging through the purchase of options on
securities indices will depend upon the extent to which price movements in the
portion of the securities portfolio being hedged
Hodges SAI B-6
<PAGE>
correlate with price movements in the selected stock index. Perfect correlation
is not possible because the securities held or to be acquired by the Fund will
not exactly match the composition of the stock indices on which the options are
available. In addition, the purchase of stock index options involves the risk
that the premium and transaction costs paid by the Fund in purchasing an option
will be lost as a result of unanticipated movements in prices of the securities
comprising the stock index on which the option is based.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the 1940 Act. The Fund may not:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b)
through the lending of its portfolio securities as described above and in its
Prospectus, or (c) to the extent the entry into a repurchase agreement is deemed
to be a loan.
2. (a) Borrow money, except temporarily for extraordinary or emergency
purposes from a bank and then not in excess of 10% of its total assets (at the
lower of cost or fair market value). Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least 300% of all
borrowings, and no additional investments may be made while any such borrowings
are in excess of 5% of total assets.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
3. Purchase securities on margin, participate on a joint or joint and
several basis in any securities trading account, or underwrite securities. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
4. Buy or sell interests in oil, gas or mineral exploration or
development programs or related leases, or real estate. (Does not preclude
investments in marketable securities of issuers engaged in such activities.)
5. Purchase or sell real estate, commodities or commodity contracts.
(As a matter of operating policy, the Board of Trustees may authorize the Fund
to engage in certain activities regarding futures contracts for bona fide
hedging purposes; any such authorization will be accompanied by appropriate
notification to shareholders.)
Hodges SAI B-7
<PAGE>
6. Invest 25% or more of the market value of its assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S.
Government, its agencies or instrumentalities.)
7. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures or repurchase transactions.
8. Invest in any issuer for purposes of exercising control or
management.
The Fund observes the following policies, which are not deemed
fundamental and which may be changed without shareholder vote. The Fund may not:
9. Invest in securities of other investment companies which would
result in the Fund owning more than 3% of the outstanding voting securities of
any one such investment company, the Fund owning securities of another
investment company having an aggregate value in excess of 5% of the value of the
Fund's total assets, or the Fund owning securities of investment companies which
in the aggregate would exceed 10% of the value of the Fund's total assets.
10. Invest, in the aggregate, more than 15% of its total assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable and repurchase agreements with more than seven days
to maturity.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually. Also, the Fund expects
to distribute any undistributed net investment income on or about December 31 of
each year. Any net capital gains realized through the period ended October 31 of
each year will also be distributed by December 31 of each year.
Each distribution by the Fund is accompanied by a brief explanation of
the form and character of the distribution. In January of each year the Fund
will issue to each shareholder a statement of the federal income tax status of
all distributions.
Hodges SAI B-8
<PAGE>
Tax Information
Each series of the Trust is treated as a separate entity for federal
income tax purposes. The Fund intends to continue to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), provided it complies with all
applicable requirements regarding the source of its income, diversification of
its assets and timing of distributions. The Fund's policy is to distribute to
its shareholders all of its investment company taxable income and any net
realized long-term capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes. To comply with the requirements,
the Fund must also distribute (or be deemed to have distributed) by December 31
of each calendar year (i) at least 98% of its ordinary income for such year,
(ii) at least 98% of the excess of its realized capital gains over its realized
capital losses for the 12-month period ending on October 31 during such year and
(iii) any amounts from the prior calendar year that were not distributed and on
which the Fund paid no federal income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains
are taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent the Fund designates the amount
distributed as a qualifying dividend. The aggregate amount so designated cannot,
however, exceed the aggregate amount of qualifying dividends received by the
Fund for its taxable year. In view of the Fund's investment policy, it is
expected that dividends from domestic corporations will be part of the Fund's
gross income and that, accordingly, part of the distributions by the Fund may be
eligible for the dividends-received deduction for corporate shareholders.
However, the portion of the Fund's gross income attributable to qualifying
dividends is largely dependent on that Fund's investment activities for a
particular year and therefore cannot be predicted with any certainty. The
deduction may be reduced or eliminated if the Fund shares held by a corporate
investor are treated as debt-financed or are held for less than 46 days during
the 90-day period that begins 45 days before the stock becomes ex-dividend with
respect to the dividend.
Any long-term or mid-term capital gain distributions are taxable to
shareholders as long-term or mid-term capital gains, respectively, regardless of
the length of time shares have been held. Capital gains distributions are not
eligible for the dividends-received deduction referred to in the previous
paragraph. Distributions of any net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date. Distributions
are generally taxable when received. However, distributions declared in October,
November or December to shareholders of record on a date in such a month and
paid the following
Hodges SAI B-9
<PAGE>
January are taxable as if received on December 31. Distributions are includable
in alternative minimum taxable income in computing a shareholder's liability for
the alternative minimum tax.
The Fund may write, purchase or sell certain options and futures
contracts. Such transactions are subject to special tax rules that may affect
the amount, timing and character of distributions to shareholders. Unless the
Fund is eligible to make and makes a special election, such contracts that are
"Section 1256 contracts" will be "marked-to-market" for federal income tax
purposes at the end of each taxable year, i.e., each contract will be treated as
sold for its fair market value on the last day of the taxable year. In general,
unless the special election referred to in the previous sentence is made, gain
or loss from transactions in such contracts will be 60% long-term and 40%
short-term capital gain or loss. Section 1092 of the Code, which applies to
certain "straddles", may affect the taxation of the Fund's transactions in
options and futures contracts. Under Section 1092 of the Code, the Fund may be
required to postpone recognition for tax purposes of losses incurred in certain
closing transactions.
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. Any loss realized upon a redemption or exchange of shares
within six months from the date of their purchase will be treated as a long-term
capital loss to the extent of any amounts treated as distributions of long-term
capital gains during such six-month period. Any loss realized upon a redemption
or exchange may be disallowed under certain wash sale rules to the extent shares
of the same Fund are purchased (through reinvestment of distributions or
otherwise) within 30 days before or after the redemption or exchange.
Under the Code, the Fund will be required to report to the Internal
Revenue Service ("IRS") all distributions of taxable income and capital gains as
well as gross proceeds from the redemption or exchange of Fund shares, except in
the case of exempt shareholders, which includes most corporations. Pursuant to
the backup withholding provisions of the Internal Revenue Code, distributions of
any taxable income and capital gains and proceeds from the redemption of Fund
shares may be subject to withholding of federal income tax at the rate of 31
percent in the case of non-exempt shareholders who fail to furnish the Fund with
their taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld. Corporate and other exempt shareholders should provide the Fund with
their taxpayer identification numbers or certify their exempt status in order to
avoid possible erroneous application of backup withholding. The Fund reserves
the right to refuse to open an account for any person failing to provide a
certified taxpayer identification number.
Hodges SAI B-10
<PAGE>
The Fund will not be subject to tax in the Commonwealth of
Massachusetts as long as it qualifies as a regulated investment company for
federal income tax purposes. Distributions and the transactions referred to in
the preceding paragraphs may be subject to state and local income taxes, and the
tax treatment thereof may differ from the federal income tax treatment.
Moreover, the above discussion is not intended to be a complete discussion of
all applicable federal tax consequences of an investment in the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of federal, state and local taxes to an investment in the Fund.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the prospectus have been
prepared by Fund management, and counsel to the Fund has expressed no opinion in
respect thereof.
TRUSTEES AND EXECUTIVE OFFICERS
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, their
affiliations, dates of birth and principal occupations for the past five years
are set forth below.
Steven J. Paggioli,* 04/03/50 President and Trustee
479 West 22nd Street, New York, NY 10011. Executive Vice President, The
Wadsworth Group (consultants) since 1986; Executive Vice President of Investment
Company Administration Corporation ("ICAC") (mutual fund administrator and the
Trust's Administrator), and Vice President of First Fund Distributors, Inc.
("FFD") (a registered broker-dealer and the Fund's Distributor) since 1990.
Dorothy A. Berry, 08/12/43 Trustee
14 Five Roses East, Ancram, NY 12517. 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).
Hodges SAI B-11
<PAGE>
Wallace L. Cook, 09/10/39 Trustee
One Peabody Lane, Darien, CT 06820. Retired. Formerly Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
Carl A. Froebel, 05/23/38 Trustee
2 Crown Cove Lane, Savannah, GA 31411. Private Investor. Formerly Managing
Director, Premier Solutions, Ltd. (asset management computer and software
products). Formerly President and Founder, National Investor Data Services, Inc.
(investment related computer software).
Rowley W.P. Redington, 06/01/44 Trustee
1191 Valley Road, Clifton, NJ 07103. President, Intertech (consumer electronics
and computer service and marketing); formerly Vice President, PRS of New Jersey,
Inc. (management consulting), and Chief Executive Officer, Rowley Associates
(consultants).
Eric M. Banhazl*, 08/05/57 Treasurer
2020 E. Financial Way, Glendora, CA 91741. Senior Vice President, The Wadsworth
Group, Senior Vice President of ICAC and Vice President of FFD since 1990.
Robin Berger*, 11/17/56 Secretary
479 West 22nd St., New York, NY 10011. Vice President, The Wadsworth Group since
June, 1993.
Robert H. Wadsworth*, 01/25/40 Vice President
4455 E. Camelback Road, Suite 261E, Phoenix, AZ 85018. President of The
Wadsworth Group since 1982, President of ICAC and FFD since 1990.
*Indicates an "interested person" of the Trust as defined in the 1940 Act.
Set forth below is the rate of compensation received by the following
Trustees from the Fund and all other portfolios of the Trust. This total amount
is allocated among the portfolios. Disinterested trustees receive an annual
retainer of $7,500 and a fee of $2,500 for each regularly scheduled meeting.
These trustees also receive a fee of $1000 for any special meeting attended. The
Chairman of the Board of Trustees receives an additional annual retainer of
$4,500. Disinterested trustees are also reimbursed for expenses in connection
with each Board meeting attended. No other compensation or retirement benefits
were received by any Trustee or officer from the Fund or any other portfolios of
the Trust.
Hodges SAI B-12
<PAGE>
Name of Trustee Total Annual Compensation
Dorothy A. Berry $22,000
Wallace L. Cook $17,500
Carl A. Froebel $17,500
Rowley W.P. Redington $17,500
During the fiscal year ended March 31, 1998, trustees' fees and
expenses in the amount of $6,841 were allocated to the Fund. 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 the Fund.
THE FUND'S INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided
to the Fund by Hodges Capital Management, Inc., the Advisor, pursuant to an
Investment Advisory Agreement.
For the fiscal years ended March 31, 1996, March 31, 1997 and March 31,
1998, the Advisor received advisory fees totaling $94,361, $141,685 and
$225,283, respectively.
The use of the name "Hodges" by the Fund is pursuant to a license
granted by the Advisor, and in the event the Investment Advisory Agreement with
the Fund is terminated, the Advisor has reserved the right to require the Fund
to remove any references to the name "Hodges."
The Investment Advisory Agreement continues in effect for successive
annual periods so long as such continuation is approved at least annually by the
vote of (1) the Board of Trustees of the Trust (or a majority of the outstanding
shares of the Fund to which the agreement applies), and (2) a majority of the
Trustees who are not interested persons of any party to the Agreement, in each
case cast in person at a meeting called for the purpose of voting on such
approval. Any such agreement may be terminated at any time, without penalty, by
either party to the agreement upon sixty days' written notice and is
automatically terminated in the event of its "assignment," as defined in the
1940 Act.
THE FUND'S ADMINISTRATOR
The Fund has an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"), a corporation owned and
controlled by Messrs. Banhazl, Paggioli and Wadsworth with offices at 4455 E.
Camelback Rd., Ste. 261-E, Phoenix, AZ 85018. The Administration Agreement
provides that the Administrator will prepare and coordinate reports and other
materials supplied to the Trustees; prepare and/or supervise the preparation and
filing of all securities filings, periodic financial reports, prospectuses,
statements of additional information, marketing materials, tax returns,
shareholder reports and other regulatory reports or filings required
Hodges SAI B-13
<PAGE>
of the Fund; prepare all required filings necessary to maintain the Fund's
qualification and/or registration to sell shares in all states where the Fund
currently does, or intends to do business; coordinate the preparation, printing
and mailing of all materials (e.g., Annual Reports) required to be sent to
shareholders; coordinate the preparation and payment of Fund related expenses;
monitor and oversee the activities of the Fund's servicing agents (i.e.,
transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary the Fund's daily expense accruals; and perform such additional
services as may be agreed upon by the Fund and the Administrator. For its
services, the Administrator receives a monthly fee at the following annual rate:
Average Net Assets Fee or Fee Rate
- ------------------ ---------------
Under $15 million $30,000
$15 to $50 million 0.20%
$50 to $100 million 0.15%
$100 to $150 million 0.10%
Over $150 million 0.05%
During the fiscal years ended March 31, 1996, March 31, 1997 and March 31, 1998,
ICAC and its predecessor received fees of $30,476, $33,748 and $53,008,
respectively.
THE FUND'S DISTRIBUTOR
First Dallas Securities, (the "Distributor"), an affiliate of the
Advisor, acts as the Fund's principal underwriter in a continuous public
offering of the Fund's shares. The Distribution Agreement between the Fund and
the Distributor continues in effect from year to year if approved at least
annually by (i) the Board of Trustees or the vote of a majority of the
outstanding shares of the Fund (as defined in the 1940 Act) and (ii) a majority
of the Trustees who are not interested persons of any such party, in each case
cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement may be terminated without penalty by the parties
thereto upon sixty days' written notice, and is automatically terminated in the
event of its assignment as defined in the 1940 Act. In connection with the
distribution of the Fund's shares, the Distributor received as commissions
during the fiscal years ended March 31, 1996, March 31, 1997 and March 31, 1998,
$7,021, $58,983 and $95,040, respectively.
The Fund has adopted a Distribution Plan in accordance with Rule 12b-1
under the 1940 Act. The Plan provides that the Fund will pay a fee to the
Distributor at an annual rate of up to 0.50% of the average daily net assets of
the Fund. The fee is paid to the Distributor as reimbursement for or in
anticipation of, expenses incurred for distribution related activities. During
the year ended March 31, 1998, the Fund paid fees of $132,520 to the
Distributor, of which $40,405 was for compensation to sales personnel, $81,152
was for expenses related to advertising and marketing material and $10,963 was
for printing, postage and office expenses.
Hodges SAI B-14
<PAGE>
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement, the Advisor determines
which securities are to be purchased and sold by the Fund and which
broker-dealers are eligible to execute the Fund's portfolio transactions.
Purchases and sales of securities in the over-the-counter market will generally
be executed directly with a "market-maker" unless, in the opinion of the
Advisor, a better price and execution can otherwise be obtained by using a
broker for the transaction.
Purchases of portfolio securities for the Fund also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Fund will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principal for their own accounts. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Advisor will use its reasonable
efforts to choose broker-dealers capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers which furnish or supply research and statistical
information to the Advisor that it may lawfully and appropriately use in its
investment advisory capacities, as well as provide other services in addition to
execution services. The Advisor considers such information, which is in addition
to and not in lieu of the services required to be performed by it under its
Agreement with the Fund, to be useful in varying degrees, but of indeterminable
value. Portfolio transactions may be placed with broker-dealers who sell shares
of the Fund subject to rules adopted by the National Association of Securities
Dealers, Inc.
While it is the Fund's general policy to seek first to obtain the most
favorable price and execution available in selecting a broker-dealer to execute
portfolio transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Advisor, even if the specific services are not directly useful to the Fund and
may be useful to the Advisor in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, the
Fund may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Advisor to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer. The standard of reasonableness
is to be measured in light of the Advisor's overall responsibilities to the
Fund.
Investment decisions for the Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts or Funds.
In such event, the position of the Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or Funds seeks to acquire the same security as the Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such security. Similarly, the Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts or Funds simultaneously
purchases or sells the same security that the Fund is purchasing or selling,
each day's transactions in such security will be allocated between the Fund and
all such client accounts or Funds in a manner deemed equitable by the Advisor,
taking into account the respective sizes of the accounts and the amount being
purchased or sold. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as the Fund is
concerned. In other cases, however, it is believed that the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
brokers solely for selling shares of the Fund, although the Fund may consider
the sale of shares as a factor in allocating brokerage. However, as stated
above, broker-dealers who execute brokerage transactions may effect purchase of
shares of the Fund for their customers. The Fund does not use the Distributor to
execute its portfolio transactions.
During the Fund's fiscal years ended March 31, 1996, 1997, and 1998,
the Distributor received $20,198, $17,268 and $13,251, respectively in brokerage
commissions with respect to Fund portfolio transactions, which constituted 100%,
46% and 25%, respectively, of the Fund's brokerage commissions during those
periods.
Of the total commissions paid by the Fund during the fiscal year ended
March 31, 1998, $7,070 (13.25%) was paid to firms for research, statistical or
other services provided to the Advisor.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Fund's shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Fund, and (iii) to reduce or waive the
Hodges SAI B-15
<PAGE>
minimum for initial and subsequent investments for certain fiduciary accounts or
under circumstances where certain economies can be achieved in sales of the
Fund's shares.
Payments to shareholders for shares of the Fund redeemed directly from
the Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable; or (c) for such other period as the SEC may permit for the
protection of the Fund's shareholders. At various times, the Fund may be
requested to redeem shares for which it has not yet received confirmation of
good payment; in this circumstance, the Fund may delay the redemption until
payment for the purchase of such shares has been collected and confirmed to the
Fund.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions which make payment in cash unwise, the Fund may
make payment partly in securities with a current market value equal to the
redemption price. Although the Fund does not anticipate that it will make any
part of a redemption payment in securities, if such payment were made, an
investor may incur brokerage costs in converting such securities to cash. The
Fund has elected to be governed by the provisions of Rule 18f-1 under the 1940
Act, which contains a formula for determining the minimum redemption amounts
that must be paid in cash.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
Check-A-Matic
As discussed in the Prospectus, the Fund provides a Check-A-Matic Plan
for the convenience of investors who wish to purchase shares of the Fund on a
regular basis. All record keeping and custodial costs of the Check-A-Matic Plan
are paid by the Fund. The market value of the Fund's shares is subject to
fluctuation, so before undertaking any plan for systematic investment, the
investor should keep in mind that this plan does not assure a profit nor protect
against depreciation in declining markets.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Fund will be determined once daily as of the close of public
trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on
each day that the Exchange is open for trading. It is expected
Hodges SAI B-16
<PAGE>
that the Exchange will be closed on Saturdays and Sundays and on New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund does
not expect to determine the net asset value of its shares on any day when the
Exchange is not open for trading even if there is sufficient trading in its
portfolio securities on such days to materially affect the net asset value per
share.
In valuing the Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each Fund are valued in such manner as the Board of Trustees in
good faith deems appropriate to reflect their fair value.
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
From time to time, the Fund may state its total return in
advertisements and investor communications. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return will be accompanied by information on the Fund's
average annual compounded rate of return over the most recent four calendar
quarters and the period from the Fund's inception of operations. The Fund may
also advertise aggregate and average total return information over different
periods of time.
The Fund's total return may be compared to relevant indices, including
Standard & Poor's 500 Composite Stock Index and indices published by Lipper
Analytical Services, Inc. From time to time, evaluations of a Fund's performance
by independent sources may also be used in advertisements and in information
furnished to present or prospective investors in the Funds.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
The Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
Hodges SAI B-17
<PAGE>
P(1+T)n = ERV
Where: P = a hypothetical initial purchase order of $1,000 from which the
maximum sales load is deducted
T = average annual total return n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at
the end of the period
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period and gives effect to the maximum applicable sales charge.
The average annual compounded rate of returns, or total return, for the
Fund for the one year and five year periods and from the period from inception
of the Fund on October 9, 1992 through March 31, 1998 were 37.69%, 17.96% and
19.28%, respectively.
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
Star Bank N.A., 425 Walnut St., Cincinnati, OH 45202 acts as Custodian
of the securities and other assets of the Fund. American Data Services, Inc.,
P.O. Box 5536, Hauppauge, NY 11788-0132 is the Fund's transfer and shareholder
service agent. The Custodian and Transfer Agent do not participate in decisions
relating to the purchase and sale of securities by the Fund.
Tait, Weller & Baker, Eight Penn Center Plaza, Philadelphia, PA 19103,
are the independent auditors for the Fund.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th
Floor, San Francisco, California 94104, are legal counsel to the Fund.
The following persons are beneficial owners of more than 5% of the
Fund's outstanding voting securities as of July 1, 1998. An asterisk (*) denotes
an account affiliated with the Fund's investment advisor, officers or trustees:
*Wheat First Securities as Custodian for Don W. Hodges, Dallas, TX
75225; 6.28%
Wheat First Securities as Custodian for Four K Investments, L.P.,
Dallas, TX 75244; 6.26%.
Hodges SAI B-18
<PAGE>
Wheat First Securities as Custodian for Frank R. Farrar and Polly C.
Farrar, Canadian, TX 79014; 5.03%.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Agreement and Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Fund's assets for any shareholder held
personally liable for obligations of the Fund or Trust. The Agreement and
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Fund. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Furthermore, the activities of the Trust as
an investment company would not likely give rise to liabilities in excess of the
Trust's total assets. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to the unlikely circumstances in
which both inadequate insurance exists and the Fund itself is unable to meet its
obligations.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Fund. The Prospectus of the Fund and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of such information may be
obtained from the SEC upon payment of the prescribed fee, or may be accessed via
the world wide web at http://www.sec.gov.
FINANCIAL STATEMENTS
The annual report to shareholders for the Fund for its most recent
fiscal year end is a separate document supplied with this Statement of
Additional Information and the financial statements, accompanying notes and
report of independent accountants appearing therein are incorporated by
reference in this Statement of Additional Information.
Hodges SAI B-19
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
THE OSTERWEIS FUND
a series of
PROFESSIONALLY MANAGED PORTFOLIOS
One Maritime Plaza, Suite 1201
San Francisco, CA 94111
(415) 434-4441
(800-282-2340
This Statement of Additional Information is not a prospectus and it
should be read in conjunction with the prospectus of the Osterweis Fund (the
"Fund"). A copy of the prospectus of the Fund dated August 1, 1998 is available
by calling either of the numbers listed above.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
The Trust.......................................................................................................B-2
Investment Objective and Policies...............................................................................B-2
Investment Restrictions.........................................................................................B-6
Distributions and Tax Information...............................................................................B-7
Trustees and Executive Officers................................................................................B-10
The Fund's Investment Advisor..................................................................................B-12
The Fund's Administrator.......................................................................................B-13
The Fund's Distributor.........................................................................................B-13
Execution of Portfolio Transactions............................................................................B-14
Additional Purchase and Redemption Information.................................................................B-15
Determination of Share Price...................................................................................B-16
Performance Information........................................................................................B-17
General Information............................................................................................B-18
Financial Statements...........................................................................................B-19
Appendix.......................................................................................................B-20
</TABLE>
Osterweis SAI B-1
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of various series which represent separate investment portfolios.
This Statement of Additional Information relates only to the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Osterweis Fund is a mutual fund with the investment objective of
attaining long term total returns. The following discussion supplements the
discussion of the Fund's investment objective and policies as set forth in the
Prospectus. There can be no assurance the objective of the Fund will be
attained.
Repurchase Agreements
The Fund may enter into repurchase agreements as discussed in the
Prospectus. Under such agreements, the seller of the security agrees to
repurchase it at a mutually agreed upon time and price. The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Fund together with the repurchase price on repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the U.S.
Government security itself. Such repurchase agreements will be made only with
banks with assets of $500 million or more that are insured by the Federal
Deposit Insurance Corporation or with Government securities dealers recognized
by the Federal Reserve Board and registered as broker-dealers with the
Securities and Exchange Commission ("SEC") or exempt from such registration. The
Fund will generally enter into repurchase agreements of short durations, from
overnight to one week, although the underlying securities generally have longer
maturities. The Fund may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 15% of the value of the Fund's
total assets would be invested in illiquid securities including such repurchase
agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government security subject to the repurchase agreement. In the event of
the insolvency or default of the seller, the Fund could encounter delays and
incur costs before being able to sell the security. Delays may involve loss of
interest or a decline in price of the U.S. Government security. As with any
unsecured debt instrument purchased for the Fund, the Investment Advisor seeks
to minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the U.S.
Government security.
There is also the risk that the seller may fail to repurchase the
security. However, the Fund will always receive as collateral for any repurchase
agreement to which it is a party securities
Osterweis SAI B-2
<PAGE>
acceptable to it, the market value of which is equal to at least 100% of the
amount invested by the Fund plus accrued interest, and the Fund will make
payment against such securities only upon physical delivery or evidence of book
entry transfer to the account of its Custodian. If the market value of the U.S.
Government security subject to the repurchase agreement becomes less than the
repurchase price (including interest), the Fund will direct the seller of the
U.S. Government security to deliver additional securities so that the market
value of all securities subject to the repurchase agreement will equal or exceed
the repurchase price. It is possible that the Fund will be unsuccessful in
seeking to impose on the seller a contractual obligation to deliver additional
securities.
When-Issued Securities
The Fund is authorized to purchase securities on a "when-issued" basis.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase; during the period between purchase and
settlement, no payment is made by the Fund to the issuer and no interest accrues
to the Fund. To the extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, the Fund would earn no income; however,
it is the Fund's intention to be fully invested to the extent practicable and
subject to the policies stated above. While when-issued securities may be sold
prior to the settlement date, any purchase of such securities would be made with
the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The market value of
the when-issued securities may be more or less than the purchase price. The Fund
does not believe that its net asset value or income will be adversely affected
by its purchase of securities on a when-issued basis. The Fund will segregate
liquid assets with its Custodian equal in value to commitments for when-issued
securities. Such segregated assets either will mature or, if necessary, be sold
on or before the settlement date.
Foreign Securities
Among the means through which the Fund may invest in foreign securities
is the purchase of American Depository Receipts ("ADR's") or European Depository
Receipts ("EDR's"). Generally, ADR's, in registered form, are denominated in
U.S. dollars and are designed for use in the U.S. securities markets, while
EDR's, in bearer form, may be denominated in other currencies and are designed
for use in European securities markets. ADR's are receipts typically issued by a
U.S. bank or trust company evidencing ownership of the underlying securities.
EDR's are European receipts evidencing a similar arrangement. For purposes of
the Fund's investment policies, ADR's and EDR's are deemed to have the same
classification as the underlying securities they represent. Thus an ADR or EDR
representing ownership of common stock will be treated as common stock.
Osterweis SAI B-3
<PAGE>
Debt Securities and Ratings
Ratings of debt securities represent the rating agencies' opinions
regarding their quality, are not a guarantee of quality and may be reduced after
the Fund has acquired the security. If a security's rating is reduced while it
is held by the Fund, the Advisor will consider whether the Fund should continue
to hold the security but is not required to dispose of it. Credit ratings
attempt to evaluate the safety of principal and interest payments and do not
evaluate the risks of fluctuations in market value. Also, rating agencies may
fail to make timely changes in credit ratings in response to subsequent events,
so that an issuer's current financial conditions may be better or worse than the
rating indicates.
The Fund reserves the right to invest up to 30% of its assets in
securities rated lower than BBB by S & P or lower than Baa by Moody's but rated
at least B by S & P or Moody's (or, in either case, if unrated, deemed by the
Advisor to be of comparable quality). Lower-rated securities generally offer a
higher current yield than that available for higher grade issues. However,
lower-rated securities involve higher risks, in that they are especially subject
to adverse changes in general economic conditions and in the industries in which
the issuers are engaged, to changes in the financial condition of the issuers
and to price fluctuations in response to changes in interest rates. During
periods of economic downturn or rising interest rates, highly leveraged issuers
may experience financial stress which could adversely affect their ability to
make payments of interest and principal and increase the possibility of default.
In addition, the market for lower-rated debt securities has expanded rapidly in
recent years, and its growth paralleled a long economic expansion. At times in
recent years, the prices of many lower-rated debt securities declined
substantially, reflecting an expectation that many issuers of such securities
might experience financial difficulties. As a result, the yields on lower-rated
debt securities rose dramatically, but such higher yields did not reflect the
value of the income stream that holders of such securities expected, but rather,
the risk that holders of such securities could lose a substantial portion of
their value as a result of the issuers' financial restructuring or default.
There can be no assurance that such declines will not recur. The market for
lower-rated debt issues generally is thinner and less active than that for
higher quality securities, which may limit the Fund's ability to sell such
securities at fair value in response to changes in the economy or financial
markets. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may also decrease the values and liquidity of lower-rated
securities, especially in a thinly traded market.
Lower-rated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, a Fund may have
to replace the security with a lower-yielding security, resulting in a decreased
return for investors. Also, as the principal value of bonds moves inversely with
movements in interest rates, in the event of rising interest rates the value of
the securities held by a Fund may decline proportionately more than a Fund
consisting of higher-rated securities. If a Fund experiences unexpected net
redemptions, it may be forced to sell its higher-rated bonds, resulting in a
decline in the overall credit quality of the securities held by the Fund and
increasing the exposure of the Fund to the risks of lower-rated securities.
Investments in zero-coupon
Osterweis SAI B-4
<PAGE>
bonds may be more speculative and subject to greater fluctuations in value due
to changes in interest rates than bonds that pay interest currently.
Options and Futures Transactions
As indicated in the prospectus, to the extent consistent with its
investment objectives and policies, the Fund may purchase and write call and put
options on securities, securities indexes and on foreign currencies and enter
into futures contracts and use options on futures contracts, to the extent of up
to 5% of its assets.
Transactions in options on securities and on indexes involve certain
risks. For example, there are significant differences between the securities and
options markets that could result in an imperfect correlation between these
markets, causing a given transaction not to achieve its objectives. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. If the Fund were unable to close out an
option that it had purchased on a security, it would have to exercise the option
in order to realize any profit or the option may expire worthless. If the Fund
were unable to close out a covered call option that it had written on a
security, it would not be able to sell the underlying security unless the option
expired without exercise. As the writer of a covered call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the security covering the call option above the sum of the
premium and the exercise price of the call.
If trading were suspended in an option purchased by the Fund, the Fund
would not be able to close out the option. If restrictions on exercise were
imposed, the Fund might be unable to exercise an option it has purchased. Except
to the extent that a call option on an index written by the Fund is covered by
an option on the same index purchased by the Fund, movements in the index may
result in a loss to the Fund; such losses may be mitigated or exacerbated by
changes in the value of the Fund's securities during the period the option was
outstanding.
Use of futures contracts and options thereon also involves certain
risks. The variable degree of correlation between price movements of futures
contracts and price movements in the related portfolio positions of the Fund
creates the possibility that losses on the hedging instrument may be greater
than gains in the value of the Fund's position. Also, futures and options
markets may not be liquid in all circumstances and certain over the counter
options may have no markets. As a result, in certain markets, the Fund might not
be able to close out a transaction at all or without incurring losses. Although
the use of options and futures transactions for hedging should minimize the risk
of loss due to a decline in the value of the hedged position, at the same time
they tend to limit any potential gain which might result from an increase in the
value of such position. If losses were to result from the use of such
transactions, they could reduce net asset value and possibly income. The
Osterweis SAI B-5
<PAGE>
Fund may use these techniques to hedge against changes in interest rates or
securities prices or as part of its overall investment strategy. The Fund will
segregate liquid assets, (or, as permitted by applicable regulation, enter into
certain offsetting positions) to cover its obligations under options and futures
contracts to avoid leveraging of the Fund.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the 1940 Act. The Fund may not:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b) to the
extent the entry into a repurchase agreement is deemed to be a loan.
2. (a) Borrow money, except as stated in the Prospectus and this
Statement of Additional Information. Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least 300% of all
borrowings.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
3. Purchase securities on margin, participate on a joint or joint and
several basis in any securities trading account, or underwrite securities. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities).
4. Purchase or sell real estate, commodities or commodity contracts
(other than futures transactions for the purposes and under the conditions
described in the prospectus and in this Statement of Additional Information).
5. Invest 25% or more of the market value of its assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
6. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures, forward or repurchase transactions.
7. Purchase the securities of any issuer, if as a result more than 5%
of the total assets of the Fund would be invested in the securities of that
issuer, other than obligations of the U.S. Government,
Osterweis SAI B-6
<PAGE>
its agencies or instrumentalities, provided that up to 25% of the value of the
Fund's assets may be invested without regard to this limitation.
The Fund observes the following policies, which are not deemed
fundamental and which may be changed without shareholder vote. The Fund may not:
8. Purchase any security if as a result the Fund would then hold more
than 10% of any class of securities of an issuer (taking all common stock issues
of an issuer as a single class, all preferred stock issues as a single class,
and all debt issues as a single class) or more than 10% of the outstanding
voting securities of an issuer.
9. Invest in any issuer for purposes of exercising control or
management.
10. Invest in securities of other investment companies which would
result in the Fund owning more than 3% of the outstanding voting securities of
any one such investment company, the Fund owning securities of another
investment company having an aggregate value in excess of 5% of the value of the
Fund's total assets, or the Fund owning securities of investment companies which
in the aggregate would exceed 10% of the value of the Fund's total assets.
11. Invest, in the aggregate, more than 15% of its total assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable and repurchase agreements with more than seven days
to maturity.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually. Also, the Fund expects
to distribute any undistributed net investment income on or about December 31 of
each year. Any net capital gains realized through the period ended October 31 of
each year will also be distributed by December 31 of each year.
Each distribution by the Fund is accompanied by a brief explanation of
the form and character of the distribution. In January of each year the Fund
will issue to each shareholder a statement of the federal income tax status of
all distributions.
Tax Information
Osterweis SAI B-7
<PAGE>
Each series of the Trust is treated as a separate entity for federal
income tax purposes. The Fund intends to continue to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), provided it complies with all
applicable requirements regarding the source of its income, diversification of
its assets and timing of distributions. The Fund's policy is to distribute to
its shareholders all of its investment company taxable income and any net
realized long-term capital gains for each fiscal year in a manner that complies
with the distribution requirements of the Code, so that the Fund will not be
subject to any federal income or excise taxes. To comply with the requirements,
the Fund must also distribute (or be deemed to have distributed) by December 31
of each calendar year (i) at least 98% of its ordinary income for such year,
(ii) at least 98% of the excess of its realized capital gains over its realized
capital losses for the 12-month period ending on October 31 during such year and
(iii) any amounts from the prior calendar year that were not distributed and on
which the Fund paid no federal income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains
are taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent the Fund designates the amount
distributed as a qualifying dividend. The aggregate amount so designated cannot,
however, exceed the aggregate amount of qualifying dividends received by the
Fund for its taxable year. In view of the Fund's investment policy, it is
expected that dividends from domestic corporations will be part of the Fund's
gross income and that, accordingly, part of the distributions by the Fund may be
eligible for the dividends-received deduction for corporate shareholders.
However, the portion of the Fund's gross income attributable to qualifying
dividends is largely dependent on that Fund's investment activities for a
particular year and therefore cannot be predicted with any certainty. The
deduction may be reduced or eliminated if the Fund shares held by a corporate
investor are treated as debt-financed or are held for less than 46 days during
the 90-day period that begins 45 days before the stock becomes ex-dividend with
respect to the dividend.
Any long-term or mid-term capital gain distributions are taxable to
shareholders as long-term or mid-term capital gains, respectively, regardless of
the length of time shares have been held. Capital gains distributions are not
eligible for the dividends-received deduction referred to in the previous
paragraph. Distributions of any net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date. Distributions
are generally taxable when received. However, distributions declared in October,
November or December to shareholders of record on a date in such a month and
paid the following January are taxable as if received on December 31.
Distributions are includable in alternative minimum taxable income in computing
a shareholder's liability for the alternative minimum tax.
Osterweis SAI B-8
<PAGE>
The Fund may write, purchase or sell certain options and futures
contracts. Such transactions are subject to special tax rules that may affect
the amount, timing and character of distributions to shareholders. Unless the
Fund is able to make a special election, such contracts that are "Section 1256
contracts" will be "marked-to-market" for federal income tax purposes at the end
of each taxable year, i.e., each contract will be treated as sold for its fair
market value on the last day of the taxable year. In general, unless the special
election referred to in the previous sentence is made, gain or loss from
transactions in such contracts will be 60% long-term and 40% short-term capital
gain or loss. Section 1092 of the Code, which applies to certain "straddles",
may affect the taxation of the Fund's transactions in options and futures
contracts. Under Section 1092 of the Code, the Fund may be required to postpone
recognition for tax purposes of losses incurred in certain closing transactions.
One of the requirements for qualification as a regulated investment
company is that less than 30% of the Fund's gross income must be derived from
gains from the sale or other disposition of securities held for less than three
months. Accordingly, the Fund may be restricted in effecting closing
transactions within three months after entering into an option contract.
A redemption of Fund shares may result in recognition of a taxable gain
or loss. Any loss realized upon a redemption of shares within six months from
the date of their purchase will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gains during
such six-month period. Any loss realized upon a redemption of Fund shares may be
disallowed under certain wash sale rules to the extent shares of the Fund are
purchased (through reinvestment of distributions or otherwise) within 30 days
before or after the redemption.
Under the Code, the Fund will be required to report to the Internal
Revenue Service ("IRS") all distributions of taxable income and capital gains as
well as gross proceeds from the redemption or exchange of Fund shares, except in
the case of exempt shareholders, which includes most corporations. Pursuant to
the backup withholding provisions of the Internal Revenue Code, distributions of
any taxable income and capital gains and proceeds from the redemption of Fund
shares may be subject to withholding of federal income tax at the rate of 31
percent in the case of non-exempt shareholders who fail to furnish the Fund with
their taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld. Corporate and other exempt shareholders should provide the Fund with
their taxpayer identification numbers or certify their exempt status in order to
avoid possible erroneous application of backup withholding. The Fund reserves
the right to refuse to open an account for any person failing to provide a
certified taxpayer identification number.
The Fund will not be subject to tax in the Commonwealth of
Massachusetts as long as it qualifies as a regulated investment company for
federal income tax purposes. Distributions and the transactions referred to in
the preceding paragraphs may be subject to state and local income taxes, and the
tax treatment thereof may differ from the federal income tax treatment.
Moreover, the above
Osterweis SAI B-9
<PAGE>
discussion is not intended to be a complete discussion of all applicable federal
tax consequences of an investment in the Fund. Shareholders are advised to
consult with their own tax advisers concerning the application of federal, state
and local taxes to an investment in the Fund.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the prospectus have been
prepared by Fund management, and counsel to the Fund has expressed no opinion in
respect thereof.
TRUSTEES AND EXECUTIVE OFFICERS
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, their
affiliations, dates of birth and principal occupations for the past five years
are set forth below.
Steven J. Paggioli,* 04/03/50 President and Trustee
479 West 22nd Street, New York, NY 10011. Executive Vice President, The
Wadsworth Group (consultants) since 1986; Executive Vice President of Investment
Company Administration Corporation ("ICAC") (mutual fund administrator and the
Trust's Administrator), and Vice President of First Fund Distributors, Inc.
("FFD") (a registered broker-dealer and the Fund's Distributor) since 1990.
Dorothy A. Berry, 08/12/43 Trustee
14 Five Roses East, Ancram, NY 12517. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment advisor and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
Wallace L. Cook, 09/10/39 Trustee
One Peabody Lane, Darien, CT 06820. Retired. Formerly Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
Osterweis SAI B-10
<PAGE>
Carl A. Froebel, 05/23/38 Trustee
2 Crown Cove Lane, Savannah, GA 31411. Private Investor. Formerly Managing
Director, Premier Solutions, Ltd. (asset management computer and software
products). Formerly President and Founder, National Investor Data Services, Inc.
(investment related computer software).
Rowley W.P. Redington, 06/01/44 Trustee
1191 Valley Road, Clifton, NJ 07103. President, Intertech (consumer electronics
and computer service and marketing); formerly Vice President, PRS of New Jersey,
Inc. (management consulting), and Chief Executive Officer, Rowley Associates
(consultants).
Eric M. Banhazl*, 08/05/57 Treasurer
2020 E. Financial Way, Glendora, CA 91741. Senior Vice President, The Wadsworth
Group, Senior Vice President of ICAC and Vice President of FFD since 1990.
Robin Berger*, 11/17/56 Secretary
479 West 22nd St., New York, NY 10011. Vice President, The Wadsworth Group since
June, 1993.
Robert H. Wadsworth*, 01/25/40 Vice President
4455 E. Camelback Road, Suite 261E, Phoenix, AZ 85018. President of The
Wadsworth Group since 1982, President of ICAC and FFD since 1990.
*Indicates an "interested person" of the Trust as defined in the 1940 Act.
Set forth below is the rate of compensation received by the following
Trustees from the Fund and all other portfolios of the Trust. This total amount
is allocated among the portfolios. Disinterested trustees receive an annual
retainer of $7,500 and a fee of $2,500 for each regularly scheduled meeting.
These trustees also receive a fee of $1000 for any special meeting attended. The
Chairman of the Board of Trustees receives an additional annual retainer of
$4,500. Disinterested trustees are also reimbursed for expenses in connection
with each Board meeting attended. No other compensation or retirement benefits
were received by any Trustee or officer from the Fund or any other portfolios of
the Trust.
Name of Trustee Total Annual Compensation
Dorothy A. Berry $22,000
Wallace L. Cook $17,500
Carl A. Froebel $17,500
Rowley W.P. Redington $17,500
Osterweis SAI B-11
<PAGE>
During the fiscal year ended March 31, 1998, trustees' fees and
expenses in the amount of $6,102 were allocated to the Fund. 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 the Fund.
THE FUND'S INVESTMENT ADVISOR
The Board of Trustees of the Trust establishes the Fund's policies and
supervises and reviews the management of the Fund. Osterweis Capital Management,
One Maritime Plaza, Suite 1201, San Francisco, CA 94111, is the Advisor to the
Fund.
Under an Investment Advisory Agreement with the Fund, the Advisor
provides the Fund with advice on buying and selling securities, manages the
investments of the Fund, furnishes the Fund with office space and certain
administrative services, and provides most of the personnel needed by the Fund.
As compensation, the Fund pays the Advisor a monthly management fee (accrued
daily) based upon the average daily net assets of the Fund at the rate of 1.00%
annually.
The Adviser has undertaken to limit the Fund's operating expenses to an
annual level of 1.75% of the Fund's average net assets. During the fiscal year
ended March 31, 1996, the Advisor received fees of $160,490 and reimbursed
expenses of $2,770. During the fiscal year ended March 31, 1997, the Advisor
received fees of $179,929. During the fiscal year ended March 31, 1998, the
Advisor received fees of $190,006; for the same period, the Fund repaid the
Advisor $15,381 of the amounts of expenses it previously reimbursed the Fund
during prior fiscal periods.
The Investment Advisory Agreement continues in effect for successive
annual periods so long as such continuation is approved at least annually by the
vote of (1) the Board of Trustees of the Trust (or a majority of the outstanding
shares of the Fund to which the agreement applies), and (2) a majority of the
Trustees who are not interested persons of any party to the Agreement, in each
case cast in person at a meeting called for the purpose of voting on such
approval. Any such agreement may be terminated at any time, without penalty, by
either party to the agreement upon sixty days' written notice and is
automatically terminated in the event of its "assignment," as defined in the
1940 Act.
THE FUND'S ADMINISTRATOR
The Fund has an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"), a corporation owned and
controlled by Messrs. Banhazl, Paggioli and Wadsworth with offices at 4455 E.
Camelback Rd., Ste. 261-E, Phoenix, AZ 85018. The Administration Agreement
provides that the Administrator will prepare and coordinate reports and other
materials supplied to the Trustees; prepare and/or supervise the preparation and
filing of all
Osterweis SAI B-12
<PAGE>
securities filings, periodic financial reports, prospectuses, statements of
additional information, marketing materials, tax returns, shareholder reports
and other regulatory reports or filings required of the Fund; prepare all
required filings necessary to maintain the Fund's qualification and/or
registration to sell shares in all states where the Fund currently does, or
intends to do business; coordinate the preparation, printing and mailing of all
materials (e.g., Annual Reports) required to be sent to shareholders; coordinate
the preparation and payment of Fund related expenses; monitor and oversee the
activities of the Fund's servicing agents (i.e., transfer agent, custodian, fund
accountants, etc.); review and adjust as necessary the Fund's daily expense
accruals; and perform such additional services as may be agreed upon by the Fund
and the Administrator. For its services, the Administrator receives a monthly
fee at the following annual rate:
Average Net Assets Fee or Fee Rate
- ------------------ ---------------
Under $15 million $30,000
$15 to $15 million 0.20%
$50 to $100 million 0.15%
$100 to $150 million 0.10%
Over $150 million 0.05%
During the fiscal years ended March 31, 1996, March 31, 1997, and March 31,
1998, the Administrator received fees of $38,728, $34,149 and $38,001,
respectively.
THE FUND'S DISTRIBUTOR
First Fund Distributors, Inc., (the "Distributor"), a corporation owned
by Messrs. Banhazl, Paggioli and Wadsworth, acts as the Fund's principal
underwriter in a continuous public offering of the Fund's shares. The
Distribution Agreement between the Fund and the Distributor continues in effect
for periods not exceeding one year if approved at least annually by (i) the
Board of Trustees or the vote of a majority of the outstanding shares of the
Fund (as defined in the 1940 Act) and (ii) a majority of the Trustees who are
not interested persons of any such party, in each case cast in person at a
meeting called for the purpose of voting on such approval. The Distribution
Agreement may be terminated without penalty by the parties thereto upon sixty
days' written notice, and is automatically terminated in the event of its
assignment as defined in the 1940 Act.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement, the Advisor determines
which securities are to be purchased and sold by the Fund and which
broker-dealers are eligible to execute the Fund's portfolio transactions.
Purchases and sales of securities in the over-the-counter market will generally
be executed directly with a "market-maker" unless, in the opinion of the
Advisor, a better price and execution can otherwise be obtained by using a
broker for the transaction.
Purchases of portfolio securities for the Fund also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers
Osterweis SAI B-13
<PAGE>
(including banks) which specialize in the types of securities which the Fund
will be holding, unless better executions are available elsewhere. Dealers and
underwriters usually act as principal for their own accounts. Purchases from
underwriters will include a concession paid by the issuer to the underwriter and
purchases from dealers will include the spread between the bid and the asked
price. If the execution and price offered by more than one dealer or underwriter
are comparable, the order may be allocated to a dealer or underwriter that has
provided research or other services as discussed below.
In placing portfolio transactions, the Advisor will use its reasonable
efforts to choose broker-dealers capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers which furnish or supply research and statistical
information to the Advisor that it may lawfully and appropriately use in its
investment advisory capacities, as well as provide other services in addition to
execution services. The Advisor considers such information, which is in addition
to and not in lieu of the services required to be performed by it under its
Agreement with the Fund, to be useful in varying degrees, but of indeterminable
value. Portfolio transactions may be placed with broker-dealers who sell shares
of the Fund subject to rules adopted by the National Association of Securities
Dealers, Inc.
While it is the Fund's general policy to seek first to obtain the most
favorable price and execution available in selecting a broker-dealer to execute
portfolio transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Advisor, even if the specific services are not directly useful to the Fund and
may be useful to the Advisor in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, the
Fund may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Advisor to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer. The standard of reasonableness
is to be measured in light of the Advisor's overall responsibilities to the
Fund.
Investment decisions for the Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts or Funds.
In such event, the position of the Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or Funds seeks to acquire the same security as the Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such
Osterweis SAI B-14
<PAGE>
security. Similarly, the Fund may not be able to obtain as high a price for, or
as large an execution of, an order to sell any particular security at the same
time. If one or more of such client accounts or Funds simultaneously purchases
or sells the same security that the Fund is purchasing or selling, each day's
transactions in such security will be allocated between the Fund and all such
client accounts or Funds in a manner deemed equitable by the Advisor, taking
into account the respective sizes of the accounts and the amount being purchased
or sold. It is recognized that in some cases this system could have a
detrimental effect on the price or value of the security insofar as the Fund is
concerned. In other cases, however, it is believed that the ability of the Fund
to participate in volume transactions may produce better executions for the
Fund.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
brokers solely for selling shares of the Fund, although the Fund may consider
the sale of shares as a factor in allocating brokerage. However, as stated
above, broker-dealers who execute brokerage transactions may effect purchase of
shares of the Fund for their customers. The Fund does not use the Distributor to
execute its portfolio transactions.
During the fiscal years ended March 31, 1996, March 31, 1997 and March
31, 1998, aggregate brokerage commissions paid by the Fund were$23,276, $23,956
and $23,654, respectively.
Of the total commissions paid by the Fund during the fiscal year ended
March 31, 1998, $12,723 (53.79%) was paid to firms for research, statistical or
other services provided to the Advisor.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Fund's shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Fund, and (iii) to reduce or waive the minimum
for initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
Payments to shareholders for shares of the Fund redeemed directly from
the Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable; or (c) for such other period as the SEC may permit for the
protection of the Fund's shareholders. At various times, the Fund may be
requested to redeem shares for which it has not yet received confirmation of
good payment; in this circumstance, the Fund may delay the
Osterweis SAI B-15
<PAGE>
redemption until payment for the purchase of such shares has been collected and
confirmed to the Fund.
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions which make payment in cash unwise, the Fund may
make payment partly in securities with a current market value equal to the
redemption price. Although the Fund does not anticipate that it will make any
part of a redemption payment in securities, if such payment were made, an
investor may incur brokerage costs in converting such securities to cash. The
Fund has elected to be governed by the provisions of Rule 18f-1 under the 1940
Act, which contains a formula for determining the minimum redemption amounts
that must be paid in cash.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
Check-A-Matic
As discussed in the Prospectus, the Fund provides a Check-A-Matic Plan
for the convenience of investors who wish to purchase shares of the Fund on a
regular basis. All record keeping and custodial costs of the Check-A-Matic Plan
are paid by the Fund. The market value of the Fund's shares is subject to
fluctuation, so before undertaking any plan for systematic investment, the
investor should keep in mind that this plan does not assure a profit nor protect
against depreciation in declining markets.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Fund will be determined once daily as of the close of public
trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on
each day that the Exchange is open for trading. It is expected that the Exchange
will be closed on Saturdays and Sundays and on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. The Fund does not expect to
determine the net asset value of its shares on any day when the Exchange is not
open for trading even if there is sufficient trading in its portfolio securities
on such days to materially affect the net asset value per share.
In valuing the Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair
Osterweis SAI B-16
<PAGE>
value. All other assets of each Fund are valued in such manner as the Board of
Trustees in good faith deems appropriate to reflect their fair value.
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
From time to time, the Fund may state its total return in
advertisements and investor communications. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return will be accompanied by information on the Fund's
average annual compounded rate of return over the most recent four calendar
quarters and the period from the Fund's inception of operations. The Fund may
also advertise aggregate and average total return information over different
periods of time.
The Fund's total return may be compared to relevant indices, including
Standard & Poor's 500 Composite Stock Index and indices published by Lipper
Analytical Services, Inc. From time to time, evaluations of a Fund's performance
by independent sources may also be used in advertisements and in information
furnished to present or prospective investors in the Funds.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
The Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial purchase order of $1,000 from which
the maximum sales load is deducted
T = average annual total return n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at
the end of the period
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period.
Osterweis SAI B-17
<PAGE>
The Fund's average annual total returns for the one year period and
period from inception on October 4, 1993 through March 31, 1998 were 45.77% and
16.85%, respectively.
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
Star Bank, 425 Walnut St., Cincinnati, OH 45201 acts as Custodian of
the securities and other assets of the Fund. American Data Services, P.O. Box
5536, Hauppauge, NY 11788-0132 acts as the Fund's transfer agent. The Custodian
and Transfer agent do not participate in decisions relating to the purchase and
sale of securities by the Fund.
Ernst & Young LLP, 515 S. Flower St., Los Angeles, CA 90071, are the
independent auditors for the Fund.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th
Floor, San Francisco, California 94104, are legal counsel to the Fund.
The following persons are beneficial owners of more than 5% of the
Fund's outstanding voting securities as of July 1, 1998. An asterisk (*) denotes
an account affiliated with the Advisor, officers or trustees:
*Osterweis Capital Management Retirement Trust, John S. Osterweis,
Trustee, San Francisco, CA 94111; 13.64%
Karen Klutznick; Chicago, IL 60611; 5.03%
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Agreement and Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Fund's assets for any shareholder held
personally liable for obligations of the Fund or Trust. The Agreement and
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Fund. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Furthermore, the activities of the Trust as
an investment company would not likely give rise to liabilities in excess of the
Trust's total assets. Thus, the risk of a shareholder incurring financial
Osterweis SAI B-18
<PAGE>
loss on account of shareholder liability is limited to the unlikely
circumstances in which both inadequate insurance exists and the Fund itself is
unable to meet its obligations.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Fund. The Prospectus of the Fund and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of such information may be
Osterweis SAI B-19
<PAGE>
obtained from the SEC upon payment of the prescribed fee, or may be accessed via
the world wide web at http://www.sec.gov.
FINANCIAL STATEMENTS
The annual report to shareholders for the Fund for its most recent
fiscal year end is a separate document supplied with this Statement of
Additional Information and the financial statements, accompanying notes and
report of independent accountants appearing therein are incorporated by
reference in this Statement of Additional Information.
Osterweis SAI B-20
<PAGE>
APPENDIX
Description of Bond Ratings*
Moody's Investors Service
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuations or protective elements
may be of greater amplitude or there may be other elements present which make
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements: their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Osterweis SAI B-21
<PAGE>
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
Standard & Poor's Corporation
AAA: Bonds rated AAA are highest grade debt obligations. This rating indicates
an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are more susceptible to the adverse effects of changes in circumstances and
economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
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.
*Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
Osterweis SAI B-22
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1998
PERKINS OPPORTUNITY FUND
a series of
PROFESSIONALLY MANAGED PORTFOLIOS
730 East Lake Street
Wayzata, MN 55391-1713
(800) 280-4779
(612) 473-8367
This Statement of Additional Information is not a prospectus and it
should be read in conjunction with the prospectus of the Perkins Opportunity
Fund (the "Fund"). A copy of the prospectus of the Fund dated August 1, 1998 is
available by calling either of the numbers listed above.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
The Trust.......................................................................................................B-2
Investment Objective And Policies...............................................................................B-2
Investment Restrictions.........................................................................................B-7
Distributions and Tax Information...............................................................................B-8
Trustees and Executive Officers................................................................................B-11
The Fund's Investment Advisor..................................................................................B-12
The Fund's Administrator.......................................................................................B-13
The Fund's Distributor.........................................................................................B-14
Execution of Portfolio Transactions............................................................................B-14
Additional Purchase and Redemption Information.................................................................B-16
Determination of Share Price...................................................................................B-17
Performance Information........................................................................................B-17
General Information............................................................................................B-19
Financial Statements...........................................................................................B-20
</TABLE>
Perkins SAI B-1
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of various series which represent separate investment portfolios.
This Statement of Additional Information relates only to the Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Perkins Opportunity Fund (the "Fund") is a mutual fund with the
investment objective of seeking capital appreciation. The following discussion
supplements the discussion of the Fund's investment objective and policies as
set forth in the Prospectus. There can be no assurance the objective of the Fund
will be attained.
Repurchase Agreements
The Fund may enter into repurchase agreements as discussed in the
Prospectus. Under such agreements, the seller of the security agrees to
repurchase it at a mutually agreed upon time and price. The repurchase price may
be higher than the purchase price, the difference being income to the Fund, or
the purchase and repurchase prices may be the same, with interest at a stated
rate due to the Fund together with the repurchase price on repurchase. In either
case, the income to the Fund is unrelated to the interest rate on the U.S.
Government security itself. Such repurchase agreements will be made only with
banks with assets of $500 million or more that are insured by the Federal
Deposit Insurance Corporation or with Government securities dealers recognized
by the Federal Reserve Board and registered as broker-dealers with the
Securities and Exchange Commission ("SEC") or exempt from such registration. The
Fund will generally enter into repurchase agreements of short durations, from
overnight to one week, although the underlying securities generally have longer
maturities. The Fund may not enter into a repurchase agreement with more than
seven days to maturity if, as a result, more than 15% of the value of the Fund's
total assets would be invested in illiquid securities including such repurchase
agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government security subject to the repurchase agreement. In the event of
the insolvency or default of the seller, the Fund could encounter delays and
incur costs before being able to sell the security. Delays may involve loss of
interest or a decline in price of the U.S. Government security. As with any
unsecured debt instrument purchased for the Fund, the Investment Advisor seeks
to minimize the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the U.S.
Government security.
There is also the risk that the seller may fail to repurchase the
security. However, the Fund will always receive as collateral for any repurchase
agreement to which it is a party securities acceptable to it, the market value
of which is equal to at least 100% of the amount invested by the
Perkins SAI B-2
<PAGE>
Fund plus accrued interest, and the Fund will make payment against such
securities only upon physical delivery or evidence of book entry transfer to the
account of its Custodian. If the market value of the U.S. Government security
subject to the repurchase agreement becomes less than the repurchase price
(including interest), the Fund will direct the seller of the U.S. Government
security to deliver additional securities so that the market value of all
securities subject to the repurchase agreement will equal or exceed the
repurchase price. It is possible that the Fund will be unsuccessful in seeking
to impose on the seller a contractual obligation to deliver additional
securities.
When-Issued Securities
The Fund is authorized to purchase securities on a "when-issued" basis.
The price of such securities, which may be expressed in yield terms, is fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase; during the period between purchase and
settlement, no payment is made by the Fund to the issuer and no interest accrues
to the Fund. To the extent that assets of the Fund are held in cash pending the
settlement of a purchase of securities, the Fund would earn no income; however,
it is the Fund's intention to be fully invested to the extent practicable and
subject to the policies stated above. While when-issued securities may be sold
prior to the settlement date, any purchase of such securities would be made with
the purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the transaction and reflect the
value of the security in determining its net asset value. The market value of
the when-issued securities may be more or less than the purchase price. The Fund
does not believe that its net asset value or income will be adversely affected
by its purchase of securities on a when-issued basis. The Fund will segregate
liquid assets with its Custodian equal in value to commitments for when-issued
securities. Such segregated assets either will mature or, if necessary, be sold
on or before the settlement date.
Securities Lending
Although the Fund's objective is capital appreciation, the Fund
reserves the right to lend its portfolio securities in order to generate
additional income. Securities may be loaned to broker-dealers, major banks or
other recognized domestic institutional borrowers of securities who are not
affiliated with the Advisor or Distributor and whose creditworthiness is
acceptable to the Advisor. The borrower must deliver to the Fund cash or cash
equivalent collateral, or provide to the Fund an irrevocable letter of credit
equal in value to at least 100% of the value of the loaned securities at all
times during the loan, marked to market daily. During the time the portfolio
securities are on loan, the borrower pays the Fund any interest paid on such
securities. The Fund may invest the cash collateral and earn additional income,
or it may receive an agreed-upon amount of interest income if the borrower has
delivered equivalent collateral or a letter of credit. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the income earned on the cash to the borrower or
placing broker. Loans are subject to termination at
Perkins SAI B-3
<PAGE>
the option of the Fund or the borrower at any time. It is not anticipated that
more than 5% of the value of the Fund's portfolio securities will be subject to
lending.
Foreign Investments
The Fund has reserved the right to invest in foreign securities.
Foreign investments can involve significant risks in addition to the risks
inherent in U.S. investments. The value of securities denominated in or indexed
to foreign currencies, and of dividends and interest from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. dollar. Foreign securities markets generally have less trading volume
and less liquidity than U.S. markets, and prices on some foreign markets can be
highly volatile. Many foreign countries lack uniform accounting and disclosure
standards comparable to those applicable to U.S. companies, and it may be more
difficult to obtain reliable information regarding an issuer's financial
condition and operations. In addition, the costs of foreign investing, including
withholding taxes, brokerage commissions, and custodial costs, generally are
higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may invoke increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It also may be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that an Advisor will be able to
anticipate or counter these potential events and their impacts on the Fund's
share price.
American Depositary Receipts and European Depositary Receipts ("ADRs"
and "EDRs") are certificates evidencing ownership of shares of a foreign-based
issuer held in trust by a bank or similar financial institution. Designed for
use in U.S. and European securities markets, respectively, ADRs and EDRs are
alternatives to the purchase of the underlying securities in their national
market and currencies.
Options on Securities
Although it has no present intention of doing so, the Fund reserves the
right to engage in certain purchases and sales of options on securities. The
Fund may write (i.e., sell) call options ("calls") on equity securities if the
calls are "covered" throughout the life of the option. A call is
Perkins SAI B-4
<PAGE>
"covered" if the Fund owns the optioned securities. When the Fund writes a call,
it receives a premium and gives the purchaser the right to buy the underlying
security at any time during the call period at a fixed exercise price regardless
of market price changes during the call period. If the call is exercised, the
Fund will forgo any gain from an increase in the market price of the underlying
security over the exercise price.
The Fund may purchase a call on securities to effect a "closing
purchase transaction" which is the purchase of a call covering the same
underlying security and having the same exercise price and expiration date as a
call previously written by the Fund on which it wishes to terminate its
obligation. If the Fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call previously
written by the Fund expires (or until the call is exercised and the Fund
delivers the underlying security).
The Fund also may write and purchase put options ("puts"). When the
Fund writes a put, it receives a premium and gives the purchaser of the put the
right to sell the underlying security to the Fund at the exercise price at any
time during the option period. When the Fund purchases a put, it pays a premium
in return for the right to sell the underlying security at the exercise price at
any time during the option period. If any put is not exercised or sold, it will
become worthless on its expiration date. When the Fund writes a put, it will
maintain at all times during the option period, in a segregated account, liquid
assets equal in value to the exercise price of the put.
The Fund's option positions may be closed out only on an exchange which
provides a secondary market for options of the same series, but there can be no
assurance that a liquid secondary market will exist at a given time for any
particular option.
The Fund's custodian, or a securities depository acting for it,
generally acts as escrow agent as to the securities on which the Fund has
written puts or calls, or as to other securities acceptable for such escrow so
that no margin deposit is required of the Fund. Until the underlying securities
are released from escrow, they cannot be sold by the Fund.
In the event of a shortage of the underlying securities deliverable on
exercise of an option, the Options Clearing Corporation has the authority to
permit other, generally comparable securities to be delivered in fulfillment of
option exercise obligations. If the Options Clearing Corporation exercises its
discretionary authority to allow such other securities to be delivered, it may
also adjust the exercise prices of the affected options by setting different
prices at which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options Clearing
Corporation may impose special exercise settlement procedures.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and
rate movements may take place in the underlying markets that cannot be reflected
in the options markets. The purchase of options is a highly specialized
Perkins SAI B-5
<PAGE>
activity which involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions.
Short Sales
The Fund may seek to hedge investments or realize additional gains
through short sales. The Fund may make short sales, which are transactions in
which the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, the Fund must
borrow the security to make delivery to the buyer. The Fund than is obligated to
replace the security borrowed by purchasing it at the market price at or prior
to the time of replacement. The price at such time may be more or less than the
price at which the security was sold by the Fund. Until the security is
replaced, the Fund is required to repay the lender any dividends or interest
that accrue during the period of the loan. To borrow the security, the Fund also
may be required to pay a premium, which would increase the cost of the security
sold. The net proceeds of the short sale will be retained by the broker, to the
extent necessary to meet margin requirements, until the short position is closed
out. The Fund also will incur transaction costs in effecting short sales.
The Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which the Fund replaces the borrowed security. The Fund will realize a gain if
the security declines in price between those dates. The amount of any gain will
be decreased, and the amount of any loss increased by the amount of the premium,
dividends, interest, or expenses the Fund may be required to pay in connection
with a short sale.
No securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of the Fund's net assets.
Whenever the Fund engages in short sales, its custodian will segregate
liquid assets equal to the difference between (a) the market value of the
securities sold short at the time they were sold short and (b) any assets
required to be deposited with the broker in connection with the short sale (not
including the proceeds from the short sale). The segregated assets are marked to
market daily, provided that at no time will the amount deposited in it plus the
amount deposited with the broker be less than the market value of the securities
at the time they were sold short.
Leverage Through Borrowing
The Fund may borrow money for leveraging purposes. Leveraging creates
an opportunity for increased net income but, at the same time, creates special
risk considerations. For example, leveraging may exaggerate changes in the net
asset value of Fund shares and in the yield on the Fund's portfolio. Although
the principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. Leveraging will create
interest expenses for the Fund which can exceed the income from the assets
retained. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than if leveraging were not used. Conversely, if the
income from the assets
Perkins SAI B-6
<PAGE>
retained with borrowed funds is not sufficient to cover the cost of leveraging,
the net income of the Fund will be less than if leveraging were not used, and
therefore the amount available for distribution to stockholders as dividends
will be reduced.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by
the Fund and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of the Fund's outstanding voting
securities as defined in the 1940 Act. The Fund may not:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b)
through the lending of its portfolio securities as described above and in its
Prospectus, or (c) to the extent the entry into a repurchase agreement is deemed
to be a loan.
2. (a) Borrow money, except as stated in the Prospectus and this
Statement of Additional Information. Any such borrowing will be made only if
immediately thereafter there is an asset coverage of at least 300% of all
borrowings.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
3. Purchase securities on margin, participate on a joint or joint and
several basis in any securities trading account, or underwrite securities. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
4. Buy or sell interests in oil, gas or mineral exploration or
development programs or related leases or real estate. (Does not preclude
investments in marketable securities of issuers engaged in such activities.)
5. Purchase or sell real estate, commodities or commodity contracts.
(As a matter of operating policy, the Board of Trustees may authorize the Fund
to engage in certain activities regarding futures contracts for bona fide
hedging purposes; any such authorization will be accompanied by appropriate
notification to shareholders.)
6. Invest 25% or more of the market value of its assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
Perkins SAI B-7
<PAGE>
7. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures or repurchase transactions.
8. Invest in any issuer for purposes of exercising control or
management.
The Fund observes the following policies, which are not deemed
fundamental and which may be changed without shareholder vote. The Fund may not:
9. Invest in securities of other investment companies which would
result in the Fund owning more than 3% of the outstanding voting securities of
any one such investment company, the Fund owning securities of another
investment company having an aggregate value in excess of 5% of the value of the
Fund's total assets, or the Fund owning securities of investment companies which
in the aggregate would exceed 10% of the value of the Fund's total assets.
10. Invest, in the aggregate, more than 15% of its total assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable and repurchase agreements with more than seven days
to maturity.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
DISTRIBUTIONS AND TAX INFORMATION
Distributions
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually. Also, the Fund expects
to distribute any undistributed net investment income on or about December 31 of
each year. Any net capital gains realized through the period ended October 31 of
each year will also be distributed by December 31 of each year.
Each distribution by the Fund is accompanied by a brief explanation of
the form and character of the distribution. In January of each year the Fund
will issue to each shareholder a statement of the federal income tax status of
all distributions.
Tax Information
Each series of the Trust is treated as a separate entity for federal
income tax purposes. The Fund intends to continue to qualify and elect to be
treated as a regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), provided it complies with all
applicable requirements regarding the source of its income, diversification of
its assets and
Perkins SAI B-8
<PAGE>
timing of distributions. The Fund's policy is to distribute to its shareholders
all of its investment company taxable income and any net realized long-term
capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes. To comply with the requirements, the Fund
must also distribute (or be deemed to have distributed) by December 31 of each
calendar year (i) at least 98% of its ordinary income for such year, (ii) at
least 98% of the excess of its realized capital gains over its realized capital
losses for the 12-month period ending on October 31 during such year and (iii)
any amounts from the prior calendar year that were not distributed and on which
the Fund paid no federal income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains
are taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent the Fund designates the amount
distributed as a qualifying dividend. The aggregate amount so designated cannot,
however, exceed the aggregate amount of qualifying dividends received by the
Fund for its taxable year. In view of the Fund's investment policy, it is
expected that dividends from domestic corporations will be part of the Fund's
gross income and that, accordingly, part of the distributions by the Fund may be
eligible for the dividends-received deduction for corporate shareholders.
However, the portion of the Fund's gross income attributable to qualifying
dividends is largely dependent on that Fund's investment activities for a
particular year and therefore cannot be predicted with any certainty. The
deduction may be reduced or eliminated if the Fund shares held by a corporate
investor are treated as debt-financed or are held for less than 46 days during
the 90-day period that begins 45 days before the stock becomes ex-dividend with
respect to the dividend.
Any long-term or mid-term capital gain distributions are taxable to
shareholders as long-term or mid-term capital gains, respectively, regardless of
the length of time shares have been held. Capital gains distributions are not
eligible for the dividends-received deduction referred to in the previous
paragraph. Distributions of any net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date. Distributions
are generally taxable when received. However, distributions declared in October,
November or December to shareholders of record on a date in such a month and
paid the following January are taxable as if received on December 31.
Distributions are includable in alternative minimum taxable income in computing
a shareholder's liability for the alternative minimum tax.
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. Any loss realized upon a redemption or exchange of shares
within six months from the date of their purchase will be treated as a long-term
capital loss to the extent of any amounts treated as
Perkins SAI B-9
<PAGE>
distributions of long-term capital gains during such six-month period. Any
loss realized upon a redemption or exchange may be disallowed under certain wash
sale rules to the extent shares of the same Fund are purchased (through
reinvestment of distributions or otherwise) within 30 days before or after the
redemption or exchange.
Under the Code, the Fund will be required to report to the Internal
Revenue Service ("IRS") all distributions of taxable income and capital gains as
well as gross proceeds from the redemption or exchange of Fund shares, except in
the case of exempt shareholders, which includes most corporations. Pursuant to
the backup withholding provisions of the Internal Revenue Code, distributions of
any taxable income and capital gains and proceeds from the redemption of Fund
shares may be subject to withholding of federal income tax at the rate of 31
percent in the case of non-exempt shareholders who fail to furnish the Fund with
their taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in additional shares, will be reduced by the amounts required to be
withheld. Corporate and other exempt shareholders should provide the Fund with
their taxpayer identification numbers or certify their exempt status in order to
avoid possible erroneous application of backup withholding. The Fund reserves
the right to refuse to open an account for any person failing to provide a
certified taxpayer identification number.
The Fund will not be subject to tax in the Commonwealth of
Massachusetts as long as it qualifies as a regulated investment company for
federal income tax purposes. Distributions and the transactions referred to in
the preceding paragraphs may be subject to state and local income taxes, and the
tax treatment thereof may differ from the federal income tax treatment.
Moreover, the above discussion is not intended to be a complete discussion of
all applicable federal tax consequences of an investment in the Fund.
Shareholders are advised to consult with their own tax advisers concerning the
application of federal, state and local taxes to an investment in the Fund.
The foregoing discussion of U.S. federal income tax law relates solely
to the application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the prospectus have been
prepared by Fund management, and counsel to the Fund has expressed no opinion in
respect thereof.
Perkins SAI B-10
<PAGE>
TRUSTEES AND EXECUTIVE OFFICERS
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, their
affiliations, dates of birth and principal occupations for the past five years
are set forth below.
Steven J. Paggioli,* 04/03/50 President and Trustee
479 West 22nd Street, New York, NY 10011. Executive Vice President, The
Wadsworth Group (consultants) since 1986; Executive Vice President of Investment
Company Administration Corporation ("ICAC") (mutual fund administrator and the
Trust's Administrator), and Vice President of First Fund Distributors, Inc.
("FFD") (a registered broker-dealer and the Fund's Distributor) since 1990.
Dorothy A. Berry, 08/12/43 Trustee
14 Five Roses East, Ancram, NY 12517. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment advisor and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
Wallace L. Cook, 09/10/39 Trustee
One Peabody Lane, Darien, CT 06820. Retired. Formerly Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
Carl A. Froebel, 05/23/38 Trustee
2 Crown Cove Lane, Savannah, GA 31411. Private Investor. Formerly Managing
Director, Premier Solutions, Ltd. (asset management computer and software
products). Formerly President and Founder, National Investor Data Services, Inc.
(investment related computer software).
Rowley W.P. Redington, 06/01/44 Trustee
1191 Valley Road, Clifton, NJ 07103. President, Intertech (consumer electronics
and computer service and marketing); formerly Vice President, PRS of New Jersey,
Inc. (management consulting), and Chief Executive Officer, Rowley Associates
(consultants).
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<PAGE>
Eric M. Banhazl*, 08/05/57 Treasurer
2020 E. Financial Way, Glendora, CA 91741. Senior Vice President, The Wadsworth
Group, Senior Vice President of ICAC and Vice President of FFD since 1990.
Robin Berger*, 11/17/56 Secretary
479 West 22nd St., New York, NY 10011. Vice President, The Wadsworth Group since
June, 1993.
Robert H. Wadsworth*, 01/25/40 Vice President
4455 E. Camelback Road, Suite 261E, Phoenix, AZ 85018. President of The
Wadsworth Group since 1982, President of ICAC and FFD since 1990.
*Indicates an "interested person" of the Trust as defined in the 1940 Act.
Set forth below is the rate of compensation received by the following
Trustees from the Fund and all other portfolios of the Trust. This total amount
is allocated among the portfolios. Disinterested trustees receive an annual
retainer of $7,500 and a fee of $2,500 for each regularly scheduled meeting.
These trustees also receive a fee of $1000 for any special meeting attended. The
Chairman of the Board of Trustees receives an additional annual retainer of
$4,500. Disinterested trustees are also reimbursed for expenses in connection
with each Board meeting attended. No other compensation or retirement benefits
were received by any Trustee or officer from the Fund or any other portfolios of
the Trust.
Name of Trustee Total Annual Compensation
Dorothy A. Berry $22,000
Wallace L. Cook $17,500
Carl A. Froebel $17,500
Rowley W.P. Redington $17,500
During the fiscal year ended March 31, 1998, trustees fees and expenses
of $15,211 were allocated to the Fund. 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 the Fund.
THE FUND'S INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided
to the Fund by Perkins Capital Management, Inc., the Advisor, pursuant to an
Investment Advisory Agreement. The Advisor is controlled by Richard Perkins,
Sr., Richard Perkins, Jr. and Daniel Perkins.
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For the fiscal years ended March 31, 1996, March 31, 1997 and March 31,
1998, the Advisor received fees of $516,259, $1,152,114 and $726,828,
respectively.
The use of the name "Perkins" by the Fund is pursuant to a license
granted by the Advisor, and in the event the Investment Advisory Agreement with
the Fund is terminated, the Advisor has reserved the right to require the Fund
to remove any references to the name "Perkins."
The Investment Advisory Agreement continues in effect for successive
annual periods so long as such continuation is approved at least annually by the
vote of (1) the Board of Trustees of the Trust (or a majority of the outstanding
shares of the Fund to which the agreement applies), and (2) a majority of the
Trustees who are not interested persons of any party to the Agreement, in each
case cast in person at a meeting called for the purpose of voting on such
approval. Any such agreement may be terminated at any time, without penalty, by
either party to the agreement upon sixty days' written notice and is
automatically terminated in the event of its "assignment," as defined in the
1940 Act.
THE FUND'S ADMINISTRATOR
The Fund has an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"), a corporation owned and
controlled by Messrs. Banhazl, Paggioli and Wadsworth with offices at 4455 E.
Camelback Rd., Ste. 261-E, Phoenix, AZ 85018. The Administration Agreement
provides that the Administrator will prepare and coordinate reports and other
materials supplied to the Trustees; prepare and/or supervise the preparation and
filing of all securities filings, periodic financial reports, prospectuses,
statements of additional information, marketing materials, tax returns,
shareholder reports and other regulatory reports or filings required of the
Fund; prepare all required filings necessary to maintain the Fund's
qualification and/or registration to sell shares in all states where the Fund
currently does, or intends to do business; coordinate the preparation, printing
and mailing of all materials (e.g., Annual Reports) required to be sent to
shareholders; coordinate the preparation and payment of Fund related expenses;
monitor and oversee the activities of the Fund's servicing agents (i.e.,
transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary the Fund's daily expense accruals; and perform such additional
services as may be agreed upon by the Fund and the Administrator. For its
services, the Administrator receives an monthly fee at the following annual
rate:
Average Net Assets Fee or Fee Rate
- ------------------ ---------------
Less than $12,000,000 $30,000
$12 million to $50 million 0.25%
$50 million to $100 million 0.20%
$100 million to $200 million 0.15%
Over $200 million 0.10%
Perkins SAI B-13
<PAGE>
During the fiscal years ended March 31, 1996, March 31, 1997 and March 31, 1998,
the Administrator received fees of $123,567, $246,706 and $140,366,
respectively.
THE FUND'S DISTRIBUTOR
First Fund Distributors, Inc., (the "Distributor"), a corporation owned
by Messrs. Banhazl, Paggioli and Wadsworth, acts as the Fund's principal
underwriter in a continuous public offering of the Fund's shares. The
Distribution Agreement between the Fund and the Distributor continues in effect
for periods not exceeding one year if approved at least annually by (i) the
Board of Trustees or the vote of a majority of the outstanding shares of the
Fund (as defined in the 1940 Act) and (ii) a majority of the Trustees who are
not interested persons of any such party, in each case cast in person at a
meeting called for the purpose of voting on such approval. The Distribution
Agreement may be terminated without penalty by the parties thereto upon sixty
days' written notice, and is automatically terminated in the event of its
assignment as defined in the 1940 Act. During the fiscal years ended March 31,
1996, March 31, 1997 and March 31, 1998, the aggregate sales commissions
received by the Distributor were $78,000, $110,107 and $14,077, respectively.
The Fund has adopted a Distribution Plan in accordance with Rule 12b-1
under the 1940 Act. The Plan provides that the Fund will pay a fee to the
Advisor as Distribution Coordinator at an annual rate of up to 0.25% of the
average daily net assets of the Fund (currently 0.20%). The fee is paid to the
Advisor as reimbursement for, or in anticipation of, expenses incurred for
distribution related activity. During the fiscal year ended March 31, 1998, the
Fund paid fees of $145,366 under the Plan, of which $90,046 was paid out as
selling compensation to dealers, $15,393 was for reimbursement of printing,
postage and office expenses, $6,947 was for reimbursement of travel and
entertainment expenses and $32,980 was for reimbursement of advertising and
marketing materials expenses. The Fund also has a Shareholder Service Plan
pursuant to which payments or reimbursements of payments may be made to selected
brokers, dealers or administrators which have entered into agreements for
services provided to shareholders of the Fund. During the fiscal year ended
March 31, 1998, fees of $160,272 were paid pursuant to the shareholder service
plan.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement, the Advisor determines
which securities are to be purchased and sold by the Fund and which
broker-dealers are eligible to execute the Fund's portfolio transactions.
Purchases and sales of securities in the over-the-counter market will generally
be executed directly with a "market-maker" unless, in the opinion of the
Advisor, a better price and execution can otherwise be obtained by using a
broker for the transaction.
Purchases of portfolio securities for the Fund also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Fund will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principal for their
Perkins SAI B-14
<PAGE>
own accounts. Purchases from underwriters will include a concession paid by the
issuer to the underwriter and purchases from dealers will include the spread
between the bid and the asked price. If the execution and price offered by more
than one dealer or underwriter are comparable, the order may be allocated to a
dealer or underwriter that has provided research or other services as discussed
below.
In placing portfolio transactions, the Advisor will use its reasonable
efforts to choose broker-dealers capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers which furnish or supply research and statistical
information to the Advisor that it may lawfully and appropriately use in its
investment advisory capacities, as well as provide other services in addition to
execution services. The Advisor considers such information, which is in addition
to and not in lieu of the services required to be performed by it under its
Agreement with the Fund, to be useful in varying degrees, but of indeterminable
value. Portfolio transactions may be placed with broker-dealers who sell shares
of the Fund subject to rules adopted by the National Association of Securities
Dealers, Inc.
While it is the Fund's general policy to seek first to obtain the most
favorable price and execution available in selecting a broker-dealer to execute
portfolio transactions for the Fund, weight is also given to the ability of a
broker-dealer to furnish brokerage and research services to the Fund or to the
Advisor, even if the specific services are not directly useful to the Fund and
may be useful to the Advisor in advising other clients. In negotiating
commissions with a broker or evaluating the spread to be paid to a dealer, the
Fund may therefore pay a higher commission or spread than would be the case if
no weight were given to the furnishing of these supplemental services, provided
that the amount of such commission or spread has been determined in good faith
by the Advisor to be reasonable in relation to the value of the brokerage and/or
research services provided by such broker-dealer. The standard of reasonableness
is to be measured in light of the Advisor's overall responsibilities to the
Fund.
Investment decisions for the Fund are made independently from those of
other client accounts or mutual funds ("Funds") managed or advised by the
Advisor. Nevertheless, it is possible that at times identical securities will be
acceptable for both the Fund and one or more of such client accounts or Funds.
In such event, the position of the Fund and such client account(s) or Funds in
the same issuer may vary and the length of time that each may choose to hold its
investment in the same issuer may likewise vary. However, to the extent any of
these client accounts or Funds seeks to acquire the same security as the Fund at
the same time, the Fund may not be able to acquire as large a portion of such
security as it desires, or it may have to pay a higher price or obtain a lower
yield for such security. Similarly, the Fund may not be able to obtain as high a
price for, or as large an execution of, an order to sell any particular security
at the same time. If one or more of such client accounts
Perkins SAI B-15
<PAGE>
or Funds simultaneously purchases or sells the same security that the Fund is
purchasing or selling, each day's transactions in such security will be
allocated between the Fund and all such client accounts or Funds in a manner
deemed equitable by the Advisor, taking into account the respective sizes of the
accounts and the amount being purchased or sold. It is recognized that in some
cases this system could have a detrimental effect on the price or value of the
security insofar as the Fund is concerned. In other cases, however, it is
believed that the ability of the Fund to participate in volume transactions may
produce better executions for the Fund.
The Fund does not effect securities transactions through brokers in
accordance with any formula, nor does it effect securities transactions through
brokers solely for selling shares of the Fund, although the Fund may consider
the sale of shares as a factor in allocating brokerage. However, as stated
above, broker-dealers who execute brokerage transactions may effect purchase of
shares of the Fund for their customers. The Fund does not use the Distributor to
execute its portfolio transactions.
During the fiscal years ended March 31, 1996, March 31, 1997 and March
31, 1998, brokerage commissions paid by the Fund totaled $225,689, $333,259 and
$233,821, respectively.
Of the total commissions paid by the Fund during the fiscal year ended
March 31, 1998, $131,471 (56.23%) was paid to firms for research, statistical or
other services provided to the Advisor.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Fund's shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or the Distributor such rejection
is in the best interest of the Fund, and (iii) to reduce or waive the minimum
for initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of the Fund's
shares.
Payments to shareholders for shares of the Fund redeemed directly from
the Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that the Fund
may suspend the right of redemption or postpone the date of payment during any
period when (a) trading on the New York Stock Exchange is restricted as
determined by the SEC or such Exchange is closed for other than weekends and
holidays; (b) an emergency exists as determined by the SEC making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable; or (c) for such other period as the SEC may permit for the
protection of the Fund's shareholders. At various times, the Fund may be
requested to redeem shares for which it has not yet received confirmation of
good payment; in this circumstance, the Fund may delay the redemption until
payment for the purchase of such shares has been collected and confirmed to the
Fund.
Perkins SAI B-16
<PAGE>
The Fund intends to pay cash (U.S. dollars) for all shares redeemed,
but, under abnormal conditions which make payment in cash unwise, the Fund may
make payment partly in securities with a current market value equal to the
redemption price. Although the Fund does not anticipate that it will make any
part of a redemption payment in securities, if such payment were made, an
investor may incur brokerage costs in converting such securities to cash. The
Fund has elected to be governed by the provisions of Rule 18f-1 under the 1940
Act, which contains a formula for determining the minimum redemption amounts
that must be paid in cash.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Fund will be determined once daily as of the close of public
trading on the New York Stock Exchange (currently 4:00 p.m. Eastern time) on
each day that the Exchange is open for trading. It is expected that the Exchange
will be closed on Saturdays and Sundays and on New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. The Fund does not expect to
determine the net asset value of its shares on any day when the Exchange is not
open for trading even if there is sufficient trading in its portfolio securities
on such days to materially affect the net asset value per share.
In valuing the Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each Fund are valued in such manner as the Board of Trustees in
good faith deems appropriate to reflect their fair value.
The net asset value per share of the Fund is calculated as follows: all
liabilities incurred or accrued are deducted from the valuation of total assets
which includes accrued but undistributed income; the resulting net assets are
divided by the number of shares of the Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
Perkins SAI B-17
<PAGE>
From time to time, the Fund may state its total return in
advertisements and investor communications. Total return may be stated for any
relevant period as specified in the advertisement or communication. Any
statements of total return will be accompanied by information on the Fund's
average annual compounded rate of return over the most recent four calendar
quarters and the period from the Fund's inception of operations. The Fund may
also advertise aggregate and average total return information over different
periods of time.
The Fund's total return may be compared to relevant indices, including
Standard & Poor's 500 Composite Stock Index and indices published by Lipper
Analytical Services, Inc. From time to time, evaluations of a Fund's performance
by independent sources may also be used in advertisements and in information
furnished to present or prospective investors in the Funds.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
The Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial purchase order of $1,000 from which the
maximum sales load is deducted
T = average annual total return n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at
the end of the period
Aggregate total return is calculated in a similar manner, except that
the results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period and gives effect to the maximum applicable sales charge.
The Fund's average annual total returns, after giving effect to the
maximum sales charge of 4.75%, for the one and five year periods and for the
period from inception on February 18, 1993 through March 31, 1998 were 7.8%,
16.25% and 17.21%, respectively.
Perkins SAI B-18
<PAGE>
GENERAL INFORMATION
Investors in the Fund will be informed of the Fund's progress through
periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders at least annually.
Star Bank, 425 Walnut Street, Cincinnati, OH 45202 acts as Custodian of
the securities and other assets of the Fund. Rodney Square Management Corp.,
P.O. Box 8987, Wilmington, DE 19899, acts as the Fund's transfer and shareholder
service agent. The Custodian and Transfer Agent do not participate in decisions
relating to the purchase and sale of securities by the Fund.
Tait, Weller & Baker, Eight Penn Center Plaza, Philadelphia, PA 19103,
are the independent auditors for the Fund.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th
Floor, San Francisco, California 94104, are legal counsel to the Fund.
As of June 30, 1998, the following shareholders owned more than 5% of
the outstanding voting securities of the Fund:
Charles Schwab & Co., Inc., Special Custody Account FBO Customers, San
Francisco, CA 94104; 6.69%
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Agreement and Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Fund's assets for any shareholder held
personally liable for obligations of the Fund or Trust. The Agreement and
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Fund. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Furthermore, the activities of the Trust as
an investment company would not likely give rise to liabilities in excess of the
Trust's total assets. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to the unlikely circumstances in
which both inadequate insurance exists and the Fund itself is unable to meet its
obligations.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Fund. The Prospectus of the Fund and this
Statement of Additional Information omit certain of the information contained in
the Registration Statement filed with the SEC. Copies of such information may be
Perkins SAI B-19
<PAGE>
obtained from the SEC upon payment of the prescribed fee, or may be accessed via
the world wide web at http://www.sec.gov.
FINANCIAL STATEMENTS
The annual report to shareholders for the Fund for its most recent
fiscal year end is a separate document supplied with this Statement of
Additional Information and the financial statements, accompanying notes and
report of independent accountants appearing therein are incorporated by
reference in this Statement of Additional Information.
Perkins SAI B-20
