AS FILED WITH THE COMMISSION ON JUNE 22, 1999
SECURITIES ACT FILE NO. 33-12213
INVESTMENT COMPANY ACT FILE NO. 811-5037
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. [ ]
Post Effective Amendment No. 70 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 71 [X]
(Check appropriate box or boxes)
PROFESSIONALLY MANAGED PORTFOLIOS
(Exact Name of Registrant as Specified in Charter)
915 Broadway, New York, NY 10010
(Address of Principal Executive Offices, including Zip Code)
(212) 633-9700
(Registrant's Telephone Number, including Area Code)
Steven J. Paggioli
Professionally Managed Portfolios
915 Broadway
New York, NY 10010
(Name and Address of Agent for Service)
Copy to:
Julie Allecta, Esq.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, CA 94104
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It is proposed that this filing will become effective (check appropriate box)
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] On pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] On August 27, 1999 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
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TITAN FINANCIAL SERVICES FUND,
A SERIES OF PROFESSIONALLY MANAGED PORTFOLIOS
The Titan Financial Services Fund is a stock mutual fund with the primary
objective of capital appreciation. Its secondary objective is moderate income.
The Fund invest principally in equity securities of financial services
companies.
AS WITH ALL MUTUAL FUNDS, THE SECURITIES AND EXCHANGE COMMISSION DOES NOT
APPROVE OR DISAPPROVE OF THESE SHARES OR DETERMINE WHETHER THE INFORMATION IN
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS A CRIMINAL OFFENSE FOR ANYONE TO
INFORM YOU OTHERWISE.
The date of this Prospectus is ____________ , 1999
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TABLE OF CONTENTS
An Overview of the Fund ................................................... 3
Performance ............................................................... 4
Fees and Expenses ......................................................... 4
Investment Objectives and Principal Investment Strategies ................. 5
Principal Risks of Investing in the Fund .................................. 6
Investment Advisor ........................................................ 7
Shareholder Information ................................................... 8
How to Buy Shares ..................................................... 8
How to Sell Shares .................................................... 10
Pricing of Fund Shares .................................................... 12
Dividends and Distributions ............................................... 12
Tax Consequences .......................................................... 12
12b-1 Fees ................................................................ 13
Financial Highlights ...................................................... 13
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AN OVERVIEW OF THE FUND
TITAN FINANCIAL SERVICES FUND'S INVESTMENT GOALS
The Fund primarily seeks capital appreciation. Its secondary goal is moderate
income.
TITAN FINANCIAL SERVICES FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Fund primarily invests in equity securities of financial services companies.
In selecting investments, the Advisor combines systematic and disciplined
valuation techniques with intensive, traditional fundamental research to
identify companies that are currently undervalued in relation to estimated
future earnings and cash flow.
PRINCIPAL RISKS OF INVESTING IN THE TITAN FINANCIAL SERVICES FUND
There is the risk that you could lose money on your investment in the Fund. For
example, the following risks could affect the value of your investment:
* The stock market goes down
* Interest rates go up which can result in a decline in the value of
financial services companies
* Stocks in the Fund's portfolio may not increase their earnings at the rate
anticipated
* Securities of small and medium capitalization companies involve greater
risk than investing in larger companies
* As a mutual fund that concentrates its assets in the financial services
industry, the Fund's share price may be more volatile than the share price
of a fund investing in a broader range of securities
WHO MAY WANT TO INVEST IN THE TITAN FINANCIAL SERVICES FUND
The Fund may be appropriate for investors who:
* Are pursuing a long-term goal such as retirement
* Are willing to accept higher short-term risk along with higher potential
for long-term growth of capital
The Fund may not be appropriate for investors who:
* Need regular income or stability of principal
* Are pursuing a short-term goal
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PERFORMANCE
The following performance information indicates some of the risks of
investing in the Fund. The bar chart shows how the Fund's total return has
varied from year to year. The table shows the Fund's average return over time
compared with broad-based market indices. This past performance will not
necessarily continue in the future.
CALENDAR YEAR TOTAL RETURNS*
[The following is the bar chart]
1997: 55.55%
1998: -9.12%
[End of bar chart]
*The Fund's year-to-date return as of 3/31/99 was 11.79%.
During the period shown in the bar chart, the Fund's highest quarterly return
was 17.38% for the quarter ended September 30, 1997 and the lowest quarterly
return was -26.02% for the quarter ended September 30, 1998.
AVERAGE ANNUAL TOTAL RETURNS
AS OF DECEMBER 31, 1998
Since Inception
1 Year (4/22/96)
------ ---------------
Titan Financial Services Fund -9.12% 22.10%
S&P 500 Index* 28.72% 27.81%
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* The S&P 500 Index is an unmanaged index generally representative of the
market for the stocks of large-sized U.S. companies.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases
(as a percentage of offering price ..................................... None
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Maximum deferred sales charge (load)
(as a percentage of the lower of original purchase
price or redemption proceeds) .......................................... None
Redemption fee* ......................................................... 1.00%
ANNUAL FUND OPERATING EXPENSES
Management Fees ......................................................... 1.00%
Distribution and Service (12b-1) Fees ................................... 0.25%
Other Expenses .......................................................... ____%
Total Annual Fund Operating Expenses .................................... ____%
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* You will pay a redemption fee of 1.00% of the value of shares you have
purchased and redeemed within one year of their purchase.
EXAMPLE
This example is intended to help you compare the costs of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, under the assumptions, your costs would be:
One Year .................. $____________
Three Years ............... $____________
Five Years ................ $____________
Ten Years ................. $____________
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
The primary goal of the Titan Financial Services Fund is to seek capital
appreciation. Its secondary goal is to provide moderate income.
Normally, the Fund invests at least 65% of its total assets in equity
securities of financial services companies and may invest up to 100% of its
assets in these securities. Financial services companies include:
* commercial banks
* consumer banks
* savings and loan institutions
* insurance companies
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* finance companies
* mortgage and other lenders
* securities brokerage companies
* credit card providers
* service providers to the banking and financial services sectors
* holding companies for each of the foregoing
The Fund will concentrate its investments in equity securities of those
companies that are, in the Advisor's opinion, undervalued from the standpoint of
both book value and earnings. The Advisor seeks to identify companies whose
prospects are deemed attractive on the basis of a growth in earnings and assets
and the companies' fundamentals. The Advisor will select equity securities on
the basis of book value, earnings, quality of assets, merger potential and
franchise value (particularly in regard to banks and savings and loan
institutions).
The Advisor will pay particular attention to smaller banking institutions
with assets of $5 billion or less. In addition, the Fund will invest in stronger
mutual savings banks that have converted to publicly held companies. The Fund
will also endeavor to open deposit accounts with mutual savings and loan
associations with the intention of subscribing to stock in the event the
institutions go public.
The Fund may invest up to 35% of its total assets in equity securities of
non-financial services companies.
A security in the Fund's portfolio may be sold when, in the opinion of the
Advisor, that security becomes overvalued both from the standpoint of book value
and earnings.
Under normal market conditions, the Fund will stay fully invested in
stocks. However, the Fund may temporarily depart from its principal investment
strategies by making short-term investments in cash equivalents in response to
adverse market, economic or political conditions. This may result in the Fund
not achieving its investment objectives.
PRINCIPAL RISKS OF INVESTING IN THE FUND
The principal risks of investing in the Fund that may adversely affect the
Fund's net asset value or total return are summarized above in "Principal Risks
of Investing in the Titan Financial Services Fund." These risks are discussed in
more detail below.
MARKET RISK. The risk that the market value of a security may move up and
down, sometimes rapidly and unpredictably. These fluctuations may cause a
security to be worth less than the price originally paid for it, or less than it
was worth at an earlier time. Market risk may affect a single issuer, industry,
sector of the economy or the market as a whole.
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INDUSTRY CONCENTRATION RISK. Because the Fund concentrates its investments
in financial services companies, the value of its shares are subject to greater
risks than the shares of a fund whose portfolio is not so concentrated. The
shares of financial services companies are particularly affected by economic,
legislative and regulatory developments affecting those industries as well as
movements in interest rates. Financial services stocks therefore may decline in
value even if the overall market is doing well.
INTEREST RATE RISK: Financial services companies tend to be more interest
rate sensitive than other stocks. As interest rates increase, financial services
stocks tend to decline in value.
GOVERNMENT REGULATION RISK: The financial services industry may be subject
to greater government regulation than many other industries and changes in
governmental policies and the need for regulatory approval may have a material
effect on the services of this industry. Banks, savings and loan institutions
and financial companies are subject to extensive governmental and, in some
cases, state regulations which may limit both the financial commitments they can
make, including the amounts and types of loans and the interest rates and fees
they can charge. Insurance companies are also subject to extensive governmental
regulation, including the imposition of maximum rate levels, which may be
inadequate for some lines of business. The performance of insurance companies
will be affected by interest rates, severe competition in the pricing of
services, claims activities, marketing competition and general economic
conditions. Profitability is largely dependent on the availability and cost of
capital funds and can fluctuate significantly when interest rates change.
SMALL-CAPITALIZATION RISK: The risk of investing in securities of
small-sized companies may involve greater risk than investing in larger
companies because they can be subject to more abrupt or erratic share price
changes. Small companies may have limited markets or financial resources and
their management may be dependent on a limited number of key individuals.
Securities of these companies may have limited market liquidity.
YEAR 2000 RISK. The risk that the Fund 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 Problem." This situation may negatively
affect the companies in which the Fund invests and by extension the value of the
Fund's shares. Although the Fund's service providers are taking steps to address
this issue, there may still be some risk of adverse effects.
INVESTMENT ADVISOR
Titan Investment Advisors, LLC is the investment advisor to the Fund. The
Advisor's address is 9672 Pennsylvania Avenue, Upper Marlboro. MD 20772. The
Advisor has been providing investment advisory services since 1995. The Advisor
provides advice on buying and selling securities. The Advisor also furnishes the
Fund with office space and certain administrative services and provides most of
the personnel needed by the Fund. For its services, the Fund pays the Advisor a
monthly management fee based upon its average daily net assets. For the fiscal
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year ended June 30, 1999, the Advisor received advisory fees of ___% of the
Fund's average net assets.
Gilbert R. Giordano, President of the Advisor, has primarily responsibility
for the day-to-day management of the Fund's portfolio. Mr. Giordiano has been
employed by the Advisor since its inception and has over thirty years experience
in the banking and financial services industry.
He was founder of the United Bank & Trust Company of Maryland in 1966 and
served as the Chairman of the organization which merged with First Virginia Bank
and was known as First Virginia Bank of Maryland until 1999. Mr. Giordiano now
serves on the Board of First Virginia Bank as well as Farmers Bank of Maryland.
Mervin H. Zimmerman, M.D., a partner in the Advisor, assists in the Fund's
portfolio management, especially in regard to non-financial holdings. Dr.
Zimmerman has over 30 years experience in the financial markets and has been
associated with the Advisor since its inception.
FUND EXPENSES
The Fund is responsible for its own operating expenses. At times, the
Advisor may reduce its fees and/or pay expenses of the Fund in order to reduce
the Fund's aggregate annual operating expenses. Any reduction in advisory fees
or payment of expenses made by the Advisor are subject to reimbursement by the
Fund if requested by the Advisor in subsequent fiscal years. The Advisor is
permitted to be reimbursed for fee reductions and/or expense payments made in
the prior three fiscal years. Any such reimbursement will be reviewed by the
Trustees. The Fund must pay its current ordinary operating expenses before the
Advisor is entitled to any reimbursement of fees and/or expenses.
SHAREHOLDER INFORMATION
HOW TO BUY SHARES
You may open a Fund account with $5,000 and add to your account at any time
with $100 or more. You may open a retirement plan account with $2,000 and add to
your account at any time with $100 or more. The minimum investment requirements
may be waived from time to time by the Fund.
You may purchase shares of the Fund by check or wire. All purchases by
check must be in U.S. dollars. Third party checks and cash will not be accepted.
A charge may be imposed if your check does not clear. The Fund is not required
to issue share certificates. The Fund reserves the right to reject any purchase
in whole or in part.
BY CHECK
If you are making an initial investment in the Fund, simply complete the
Application Form included with this Prospectus and mail it with a check (made
payable to "Titan Financial Services Fund") to:
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Titan Financial Services Fund
P.O. Box 640856
Cincinnati, OH 45264-0856
If you wish to send your Application Form and check via an overnight
delivery service (such as FedEx), you should call the Transfer Agent at (800-
282-2340) for instructions:
If you are making a subsequent purchase, a stub is attached to the account
statement you will receive after each transaction. Detach the stub from the
statement and mail it together with a check made payable to "Titan Financial
Services Fund" to the Fund in the envelope provided with your statement or to
the address noted above. Your account number should be written on the check.
BY WIRE
If you are making an initial investment in the Fund, before you wire funds
you should call the Transfer Agent at (800) 282-2340 between 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 to advise them that you are making an investment by wire. The
Transfer Agent will ask for your name and the dollar amount you are investing.
You will then receive your account number and an order confirmation number. You
should then complete the Account Application included with this Prospectus.
Include the date and the order confirmation number on the Account Application
and mail the completed Account Application to the address at the top of the
Account Application. Your bank should transmit immediately available funds by
wire in your name to:
Firstar Bank, N.A. Cinti/Trust
ABA Routing #0420-0001-3
Titan Financial Services Fund
DDA #485776504
Account name (shareholder name)
Shareholder account number
If you are making a subsequent purchase, your bank should wire funds as
indicated above. Before each wire purchase, you should be sure to notify the
Transfer Agent. IT IS ESSENTIAL THAT YOUR BANK INCLUDE COMPLETE INFORMATION
ABOUT YOUR ACCOUNT IN ALL WIRE INSTRUCTIONS. If you have questions about how to
invest by wire, you may call the Transfer Agent. Your bank may charge you a fee
for sending a wire to the Fund.
You may buy and sell shares of the Fund through certain brokers (and their
agents) that have made arrangements with the Fund to sell its shares. When you
place your order with such a broker or its authorized agent, your order is
treated as if you had placed it directly with the Fund's Transfer Agent, and you
will pay or receive the next price calculated by the Fund. The broker (or agent)
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holds your shares in an omnibus account in the broker's (or agent's) name, and
the broker (or agent) maintains your individual ownership records. The Fund may
pay the broker (or its agent) for maintaining these records as well as providing
other shareholder services. The broker (or its agent) may charge you a fee for
handling your order. The broker (or agent) is responsible for processing your
order correctly and promptly, keeping you advised regarding the status of your
individual account, confirming your transactions and ensuring that you receive
copies of the Fund's prospectus.
HOW TO SELL SHARES
You may sell (redeem) your Fund shares on any day the Fund and the NYSE are
open for business.
You may redeem your shares by simply sending a written request to the
Transfer Agent. You should give your account number and state whether you want
all or some of your shares redeemed. The letter should be signed by all of the
shareholders whose names appear in the account registration. You should send
your redemption request to:
Titan Financial Services Fund c/o
American Data Services
P.O. Box 5536
Hauppauge, NY 11788-0132
To protect the Fund and its shareholders, a signature guarantee is required
for all written redemption requests. Signature(s) on the redemption request must
be guaranteed by an "eligible guarantor institution." These 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 for any eligible
guarantor institution which participates in a signature guarantee program. A
notary public is not an acceptable guarantor.
If you complete the Redemption by Telephone portion of the Account
Application, you may redeem all or some of your shares on any day the NYSE is
open for trading by calling the Transfer Agent at (800) 282-2340 between the
hours of 9:00 a.m., Eastern time. Redemption proceeds will be mailed on the next
business day to the address that appears on the Transfer Agent's records. If you
request, redemption proceeds will be wired on the next business day to the bank
account you designated on the Account Application. The minimum amount that may
be wired is $1,000. Wire charges, if any, will be deducted from your redemption
proceeds. Telephone redemptions cannot be made if you notify the Transfer Agent
of a change of address within 30 days before the redemption request. If you have
a retirement account, you may not redeem shares by telephone.
When you establish telephone privileges, you are authorizing the Fund and
its Transfer Agent to act upon the telephone instructions of the person or
persons you have designated in your Account Application. Redemption proceeds
will be transferred to the bank account you have designated on your Account
Application.
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Before executing an instruction received by telephone, the Fund and the
Transfer Agent will use reasonable procedures to confirm that the telephone
instructions are genuine. These procedures will include recording the telephone
call and asking the caller for a form of personal identification. If the Fund
and the Transfer Agent follow these reasonable procedures, they will not be
liable for any loss, expense, or cost arising out of any telephone redemption
request that is reasonably believed to be genuine. This includes any fraudulent
or unauthorized request. The Fund may change, modify or terminate these
privileges at any time upon at least 60 days' notice to shareholders.
You may request telephone redemption privileges after your account is
opened by calling the Transfer Agent at (800) 282-2340 for instructions.
You may have difficulties in making a telephone redemption during periods
of abnormal market activity. If this occurs, you may make your redemption
request in writing.
REDEMPTION FEE
A redemption fee is imposed on the redemption of Fund shares within one
year of their initial purchase. The fee is 1.00% of the amount redeemed. The fee
is designed to compensate the Fund for transaction costs and administrative
expenses that may arise from frequent short-term trading activity in its shares.
Payment of your redemption proceeds will be made promptly, but not later
than seven days after the receipt of your written request in proper form. If you
made your initial investment by wire, payment of your redemption proceeds for
those shares will not be made until one business day after your completed
Account Application is received by the Fund. If you did not purchase your shares
with a certified check or wire, the Fund may delay payment of your redemption
proceeds for up to 15 days from date of purchase or until your check has
cleared, whichever occurs first.
The Fund may redeem the shares in your account if the value of your account
is less than $2,000 as a result of redemptions you have made. This does not
apply to retirement plan or Uniform Gifts or Transfers to Minors Act accounts.
You will be notified that the value of your account is less than $2,000 before
the Fund makes an involuntary redemption. You will then have 30 days in which to
make an additional investment to bring the value of your account to at least
$2,000 before the Fund takes any action.
The Fund has the right to pay redemption proceeds to you in whole or in
part by a distribution of securities from the Fund's portfolio. It is not
expected that the Fund would do so except in unusual circumstances.
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SYSTEMATIC WITHDRAWAL PROGRAM
As another convenience, you may redeem your Fund shares through the
Systematic Withdrawal Program. If you elect this method of redemption, the Fund
will send you a check in a minimum amount of $___. You may choose to receive a
check each month or calendar quarter. Your Fund account must have a value of at
least $10,000 in order to participate in this Program. This Program may be
terminated at any time by the Fund. You may also elect to terminate your
participation in this Program at any time by writing to the Transfer Agent.
A withdrawal under the 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 your account, the account ultimately may be depleted.
PRICING OF FUND SHARES
The price of the Fund's shares is based on the Fund's net asset value. This
is done by dividing the Fund's assets, minus its liabilities, by the number of
shares outstanding. The Fund's assets are the market value of securities held in
its portfolio, plus any cash and other assets. The Fund's liabilities are fees
and expenses owed by the Fund. The number of Fund shares outstanding is the
amount of shares which have been issued to shareholders. The price you will pay
to buy Fund shares or the amount you will receive when you sell your Fund shares
is based on the net asset value next calculated after your order is received by
the Transfer Agent with complete information and meeting all the requirements
discussed in this Prospectus.
The net asset value of the Fund's shares is determined as of the close of
regular trading on the NYSE. This is normally 4:00 p.m., Eastern time. Fund
shares will not be priced on days that the NYSE is closed for trading (including
certain U.S. holidays).
DIVIDENDS AND DISTRIBUTIONS
The Fund will make distributions of dividends and capital gains, if any, at
least annually, typically after year end. The Fund will make another
distribution of any additional undistributed capital gains earned during the
12-month period ended October 31 on or about December 31.
All distributions will be reinvested in Fund shares unless you request in
writing to the Transfer Agent that you wish to receive your distributions in
cash. This written request must be received by the Transfer Agent in advance of
the payment date for the distribution.
TAX CONSEQUENCES
The Fund intends to make distributions of dividends and capital gains.
Dividends are taxable to you as ordinary income. The rate you pay on capital
gain distributions will depend on how long the Fund held the securities that
generated the gains, not on how long you owned your Fund shares. You will be
taxed in the same manner whether you receive your dividends and capital gain
distributions in cash or reinvest them in additional Fund shares.
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If you sell your Fund shares, it is considered a taxable event for you.
Depending on the purchase price and the sale price of the shares you exchange or
sell, you may have a gain or a loss on the transaction. You are responsible for
any tax liabilities generated by your transaction.
RULE 12b-1 FEES
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. This rule allows the Fund to pay distribution
fees for the sale and distribution of its shares and for services provided to
its shareholders. The annual distribution and service fee is 0.25% of the Fund's
average daily net assets which is payable to the Advisor, as Distribution
Coordinator. Because these fees are paid out of the Fund's assets on an on-going
basis, over time these fees will increase the cost of your investment in Fund
shares and may cost you more than paying other types of sales charges.
FINANCIAL HIGHLIGHTS
This table shows the Fund's financial performance for up to the past five
years. "Total return" shows how much your investment in the Fund would have
increased or decreased during each period, assuming you had reinvested all
dividends and distributions. This information has been audited by _____________,
Independent Certified Public Accountants. Their report and the Fund's financial
statements are included in the Annual Report, which is available upon request.
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TITAN FINANCIAL SERVICES FUND,
A SERIES OF PROFESSIONALLY MANAGED PORTFOLIOS (THE "TRUST")
For investors who want more information about the Fund, the following documents
are available free upon request:
ANNUAL/SEMI-ANNUAL REPORTS: Additional information about the Fund's investments
is available in the Fund's annual and semi-annual reports to shareholders. In
the Fund's annual report, you will find a discussion of market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Fund and is incorporated by reference into this
Prospectus.
You can get free copies of reports and the SAI, request other information and
discuss your questions about the Fund by contacting the Fund at:
American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788-0132
Telephone: 1-800-282-2340
You can review and copy information including the Fund's reports and SAI at the
Public Reference Room of the Securities and Exchange Commission in Washington,
D.C. You can obtain information on the operation of the Public Reference Room by
calling 1-800-SEC-0330. You can get text-only copies:
* For a fee, by writing to the Public Reference Room of the Commission,
Washington, DC 20549-6009, or
* For a fee, by calling 1-800-SEC-0330, or
* Free of charge from the Commission's Internet website at http://www.sec.gov.
(The Trust's SEC Investment Company Act
file number is 811-5037)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
_________________, 1999
TITAN FINANCIAL SERVICES FUND
A SERIES OF
PROFESSIONALLY MANAGED PORTFOLIOS
9672 PENNSYLVANIA AVENUE
UPPER MARLBORO, MD 20772
(888) 44-TITAN
(800) 282-2340
This Statement of Additional Information ("SAI") is not a prospectus and it
should be read in conjunction with the prospectus of the Titan Financial
Services Fund (the "Fund"). Titan Investment Advisors, LLC (the "Advisor) is the
investment advisor to the Fund. Copies of the Fund's Prospectus dated
_____________, 1999 are available by calling (800) 282-2340.
TABLE OF CONTENTS
The Trust................................................................ B-
Investment Objectives and Policies....................................... B-
Investment Restrictions.................................................. B-
Distributions and Tax Information........................................ B-
Trustees and Executive Officers.......................................... B-
The Fund's Investment Advisor............................................ B-
The Fund's Administrator................................................. B-
The Fund's Distributor................................................... B-
Execution of Portfolio Transactions...................................... B-
Portfolio Turnover ..................................................... B-
Additional Purchase And Redemption Information........................... B-
Determination of Share Price............................................. B-
Performance Information.................................................. B-
General Information...................................................... B-
Financial Statements..................................................... B-
Appendix A ............................................................. B-
Appendix B ............................................................. B-
B-1
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THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end management
investment company organized as a Massachusetts business trust. The Trust may
consist of various series which represent separate investment portfolios. This
SAI relates only to the Fund.
The Trust is registered with the SEC as a management investment company. Such a
registration does not involve supervision of the management or policies of the
Fund. The Prospectus of the Fund and this SAI 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.
INVESTMENT OBJECTIVES AND POLICIES
The Titan Financial Services Fund is a mutual fund with the primary investment
objective of seeking capital appreciation. Its secondary objective is moderate
income. The Fund is diversified, which under applicable federal law means that
as to 75% of its total assets, not 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. The following discussion supplements the
discussion of the Fund's investment objectives and policies as set forth in the
Prospectus. There can be no assurance the objectives of the Fund will be
attained.
SPECIAL CONSIDERATIONS CONCERNING THE BANKING INDUSTRY AND THE SAVINGS AND LOAN
INDUSTRY
THE BANKING INDUSTRY. In the United States, the deposits of commercial
banks are insured by the Federal Deposit Insurance Corporation (the "FDIC").
Many of these banks are subsidiaries of bank holding companies. Commercial banks
accept deposits, make commercial and other loans, and engage in a variety of
other investments. The Fund normally intends to invest in the securities of
those bank holding companies which receive a substantial portion of their income
from one or more commercial bank subsidiaries, as well as in the securities of
banking institutions.
Despite some measure of deregulation, commercial banks and their holding
companies are also subject to extensive government regulation that significantly
affects their activities, earnings, and competitive environment. The Office of
the Comptroller of the Currency is the primary federal regulator of national
banks. The FDIC is the primary federal regulatory of most state-chartered
commercial banks with FDIC-insured deposits. State-chartered commercial banks
are also subject to primary supervision and regulation by state banking
authorities. The Board of Governors of the Federal Reserve System ("FRB") is the
primary federal regulator of bank holding companies and also has regulatory
authority over state-chartered banks which are members of the Federal Reserve
System. Federal regulators receive comprehensive reports on and conduct
examinations of a number of aspects of a federally regulated commercial bank's
operations and financial condition, including capital adequacy, liquidity,
earnings, dividends, investments, management practice and loan loss reserves.
Federal regulators also require that commercial banks maintain minimum levels of
capital and liquidity, require the establishment of loan loss reserves, and may
limit the bank's ability to pay dividends in certain circumstances.
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Bank holding companies must file regular reports with the FRB and are
subject to examinations of certain aspects of their own and their subsidiaries'
operations. The activities of a bank holding company are restricted by federal
regulations which, among other things, generally prohibit a bank holding company
from controlling banks in more than one state, except where specifically
permitted by state law, and restrict the types of non-banking activities in
which the holding company directly or indirectly may engage.
Certain economic factors are of particular importance to commercial banks.
The availability and cost of funds to commercial banks and other finance
companies is important to their profitability. This factor has increased in
importance with the deregulation of interest rates. The quality of a bank's
portfolio of loans can be adversely affected by depressed market conditions in
certain industries. Recent examples of such industries that have affected the
loan portfolios of some banks include commercial real estate, international
sovereign credits, energy and agriculture. Smaller banks can be particularly
affected by such conditions if the economic base of the area in which they are
located is closely tied to a depressed industry, such as agriculture.
THE SAVINGS AND LOAN INDUSTRY. The principal business of savings and loan
institutions traditionally has consisted of attracting deposits from the general
public and originating or purchasing mortgage loans secured by liens on
residential real estate. In addition to long-term, fixed-rate residential
mortgage loans, savings institutions recently have begun to extend a greater
number of loans with shorter terms and/or adjustable interest rates, including
consumer and commercial loans, and construction loans on both residential and
commercial real estate developments. These types of loans may involve greater
risks of default than residential mortgage loans.
Historically, many savings institutions were organized primarily as mutual
companies and as such were owned by their depositors and did not issue common
stock. However, in recent years, the need for equity capital and the
deregulation of the industry have encouraged conversion to stock ownership.
Securities of newly converted savings institutions may not be readily
marketable, due to the lack of a public trading market or certain restrictions
on transfer. Some savings institutions are controlled by holding companies. The
Fund normally intends to invest in the securities of those savings institution
holding companies, the savings institution subsidiaries of which comprise a
significant percentage of their total assets and provide a significant
percentage of their income.
Savings institutions and their holding companies are subject to extensive
government regulation. Savings institutions with FDIC-insured deposits are
subject to periodic FDIC examination and to FDIC regulation and supervision of
their operations. A state-chartered savings institution is also regulated by the
laws and bank regulatory authority of the state in which it has its principal
office. Savings institutions with federally insured deposits are subject to
certain minimum net worth or capital requirements and to other requirements
limiting the types of investments they may make. In addition, holding companies
of savings institutions which are federally chartered may be subject in certain
cases to restrictions on the activities in which they may engage.
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<PAGE>
The results of operations of savings institutions may be materially
affected by general economic conditions, the monetary and fiscal policies of the
federal government and the regulatory policies of governmental authorities.
Although in recent years savings institutions have derived an increased portion
of their income from receipt of fees, the results of operations of savings
institutions continue to depend to a large extent on the level of their "net
interest income" (the difference between the interest earned on loans and
investments and the interest paid on deposits and borrowings). During the period
between the late 1970s and mid-1982, general market interest rates rose to, and
remained at, historically high levels as a result of inflationary pressures and
governmental policies. During the same period, savings institutions generally
experienced a shift in the composition of their deposits form relatively
long-term, low-rate certificate accounts or low-rate passbook accounts to
certificates of deposit and accounts bearing rates determined by market
conditions, often with short maturities. Competition from alternative
investments such as money market mutual funds affected savings flows, causing
reduced inflows to (or actual net outflows from) savings institutions, thus
limiting their ability to make new loans or investments. As a result, the
average cost of funds of most savings institutions increased faster than the
average yield earned on their assets, which consisted principally of long-term
real estate loans at fixed rates of interest. These factors had a severe adverse
impact on the earnings of most of the savings industry, with the large majority
of savings institutions reporting operating losses for 1991 and 1992. Although
interest rates have since declined, there can be no assurance that interest
rates will remain at current levels.
Beginning in the early 1980s a substantial number of savings institutions
significantly expanded the amount of their investments in construction lending,
real estate development projects, and secured and unsecured commercial and
consumer loans. These investments generally entail more risk than mortgage loans
secured by residential real estate and may result in losses for certain
institutions. Many institutions have also initiated asset and liability
management programs designed to minimize vulnerability to interest rate changes.
These programs have included such activities as increasing use of adjustable
rate mortgages, origination of a higher proportion of shorter-term commercial
and consumer loans, and the lengthening of maturities for deposits and
borrowings. By including such investments, the assets of savings institutions
have begun to match the maturities of their liabilities more closely. In
addition, some savings institutions are conducting hedging transactions to
reduce their exposure to interest rate risk. The Fund's investments in savings
institutions will be affected by changes in the levels of interest rates,
national and local cycles in real estate and other economic factors.
Federal and state regulations do not insure the solvency or profitability
of savings and banking institutions or their holding companies, nor do they
insure against risk any investments in securities issued by such institutions.
The FDIC insure the deposits of member institutions but in no way protect or
insure investments in the securities of these institutions.
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<PAGE>
LEGISLATIVE CONCERNS. Legislation has been enacted which has altered the
regulatory structure and capital requirements of the banking and savings and
loan institution industries. This legislation was enacted as a response to
financial problems experienced by a number of banks and savings and loan
institutions relating to inadequate capital, adverse economic conditions and
alleged fraud and mismanagement. This legislation also strengthened the civil
sanctions and criminal penalties for defrauding or otherwise damaging depository
institutions and their depositors and curtailed the authority of savings and
loan institutions to engage in real estate investment and certain other
activities. In addition, the legislation has given federal regulators
substantial authority to use all of the assets of a bank or savings and loan
institution holding company to satisfy federal claims against an insolvent
savings and loan institution or bank owned by the holding company and mandated
regulatory action against institutions with inadequate capital levels.
Legislative and regulatory actions have also increased the capital requirements
applicable to commercial banks and savings and loan institutions. These changes
have extended the risk to holding company shareholders in the event of the
insolvency of any depository institution owned by the holding company.
Legislative proposals have been introduced that if enacted could expose
bank holding companies to well-established competitors, such as securities firms
and insurance companies, as well as companies engaged in other areas of
business. Increased competition may also result from the broadening of
interstate banking powers, which has already lead to a reduction in the number
of publicly traded regional banks. Although the costs of insurance premiums have
been reduced, these rates can be increased in the future which may adversely
affect the Fund.
SPECIAL CONSIDERATIONS CONCERNING OTHER FINANCIAL SERVICES INDUSTRIES. Many
of the investment considerations discussed in connection which banks and savings
associations also apply to financial services companies. These companies are all
subject to extensive regulation, rapid business changes, value fluctuations due
to the concentration of loans in particular industries significantly affected by
economic conditions, volatile performance dependent upon the availability and
cost of capital and prevailing interest rates, and significant competition.
General economic conditions significantly affect these companies. Credit and
other losses resulting from the financial difficulty of borrowers or other third
parties have a potentially adverse effect on companies in this industry.
Investment banking, securities brokerage and investment advisory companies are
particularly subject to government regulation and rate setting, potential
anti-trust and tax law changes, and industry-wide pricing and competition
cycles. Property and casualty insurance companies may be affected by weather and
other catastrophes. Life and health insurance companies may be affected by
mortality and morbidity rates, including the effects of epidemics, and by
possible future changes in the health care industries. Individual insurance
companies may be exposed to reserve inadequacies, problems in investment
portfolios (for example, due to real estate or "junk" bond holdings) and
failures of reinsurance carriers. Proposed or potential anti-trust or tax law
changes also may affect adversely insurance companies' policy sales, tax
obligations and profitability. In addition, several significant companies have
recently reported liquidity or solvency difficulties and credit rating
downgrades.
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The financial services industries currently are changing relatively rapidly
as existing distinctions between various financial services industries become
less clear. For example, recent business combinations have included different
financial services industries such as insurance, finance and securities
brokerage under single ownership. In addition, changes in governmental
regulation have permitted companies traditionally active in one area to expand
into other areas. The effect of these changes in particular segments of the
financial services industries is difficult to predict.
PREFERRED STOCK. A preferred stock is a blend of the characteristics of a
bond and common stock. It can offer the higher yield of a bond and has priority
over common stock in equity ownership, but does not have the seniority of a bond
and, unlike common stock, its participation in the issuer's growth may be
limited. Preferred stock has preference over common stock in the receipt of
dividends and in any residual assets after payment to creditors should the
issuer by dissolved. Although the dividend is set at a fixed annual rate, in
some circumstances it can be changed or omitted by the issuer.
CONVERTIBLE SECURITIES AND WARRANTS. The Fund may invest in convertible
securities and warrants. A convertible security is a fixed-income security (a
debt instrument or a preferred stock) which may be converted at a stated price
within a specified period of time into a certain quantity of the common stock of
the same or a different issuer. Convertible securities are senior to common
stocks in an issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security) a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.
A warrant gives the holder a right to purchase at any time during a
specified period a predetermined number of shares of common stock at a fixed
price. Unlike convertible debt securities or preferred stock, warrants do not
pay a fixed dividend. Investments in warrants involve certain risks, including
the possible lack of a liquid market for resale of the warrants, potential price
fluctuations as a result of speculation or other factors, and failure of the
price of the underlying security to reach or have reasonable prospects of
reaching a level at which the warrant can be prudently exercised (in which event
the warrant may expire without being exercised, resulting in a loss of the
Fund's entire investment therein).
INVESTMENT COMPANIES. The Fund may under certain circumstances invest a
portion of its assets in other investment companies, including money market
funds. In addition to the Fund's advisory fee and other expenses, an investment
in an underlying mutual fund will involve payment by the Fund of its pro rata
share of advisory and administrative fees charged by such fund.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. 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
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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 its net assets would be invested
in illiquid securities including such repurchase agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from the Fund to the seller of the
U.S. Government security subject to the repurchase agreement. It is not clear
whether a court would consider the U.S. Government security acquired by the Fund
subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the U.S. Government security before its repurchase under a repurchase
agreement, the Fund may encounter delays and incur costs before being able to
sell the security. Delays may involve loss of interest or a decline in price of
the U.S. Government security. If a court characterizes the transaction as a loan
and the Fund has not perfected a security interest in the U.S. Government
security, the Fund may be required to return the security to the seller's estate
and be treated as an unsecured creditor of the seller. As an unsecured creditor,
the Fund would be at the risk of losing some or all of the principal and income
involved in the transaction. As with any unsecured debt instrument purchased for
the Fund, the Advisor seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the other party, in this case
the seller of the U.S. Government security.
REVERSE REPURCHASE AGREEMENTS. Although it has no intention of doing so
during the coming year, the Fund may enter into reverse repurchase agreements
with banks up to an aggregate value of not more than 5% of its total assets.
Such agreements involve the sale of securities held by the Fund subject to the
Fund's agreement to repurchase the securities at an agreed-upon date and price
reflecting a market rate of interest. Such agreements are considered to be
borrowings and may be entered into only for temporary or emergency purposes.
While a reverse repurchase agreement is outstanding, the Fund will segregate
liquid assets, marked to market daily, in an amount at least equal to the Fund's
obligations under the reverse repurchase agreement.
Apart from the risk of bankruptcy or insolvency proceedings, there is also
the risk that the seller may fail to repurchase the security. However, the Fund
will always receive as collateral for any repurchase agreement to which it is a
party securities acceptable to it, the market value of which is equal to at
least 100% of the amount invested by the Fund plus accrued interest, and the
Fund will make payment against such securities only upon physical delivery or
evidence of book entry transfer to the account of its Custodian. If the market
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<PAGE>
value of the U.S. Government security subject to the repurchase agreement
becomes less than the repurchase price (including interest), the Fund will
direct the seller of the U.S. Government security to deliver additional
securities so that the market value of all securities subject to the repurchase
agreement will equal or exceed the repurchase price. It is possible that the
Fund will be unsuccessful in seeking to impose on the seller a contractual
obligation to deliver additional securities.
WHEN-ISSUED SECURITIES. The Fund may from time to time purchase securities
on a "when- issued" basis. The price of such securities, which may be expressed
in yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for them take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by the Fund to the issuer
and no interest accrues to the Fund. To the extent that assets of the Fund are
held in cash pending the settlement of a purchase of securities, the Fund would
earn no income; however, it is the Fund's intention to be fully invested to the
extent practicable and subject to the policies stated above. While when- issued
securities may be sold prior to the settlement date, the Fund intends to
purchase them 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's
Custodian will segregate liquid assets 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.
ILLIQUID SECURITIES. The Fund may invest up to 15% of the value of its net
assets in securities that at the time of purchase have legal or contractual
restrictions on resale or are otherwise illiquid. The Advisor will monitor the
amount of illiquid securities in the Fund's portfolio, under the supervision of
the Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and the Fund might be unable
to sell restricted or other illiquid securities promptly or at reasonable prices
and might thereby experience difficulty satisfying redemption requests within
seven days. The Fund might also have to register such restricted securities in
order to sell them, resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
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<PAGE>
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not reflect the actual liquidity of such
investments. If such securities are subject to purchase by institutional buyers
in accordance with Rule 144A promulgated by the SEC under the Securities Act,
the Trust's Board of Trustees may determine that such securities are not
illiquid securities despite their legal or contractual restrictions on resale.
In all other cases, however, securities subject to restrictions on resale will
be deemed illiquid.
LENDING OF PORTFOLIO SECURITIES. Although it has no present intention of
doing so during the coming year, the Fund may lend up to 331/3% of the total
value of its portfolio securities to broker-dealers or institutional investors
that the Advisor deems qualified, but only when the borrower maintains with the
Fund's custodian collateral either in cash or money market instruments in an
amount at least equal to the market value of the securities loaned, plus accrued
interest and dividends, determined on a daily basis and adjusted accordingly. In
determining whether to lend securities to a particular broker-dealer or
institutional investor, the Advisor will consider, and during the period of the
loan will monitor, all relevant facts and circumstances, including the
creditworthiness of the borrower. The Fund will retain authority to terminate
any loans at any time. The Fund may pay reasonable administrative and custodial
fees in connection with a loan and may pay a negotiated portion of the interest
earned on the cash or money market instruments held as collateral to the
borrower or placing broker. The Fund will receive reasonable interest on the
loan or a flat fee from the borrower and amounts equivalent to any dividends,
interest or other distributions on the securities loaned. The Fund will retain
record ownership of loaned securities to exercise beneficial rights, such as
voting and subscription rights and rights to dividends, interest or other
distributions, when retaining such rights is considered to be in the Fund's
interest.
FOREIGN INVESTMENTS. The Fund may invest in up to 20% of its net assets in
securities of foreign companies, including American Depositary Receipts and
Global Depositary Receipts.
DEPOSITARY RECEIPTS. The Fund may invest in securities of foreign issuers
in the form of American Depositary Receipts ("ADRs") and Global Depositary
Receipts ("GDRs"). These securities may not necessarily be denominated in the
same currency as the securities for which they may be exchanged. These are
certificates evidencing ownership of shares of a foreign-based issuer held in
trust by a bank or similar financial institution, Designed for use in U.S. and
non-U.S. securities, respectively, ADRs and GDRs are alternatives to the
purchase of the underlying securities in their national market and currencies.
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RISKS OF INVESTING IN FOREIGN SECURITIES. Investments in foreign securities
involve certain inherent risks, including the following:
POLITICAL AND ECONOMIC FACTORS. Individual foreign economies of certain
countries may differ favorably or unfavorably from the U.S. economy in such
respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency, and diversification and balance of
payments position. The internal politics of some foreign countries may not be as
stable as those of the United States. Governments in some foreign countries also
continue to participate to a significant degree, through ownership interest or
regulation, in their respective economies. Action by these governments could
include restrictions on foreign investment, nationalization, expropriation of
goods or imposition of taxes, and could have a significant effect on market
prices of securities and payment of interest. The economies of many foreign
countries are heavily dependent upon international trade and are affected by the
trade policies and economic conditions of their trading partners. If these
trading partners enacted protectionist trade legislation, it could have a
significant adverse effect upon the securities markets of such countries.
CURRENCY FLUCTUATIONS. The Fund may invest in securities denominated in
foreign currencies. A change in the value of any such currency against the U.S.
dollar will result in a corresponding change in the U.S. dollar value of the
Fund's assets denominated in that currency. Such changes will also affect the
Fund's income. The value of the Fund's assets may also be affected significantly
by currency restrictions and exchange control regulations enacted from time to
time.
EURO CONVERSION. Several European countries adopted a single uniform
currency known as the "euro," effective January 1, 1999. The euro conversion,
that will take place over a several-year period, could have potential adverse
effects on the Fund's ability to value its portfolio holdings in foreign
securities, and could increase the costs associated with the Fund's operations.
The Fund and the Advisor are working with providers of services to the Fund in
the areas of clearance and settlement of trade to avoid any material impact on
the Fund due to the euro conversion; there can be no assurance, however, that
the steps taken will be sufficient to avoid any adverse impact on the Fund.
MARKET CHARACTERISTICS. The Advisor expects that many foreign securities in
which the Fund invests will be purchased in over-the-counter markets or on
exchanges located in the countries in which the principal offices of the issuers
of the various securities are located, if that is the best available market.
Foreign exchanges and markets may be more volatile than those in the United
States. While growing, they usually have substantially less volume than U.S.
markets, and the Fund's foreign securities may be less liquid and more volatile
than U.S. securities. Also, settlement practices for transactions in foreign
markets may differ from those in United States markets, and may include delays
beyond periods customary in the United States. Foreign security trading
practices, including those involving securities settlement where Fund assets may
be released prior to receipt of payment or securities, may expose the Fund to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer.
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LEGAL AND REGULATORY MATTERS. Certain foreign countries may have less
supervision of securities markets, brokers and issuers of securities, and less
financial information available to issuers, than is available in the United
States.
TAXES. The interest and dividends payable on some of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus reducing
the net amount of income available for distribution to Fund shareholders.
COSTS. To the extent that the Fund invests in foreign securities, its
expense ratio is likely to be higher than those of investment companies
investing only in domestic securities, since the cost of maintaining the custody
of foreign securities is higher.
CORPORATE DEBT SECURITIES. The Fund may invest in investment-grade
corporate debt securities. Investment-grade securities are those rated Baa or
better By Moody's or BBB or better by S&P or, if unrated, of equivalent quality
as determined by the Advisor. Securities rated BBB or Baa are considered
investment grade, but may have speculative characteristics. The Fund may also
invest in corporate debt securities rated below investment grade. Bonds rated
below BBB by S&P or Baa by Moody's, commonly referred to "junk bonds," typically
carry higher coupon rates than investment grade bonds, but also are described as
speculative by both S&P and Moody's and may be subject to greater market price
fluctuations, less liquidity and greater risk of income or principal including
greater possibility of default and bankruptcy of the issuer of such securities
than more highly rated bonds. Lower rated bonds also are more likely to be
sensitive to adverse economic or company developments and more subject to price
fluctuations in response to changes in interest rates. 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. 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.
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
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 ratings for corporate debt securities are described in Appendix
A.
SEGREGATED ASSETS. When the Fund enters into certain transactions that
involve obligations to make future payments to third parties, including the
purchase of securities on a when-issued or delayed delivery basis or reverse
repurchase agreements, the Fund will maintain with its custodian liquid assets,
marked to market daily, in an amount at least equal to the Fund's obligation or
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commitment under such transactions. As described below under "Special Risks of
Hedging Strategies," segregation of liquid assets may also be required in
connection with certain transactions involving options.
SPECIAL RISKS OF HEDGING STRATEGIES. The use of options involves special
considerations and risks, as described below. Risks pertaining to particular
instruments are described in the sections that follow.
(1) Successful use of options depends upon the Advisor's ability to predict
movements of the overall securities, currency and interest rate markets, which
require different skills than predicting changes in the prices of individual
securities.
(2) There might be imperfect correlation, or even no correlation, between
price movements of an instrument and price movements of the investments being
hedged. For example, if the value of a an instrument used in a short hedge
increased by less than the decline in value of the hedged investment, the hedge
would not be fully successful. Such a lack of correlation might occur due to
factors unrelated to the value of the investments being hedged, such as
speculative or other pressures on the markets in which instruments are traded.
The effectiveness of hedges using instruments on indices will depend on the
degree of correlation between price movements in the index and price movements
in the securities being hedged.
(3) Hedging strategies, if successful, can reduce risk of loss by wholly or
partially offsetting the negative effect of unfavorable price movements in the
investments being hedged. However, hedging strategies can also reduce
opportunity for gain by offsetting the positive effect of favorable price
movements in the hedged investments. For example, if the Fund entered into a
short hedge because the Advisor projected a decline in the price of a security
in the Fund's portfolio, and the price of that security increased instead, the
gain from that increase might be wholly or partially offset by a decline in the
price of the instrument. Moreover, if the price of the instrument declined by
more than the increase in the price of the security, the Fund could suffer a
loss. In either such case, the Fund would have been in a better position had it
not hedged at all.
(4) As described below, the Fund might be required to maintain assets as
"cover," maintain segregated assets or make margin payments when it takes
positions in instruments involving obligations to third parties (i.e.,
instruments other than purchased options). If the Fund were unable to close out
its positions in such instruments, it might be required to continue to maintain
such assets or make such payments until the position expired or matured. These
requirements might impair the Fund's ability to sell a portfolio security or
make an investment at a time when it would otherwise be favorable to do so, or
require that the Fund sell a portfolio security at a disadvantageous time. The
Fund's ability to close out a position in an instrument prior to expiration or
maturity depends on the existence of a liquid secondary market or, in the
absence of such a market, the ability and willingness of a contra party to enter
into a transaction closing out the position. Therefore, there is no assurance
that any hedging position can be closed out at a time and price that is
favorable to the Fund.
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WRITING CALL OPTIONS. The Fund may write (sell) call options on securities
and indices. Call options generally will be written on securities that, in the
opinion of the Advisor, are not expected to make any major price moves in the
near future but that, over the long term, are deemed to be attractive
investments for the Fund.
A call option gives the holder (buyer) the right to purchase a security at
a specified price (the exercise price) at any time until a certain date (the
expiration date). So long as the obligation of the writer of a call option
continues, he or she may be assigned an exercise notice, requiring him or her to
deliver the underlying security against payment of the exercise price. This
obligation terminates upon the expiration of the call option, or such earlier
time at which the writer effects a closing purchase transaction by purchasing an
option identical to that previously sold.
Portfolio securities on which call options may be written will be purchase
solely on the basis of investment considerations consistent with the Fund's
investment objective. When writing a call option, the Fund, in return for the
premium, gives up the opportunity for profit from a price increase in the
underlying security above the exercise price, and retains the risk of loss
should the price of the security decline. Unlike one who owns securities not
subject to an option, the Fund has no control over when it may be required to
sell the underlying securities, since most options may be exercised at any time
prior to the option's expiration. If a call option that the Fund has written
expires, the Fund will realize a gain in the amount of the premium; however,
such gain may be offset by a decline in the market value of the underlying
security during the option period. If the call option is exercised, the Fund
will realize a gain or loss from the sale of underlying security, which will be
increased or offset by the premium received. The Fund does not consider a
security covered by a call option to be "pledged" as that term is used in the
Fund's policy that limits the pledging or mortgaging of its assets.
Writing call options can serve as a limited short hedge because declines in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security appreciates to a price
higher than the exercise price of the call option, it can be expected that the
option will be exercised and the Fund will be obligated to sell the security at
less than its market value.
The premium that the Fund receives for writing a call option is deemed to
constitute the market value of an option. The premium the Fund will receive from
writing a call option will reflect, among other things, the current market price
of the underlying investment, the relationship of the exercise price to such
market price, the historical price volatility of the underlying investment, and
the length of the option period. In determining whether a particular call option
should be written, the Advisor will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will exist
for those options.
Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security from being called, or
to permit the sale of the underlying security. Furthermore, effecting a closing
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<PAGE>
transaction will permit the Fund to write another call option on the underlying
security with either a different exercise price or expiration date or both.
The Fund will pay transaction costs in connection with the writing of
options and in entering into closing purchase contracts. Transaction costs
relating to options activity normally are higher than those applicable to
purchases and sales of portfolio securities.
The exercise price of the options may be below, equal to or above the
current market values of the underlying securities at the time the options are
written. From time to time, the Fund may purchase an underlying security for
delivery in accordance with the exercise of an option, rather than delivering
such security from its portfolio. In such cases, additional costs will be
incurred.
The Fund will realize a profit or loss from a closing purchase transaction
is less or more, respectively, than the premium received from writing the
option. Because increases in the market price of a call option generally will
reflect increases in the market price of the underlying security, any loss
resulting from the repurchase of a call option is likely to be offset in whole
or in part by appreciation of the underlying security owned by the Fund.
WRITING PUT OPTIONS. The Fund may write put options on securities and
indices. A put option gives the purchases of the option the right to sell, and
the writer (seller) the obligation to buy, the underlying security at the
exercise price at any time until the expiration date. The operation of put
options in other respects, including their related risks and rewards, is
substantially identical to that of call options.
The Fund generally would write put options in circumstances where the
Advisor wishes to purchase the underlying security for the Fund's portfolio at a
price lower than the current market price of the security. In such event, the
Fund would write a put option at an exercise price that, reduced by the premium
received on the option, reflects the lower price it is willing to pay. Since the
Fund also would receive interest on debt securities maintained to cover the
exercise price of the option, this technique could be used to enhance current
return during periods of market uncertainty. The risk in such a transaction
would be that the market price of the underlying security would decline below
the exercise price, less the premium received.
Writing put options can serve as a limited long hedge because increases in
the value of the hedged investment would be offset to the extent of the premium
received for writing the option. However, if the security depreciates to a price
lower than the exercise price of the put option, it can be expected that the put
option will be exercised and the Fund will be obligated to purchase the security
at more than its market value.
PURCHASING PUT OPTIONS. The Fund may purchase put options on securities and
indices. As the holder of a put option, the Fund would have the right to sell
the underlying security at the exercise price at any time until the expiration
date. The Fund may enter into closing sale transactions with respect to such
options, exercise such options or permit such options to expire.
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<PAGE>
The Fund may purchase a put option on an underlying security ("protective
put") owned by the Fund in order to protect against an anticipated decline in
the value of the security. Such hedge protection is provided only during the
life of the put option when the Fund, as the holder of the put option, is able
to sell the underlying security at the put exercise price regardless of any
decline in the underlying security's market price. For example, a put option may
be purchased in order to protect unrealized appreciation of a security when the
Advisor deems it desirable to continue to hold the security because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any profit otherwise available for distribution when the security
eventually is sold.
The Fund also may purchase put options at a time when the Fund does not own
the underlying security. By purchasing put options on a security it does not
own, the Fund seeks to benefit from a decline in the market price of the
underlying security. If the put option is not sold when it has remaining value,
and if the market price of the underlying security remains equal to or greater
than the exercise price during the life of the put option, the Fund will lose
its entire investment in the put option. In order for the purchase of a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale transaction.
PURCHASING CALL OPTIONS. The Fund may purchase call options on securities
and indices. As the holder of a call option, the Fund would have the right to
purchase the underlying security at the exercise price at any time until the
expiration date. The Fund may enter into closing sale transactions with respect
to such options, exercise such options or permit such options to expire.
The Fund also may purchase call options on underlying securities it owns in
order to protect unrealized gains on call options previously written by it. A
call option could be purchased for this purpose where tax considerations make it
inadvisable to realize such gains through a closing purchase transaction. Call
options also may be purchased at times to avoid realizing losses that would
result in a reduction of the Fund's current return. For example, where the Fund
has written a call option on an underlying security having a current market
value below the price at which such security was purchased by the Fund, an
increase in the market price could result in the exercise of the call option
written by the Fund and the realization of a loss on the underlying security.
Accordingly, the Fund could purchase a call option on the same underlying
security, which could be exercised to fulfill the Fund's delivery obligations
under its written call (if it is exercised). This strategy could allow the Fund
to avoid selling the Fund security at a time when it has an unrealized loss;
however, the Fund would have to pay a premium to purchase the call option plus
transaction costs.
Aggregate premiums paid for put and call options will not exceed 5% of such
Fund's total assets at the time of purchase.
Options may be either listed on an exchange or traded over-the-counter
("OTC"). Listed options are third-party contracts (i.e., performance of the
obligations of the purchase and seller is guaranteed by the exchange or clearing
B-15
<PAGE>
corporation), and have standardized strike prices and expiration dates. OTC
options are two-party contracts with negotiated strike prices and expiration
dates. OTC options differ from exchange-traded options in that OTC options are
transacted with dealers directly and not through a corporation (which guarantees
performance). Consequently, there is a risk of non-performance by the dealer.
Since no exchange is involved, OTC options are valued on the basis of a quote
provided by the dealer. In the case of OTC options, there can be no assurance
that a liquid secondary market will exist for any particular option at any
specific time.
The staff of the SEC considers purchased OTC options to be illiquid
securities. A Fund may also sell OTC options and, in connection therewith,
segregate assets or cover its obligations with respect to OTC options written by
the Fund. The assets used as cover for OTC options written by the Fund will be
considered illiquid unless the OTC options are sold to qualified dealers who
agree that the Fund may repurchase any OTC option its writes at a maximum price
to be calculated by a formula set forth in the option agreement. The cover for
an OTC option written subject to this procedure would be considered illiquid
only to the extent that the maximum repurchase price under the formula exceeds
the intrinsic value of the option.
The Fund's ability to establish and close out positions in exchange-listed
options depends on the existence of a liquid market. The Fund intends to
purchase or write only those exchange-traded options for which there appears to
be liquid secondary market. However, there can be no assurance that such a
market will exist at any particular time. Closing transactions can be made for
OTC options only by negotiating directly with the contra party, or by a
transaction in the secondary market if any such market exists. Although the Fund
will enter into OTC options only with contra parties that are expected to be
capable of entering into closing transactions with the Fund, there is no
assurance that the Fund will in fact be able to close out an OTC option position
at a favorable price prior to expiration. In the event of insolvency of the
contra party, the Fund might be unable to close out an OTC option position at
any time prior to its expiration.
SHORT-TERM INVESTMENTS
The Fund may invest in any of the following securities and instruments:
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. The Fund
may hold certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by the Fund will be
dollar-denominated obligations of domestic banks, savings and loan associations
or financial institutions which, at the time of purchase, have capital, surplus
and undivided profits in excess of $100 million (including assets of both
domestic and foreign branches), based on latest published reports, or less than
$100 million if the principal amount of such bank obligations are fully insured
by the U.S. Government.
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<PAGE>
In addition to buying certificates of deposit and bankers' acceptances, the
Fund also may make interest-bearing time or other interest-bearing deposits in
commercial or savings banks. Time deposits are non-negotiable deposits
maintained at a banking institution for a specified period of time at a
specified interest rate.
COMMERCIAL PAPER AND SHORT-TERM NOTES. The Fund may invest a portion of its
assets in commercial paper and short-term notes. Commercial paper consists of
unsecured promissory notes issued by corporations. Commercial paper and
short-term notes will normally have maturities of less than nine months and
fixed rates of return, although such instruments may have maturities of up to
one year.
Commercial paper and short-term notes will consist of issues rated at the
time of purchase "A-2" or higher by S&P, "Prime-1" or "Prime-2" by Moody's, or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Advisor to be of comparable quality.
These rating symbols are described in Appendix B.
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. Purchase securities of any one issuer, if as a result, more than 5% of
the Fund's total assets would be invested in securities of that issuer or the
Fund would own or hold more than 10% of the outstanding voting securities of
that issuer, except that up to 25% of the Fund's total assets may be invested
without regard to this limitation, and except that this limitation does not
apply to securities issued or guaranteed by the U.S. government, its agencies
and instrumentalities or to securities issued by other investment companies.
2. Issue senior securities or borrow money, except as permitted under the
Investment Company Act of 1940 (the "1940 Act") and then not in excess of
33-1/3% of the Fund's total assets (including the amount of the senior
securities issued but reduced by any liabilities not constituting senior
securities) at the time of the issuance or borrowing, except that the Fund may
borrow up to an additional 5% of its total assets (not including the amount
borrowed) for temporary or emergency purposes.
3. Purchase or sell physical commodities unless acquired as a result of
owning securities or other instruments, except that the Fund may purchase, sell
or enter into financial options.
B-17
<PAGE>
4. Purchase or sell real estate, except that investments in securities of
issuers that invest in real estate and investments in mortgage-backed
securities, mortgage participations or other instruments supported by interests
in real estate are not subject to this limitation, and except that the Fund may
exercise rights under agreements relating to such securities, including the
right to enforce security interests and to hold real estate acquired by reason
of such enforcement until that real estate can be liquidated in an orderly
manner.
5. Engage in the business of underwriting securities of other issuers,
except to the extent that the Fund might be considered an underwriter under the
federal securities laws in connection with its disposition of portfolio
securities.
6. Make loans, except through loans of portfolio securities, or through
repurchase agreements, provided that for purposes of this restriction, the
acquisition of bonds, debentures or other debt securities and investments in
government obligations, commercial paper, certificates of deposit, bankers'
acceptances or similar instruments will not be considered the making of a loan.
The Fund observes the following policies, which are not deemed fundamental
and which may be changed without shareholder vote. The Fund may not:
7. Purchase any securities of other investment companies, except to the
extent permitted by the 1940 Act and except that this limitation does not apply
to securities received or acquired as dividends, through offers of exchange, or
as a result of reorganization, consolidation, or merger.
8. Purchase securities on margin, except for short-term credit necessary
for clearance of portfolio transactions and except that the Fund may make margin
deposits in connection with its use of financial options.
9. Make short sales of securities or maintain a short position, except that
a Fund may (a) sell short "against the box" and (b) maintain short positions in
connection with its use of financial options.
10. Mortgage, pledge, or hypothecate any assets except in connection with
permitted borrowings or the issuance of senior securities.
11. 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 described in the Fund's Prospectus or this SAI
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 for the policy regarding borrowing or the
purchase of restricted and illiquid securities.
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<PAGE>
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 qualify and continue to elect to be treated as
a "regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986 (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 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.
The Fund's ordinary income generally 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 designate the amount
distributed as a qualifying dividend. This designated amount cannot, however,
exceed the aggregate amount of qualifying dividends received by the Fund for
their taxable year. In view of the Fund's investment policy, it is expected that
dividends from domestic corporations will be part of the Fund's gross income and
that, accordingly, part of the distributions by the Fund may be eligible for the
dividends-received deduction for corporate shareholders. However, the portion of
the Fund's gross income attributable to qualifying dividends is largely
dependent on the Fund's investment activities for a particular year and
B-19
<PAGE>
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.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
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. For example,
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 certain special elections are 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 also 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 of such transactions.
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 ordinary income and capital gains as well
as gross proceeds from the redemption or exchange of Fund shares, except in the
case of exempt shareholders, which includes most corporations. Pursuant to the
backup withholding provisions of the Code, distributions of any taxable income
and capital gains and proceeds from the redemption of Fund shares may be subject
to withholding of federal income tax at the rate of 31 percent in the case of
non-exempt shareholders who fail to furnish the Fund with their taxpayer
identification numbers and with required certifications regarding their status
under the 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 reserve 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 corporate income tax in the Commonwealth of
Massachusetts as long as its qualifies as regulated investment companies 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.
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<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.
In addition, the foregoing discussion of tax law is based on existing
provisions of the Code, existing and proposed regulations thereunder, and
current administrative rulings and court decisions, all of which are subject to
change. Any such charges could affect the validity of this discussion. The
discussion also represents only a general summary of tax law and practice
currently applicable to the Fund and certain shareholders therein, and, as such,
is subject to change. In particular, the consequences of an investment in shares
of the Fund under the laws of any state, local or foreign taxing jurisdictions
are not discussed herein. Each prospective investor should consult his or her
own tax advisor to determine the application of the tax law and practice in his
or her own particular circumstances.
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.
Unless noted otherwise, each person has held the position listed for a minimum
of five years.
Steven J. Paggioli,* 04/03/50 President and Trustee
915 Broadway, New York, New York 10010. Executive Vice President, The Wadsworth
Group (consultants); Executive Vice President of Investment Company
Administration, LLC ("ICA") (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).
Dorothy A. Berry, 08/12/43 Chairman and Trustee
14 Five Roses East, Ancram, NY 12502. President, Talon Industries (venture
capital and business consulting); formerly Chief Operating Officer, Integrated
Asset Management (investment advisor and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
B-21
<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. 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, New Jersey 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).
Robert M. Slotky* 6/17/47 Treasurer
2020 E. Financial Way, Suite 100, Glendora, California 91741. Senior Vice
President, ICA since May 1997; former instructor of accounting at California
State University-Northridge (1997); Chief Financial Officer, Wanger Asset
Management L.P. and Treasurer of Acorn Investment Trust (1992- 1996).
Robin Berger* 11/17/56 Secretary
915 Broadway, New York, New York 10010. Vice President, The Wadsworth Group.
Robert H. Wadsworth* 01/25/40 Vice President
4455 E. Camelback Road, Suite 261E, Phoenix, Arizona 85018. President of The
Wadsworth Group, President of ICA and FFD.
*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 all portfolios of the Trust. This total amount is allocated among
the portfolios. Disinterested Trustees receive an annual retainer of $10,000 and
a fee of $2,500 for each regularly scheduled meeting. These Trustees also
receive a fee of $1,000 for any special meeting attended. The Chairman of the
Board of Trustees receives an additional annual retainer of $5,000.
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 portfolios of the Trust.
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<PAGE>
Name of Trustee Total Annual Compensation
- --------------- -------------------------
Dorothy A. Berry $25,000
Wallace L. Cook $20,000
Carl A. Froebel $20,000
Rowley W.P. Redington $20,000
During the fiscal year ended April 30, 1999, trustees' fees and expenses in
the amount of $____ were allocated to the Fund. As of the date of this SAI, 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 Titan Investment Advisors, LLC, the Advisor, pursuant to an
Investment Advisory Agreement (the "Advisory Agreement"). 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 annual rate of 1.00%.
The Advisory Agreement will continue 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, and (2) a majority of the Trustees who are not interested
persons of any party to the Advisory Agreement, in each case cast in person at a
meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated at any time, without penalty, by either party to the
Advisory Agreement upon sixty days' written notice and is automatically
terminated in the event of its "assignment," as defined in the 1940 Act.
For the fiscal year ended April 30, 1999, the Advisor received advisory
fees of $_____. For the same period, the Fund repaid the Advisor $___ of the
amounts it had absorbed during the prior fiscal periods. For the fiscal year
ended April 30, 1998, the Advisor received advisory fees of $179,418. For the
same period, the Fund repaid the Advisor $30,832 of the amounts it had absorbed
during the prior fiscal periods. For the fiscal year ended April 30, 1997, the
Advisor received advisory fees of $46,576 and reimbursed the Fund for operating
expenses in the amount of $30,832 in order to limit the Fund's operating
expenses to an annual rate of 2.50%.
THE FUND'S ADMINISTRATOR
The Fund has an Administration Agreement with Investment Company
Administration, LLC (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
B-23
<PAGE>
required notice filings necessary to maintain the Fund's ability 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% of average net assets
$50 to $100 million 0.15% of average net assets
$100 million to $150 million 0.10% of average net assets
Over $150 million 0.05% of average net assets
For the fiscal years ended April 30, 1999, 1998 and 1997, the Administrator
received fees of $________, $39,592 and $28,591, 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
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.
The Fund has adopted a Plan of Distribution pursuant to Rule 12b-1 under
the Act (the "Plan"), under which, the Fund pays the Advisor as Distribution
Coordinator a fee, which is accrued daily and paid monthly, at the annual rate
of 0.25% of the Fund's average daily assets. Among other things, the Plan
provides that (1) the Advisor will submit to the Board of Trustees at least
quarterly, and the Trustees will review, reports regarding all amounts expended
under the Plan and the purposes for which such expenditures were made, (2) the
Plan will continue in effect only so long as it is approved at least annually,
and any material amendment thereto is approved, by the Board of Trustees,
including those who are not "interested persons" of the Trust and who have no
direct or indirect financial interest in operation of the plan or any agreement
related to the Plan, acting in person at a meeting called for that purpose, (3)
payments by the Fund under the Plan shall not be materially increased without
the affirmative vote of the holders of a majority of the outstanding shares of
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the Fund and (4) while the Plan remains in effect, the selection and nomination
of Trustees who are not "interested persons" of the Trust shall be committed to
the discretion of the Trustees who are not interested persons of the Trust.
During the year ended April 30, 1999, the Fund paid fees of $______ under the
Plan, of which $_______ was paid out as selling compensation to dealers and
$________ was for reimbursement of printing, postage and office expenses, $___
was for reimbursement of travel and entertainment expenses and $____ was for
reimbursement of advertising/sales literature expenses.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the 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
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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.
For the fiscal year ended April 30, 1999, the Fund paid $________ in
brokerage commissions, of which $__________ was paid to firms who furnished
research services. For the fiscal years ended April 30, 1998 and 1997, the Fund
paid $109,384 and $29,040, respectively, in brokerage commissions.
PORTFOLIO TURNOVER
Although the Fund generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Advisor, investment
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considerations warrant such action. Portfolio turnover rate is calculated by
dividing (1) the lesser of purchases or sales of portfolio securities for the
fiscal year by (2) the monthly average of the value of portfolio securities
owned during the fiscal year. A 100% turnover rate would occur if all the
securities in the Fund's portfolio, with the exception of securities whose
maturities at the time of acquisition were one year or less, were sold and
either repurchased or replaced within one year. A high rate of portfolio
turnover (100% or more) generally leads to higher transaction costs and may
result in a greater number of taxable transactions. See "Portfolio Transactions
and Brokerage." For the fiscal years ended April 30, 1999 and 1998, the Fund had
a portfolio turnover rate of ____% and 107.12%, respectively.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The information provided below supplements the information contained in the
Fund's Prospectus regarding the purchase and redemption of Fund shares.
HOW TO BUY SHARES
You may purchase shares of the Fund from selected securities brokers,
dealers or financial intermediaries. Investors should contact these agents
directly for appropriate instructions, as well as information pertaining to
accounts and any service or transaction fees that may be charged by those
agents. Purchase orders through securities brokers, dealers and other financial
intermediaries are effected at the next-determined net asset value after receipt
of the order by such agent before the Fund's daily cutoff time. Orders received
after that time will be purchased at the next-determined net asset value.
The public offering price of Fund shares is the net asset value. The Fund
receives the net asset value. Shares are purchased at the public offering price
next determined after the Transfer Agent receives your order in proper form. In
most cases, in order to receive that day's public offering price, the Transfer
Agent must receive your order in proper form as discussed in the Prospectus
before the close of regular trading on the New York Stock Exchange ("NYSE"),
normally 4:00 p.m., Eastern time. If you buy shares through your investment
representative, the representative must receive your order before the close of
regular trading on the NYSE to receive that day's public offering price. Orders
are in proper form only after funds are converted to U.S. funds.
The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that it will not be open on the
following days: New Year's Day, Martin Luther King Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, the NYSE may close on days not included in that
announcement.
If you are considering redeeming or transferring shares to another person
shortly after purchase, you should pay for those shares with a certified check
to avoid any delay in REDEMPTION, exchange or transfer. Otherwise the Funds may
delay payment until the purchase price of those shares has been collected or. To
eliminate the need for safekeeping, the Fund will not issue certificates for
your shares unless you request them.
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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.
HOW TO SELL SHARES
You can sell your Fund shares any day the NYSE is open for regular trading,
either directly to the Fund or through your investment representative.
Selling shares through your investment representative
Your investment representative must receive your request before the close
of regular trading on the NYSE to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge you for its services.
DELIVERY OF REDEMPTION PROCEEDS
Payments to shareholders for Fund shares 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 with complete information
and meeting all the requirements discussed in the Fund's 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 NYSE is restricted as determined by
the SEC or the NYSE 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 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.
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TELEPHONE REDEMPTIONS
Shareholders must have selected telephone transactions privileges on the
Account Application when opening a Fund account. Upon receipt of any
instructions or inquiries by telephone from a shareholder or, if held in a joint
account, from either party, or from any person claiming to be the shareholder,
the Fund or its agent is authorized, without notifying the shareholder or joint
account parties, to carry out the instructions or to respond to the inquiries,
consistent with the service options chosen by the shareholder or joint
shareholders in his or their latest Account Application or other written request
for services, including purchasing, exchanging or redeeming shares of the Fund
and depositing and withdrawing monies from the bank account specified in the
Bank Account Registration section of the shareholder's latest Account
Application or as otherwise properly specified to the Fund in writing.
The Transfer Agent will employ these and other reasonable procedures to
confirm that instructions communicated by telephone are genuine; if it fails to
employ reasonable procedures, the Fund and the Transfer Agent may be liable for
any losses due to unauthorized or fraudulent instructions. If these procedures
are followed, an investor agrees, however, that to the extent permitted by
applicable law, neither the Fund nor its agents will be liable for any loss,
liability, cost or expense arising out of any redemption request, including any
fraudulent or unauthorized request. For information, consult the Transfer Agent.
During periods of unusual market changes and shareholder activity, you may
experience delays in contacting the Transfer Agent by telephone. In this event,
you may wish to submit a written redemption request, as described in the
Prospectus, or contact your investment representative. The Telephone Redemption
Privilege may be modified or terminated without notice.
REDEMPTIONS-IN-KIND
Subject to compliance with applicable regulations, the Fund has reserved
the right to pay the redemption price of its shares, either totally or
partially, by a distribution in kind of readily marketable portfolio securities
(instead of cash). The securities so distributed would be valued at the same
amount as that assigned to them in calculating the net asset value for the
shares being sold. If a shareholder receives a distribution in kind, the
shareholder could incur brokerage or other charges in converting the securities
to cash. The Trust has filed an election under Rule 18f-1 committing to pay in
cash all redemptions by a shareholder of record up to amounts specified by the
rule (in excess of the lesser of (i) $250,000 or (ii) 1% of the Fund's assets).
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.
AUTOMATIC INVESTMENT PLAN
As discussed in the Prospectus, the Fund provides an Automatic Investment
Plan for the convenience of investors who wish to purchase shares of the Fund on
a regular basis. All record keeping and custodial costs of the Automatic
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Investment 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 NYSE (normally 4:00 p.m., Eastern time) on each day that the NYSE
is open for trading. The Fund does not expect to determine the net asset value
of its shares on any day when the NYSE 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. However, the net asset value of the Fund's shares
may be determined on days the NYSE is closed or at times other than 4:00 p.m. if
the Board of Trustees decides it is necessary.
Each security will be valued on the basis of the last sales price on the
valuation date on the principal exchange on which the security is traded. Where
securities are traded on one or more exchanges and also over-the-counter, the
securities will generally be valued using the quotations the Board of Trustees
or its delegate believes reflect most closely the value of such securities. With
respect to those securities for which no trades have taken place that day and
unlisted securities for which market quotations are readily available, the value
shall be determined by taking the latest "bid" prices. Short-term securities
which mature in more than 60 days will be valued at current market quotations.
Short-term securities which mature in 60 days or less will be valued at
amortized cost, if their term to maturity from date of purchase is 60 days or
less, or by amortizing their value on the 61st day prior to maturity, if their
term to maturity from date of purchase exceeds 60 days. Securities for which
market quotations are not readily available, including restricted securities,
and other assets will be valued at fair value as determined in good faith
according to a pricing procedure developed by the Investment Adviser and
approved by the Board of Trustees.
In the calculation of the Fund's net asset value; (1) an equity portfolio
security listed or traded on the New York or American Stock Exchange or other
domestic or foreign stock exchange or quoted by NASDAQ is valued at its latest
sale price on that exchange or quotation service prior to the time assets are
valued; if there were no sales that day, the security is valued at the latest
bid price (in cases where a security is traded on more than one exchange, the
security is valued on the exchange designated as the primary market by the
Fund's Board of Trustees); (2) an option is valued at the mean between the
latest bid and asked prices; (3) a futures contract is valued at the latest
sales price on the commodities exchange on which it trades unless the Board
determines that such price does not reflect its market value, in which case it
will be valued at its fair value as determined by the Board of Trustees; (4) all
other portfolio securities for which over-the-counter market quotations are
readily available are valued at the latest bid price; (5) when market quotations
are not readily available, including circumstances under which it is determined
by the Investment Adviser that sale or bid prices are not reflective of a
security's market value, portfolio securities are valued at their fair value as
determined in good faith under procedures established by and under the general
supervision of the Fund's Board of Trustees (valuation of debt securities for
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<PAGE>
which market quotations are not readily available may be used upon current
market prices of securities which are comparable in coupon, rating and maturity
or an appropriate matrix utilizing similar factors); (6) the value of short-term
debt securities which mature at a date less than sixty days subsequent to
valuation date will be determined on an amortized cost or amortized value basis;
and (7) the value of other assets will be determined in good faith at fair value
under procedures established by and under the general supervision of the Fund's
Board. For valuation purposes, quotations of foreign portfolio securities, other
assets and liabilities and forward contracts stated in foreign currency are
translated into U.S. dollar equivalents at the prevailing market ratings prior
to the close of the New York Stock Exchange. Dividends receivable are accrued as
the ex-dividend date or as of the time that the relevant ex-dividend date and
amounts become known. Interest income is accrued daily except when collection is
uncertain. Certain securities in the Fund's portfolio may be valued by an
outside pricing service approved by the Fund's Board of Trustees. The pricing
service may utilize a matrix system incorporating security quality, maturity and
coupon as the evaluation model parameters, and/or research evaluations by its
staff, including review of broker-dealer market price quotations, in determining
what it believes is the fair valuation of the portfolio securities valued by
such pricing service.
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
The Fund's performance data quoted in advertising and other promotional
materials ("Performance Advertisements") represent past performance and are not
intended to indicate future performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
TOTAL RETURN CALCULATIONS. Average annual total return quotes
("Standardized Return") used in the Fund's Performance Advertisements are
calculated according to the following formula:
n
P(1 + T) = ERV
where: P = a hypothetical initial payment of $1,000 to purchase shares of the
Fund
T = average annual total return of shares of the Fund
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of that period.
Under the foregoing formula, the time periods used in Performance
Advertisements will be based on rolling calendar quarters, updated to the last
day of the most recent quarter prior to submission of the Performance
Advertisements for publication. Total return, or "T" in the formula above, is
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computed by finding the average annual change in the value of an initial $1,000
investment over the period. All dividends and other distributions are assumed to
have been reinvested at net asset value.
The Fund also may refer in Performance Advertisements to total return
performance data that are not calculated according to the formula set forth
above ("Non-Standardized Return"). A Fund calculates Non-Standardized Return for
specified periods of time by assuming an investment of $1,000 in Fund shares and
assuming the reinvestment of all dividends and other distributions. The rate of
return is determined by subtracting the initial value of the investment from the
ending value and by dividing the remainder by the initial value.
The average annual rate of return for the Fund for the periods ending April
30, 1999, are as follows:
One year
From Inception
(May 22, 1996)
OTHER INFORMATION. In Performance Advertisements, the Fund may compare its
Standardized Return and/or their Non-Standardized Return with data published by
Lipper Analytical Services, Inc. ("Lipper"), CDA Investment Technologies, Inc.
("CDA"), Wiesenberger Investment Companies Services ("Wiesenberger"), Investment
Company Data, Inc. ("ICD"), or Morningstar Mutual Funds ("Morningstar") or with
the performance of recognized stock and other indices, including (but not
limited to) the Standard & Poor's 500 Composite Stock Price Index, the Dow Jones
Industrial Average and the Wilshire 5000 Index. The Fund also may refer in such
materials to mutual fund performance rankings and other data, such as
comparative asset, expense and fee levels, published by Lipper, CDA,
Wiesenberger, ICD, Bloomberg Financial Markets Service or Morningstar.
Performance Advertisements also may refer to discussions of the Fund and
comparative mutual fund data and ratings reported in independent periodicals,
including (but not limited to) THE WALL STREET JOURNAL, MONEY Magazine, FORBES,
BUSINESS WEEK, FINANCIAL WORLD, BARRON'S, FORTUNE, THE NEW YORK TIMES, THE
CHICAGO TRIBUNE, THE WASHINGTON POST and THE KIPLINGER LETTERS. Ratings may
include criteria relating to portfolio characteristics in addition to
performance information. In connection with a ranking, a Fund may also provide
additional information with respect to the ranking, such as the particular
category to which it relates, the number of funds in the category, the criteria
on which the ranking is based, and the effect of sales charges, fee waivers
and/or expense reimbursements.
The Fund may include discussions or illustrations of the effects of
compounding in Performance Advertisements. "Compounding" refers to the fact
that, if dividends or other distributions on the Fund investment are reinvested
by being paid in additional Fund shares, any future income or capital
appreciation of the Fund would increase the value, not only of the original Fund
investment, but also of the additional Fund shares received through
reinvestment. As a result, the value of the Fund investment would increase more
quickly than if dividends or other distributions had been paid in cash.
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The Fund may also compare its performance with the performance of bank
certificates of deposit (CDS) as measured by the CDA Investment Technologies,
Inc. Certificate of Deposit Index, the Bank Rate Monitor National Index and the
averages of yields of CDS of major banks published by Banxquote (TM) Money
Markets. In comparing the Fund's performance to CD performance, investors should
keep in mind that bank CDS are insured in whole or in part by an agency of the
U.S. government and offer fixed principal and fixed or variable rates of
interest, and that bank CD yields may vary depending on the financial
institution offering the CD and prevailing interest rates. Shares of the Fund
are not insured or guaranteed by the U.S. government and returns thereon and net
asset value will fluctuate. The securities held by the Fund generally have
longer maturities than most CDS and may reflect interest rate fluctuations for
longer term securities.
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.
Firstar Institutional Custody Services, located at 425 Walnut St.,
Cincinnati, Ohio 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 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.
________________________ 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.
On June 16, 1999, the following persons owned of record more that 5% of the
Fund's outstanding voting securities:
Mervin H. Zimmerman, Rockville, MD 10852 - 6.70%
Charles Schwab, San Francisco, DA - 7.70%
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 limited 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.
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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.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Trust's Agreement and Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust. The
Agreement and Declaration of Trust also provides for indemnification and
reimbursement of expenses out of the Fund's assets for any shareholder held
personally liable for obligations of the Fund or Trust. The Agreement and
Declaration of Trust provides that the Trust shall, upon request, assume the
defense of any claim made against any shareholder for any act or obligation of
the Fund or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Fund. The Agreement and Declaration of Trust further
provides that the Trust may maintain appropriate insurance (for example,
fidelity bonding and errors and omissions insurance) for the protection of the
Trust, its shareholders, trustees, officers, employees and agents to cover
possible tort and other liabilities. Furthermore, the activities of the Trust as
an investment company would not likely give rise to liabilities in excess of the
Trust's total assets. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which both
inadequate insurance exists and the Fund itself is unable to meet its
obligations.
FINANCIAL STATEMENTS
The Fund's annual report to shareholders for its fiscal year ended April
30, 1999 is a separate document supplied with this SAI and the financial
statements, accompanying notes and report of independent accountants appearing
therein are incorporated by reference in this SAI.
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APPENDIX A
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC.
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.
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.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospectus of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modified 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
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STANDARD & POOR'S RATINGS GROUP
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, C: Bonds rated BB, B, CCC, CC and C are regarded on balance
as predominantly speculative with respect to capacity to pay interest and repay
principal BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposure to adverse
conditions.
BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Bonds rated B has a greater vulnerability to default but currently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Bonds rated CCC have a currently identifiable vulnerability to default
and are dependent upon favorable business, financial, and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial, or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
B-36
<PAGE>
CC: The rating CC typically is applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Bonds rated D are in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
additional of a plus or minus sign to show relative standing with the major
categories.
APPENDIX B
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have
a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have
a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
B-37
<PAGE>
PROFESSIONALLY MANAGED PORTFOLIOS
PART C
ITEM 23. EXHIBITS.
(1) Agreement and Declaration of Trust (1)
(2) By-Laws (1)
(3) Specimen stock certificate (6)
(4) Form of Investment Advisory Agreement (2)
(5) Form of Distribution Agreement (2)
(6) Not applicable
(7) Form of Custodian Agreement with Star Bank, NA (5)
(8) (1) Form of Administration Agreement with Investment Company
Administration, LLC (3)
(2)(a) Fund Accounting Service Agreement with American Data
Services (5)
(2)(b) Transfer Agency and Service Agreement with American Data
Services (5)
(3) Transfer Agency and Fund Accounting Agreement with Countrywide
Fund Services (4)
(4) Transfer Agency Agreement with Provident Financial Processing
Corporation (8)
(9) Opinion of Counsel (7)
(10) Not applicable
(11) Not applicable
(12) No undertaking in effect
(13) Rule 12b-1 Plan (2)
(14) Not applicable
(15) Not applicable
1 Incorporated by reference from Post-Effective Amendment No. 23 to the
Registration Statement on Form N-1A, filed on December 29, 1995.
2 Incorporated by reference from Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A, filed on January 16, 1996.
3 Incorporated by reference from Post-Effective Amendment No. 35 to the
Registration Statement on Form N-1A, filed on April 24, 1997.
4 Incorporated by reference from Post-Effective Amendment No. 43 to the
Registration Statement on Form N-1A, filed on February 5, 1998.
5 Incorporated by reference from Post-Effective Amendment No. 48 to the
Registration Statement on Form N-1A, filed on June 15, 1998.
<PAGE>
6 Incorporated by reference from Post-Effective Amendment No. 52 to the
Registration Statement on Form N-1A, filed on October 29, 1998.
7 Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A, filed on April 13, 1987
8 To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
As of the date of this Amendment to the Registration Statement, there are
no persons controlled or under common control with the Registrant.
ITEM 25. INDEMNIFICATION
The information on insurance and indemnification is incorporated by
reference to Pre-Effective Amendment No. 1 and Post-Effective Amendment No. 1 to
the Registrant's Registration Statement.
In addition, insurance coverage for the officers and trustees of the
Registrant also is provided under a Directors and Officers/Errors and Omissions
Liability insurance policy issued by ICI Mutual Insurance Company with a
$1,000,000 limit of liability.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 ("Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
With respect to investment advisors, the response to this item is
incorporated by reference to their Form ADVs, as amended:
<PAGE>
Herbert R. Smith & Co, Inc. File No. 801-7098
Hodges Capital Management, Inc. File No. 801-35811
Perkins Capital Management, Inc. File No. 801-22888
Osterweis Capital Management File No. 801-18395
Pro-Conscience Funds, Inc. File No. 801-43868
Trent Capital Management, Inc. File No. 801-34570
Academy Capital Management File No. 801-27836
Sena, Weller, Rohs, Williams File No. 801-5326
Leonetti & Associates, Inc. File No. 801-36381
Lighthouse Capital Management File No. 801-32168
Yeager, Wood & Marshall, Inc. File No. 801-4995
Harris Bretall Sullivan & Smith File No. 801-7369
Pzena Investment Management LLC File No. 801-50838
Titan Investment Advisers, LLC File No. 801-51306
Pacific Gemini Partners LLC File No. 801-50007
James C. Edwards & Co., Inc. File No. 801-13986
Duncan-Hurst Capital
Management, Inc. File No. 801-36309
Progressive Investment
Management Corporation File No. 801-32066
With respect to United States Trust Company of Boston, the response to this
item is incorporated by reference to the responses to Item 5 of Part A and Item
16 of Part B ("Management") of Post-Effective Amendment No. 20 to the
Registration Statement.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) First Fund Distributors, Inc. (the "Distributor") is the principal
underwriter all series of the Registrant except for the Hodges Fund, the Matrix
Growth Fund and the Matrix Emerging Growth Fund. The Distributor acts as
principal underwriter for the following other investment companies:
Advisors Series Trust
Brandes Investment Trust
Fleming Mutual Fund Group
Fremont Mutual Funds
Guinness Flight Investment Funds
Jurika & Voyles Fund Group
Kayne Anderson Mutual Funds
Masters' Select Investment Trust
O'Shaughnessy Funds, Inc.
PIC Investment Trust
Purisima Funds
Rainier Investment Management Mutual Funds
RNC Mutual Fund Group
<PAGE>
First Dallas Securities, Inc., 2311 Cedar Springs Rd., Ste. 100, Dallas, TX
75201, an affiliate of Hodges Capital Management, acts as Distributor of the
Hodges Fund. The President and Chief Financial Officer of First Dallas
Securities, Inc. is Don W. Hodges. First Dallas does not act as principal
underwriter for any other investment companies. Reynolds, DeWitt Securities Co.,
an affiliate of Sena Weller Rohs Williams, 300 Main St., Cincinnati, OH 45202,
acts as Distributor for the Matrix Growth Fund and Matrix Emerging Growth Fund.
(b) The officers of First Fund Distributors, Inc. are:
Robert H. Wadsworth President & Treasurer
Eric Banhazl Vice President
Steven J. Paggioli Secretary
Each officer's business address is 4455 E. Camelback Rd., Ste. 261-E,
Phoenix, AZ 85018. Mr. Paggioli serves as President and a Trustee of the
Registrant. Mr. Wadsworth serves as Vice President of the Registrant. Mr. Robert
M. Slotky serves as Treasurer of the Registrant.
c. Incorporated by reference from the Statement of Additional Information
filed herewith as Part B.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
The accounts, books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the rules promulgated thereunder are in the possession the Registrant's
custodian and transfer agent, except those records relating to portfolio
transactions and the basic organizational and Trust documents of the Registrant
(see Subsections (2) (iii). (4), (5), (6), (7), (9), (10) and (11) of Rule
31a-1(b)), which, with respect to portfolio transactions are kept by each Fund's
Advisor at its address set forth in the prospectus and statement of additional
information and with respect to trust documents by its administrator at 479 West
22nd Street, New York, NY 10011 and 2020 E. Financial Way, Ste. 100, Glendora,
CA 91741.
ITEM 29. MANAGEMENT SERVICES.
There are no management-related service contracts not discussed in Parts A
and B.
ITEM 30. UNDERTAKINGS
The registrant undertakes:
(a) To furnish each person to whom a Prospectus is delivered a copy of
Registrant's latest annual report to shareholders, upon request and
without charge.
(b) If requested to do so by the holders of at least 10% of the Trust's
outstanding shares, to call a meeting of shareholders for the purposes
of voting upon the question of removal of a director and assist in
communications with other shareholders.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this amendment to this
Registration Statement to be signed on its behalf by the undersigned, thereto
duly authorized, in the City of New York in the State of New York on June 21,
1999.
PROFESSIONALLY MANAGED PORTFOLIOS
By /s/ Steven J. Paggioli
Steven J. Paggioli
President
Pursuant to the requirements of the Securities Act of 1933, this amendment to
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
/s/ Steven J. Paggioli Trustee June 21, 1999
- ------------------------
Steven J. Paggioli
/s/ Robert M. Slotky Principal June 21, 1999
- ------------------------
Robert M. Slotky Financial Officer
Dorothy A. Berry Trustee June 21, 1999
- ------------------------
*Dorothy A. Berry
Wallace L. Cook Trustee June 21, 1999
- ------------------------
*Wallace L. Cook
Carl A. Froebel Trustee June 21, 1999
- ------------------------
*Carl A. Froebel
Rowley W. P. Redington Trustee June 21, 1999
- ------------------------
*Rowley W. P. Redington
* By /s/ Steven J. Paggioli
-------------------------------------------------------------
Steven J. Paggioli, Attorney-in-Fact under powers of
attorney as filed with Post-Effective Amendment No. 20 to the
Registration Statement filed on May 17, 1995
