DUNCAN-HURST
TECHNOLOGY FUND
A SERIES OF PROFESSIONALLY MANAGED PORTFOLIOS
DUNCAN-HURST TECHNOLOGY FUND IS A GROWTH STOCK MUTUAL FUND THAT INVESTS
PRIMARILY IN TECHNOLOGY STOCKS. THE FUND SEEKS TO PROVIDE INVESTORS WITH
LONG-TERM GROWTH OF CAPITAL. THIS PROSPECTUS CONTAINS INFORMATION ABOUT THE
CLASS I AND CLASS R SHARES OF THE FUND.
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 September 27, 1999
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DUNCAN-HURST MUTUAL FUNDS
AN OVERVIEW OF THE FUND
THE FUND'S INVESTMENT GOAL
The Fund seeks long-term growth of capital.
THE FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Fund will primarily invest in a diversified portfolio of common stocks of
companies of any size market capitalization. In selecting investments, the
Adviser will invest in companies that it believes will benefit from advances or
improvements in technology. Investments may include companies in the software,
computer hardware, computer networking, semiconductor, or telecommunication
industries. The Fund may invest in the securities of foreign companies.
PRINCIPAL RISKS OF INVESTING IN THE FUND
There is the risk that you could lose money on your investment in the Fund. The
following risks could affect the value of your investment:
* As a mutual fund that primarily invests in the technology industry, the
Fund's share price may be more volatile than the share price of a fund
investing in a broader range of securities
* Securities of smaller companies involve greater risk than investing in
larger companies
* Growth stocks fall out of favor with the stock market
* Interest rates rise which can result in a decline in the equity market
* The stock market goes down
* Adverse developments occur in foreign markets. Foreign investments involve
greater risk.
WHO MAY WANT TO INVEST IN THE FUND
The Fund may be appropriate for investors who:
* Are pursuing a long-term goal such as retirement
* Want to add an investment in technology securities to diversify their
investment portfolio
* Are willing to accept the risks involved in investing in technology stocks
The Fund may not be appropriate for investors who:
* Need regular income or stability of principal
* Are pursuing a short-term goal
* Do not want to focus on any one industry
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DUNCAN-HURST MUTUAL FUNDS
FEES AND EXPENSES
This table described the fees and expenses that you may pay if you buy and hold
shares of the Fund.
Class R Class I
Shares Shares
------ ------
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases.............. None None
Maximum deferred sales charge (load).......................... None None
ANNUAL FUND OPERATING EXPENSES*
(expenses that are deducted from Fund assets)
Management Fees............................................... 1.00% 1.00%
Distribution and Service (12b-1) Fees......................... 0.25% None
Other Expenses................................................ 2.50% 2.50%
----- -----
Total Annual Fund Operating Expenses.......................... 3.75% 3.50%
Fee Reduction and/or Expense Reimbursement.................... (2.27)% (2.27)%
----- -----
Net Expenses.................................................. 1.48% 1.23%
===== =====
- ----------
* Other Expenses are estimated for the first fiscal year of the Fund. The
Adviser has contractually agreed to reduce its fees and/or pay expenses of the
Fund for an indefinite period to ensure that Total Fund Operating Expenses for
each class of shares will not exceed the net expense amounts shown. The Adviser
may be reimbursed for any waiver of its fees or expenses paid on behalf of the
Fund if the Fund's expenses are less than the limit agreed to by the Fund. The
Trustees may terminate this expense reimbursement arrangement at any time.
EXAMPLE
This example is intended to help you compare the cost of investing in shares of
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
-------- -----------
Class R Shares $151 $468
Class I Shares $125 $390
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DUNCAN-HURST MUTUAL FUNDS
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The Fund's investment goal is long-term growth of capital.
The Fund will invest in a diversified portfolio of common stocks of companies of
any size, from larger, well-established companies to smaller, emerging growth
companies. Under normal market conditions, the Fund will invest at least 65% of
its total assets in equity securities of companies that the Adviser believes
will benefit from advances or improvements in technology.
The Fund may invest up to 25% of its net assets in securities of foreign issuers
that are not publicly traded in the United States. The Fund may also invest in
American Depositary Receipts ("ADRs") and foreign securities traded on a
national securities market.
The Adviser's investment process seeks to identify companies with accelerating
earnings growth and positive company fundamentals. While economic forecasting
and industry sector analysis play a part in the research effort, the Adviser's
stock selection process begins with individual company analysis. This is often
referred to as a bottom-up approach to investing. From a group of companies that
meet the Adviser's standards, the Adviser selects the securities of those
companies whose earnings are expected to grow at an above-average rate over an
extended period of time. In making this determination, the Adviser considers
certain characteristics of a particular company. Among other factors, these
include new product development, management change and competitive market
dynamics.
PORTFOLIO TURNOVER
The Fund generally intends to purchase securities for long-term investment
rather than short-term gains. The Fund may engage in frequent trading of
securities. The Portfolio Manager may sell a stock when the company's earnings
are expected to grow at a below-average rate or there has been a change in
company fundamentals. Short-term transactions may result from liquidity needs or
by reason of economic or other developments not foreseen at the time of the
investment decision. The Portfolio Manager will make purchase and sell decisions
when it is believed to be appropriate.
The Fund anticipates that its portfolio turnover rate will typically exceed
150%. A high portfolio turnover rate (100% or more) has the potential to result
in the realization and distribution to shareholders of higher capital gains.
This may mean that you would be likely to have a higher tax liability. A high
portfolio turnover rate also leads to higher transaction costs, which could
negatively affect the Fund's performance.
Under normal market conditions, the Fund will stay fully invested in stocks.
However, under very unusual circumstances, 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 objective.
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DUNCAN-HURST MUTUAL FUNDS
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 previously summarized under "An
Overview of the 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.
TECHNOLOGY INDUSTRY RISK. Although the Fund does not concentrate its investment
in specific industries, it may invest in companies related in such a way that
they react similarly to certain market pressures. For example, competition among
technology companies may result in increasingly aggressive pricing of their
products and services, which may affect the profitability of companies in the
Fund's portfolio. In addition, because of the rapid pace of technological
development, products or services developed by companies in the Fund's
portfolio, may become rapidly obsolete or have relatively short product cycles.
As a result the Fund's returns should be considerably more volatile than the
returns of a fund that does not invest in similarly related companies.
SMALL COMPANY 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.
FOREIGN SECURITIES RISK. The risk of investing in the securities of foreign
companies is greater than the risk of investing in domestic companies. Some of
these risks include: (1) unfavorable changes in currency exchange rates; (2)
economic and political instability; (3) less publicly available information; (4)
less strict auditing and financial reporting requirements; (5) less governmental
supervision and regulation of securities markets; (6) higher transaction costs;
(7) potential adverse effects of the euro conversion; and (8) greater
possibility of not being able to sell securities on a timely basis.
YEAR 2000 RISK. The risk that the Fund could be adversely affected if the
computer systems used by the Adviser 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
impact 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 ADVISER
Duncan-Hurst Capital Management Inc., founded in 1990, is the investment adviser
to the Fund. The investment adviser's address is 4365 Executive Drive, Suite
1520, San Diego, CA 92121. The investment adviser currently manages assets of
approximately $3.0 billion for institutional and individual investors and other
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DUNCAN-HURST MUTUAL FUNDS
mutual funds. The investment adviser will provide advice on buying and selling
securities. The investment adviser will also furnish the Fund with office space
and certain administrative services and provide most of the personnel needed by
the Fund. For its services, the Fund will pay the investment adviser a monthly
management fee based upon its average daily net assets at the annual rate of
1.00%.
PORTFOLIO MANAGER
William H. "Beau" Duncan, Jr., Chairman, Chief Executive Officer and Chief
Investment Officer of the Adviser, will be responsible for the day-to-day
management of the Fund's portfolio. Mr. Duncan has managed the Duncan-Hurst
Aggressive Growth Fund since its inception in March 1999. Mr. Duncan has managed
the small-cap and medium-cap growth equity portfolios of the Adviser's private
accounts since starting the firm in 1990. Mr. Duncan has over twenty years of
investment experience.
FUND EXPENSES
The Fund is responsible for its own operating expenses. The Adviser has
contractually agreed to reduce its fees and/or pay expenses of the Fund to
ensure that the Fund's aggregate annual operating expenses (excluding interest
and tax expenses) will not exceed the limits set forth in the Fee Table. Any
reduction in advisory fees or payment of expenses made by the Adviser may be
reimbursed by the Fund if the Adviser requests in subsequent fiscal years. This
reimbursement may be requested if the aggregate amount actually paid by the Fund
toward operating expenses for such fiscal year (taking into account the
reimbursements) does not exceed the applicable limitation on Fund expenses. The
Adviser is permitted to be reimbursed for fee reductions and/or expense payments
made in the prior three fiscal years. (At startup, the Fund is permitted to look
for longer periods of four and five years.) Any such reimbursement will be
reviewed by the Trustees. The Fund must pay its current ordinary operating
expenses before the Adviser is entitled to any reimbursement of fees and/or
expenses.
SHAREHOLDER INFORMATION
HOW TO BUY SHARES
There are several ways to purchase shares of the Fund. An Application Form,
which accompanies this Prospectus, is used if you send money directly to the
Fund by mail or by wire. YOU MUST MAKE SURE TO SPECIFY WHICH CLASS YOU ARE
PURCHASING WHEN YOU PLACE YOUR PURCHASE ORDER. If you have questions about how
to invest, or about how to complete the Application Form, please call an account
representative at (800) 558-9105. To open a retirement plan account, call (800)
558-9105 for instructions. After your account is open, you may add to it at any
time. The Fund does not permit excessive, short-term (market-timing) trading. To
minimize harm to the Fund and its shareholders, the Fund reserves the right to
reject any purchase order, including exchanges (see "How to Exchange Shares"),
if it could disrupt management of the Fund or would not be in the best interests
of the Fund's existing shareholders.
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DUNCAN-HURST MUTUAL FUNDS
CLASS I SHARES
Class I shares are offered primarily for direct investment by investors such as
pension and profit-sharing plans, employee benefit trusts, endowments,
foundations and corporations. You may open a Class I Fund account with $1
million and add to your account at any time with $100,000 or more. The Fund may
waive the minimum investment requirements from time to time.
CLASS R SHARES
You may open a Class R Fund account with $2,500 and add to your account at any
time with $100 or more. Automatic investment plans allow you to open a Fund
account with $250 and add to your account with $100 or more. You may open a
retirement plan account with $2,000 and add to your account with $100 or more.
The Fund may waive the minimum investment requirements from time to time.
BY ONLINE ACCESS
For further information on how you can buy Fund shares through the Internet,
call the Fund at (800) 558-9105.
BY MAIL
You may make an investment in the Fund by mail. All purchases by check should be
in U.S. dollars. Third party checks and cash will not be accepted. If you wish
to invest by mail, simply complete the Application Form and mail it with a check
(made payable to "Duncan-Hurst Technology Fund") to:
Duncan-Hurst Technology Fund
c/o National Financial Data Services, Inc.
P.O. Box 419284
Kansas City, MO 64141-6284
BY OVERNIGHT DELIVERY
If you wish to send your Application Form and check via an overnight delivery
service (such as FedEx), delivery cannot be made to a post office box. In that
case, you should use the following address:
Duncan-Hurst Technology Fund
c/o National Financial Data Services, Inc.
330 West 9th Street
Kansas City, MO 64105
BY WIRE
You may wire money to the Fund. Before sending a wire you must fax your
completed application to (816) 843-8835. You should then call (800) 558-9105
between 9:00 a.m. and 5:00 p.m., Eastern time, on a day when the New York Stock
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DUNCAN-HURST MUTUAL FUNDS
Exchange ("NYSE") is open for trading, in order to receive an account number. IT
IS IMPORTANT TO CALL AND RECEIVE THIS ACCOUNT NUMBER, BECAUSE IF YOUR WIRE IS
SENT WITHOUT IT OR WITHOUT THE NAME OF THE FUND, THERE MAY BE A DELAY IN
INVESTING THE MONEY YOU WIRE. You may instruct your bank to wire money to:
Investors Fiduciary Trust Company
Kansas City, MO
ABA Routing Number: 101003621
for credit to Duncan-Hurst Technology Fund
DDA #7561040
for further credit to [your name and account number]
The original, completed application must also be sent to Duncan-Hurst Funds c/o
National Financial Data Services, Inc., P.O. Box 419284, Kansas City, MO
64141-6284. Your bank may charge you a fee for sending a wire to the Fund.
AUTOMATIC INVESTMENT PLAN
Class R shareholders may make regular investments through automatic periodic
deductions from your bank checking account. If you wish to invest on a periodic
basis, when opening your Fund account complete the Automatic Investment Plan
section of the Application Form and mail it to the Fund at the address listed
above. Current shareholders may choose at any time to enroll in the Automatic
Investment Plan. Call (800) 558-9105 for instructions.
THROUGH FINANCIAL SERVICE AGENTS
If you are investing through a Financial Service Agent, please refer to their
program materials for any additional special provisions or conditions that may
be different from those described in this Prospectus. Financial Service Agents
have the responsibility of transmitting purchase orders and funds, and of
crediting their customers' accounts following redemptions, in a timely manner in
accordance with their customer agreements and this Prospectus.
If you place an order for Fund shares through a Financial Service Agent, in
accordance with such Financial Service Agent's procedures and such Financial
Service Agent then transmits your order to the Transfer Agent before the closing
of trading on the NYSE on that day, then your purchase will be processed at the
net asset value calculated at the close of trading on the NYSE on that day. The
Financial Service Agent must promise to send to the Transfer Agent immediately
available funds in the amount of the purchase price in accordance with the
Transfer Agent's procedures. If payment is not received within the time
specified, the Transfer Agent may rescind the transaction and the Financial
Service Agent will be held liable for any resulting fees or losses. The
Financial Service Agent holds your shares in an omnibus account in its name, and
maintains your individual ownership records. The Fund or the Adviser may pay the
Financial Service Agent for maintaining these records as well as providing other
shareholder services. The Financial Service Agent may charge you a fee for
handling your order.
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DUNCAN-HURST MUTUAL FUNDS
HOW TO EXCHANGE SHARES
You may exchange your shares for shares of the Duncan-Hurst Large Cap Growth-20
Fund, the Duncan-Hurst Aggressive Growth Fund or the Duncan-Hurst International
Growth Fund on any day the Fund is open for business. EXCHANGES MAY ONLY BE MADE
BETWEEN FUNDS OF THE SAME CLASS.
Excessive exchanges can disrupt management of the Fund and raise their expenses.
The Fund has established a policy which limits excessive exchanges. You are
permitted to make four exchanges during any one twelve-month period. The Fund
reserves the right to reject any exchange order. The Fund may modify the
exchange privilege by giving 60 days' written notice to its shareholders.
BY ONLINE ACCESS
For further information on how you can exchange Fund shares through the
Internet, call the Fund at (800) 558-9105.
BY MAIL
You may exchange your shares by simply sending a written request to the Fund's
Transfer Agent. You should give your account number and the number of shares or
dollar amount to be exchanged. The letter should be signed by all of the
shareholders whose names appear on the account registration. You should send
your exchange request to:
Duncan-Hurst Technology Fund
c/o National Financial Data Services, Inc.
P.O. Box 419284
Kansas City, MO 64141-6284
BY TELEPHONE
If your account has telephone privileges, you may also exchange Fund shares by
calling the Transfer Agent at (800) 558-9105 between the hours of 9:00 a.m. and
4:00 p.m., Eastern time. If you are exchanging shares by telephone, you will be
subject to certain identification procedures which are listed below under "How
to Sell Shares."
HOW TO SELL SHARES
You may sell (redeem) your Fund shares on any day the Fund is open for business
either directly to the Fund or through your investment representative.
BY ONLINE ACCESS
For further information on how you can sell your Fund shares through the
Internet, call the Fund at (800) 558-9105.
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DUNCAN-HURST MUTUAL FUNDS
BY MAIL
You may redeem your shares by simply sending a written request to the Fund. 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 on the account registration. You should send your redemption
request to:
Duncan-Hurst Technology Fund
c/o National Financial Data Services, Inc.
P.O. Box 419284
Kansas City, MO 64141-6284
BY TELEPHONE
If you complete the Redemption by Telephone portion of the Fund's Application
Form, you may redeem some or all of your shares by calling the Fund at (800)
558-9105 before the close of trading on the NYSE. This is normally 4:00 p.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 Application Form. The minimum amount that may be wired is
$1,000. If you sell shares worth more than $25,000, the proceeds will be wired
to your bank account. 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. You may not use the telephone redemption for retirement accounts.
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 Application Form. Such persons may request that the
shares in your account be either exchanged or redeemed. Redemption proceeds will
be transferred to the bank account you have designated on your Application Form.
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 or exchange
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 (800) 558-9105 for instructions.
You may have difficulties in making a telephone redemption or exchange during
periods of abnormal market activity. If this occurs, you may make your
redemption or exchange request in writing.
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DUNCAN-HURST MUTUAL FUNDS
AUTOMATIC WITHDRAWAL PLAN
You may also make regular withdrawals on an automatic basis. Call (800) 558-9105
for instructions.
Class I shareholders who elect to use this service must maintain a minimum
balance of $1 million in order to participate in the Automatic Withdrawal Plan.
GENERAL
To protect the Fund and its shareholders, a signature guarantee is required for
all written redemption requests over $100,000. 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 from any eligible
guarantor institution which participates in a signature guarantee program. A
notary public is not an acceptable guarantor.
If you did not purchase your shares with a certified check, the Fund may delay
payment of your redemption proceeds for up to 15 days from purchase or until
your check has cleared, whichever occurs first. Additionally, you may not redeem
shares by telephone until 15 calendar days after the purchase date of the
shares. If you purchased your shares through the Automated Clearing House (ACH),
the Fund may delay payment of your redemption proceeds for up to 15 days from
purchase or until your payment clears, whichever occurs first.
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. If the Fund pays your
redemption proceeds by a distribution of securities, you could incur brokerage
or other charges in converting the securities to cash.
PRICING OF FUND SHARES
The price of the Fund's shares is based on its 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 net asset value for Class
R and Class I shares will generally differ because they have different expenses.
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).
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DUNCAN-HURST MUTUAL FUNDS
DIVIDENDS AND DISTRIBUTIONS
The Fund will make distributions of dividends and capital gains, if any,
annually, usually after the end of its fiscal year. Because of its investment
strategies, the Fund expects that its distributions will primarily consist of
capital gains.
You can choose from three distribution options: (1) reinvest all distributions
in additional Fund shares; (2) receive distributions from net investment income
in cash or by ACH to a pre-established bank account while reinvesting capital
gains distributions in additional Fund shares; or (3) receive all distributions
in cash or by ACH. If you wish to change your distribution option, write to
National Financial Data Services, Inc. before payment of the distribution. If
you do not select an option when you open your account, all distributions will
be reinvested in Fund shares. You will receive a statement confirming
reinvestment of distributions in additional Fund shares promptly following the
quarter in which the reinvestment occurs.
If a check representing a Fund distribution is not cashed within a specified
period, the Transfer Agent will notify you that you have the option of
requesting another check or reinvesting the distribution in the Fund. If the
Transfer Agent does not receive your election, the distribution will be
reinvested in the Fund.
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.
If you exchange or 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 under Rule 12b-1 that allows the Fund
to pay distribution fees for the sale and distribution of its Class R shares and
for services provided to its shareholders. The distribution and service fee is
0.25% of the Fund's average daily net assets which is payable to the Adviser, 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 Class R shares of the Fund and may cost you more than paying other
types of sales charges.
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DUNCAN-HURST MUTUAL FUNDS
MULTIPLE CLASS INFORMATION
The Fund offers two classes of shares - the Institutional Class ("Class I") and
the Retail Class ("Class R"). While each class invests in the same portfolio of
securities, the classes have separate expense structures and shareholder
privileges. The difference in the fee structures among the classes is the result
of their separate arrangements for shareholder and distribution services and not
the result of any difference in amounts charged by the Adviser for core
investment advisory services. Accordingly, the core investment advisory expenses
do not vary by class.
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DUNCAN-HURST TECHNOLOGY FUND
A SERIES OF PROFESSIONALLY MANAGED PORTFOLIOS (THE "TRUST")
For investors who want more information about the Fund, the following document
is available free upon request:
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 the SAI, request other information and discuss your
questions about the Fund by contacting the Fund at:
National Financial Data Services, Inc.
P.O. Box 419284
Kansas City, MO 64141-6284
Telephone: 1-800-558-9105
You can review and copy information including the Fund's 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 no. is 811-05037)
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER 27, 1999
DUNCAN-HURST TECHNOLOGY FUND
A SERIES OF
PROFESSIONALLY MANAGED PORTFOLIOS
4365 EXECUTIVE DRIVE
SUITE 1520
SAN DIEGO, CA 92121
(800) 558-9105
This Statement of Additional Information ("SAI") is not a prospectus and it
should be read in conjunction with the Prospectus dated September 27, 1999, as
may be revised, of the Duncan-Hurst Technology Fund (the "Fund"), a series of
Professionally Managed Portfolios (the "Trust"). Duncan-Hurst Capital Management
Inc. (the "Adviser") is the investment adviser to the Fund. A copy of the Fund's
Prospectus is available by calling the number listed above.
TABLE OF CONTENTS
The Trust ................................................................ B-2
Investment Objective and Policies ........................................ B-2
Investment Restrictions .................................................. B-16
Distributions and Tax Information ........................................ B-18
Trustees and Executive Officers .......................................... B-21
The Fund's Investment Adviser ............................................ B-22
The Fund's Administrator ................................................. B-23
The Fund's Distributor ................................................... B-23
Execution of Portfolio Transactions ...................................... B-24
Portfolio Turnover ....................................................... B-25
Additional Purchase and Redemption Information ........................... B-26
Determination of Share Price ............................................. B-29
Performance Information .................................................. B-30
General Information ...................................................... B-30
Financial Statements ..................................................... B-32
Appendix ................................................................. B-32
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
consists of various series which represent separate investment portfolios. This
SAI relates only to the Fund. Duncan-Hurst Capital Management Inc. ("the
Adviser") is the Fund's investment adviser.
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 Fund's Prospectus and this SAI omit certain 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 OBJECTIVE AND POLICIES
The Fund has the investment objective of seeking long-term growth of
capital. 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 information supplements the
discussion of the Fund's investment objective and policies as set forth in its
Prospectus. There can be no guarantee that the Fund's objective will be
attained.
GLOSSARY OF PERMITTED INVESTMENTS
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.
SMALL AND MEDIUM COMPANIES. The securities of small and medium-sized
companies often trade less frequently and in more limited volume, and may be
subject to more abrupt or erratic price movements, than securities of larger,
more established companies. Such companies may have limited product lines,
markets or financial resources, or may depend on a limited management group.
These risks are more pronounced in the securities of small-sized companies than
they are in the securities of medium-sized companies.
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
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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 invest in shares of other invest
companies in pursuit of its investment objective. This may include investment in
money market mutual funds in connection with the Fund's management of daily cash
positions. In addition to the advisory and operational fees the Fund bears
directly in connection with its own operation, the Fund and its shareholders
will also bear the pro rata portion of each other investment company's advisory
and operational expenses.
FOREIGN INVESTMENTS AND CURRENCIES. The Fund may invest in up to 25% of its
net assets in securities of foreign issuers that are not publicly traded in the
United States. The Fund may also invest in American Depositary Receipts (ADRs")
and foreign securities traded on a national securities market, purchase and sell
foreign currency on a spot basis and enter into forward currency contracts (see
"Forward Currency Contracts," below).
AMERICAN DEPOSITARY RECEIPTS. The Fund may invest its assets in securities
of foreign issuers in the form of ADRs, which are receipts for the shares of a
foreign-based corporation. The Fund treats ADRs as interests in the underlying
securities for purposes of its investment policies. A purchaser of an
unsponsored ADR may not have unlimited voting rights and may not receive as much
information about the issuer of the underlying securities as with a sponsored
ADR.
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, diversification and balance of payments
position. The internal politics of certain foreign countries may not be as
stable as those of the United States. Governments in certain foreign countries
also continue to participate to a significant degree, through ownership interest
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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 accordingly
affected by the trade policies and economic conditions of their trading
partners. Enactment by these trading partners of protectionist trade legislation
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. Accordingly, 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 Adviser are working with providers of services to the Fund in
the areas of clearance and settlement of trade in an effect 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 Adviser 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 in volume, 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. Moreover, 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.
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 certain 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.
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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.
EMERGING MARKETS. Some of the securities in which the Fund may invest may
be located in developing or emerging markets, which entail additional risks,
including less social, political and economic stability; smaller securities
markets and lower trading volume, which may result in less liquidity and greater
price volatility; national policies that may restrict the Fund's investment
opportunities, including restrictions on investments in issuers or industries,
or expropriation or confiscation of assets or property; and less developed legal
structures governing private or foreign investment.
OPTIONS AND FUTURES STRATEGIES. The Fund may purchase put and call options
and engage in the writing of covered call options and secured put options, and
employ a variety of other investment techniques. Specifically, the Fund may
engage in the purchase and sale of stock index future contracts and options on
such futures, all as described more fully below. Such investment policies and
techniques may involve a greater degree of risk than those inherent in more
conservative investment approaches.
The Fund will engage in such transactions only to hedge existing positions
and not for the purposes of speculation or leverage. The Fund will not engage in
such options or futures transactions unless it receives any necessary regulatory
approvals permitting it to engage in such transactions.
OPTIONS ON SECURITIES. To hedge against adverse market shifts, the Fund may
purchase put and call options on securities held in its portfolio. In addition,
the Fund may seek to increase its income in an amount designed to meet operating
expenses or may hedge a portion of its portfolio investments through writing
(that is, selling) "covered" put and call options. A put option provides its
purchaser with the right to compel the writer of the option to purchase from the
option holder an underlying security at a specified price at any time during or
at the end of the option period. In contrast, a call option gives the purchaser
the right to buy the underlying security covered by the option from the writer
of the option at the stated exercise price. A covered call option contemplates
that, for so long as the Fund is obligated as the writer of the option, it will
own (1) the underlying securities subject to the option or (2) securities
convertible into, or exchangeable without the payment of any consideration for,
the securities subject to the option. The value of the underlying securities on
which covered call options will be written at any one time by the Fund will not
exceed 25% of the Fund's total assets. The Fund will be considered "covered"
with respect to a put option it writes if, so long as it is obligated as the
writer of a put option, it segregates liquid assets that are acceptable to the
appropriate regulatory authority.
The Fund may purchase options on securities that are listed on securities
exchanges or that are traded over-the-counter ("OTC"). As the holder of a put
option, the Fund has the right to sell the securities underlying the option and
as the holder of a call option, the Fund has the right to purchase the
securities underlying the option, in each case at the option's exercise price at
any time prior to, or on, the option's expiration date. The Fund may choose to
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exercise the options it holds, permit them to expire or terminate them prior to
their expiration by entering into closing sale transactions. In entering into a
closing sale transaction, the Fund would sell an option of the same series as
the one it has purchased.
The Fund receives a premium when it writes call options, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, The Fund limits its
opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. The Fund receives a premium when
it writes put options, which increases the Fund's return on the underlying
security in the event the option expires unexercised or is closed out at a
profit. By writing a put, the Fund limits its opportunity to profit from an
increase in the market value of the underlying security above the exercise price
of the option for as long as the Fund's obligation as writer of the option
continues. Thus, in some periods, the Fund will receive less total return and in
other periods greater total return from its hedged positions than it would have
received from its underlying securities if unhedged.
In purchasing a put option, the Fund seeks to benefit from a decline in the
market price of the underlying security, whereas in purchasing a call option,
the Fund seeks to benefit from an increase in the market price of the underlying
security. If an option purchased is not sold or exercised when it has remaining
value, or if the market price of the underlying security remains equal to or
greater than the exercise price, in the case of a put, or remains equal to or
below the exercise price, in the case of a call, during the life of the option,
the Fund will lose its investment in the option. For the purchase of an option
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price, in the case of a put, and must increase
sufficiently above the exercise price, in the case of a call, to cover the
premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
OTC OPTIONS. OTC options differ from exchange-traded options in several
respects. They are transacted directly with dealers and not with a clearing
corporation, and there is a risk of non-performance by the dealer. However, the
premium is paid in advance by the dealer. OTC options are available for a
greater variety of securities and foreign currencies, and in a wider range of
expiration dates and exercise prices than exchange-traded options. Since there
is no exchange, pricing is normally done by reference to information from a
market maker, which information is carefully monitored or caused to be monitored
by the Adviser and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it voluntarily
only by entering into a closing transaction. In the case of OTC options, there
can be no assurance that a continuous liquid secondary market will exist for any
particular option at any specific time. Consequently, the Fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
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entering into a closing sale transaction with the dealer that issued it.
Similarly, when the Fund writes an OTC option, it generally can close out that
option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which it originally wrote the option. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security or foreign currency until the option expires or the
option is exercised. Therefore, the writer of a covered OTC call option may not
be able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, the writer of a covered OTC put option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of an OTC
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
The Fund may purchase and write OTC put and call options in negotiated
transactions. The staff of the Securities and Exchange Commission has previously
taken the position that the value of purchased OTC options and the assets used
as "cover" for written OTC options are illiquid securities and, as such, are to
be included in the calculation of the Fund's 15% limitation on illiquid
securities. The Fund will attempt to enter into contracts with certain dealers
with which it writes OTC options. Each such contract will provide that the Fund
has the absolute right to repurchase the options it writes at any time at a
repurchase price which represents the fair market value, as determined in good
faith through negotiation between the parties, but which in no event will exceed
a price determined pursuant to a formula contained in the contract. Although the
specific details of such formula may vary among contracts, the formula will
generally be based upon a multiple of the premium received by the Fund for
writing the option, plus the amount, if any, of the option's intrinsic value.
The formula will also include a factor to account for the difference between the
price of the security and the strike price of the option. If such a contract is
entered into, the Fund will count as illiquid only the initial formula price
minus the option's intrinsic value.
The Fund will enter into such contracts only with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York. Moreover,
such primary dealers will be subject to the same standards as are imposed upon
dealers with which the Fund enters into repurchase agreements.
STOCK INDEX OPTIONS. In seeking to hedge all or a portion of its
investment, the Fund may purchase and write put and call options on stock
indices listed on securities exchanges, which indices include securities held in
the Fund's portfolio.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the securities included in the index. Options on
stock indices are generally similar to options on specific securities. Unlike
options on specific securities, however, options on stock indices do not involve
the delivery of an underlying security; the option in the case of an option on a
stock index represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying stock index on the exercise date.
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When the Fund writes an option on a securities index, it will segregate
liquid assets in an amount equal to the market value of the option, and will
maintain while the option is open.
Stock index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded. If the Fund writes
a stock index option, it may terminate its obligation by effecting a closing
purchase transaction, which is accomplished by purchasing an option of the same
series as the option previously written. The ability of the Fund to engage in
closing purchase transactions with respect to stock index options depends on the
existence of a liquid secondary market. Although the Fund generally purchases or
writes stock index options only if a liquid secondary market for the options
purchased or sold appears to exist, no such secondary market may exist, or the
market may cease to exist at some future date, for some options. No assurance
can be given that a closing purchase transaction can be effected when the Fund
desires to engage in such a transaction.
RISKS RELATING TO PURCHASE AND SALE OF OPTIONS ON STOCK INDICES. Purchase
and sale of options on stock indices by the Fund are subject to certain risks
that are not present with options on securities. Because the effectiveness of
purchasing or writing stock index options as a hedging technique depends upon
the extent to which price movements in the Fund's portfolio correlate with price
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss on the purchase or writing of an
option on a stock index depends upon movements in the level of stock prices in
the stock market generally or, in the case of certain indices, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by the Fund of options on stock indices will be
subject to the ability of the Adviser to correctly predict movements in the
direction of the stock market generally or of a particular industry. This
requires different skills and techniques than predicting changes in the price of
individual stocks. In the event the Adviser is unsuccessful in predicting the
movements of an index, the Fund could be in a worse position than had no hedge
been attempted.
Stock index prices may be distorted if trading of certain stocks included
in the index is interrupted. Trading in stock index options also may be
interrupted in certain circumstances, such as if trading were halted in a
substantial number of stocks included in the index. If this occurred, the Fund
would not be able to close out options which it had purchased or written and, if
restrictions on exercise were imposed, might be unable to exercise an option it
holds, which could result in substantial losses to the Fund. However, it will be
the Fund's policy to purchase or write options only on indices which include a
sufficient number of stocks so that the likelihood of a trading halt in the
index is minimized.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may purchase
and sell stock index futures contracts. The purpose of the acquisition or sale
of a futures contract by the Fund is to hedge against fluctuations in the value
of its portfolio without actually buying or selling securities. The futures
contracts in which the Fund may invest have been developed by and are traded on
national commodity exchanges. Stock index futures contracts may be based upon
broad-based stock indices such as the S&P 500 or upon narrow-based stock
indices. A buyer entering into a stock index futures contract will, on a
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specified future date, pay or receive a final cash payment equal to the
difference between the actual value of the stock index on the last day of the
contract and the value of the stock index established by the contract. The Fund
may assume both "long" and "short" positions with respect to futures contracts.
A long position involves entering into a futures contract to buy a commodity,
whereas a short position involves entering into a futures contract to sell a
commodity.
The purpose of trading futures contracts is to protect the Fund from
fluctuations in the value of its investment securities without necessarily
buying or selling the securities. Because the value of the Fund's investment
securities will exceed the value of the futures contracts sold by the Fund, an
increase in the value of the futures contracts could only mitigate, but not
totally offset, the decline in the value of the Fund's assets. No consideration
is paid or received by the Fund upon trading a futures contract. Instead, upon
entering into a futures contract, the Fund is required to deposit an amount of
cash or U.S. Government securities generally equal to 10% or less of the
contract value. This amount is known as "initial margin" and is in the nature of
a performance bond or good faith deposit on the contract that is returned to the
Fund upon termination of the futures contract, assuming that all contractual
obligations have been satisfied; the broker will have access to amounts in the
margin account if the Fund fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the price of the currency or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, the Fund may elect to close a position by
taking an opposite position, which will operate to terminate the Fund's existing
position in the contract.
Each short position in a futures or options contract entered into by the
Fund is secured by the Fund's ownership of underlying securities. The Fund does
not use leverage when it enters into long futures or options contracts; the Fund
segregates, with respect to each of its long positions, liquid assets having a
value equal to the underlying commodity value of the contract.
The Fund may trade stock index futures contracts to the extent permitted
under rules and interpretations adopted by the Commodity Futures Trading
Commission (the "CFTC"). U.S. futures contracts have been designed by exchanges
that have been designated as "contract markets" by the CFTC, and must be
executed through a futures commission merchant, or brokerage firm, that is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange.
The Fund and the Adviser intend to comply with CFTC regulations and avoid
"commodity pool operator" or "commodity trading advisor" status. These
regulations require that the Fund use futures and options positions (a) for
"bona fide hedging purposes" (as defined in the regulations) or (b) for other
purposes so long as aggregate initial margins and premiums required in
connection with non-hedging positions do not exceed 5% of the liquidation value
of the Fund's portfolio. The Fund currently does not intend to engage in
transactions in futures contracts or options thereon for speculation, but will
engage in such transactions only for bona fide hedging purposes.
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RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS ON FUTURES
CONTRACTS. There are several risks in using stock index futures contracts as
hedging devices. First, all participants in the futures market are subject to
initial margin and variation margin requirements. Rather than making additional
variation margin payments, investors may close the contracts through offsetting
transactions which could distort the normal relationship between the index or
security and the futures market. Second, the margin requirements in the futures
market are lower than margin requirements in the securities market, and as a
result the futures market may attract more speculators than does the securities
market. Increased participation by speculators in the futures market may also
cause temporary price distortions. Because of possible price distortion in the
futures market and because of imperfect correlation between movements in stock
indices or securities and movements in the prices of futures contracts, even a
correct forecast of general market trends may not result in a successful hedging
transaction over a very short period.
Another risk arises because of imperfect correlation between movements in
the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to stock index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable stock index. It is
possible that the Fund might sell stock index futures contracts to hedge its
portfolio against a decline in the market, only to have the market advance and
the value of securities held in the Fund's portfolio decline. If this occurred,
the Fund would lose money on the contracts and also experience a decline in the
value of its portfolio securities. While this could occur, the Adviser believes
that over time the value of the Fund's portfolio will tend to move in the same
direction as the market indices and will attempt to reduce this risk, to the
extent possible, by entering into futures contracts on indices whose movements
they believe will have a significant correlation with movements in the value of
the Fund's portfolio securities sought to be hedged.
Successful use of futures contracts by the Fund is subject to the ability
of the Adviser to predict correctly movements in the direction of the market. If
the Fund has hedged against the possibility of a decline in the value of the
stocks held in its portfolio and stock prices increase instead, the Fund would
lose part or all of the benefit of the increased value of its security which it
has hedged because it will have offsetting losses in its futures positions. In
addition, in such situations, if the Fund has insufficient cash, it may have to
sell securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the rising market. The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
LIQUIDITY OF FUTURES CONTRACTS. The Fund may elect to close some or all of
its contracts prior to expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position held by the Fund. The Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain. Positions in futures contracts may be closed
only on an exchange or board of trade providing a secondary market for such
futures contracts. Although the Fund intends to enter into futures contracts
only on exchanges or boards of trade where there appears to be an active
secondary market, there is no assurance that a liquid secondary market will
exist for any particular contract at any particular time.
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In addition, most domestic futures exchanges and boards of trade limit the
amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
RISKS AND SPECIAL CONSIDERATIONS OF OPTIONS ON FUTURES CONTRACTS. The use
of options on stock index futures contracts also involves additional risk.
Compared to the purchase or sale of futures contracts, the purchase of call or
put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option on a futures contract
generates a premium which may partially offset a decline in the value of the
Fund's portfolio assets. By writing a call option, the Fund becomes obligated to
sell a futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option on a futures contract generates a
premium, but the Fund becomes obligated to purchase a futures contract, which
may have a value lower than the exercise price. Thus, the loss incurred by the
Fund in writing options on futures contracts may exceed the amount of the
premium received.
The effective use of options strategies is dependent, among other things,
on the Fund's ability to terminate options positions at a time when the Adviser
deems it desirable to do so. Although the Fund will enter into an option
position only if the Adviser believes that a liquid secondary market exists for
such option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Fund's
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
The Fund's purchase or sale of put or call options on futures contracts
will be based upon predictions as to anticipated market trends by the Adviser,
which could prove to be inaccurate. Even if the expectations of the Adviser are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
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Investments in futures contracts and related options by their nature tend
to be more short-term than other equity investments made by the Fund. The Fund's
ability to make such investments, therefore, may result in an increase in the
Fund's portfolio activity and thereby may result in the payment of additional
transaction costs.
SWAP CONTRACTS
TYPES OF SWAPS. Swaps are a specific type of OTC derivative involving
privately negotiated agreements with a trading counterparty. The Fund may use
the following (i) Long equity swap contracts: where the Fund pays a fixed rate
plus the negative performance, if any, and receives the positive performance, if
any, of an index or basket of securities; (ii) Short equity swap contacts: where
the Fund receives a fixed rate plus the negative performance, if any, and pays
the positive performance of an index or basket of securities; (iii) Contracts
for differences: equity swaps that contain both a long and short equity
component; (iv) Interest rate swap contracts: where the Fund exchanges fixed
interest payments for floating payments or vice versa; (v) Currency swap
contracts: where the Fund exchanges one currency for another at a forward
exchange rate; and (vi) other similar contractual agreements to exchange credit
obligations.
USES. The Fund may use swaps for (i) various reasons, including, but not
limited to (i) traditional hedging purposes - short equity swap contracts used
to hedge against an equity risk already present in the Fund; (ii) anticipatory
purchase hedging purposes - where the Fund anticipates significant cash purchase
transactions and enters into long equity swap contracts to obtain market
exposure until such a time where direct investment becomes possible or can be
made efficiently; (iii) anticipatory redemption hedging purposes - where the
Fund expects significant demand for redemptions and enters into short equity
swap contracts to allow it to dispose of securities in a more orderly fashion
(iv) direct investment - where the Fund purchases (particularly long equity swap
contracts) in place of investing directly in securities; (v) risk management -
where the Fund uses equity swap contracts to adjust the weight of the Fund to a
level the Adviser feels is the optimal exposure to individual markets, sectors
and equities, where the Fund uses currency swap contract to capture
inefficiencies in foreign exchange rates or to minimize exposure to the purchase
price of a foreign security held by the Fund or where the Fund uses interest
rate swap contracts to exchange a disadvantageous interest rate (whether
floating or fixed) for a different interest rate.
LIMITATIONS ON USE. There is generally no limit on the use of swaps except
to the extent such swaps are subject to the liquidity requirements of the Fund.
RISKS RELATED TO SWAPS. Swaps may relate to stocks, bonds, interest rates,
currencies or currency exchange rates, and related indices. The Fund can use
swaps for many purposes, including hedging and investment gain. The Fund may
also use swaps as a way to efficiently adjust its exposure to various
securities, markets, and currencies without having to actually sell current
assets and purchase different ones. The use of swaps involves risks different
from, or greater than the risks associated with investing directly in securities
and other more traditional investments.
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Swaps are subject to a number of risks described elsewhere in this section,
including management risk, liquidity risk and the credit risk of the
counterparty to the swaps contract. Since their value is calculated and derived
from the value of other assets instruments or references, there is greater risk
that the swap contract will be improperly valued. Valuation, although based on
current market pricing data, is typically done by the counterparty to the swap
contract. Swaps also involve the risk that changes in the value of the swaps may
not correlate perfectly with relevant assets, rates or indices they are designed
to hedge or to closely track. Also suitable swaps transactions may not be
available in all circumstances and there can be no assurance that the Fund will
engage in these transactions to reduce exposure to other risks when that would
be beneficial.
CREDIT AND COUNTERPARTY RISK. If the counterparty to the swap contract does
not make timely principal interest or settle payments when due, or otherwise
fulfill its obligations, the Fund could lose money on its investment.
LIQUIDITY RISK. Liquidity risk exists when particular investments are
difficult to purchase to sell due to a limited market or to legal restrictions,
such that the Fund may be prevented from selling particular securities at the
price at which the Fund values them. The Fund is subject to liquidity risk,
particularly with respect to the use of swaps.
MANAGEMENT RISK. As noted above, the Adviser may also fail to use swaps
effectively. For example, the Adviser may choose to hedge or not to hedge at
inopportune times. This will adversely affect the Fund's performance.
FORWARD CURRENCY CONTRACTS. The Fund may enter into forward currency
contracts in anticipation of changes in currency exchange rates. A forward
currency contract is an obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. For
example, a Fund might purchase a particular currency or enter into a forward
currency contract to preserve the U.S. dollar price of securities it intends to
or has contracted to purchase. Alternatively, it might sell a particular
currency on either a spot or forward basis to hedge against an anticipated
decline in the dollar value of securities it intends to or has contracted to
sell. Although this strategy could minimize the risk of loss due to a decline in
the value of the hedged currency, it could also limit any potential gain from an
increase in the value of the currency.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
respect to its portfolio securities. Pursuant to such agreements, the Fund
acquires securities from financial institutions such as banks and broker-dealers
as are deemed to be creditworthy by the Adviser, subject to the seller's
agreement to repurchase and the Fund's agreement to resell such securities at a
mutually agreed upon date and price. The repurchase price generally equals the
price paid by the Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the underlying
portfolio security). Securities subject to repurchase agreements will be held by
the Custodian or in the Federal Reserve/Treasury Book-Entry System or an
equivalent foreign system. The seller under a repurchase agreement will be
required to maintain the value of the underlying securities at not less than
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102% of the repurchase price under the agreement. If the seller defaults on its
repurchase obligation, the Fund will suffer a loss to the extent that the
proceeds from a sale of the underlying securities are less than the repurchase
price under the agreement. Bankruptcy or insolvency of such a defaulting seller
may cause the Fund's rights with respect to such securities to be delayed or
limited. Repurchase agreements are considered to be loans under the Investment
Company Act (the "1940 Act").
BORROWING. The Fund is authorized to borrow money from time to time for
temporary, extraordinary or emergency purposes or for clearance of transactions
in amounts not to exceed 33- 1/3% of the value of its total assets at the time
of such borrowings. The use of borrowing by the Fund involves special risk
considerations that may not be associated with other funds having similar
objectives and policies. Since substantially all of the Fund's assets fluctuate
in value, while the interest obligation resulting from a borrowing will be fixed
by the terms of the Fund's agreement with its lender, the net asset value per
share of the Fund will tend to increase more when its portfolio securities
increase in value and to decrease more when its portfolio assets decrease in
value than would otherwise be the case if the Fund did not borrow funds. In
addition, interest costs on borrowings may fluctuate with changing market rates
of interest and may partially offset or exceed the return earned on borrowed
funds. Under adverse market conditions, the Fund might have to sell portfolio
securities to meet interest or principal payments at a time when fundamental
investment considerations would not favor such sales.
LENDING PORTFOLIO SECURITIES. The Fund may lend its portfolio securities in
an amount not exceeding 33-1/3% of its total assets to financial institutions
such as banks and brokers if the loan is collateralized in accordance with
applicable regulations. Under the present regulatory requirements which govern
loans of portfolio securities, the loan collateral must, on each business day,
at least equal the value of the loaned securities and must consist of cash,
letters of credit of domestic banks or domestic branches of foreign banks, or
securities of the U.S. Government or its agencies. To be acceptable as
collateral, letters of credit must be irrevocable and obligate a bank to pay
amounts demanded by the Fund if the demand meets the terms of the letter. Such
terms and the issuing bank would have to be satisfactory to the Fund. Any loan
might be secured by any one or more of the three types of collateral. The terms
of the Fund's loans must permit the Fund to reacquire loaned securities on three
days' notice or in time to vote on any serious matter and must meet certain
tests under the Internal Revenue Code (the "Code").
ILLIQUID SECURITIES. The Fund may not invest more than 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 Adviser 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
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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 dispose of 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 dispose of them, resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
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 be indicative of the liquidity of such
investments. These securities might be adversely affected if qualified
institutional buyers were unwilling to purchase such securities. 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
notwithstanding their legal or contractual restrictions on resale. However,
these may become illiquid if institutions become for a time disinterested in
buying these securities. In all other cases, however, securities subject to
restrictions on resale will be deemed illiquid.
WHEN-ISSUED SECURITIES. The Fund may from time to time purchase securities
on a "when- issued" basis. The price of such securities, which may be expressed
in yield terms, is fixed at the time the commitment to purchase is made, but
delivery and payment for the when-issued securities take place at a later date.
Normally, the settlement date occurs within one month of the purchase; during
the period between purchase and settlement, no payment is made by the Fund to
the issuer and no interest accrues to the Fund. To the extent that assets of the
Fund are held in cash pending the settlement of a purchase of securities, the
Fund would earn no income; however, it is the Fund's intention to be fully
invested to the extent practicable and subject to the policies stated above.
While when-issued securities may be sold prior to the settlement date, the Fund
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons. At the time the Fund
makes the commitment to purchase a security on a when-issued basis, it will
record the transaction and reflect the value of the security in determining its
net asset value. The market value of the when-issued securities may be more or
less than the purchase price. The Fund does not believe that its net asset value
or income will be adversely affected by its purchase of securities on a
when-issued basis. The Fund will segregate liquid securities equal in value to
commitments for when-issued securities.
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<PAGE>
SHORT SALES. The Fund is authorized to make short sales of securities. In a
short sale, the Fund sells a security which it does not own, in anticipation of
a decline in the market value of the security. To complete the sale, the Fund
must borrow the security (generally from the broker through which the short sale
is made) in order to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The Fund is said to have a "short position" in the securities
sold until it delivers them to the broker. The period during which the Fund has
a short position can range from as little as one day to more than a year. Until
the security is replaced, the proceeds of the short sale are retained by the
broker, and the Fund is required to pay to the broker a negotiated portion of
any dividends or interest which accrue during the period of the loan. To meet
current margin requirements, the Fund is also required to deposit with the
broker additional cash or securities so that the total deposit with the broker
is maintained daily at 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account
that is convertible or exchangeable into the security sold short within 90 days
without restriction other than the payment of money).
Short sales by the Fund create opportunities to increase the Fund's return
but, at the same time, involve specific risk considerations and may be
considered a speculative technique. Since the Fund in effect profits from a
decline in the price of the securities sold short without the need to invest the
full purchase price of the securities on the date of the short sale, the Fund's
net asset value per share will tend to increase more when the securities it has
sold short decrease in value, and to decrease more when the securities it has
sold short increase in value, than would otherwise be the case if it had not
engaged in such short sales. The amount of any gain will be decreased, and the
amount of any loss increased, by the amount of any premium, dividends or
interest the Fund may be required to pay in connection with the short sale.
Furthermore, under adverse market conditions the Fund might have difficulty
purchasing securities to meet its short sale delivery obligations, and might
have to sell portfolio securities to raise the capital necessary to meet its
short sale obligations at a time when fundamental investment considerations
would not favor such sales.
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 acquire 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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In addition to purchasing certificates of deposit and bankers' acceptances,
to the extent permitted under its investment objective and policies stated above
and in its prospectus, the Fund 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. Issues of 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 Standard & Poor's Ratings Group, "Prime-1"
or "Prime-2" by Moody's Investors Service, Inc., or similarly rated by another
nationally recognized statistical rating organization or, if unrated, will be
determined by the Adviser to be of comparable quality. These rating symbols are
described in the Appendix.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by the
Fund and (unless otherwise noted) are fundamental and cannot be changed without
the affirmative vote of a majority of the Fund's outstanding voting securities
as defined in the 1940 Act. The Fund may not:
1. Make loans to others, except (a) through the purchase of debt securities
in accordance with its investment objective and policies, (b) through the
lending of its portfolio securities as described above, or (c) to the extent the
entry into a repurchase agreement is deemed to be a loan.
2. (a) Borrow money, except from banks. Any such borrowing will be made
only if immediately thereafter there is an asset coverage of at least 300% of
all borrowings.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
3. Purchase securities on margin, participate in a joint or joint and
several basis in any securities trading account, or underwrite securities. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
4. Purchase real estate, commodities or commodity contracts (As a matter of
operating policy, the Board of Trustees may authorize the Fund in the future to
engage in certain activities regarding futures contracts for bona fide hedging
purposes; any such authorization will be accompanied by appropriate notification
to shareholders).
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5. Invest 25% or more of the market value of its total assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
6. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures or repurchase transactions.
7. With respect to 75% of its total assets, invest more than 5% of its
total assets in securities of a single issuer or hold more than 10% of the
voting securities of such issuer. (Does not apply to investment in the
securities of the U.S. Government, its agencies or instrumentalities.)
The Fund observes the following policies, which are not deemed fundamental
and which may be changed without shareholder vote. The Fund may not:
8. Invest in any issuer for purposes of exercising control or management
9. Invest in securities of other investment companies except as permitted
under the Investment Company Act of 1940.
10. Invest, in the aggregate, more than 15% of its net assets in securities
with legal or contractual restrictions on resale, securities which are not
readily marketable and repurchase agreements with more than seven days to
maturity.
11. With respect to fundamental investment restriction 2(a) above, the Fund
will not purchase portfolio securities while outstanding borrowings exceed 5% of
its assets.
If a percentage restriction set forth in the prospectus or in 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 with respect to borrowing or the purchase
of restricted or illiquid securities.
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS
Dividends from net investment income and distributions from net profits
from the sale of securities are generally made annually, as described in the
Prospectus. 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.
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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 elect to be treated as a regulated
investment company under Subchapter M of 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
shareholders all of its investment company taxable income and any net realized
long-term capital gains for each fiscal year in a manner that complies with the
distribution requirements of the Code, so that the Fund will not be subject to
any federal income or excise taxes. To comply with the requirements, the Fund
must also distribute (or be deemed to have distributed) by December 31 of each
calendar year (I) at least 98% of ordinary income for such year, (ii) at least
98% of the excess of realized capital gains over realized capital losses for the
12-month period ending on October 31 during such year and (iii) any amounts from
the prior calendar year that were not distributed and on which the Fund paid no
federal income tax.
Net investment income consists of interest and dividend income, less
expenses. Net realized capital gains for a fiscal period are computed by taking
into account any capital loss carryforward of the Fund.
Distributions of net investment income and net short-term capital gains are
taxable to shareholders as ordinary income. In the case of corporate
shareholders, a portion of the distributions may qualify for the intercorporate
dividends-received deduction to the extent the Fund designates the amount
distributed as a qualifying dividend. The aggregate amount so designated cannot,
however, exceed the aggregate amount of qualifying dividends received by the
Fund for its taxable year. In view of the Fund's investment policies, it is
expected that dividends from domestic corporations may be part of the Fund's
gross income and that, accordingly, part of the distributions by the Fund may be
eligible for the dividends-received deduction for corporate shareholders.
However, the portion of the Fund's gross income attributable to qualifying
dividends is largely dependent on the Fund's investment activities for a
particular year and therefore cannot be predicted with any certainty. The
deduction may be reduced or eliminated if Fund shares held by a corporate
investor are treated as debt-financed or are held for less than 46 days.
Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time they have held their shares. Capital
gains distributions are not eligible for the dividends-received deduction
referred to in the previous paragraph. Distributions of any net investment
income and net realized capital gains will be taxable as described above,
whether received in shares or in cash. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share on the reinvestment date. Distributions are generally taxable
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when received. However, distributions declared in October, November or December
to shareholders of record on a date in such a month and paid the following
January are taxable as if received on December 31. Distributions are includable
in alternative minimum taxable income in computing a shareholder's liability for
the alternative minimum tax.
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. In determining gain or loss from an exchange of Fund
shares for shares of another mutual fund, the sales charge incurred in
purchasing the shares that are surrendered will be excluded from their tax basis
to the extent that a sales charge that would otherwise be imposed in the
purchase of the shares received in the exchange is reduced. Any portion of a
sales charge excluded from the basis of the shares surrendered will be added to
the basis of the shares received. Any loss realized upon a redemption or
exchange may be disallowed under certain wash sale rules to the extent shares of
the same Fund are purchased (through reinvestment of distributions or otherwise)
within 30 days before or after the redemption or exchange.
Under the Code, the Fund will be required to report to the Internal Revenue
Service all distributions of taxable income and capital gains as well as gross
proceeds from the redemption or exchange of Fund shares, except in the case of
exempt shareholders, which includes most corporations. Pursuant to the backup
withholding provisions of the Code, distributions of any taxable income and
capital gains and proceeds from the redemption of Fund shares may be subject to
withholding of federal income tax at the rate of 31 percent in the case of
non-exempt shareholders who fail to furnish the Fund with their taxpayer
identification numbers and with required certifications regarding their status
under the federal income tax law. If the withholding provisions are applicable,
any such distributions and proceeds, whether taken in cash or reinvested in
additional shares, will be reduced by the amounts required to be withheld.
Corporate and other exempt shareholders should provide the Fund with their
taxpayer identification numbers or certify their exempt status in order to avoid
possible erroneous application of backup withholding. The Fund reserves the
right to refuse to open an account for any person failing to provide a certified
taxpayer identification number.
The Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
The use of hedging strategies, such as entering into forward contracts,
involves complex rules that will determine the character and timing of
recognition of the income received in connection therewith by the Fund. Income
from foreign currencies (except certain gains therefrom that may be excluded by
future regulations) and income from transactions in forward contracts derived by
the Fund with respect to its business of investing in securities or foreign
currencies will qualify as permissible income under Subchapter M of the Code.
Any security or other position entered into or held by the Fund that
substantially diminishes the Fund's risk of loss from any other position held by
the Fund may constitute a "straddle" for federal income tax purposes. In
general, straddles are subject to certain rules that may affect the amount,
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character and timing of the Fund's gains and losses with respect to straddle
positions by requiring, among other things, that the loss realized on
disposition of one position of a straddle be deferred until gain is realized on
disposition of the offsetting position; that the Fund's holding period in
certain straddle positions not begin until the straddle is terminated (possibly
resulting in the gain being treated as short-term capital gain rather than
long-term capital gain); and that losses recognized with respect to certain
straddle positions, which would otherwise constitute short-term capital losses,
be treated as long-term capital losses. Different elections are available to the
Fund that may mitigate the effects of the straddle rules.
Certain forward contracts that are subject to Section 1256 of the Code
("Section 1256 Contracts") and that are held by the Fund at the end of its
taxable year generally will be required to be "marked to market" for federal
income tax purposes, that is, deemed to have been sold at market value. Sixty
percent of any net gain or loss recognized on these deemed sales and 60% of any
net gain or loss realized from any actual sales of Section 1256 Contracts will
be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss.
Section 988 of the Code contains special tax rules applicable to certain
foreign currency transactions that may affect the amount, timing and character
of income, gain or loss recognized by the Fund. Under these rules, foreign
exchange gain or loss realized with respect to foreign currency forward
contracts is treated as ordinary income or loss. Some part of the Fund's gain or
loss on the sale or other disposition of shares of a foreign corporation may,
because of changes in foreign currency exchange rates, be treated as ordinary
income or loss under Section 988 of the Code rather than as capital gain or
loss.
The Fund will not be subject to tax in the Commonwealth of Massachusetts as
long as it qualifies as a regulated investment company for federal income tax
purposes. Distributions and the transactions referred to in the preceding
paragraphs may be subject to state and local income taxes, and the tax treatment
thereof may differ from the federal income tax treatment. Moreover, the above
discussion is not intended to be a complete discussion of all applicable federal
tax consequences of an investment in the Fund. Shareholders are advised to
consult with their own tax advisers concerning the application of federal, state
and local taxes to an investment in the Fund.
The foregoing discussion of U.S. federal income tax law relates solely to
the application of that law to U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts and estates. Each shareholder who is not a
U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the Prospectus have been
prepared by the Fund's management, and counsel to the Fund has expressed no
opinion in respect thereof.
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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 L.L.C. ("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 adviser and manager) and formerly President, Value
Line, Inc., (investment advisory and financial publishing firm).
Wallace L. Cook 09/10/39 Trustee
One Peabody Lane, Darien, CT 06820. Retired. Formerly Senior Vice President,
Rockefeller Trust Co. Financial Counselor, Rockefeller & Co.
Carl A. Froebel 05/23 /38 Trustee
2 Crown Cove Lane, Savannah, GA 31411. Private Investor. Formerly Managing
Director, Premier Solutions, Ltd. (computer software); 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).
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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 other 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 from the portfolios of the Trust.
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
It is estimated that during the Fund's first fiscal year, Trustees fees and
expenses to be allocated to the Fund should not exceed $3,000.
THE FUND'S INVESTMENT ADVISER
As stated in the Prospectus, investment advisory services are provided to
the Fund by Duncan-Hurst Capital Management Inc., the Adviser, pursuant to an
Investment Advisory Agreement. After its initial two year term, the Investment
Advisory Agreement continues in effect for successive annual periods so long as
such continuation is approved at least annually by the vote of (1) the Board of
Trustees of the Trust (or a majority of the outstanding shares of the Fund to
which the agreement applies), and (2) a majority of the Trustees who are not
interested persons of any party to the Agreement, in each case cast in person at
a meeting called for the purpose of voting on such approval. Any such agreement
may be terminated at any time, without penalty, by either party to the agreement
upon sixty days' written notice and is automatically terminated in the event of
its "assignment," as defined in the 1940 Act.
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<PAGE>
THE FUND'S ADMINISTRATOR
The Fund has an Administration Agreement with Investment Company
Administration, LLC (the "Administrator"), a corporation partly owned and
controlled by Messrs. Paggioli and Wadsworth with offices at 2020 East Financial
Way, Ste. 100, Glendora, CA 91741 and 4455 E. Camelback Rd., Ste. 261-E,
Phoenix, AZ 85018. The Administration Agreement provides that the Administrator
will prepare and coordinate reports and other materials supplied to the
Trustees; prepare and/or supervise the preparation and filing of all securities
filings, periodic financial reports, prospectuses, statements of additional
information, marketing materials, tax returns, shareholder reports and other
regulatory reports or filings required of the Fund; prepare all required filings
necessary to maintain the Fund's ability to sell shares in all states where it
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 from the Fund at
the following annual rate:
Less than $22.5 million $45,000
$22.5 million to $50 million 0.20%
$50 million to $100 million 0.15%
$100 million to $150 million 0.10%
Over $150 million 0.05%
THE FUND'S DISTRIBUTOR
First Fund Distributors, Inc., (the "Distributor"), a corporation partly
owned by Messrs. Paggioli and Mr. Wadsworth, acts as the Fund's principal
underwriter in a continuous public offering of the Fund's shares. After its
initial two year term, the Distribution Agreement between the Fund and the
Distributor continues in effect for periods not exceeding one year if approved
at least annually by (I) the Board of Trustees or the vote of a majority of the
outstanding shares of the Fund (as defined in the 1940 Act) and (ii) a majority
of the Trustees who are not interested persons of any such party, in each case
cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement may be terminated without penalty by the parties
thereto upon sixty days' written notice, and is automatically terminated in the
event of its assignment as defined in the 1940 Act.
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<PAGE>
The Fund has adopted a Distribution Plan in accordance with Rule 12b-1 (the
"Plan") under the 1940 Act that permits the Fund to pay distribution fees for
the sale and distribution of its Class R shares. The Plan provides that the Fund
will pay a fee to the Adviser as Distribution Coordinator at an annual rate of
up to 0.25% of the average daily net assets of the Fund's Class R shares. The
fee is paid to the Adviser as reimbursement for, or in anticipation of, expenses
incurred for distribution related activity.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreement, the Adviser determines which
securities are to be purchased and sold by the Fund and which brokers and
dealers will be used to execute the Fund's portfolio transactions. Purchases and
sales of securities in the over-the-counter market will be executed directly
with a "market-maker" unless, in the Adviser's opinion, a better price and
execution can otherwise be obtained by using a broker for the transaction.
Where possible, transactions are effected with dealers (including banks)
that specialize in the types of securities the Fund will hold, unless better
executions are available elsewhere. Transactions with market-makers include a
"spread" between the market-maker's bid and asked prices and may also include a
markup from the asked price (in the case of a purchase) or markdown from the bid
price (in the case of a sale). Transactions with other dealers may also include
such a markup or markups. The Fund may also buy securities directly from issuers
or from underwriters in public offerings. Purchases from underwriters include a
"spread" between the public offering price and the discounted price paid by the
underwriter to the issuer.
In placing portfolio transactions, the Adviser uses its best efforts to
choose a broker or dealer that will provide the most favorable price and
execution available (known as "best execution"). In assessing a broker's or
dealer's ability to provide such price and execution, the Adviser will consider
a broad range of factors, including the difficulty of executing the particular
transaction, the dealer's risk in positioning a block of securities, the
clearance, settlement, and other operational capabilities of the broker or
dealer generally and in connection with securities of the type involved, the
broker's or dealer's ability and willingness to commit its capital to facilitate
transactions (by participating for its own account); the broker's or dealer's
reliability, integrity and financial stability; and the importance of speed or
confidentiality in the particular transaction.
Where the Adviser determines that more than one broker can provide best
execution, the Adviser may also consider whether one or more of such brokers has
provided or is willing to provide "research," services or products to the
Adviser, even if the commissions the Fund will pay are higher than the lowest
commission available. This is known as paying for those services or products
with "soft dollars." Because "research" services or products may benefit the
Adviser, the Adviser may be considered to have a conflict of interest in
allocating brokerage business, including an incentive to cause the Fund to
effect more transactions than they might otherwise do. A federal statute
protects investment advisers from liability for such conflicts of interest as
long as, among other things, the adviser determines in good faith that the
commissions paid are reasonable in light of the value of both the brokerage
B-25
<PAGE>
services and the research acquired. For these purposes, "research" includes all
services or products the Adviser uses to lawfully and appropriately assist it in
discharging its investment advisory duties. Examples of the types of research
services and products the Adviser may acquire include economic surveys, data and
analyses; financial publications; recommendations or other information about
particular companies and industries (through research reports and otherwise);
financial database software and services, analytical software and computer
hardware used in investment analysis and decisionmaking. The Adviser may use
soft dollars from the Fund's securities transactions to acquire research
services or products that are not directly useful to the Fund and that may be
useful to the Adviser in advising other clients.
In selecting brokers and dealers the Adviser may also consider whether a
broker or dealer has paid or is willing to pay expenses that the Fund would
otherwise bear in recognition of transaction business. This use of the Fund's
soft dollars does not generally involve a conflict of interest on the Adviser's
part, except to the extent it reduces Fund expenses that the Adviser might
otherwise be obligated to consider it appropriate to defray out of its own
resources.
The Adviser may consider the extent to which a broker or dealer has sold
Fund shares in determining whether to use that broker or dealer for portfolio
transactions. The Fund does not use the Distributor to execute portfolio
transactions.
The Adviser manages accounts with substantially the same objective as the
Fund and other accounts with objectives that are similar in some respects to
those of the Fund, including other mutual funds. As a result, purchases and
sales of the same security are often acceptable and desirable for the Fund and
for other accounts the Adviser manages at the same time. The Adviser attempts to
allocate transaction and investment opportunities among the Fund and its clients
on an equitable basis, considering each account's objectives, programs,
limitations and capital available for investment. However, transactions for such
other accounts could differ in substance, timing and amount from transactions
for the Fund. To the extent the Fund and other accounts seek to acquire the same
security simultaneously, the Fund may not be able to acquire as large a portion
of the security as it desires, or it may have to pay a higher price for the
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 a security at the same time sales are
being made for other of the Adviser's clients. When the Fund and one or more of
such accounts seek to buy or sell the same security simultaneously, each day's
transactions in the security will be allocated among the Fund and the other
accounts in a manner the Adviser deems equitable, generally based on order size,
each participating account will receive the average price and will bear a
proportionate share of all transactions costs, based on the size of that
account's order. This could have a detrimental effect on the price or value the
Fund receives in transactions. However, it is believed that over time the Fund's
ability to participate in volume transactions and a systematic approach to
allocating transaction opportunities is equitable and results in better overall
executions for the Fund.
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<PAGE>
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 Adviser, investment
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 "Execution of Portfolio
Transactions."
B-27
<PAGE>
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.
BUYING SHARES BY PAYMENT IN KIND
In certain situations, Fund shares may be purchased by tendering payment in
kind in the form of shares of stock, bonds or other securities. Any securities
used to buy Fund shares must be readily marketable, their acquisition consistent
with the Fund's objective and otherwise acceptable to the Adviser. For further
information, call the Fund at (800) 558-9105.
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 as
discussed in the Fund's Prospectus. In most cases, in order to receive that
day's public offering price, the Transfer Agent must receive your order in
proper form before the close of regular trading on the New York Stock Exchange
("NYSE"). 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.
If you are considering redeeming, exchanging 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 Fund may delay payment until the purchase price of those shares
has been collected or, if you redeem or exchange by telephone, until 15 calendar
days after the purchase date. To eliminate the need for safekeeping, the Fund
will not issue certificates for your shares unless you request them.
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 Adviser 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, for
employees of the Adviser or under circumstances where certain economies can be
achieved in sales of the Fund's shares.
B-28
<PAGE>
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. The Fund
will forward redemption proceeds or redeem shares for which it has collected
payment of the purchase price.
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.
SELLING SHARES DIRECTLY TO THE FUND
Send a signed letter of instruction to the Transfer Agent. The price you
will receive is the next net asset value calculated after your order is received
by the Transfer Agent with complete information and meeting all the requirements
discussed in the Fund's Prospectus. In order to receive that day's net asset
value, the Transfer Agent must receive your request before the close of regular
trading on the NYSE.
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.
If you want your redemption proceeds sent to an address other than your
address as it appears on the Transfer Agent's records, a signature guarantee is
required. The Fund may require additional documentation for the sale of shares
by a corporation, partnership, agent or fiduciary, or a surviving joint owner.
Contact the Transfer Agent for details.
Signature guarantees may be obtained from a bank, broker-dealer, credit
union (if authorized under state law), securities exchange or association,
clearing agency or savings institution. A notary public cannot provide a
signature guarantee.
B-29
<PAGE>
DELIVERY OF PROCEEDS
The Fund generally sends you payment for your shares the business day after
your request is received in proper form, assuming the Fund has collected payment
of the purchase price of your shares. Under unusual circumstances, the Fund may
suspend redemptions, or postpone payment for more than seven days, but only as
authorized by SEC rules, as stated above under "How to Sell Shares."
TELEPHONE REDEMPTIONS
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 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 may be liable for any losses due to
unauthorized or fraudulent instructions. 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 is not available if you were issued certificates for shares that
remain outstanding. The Telephone Redemption Privilege may be modified or
terminated without notice.
REDEMPTIONS-IN-KIND
The Trust has filed an election under SEC 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 Fund has reserved the right to pay the redemption price of its shares in
excess of the amounts specified by the rule, either totally or partially, by a
distribution in kind of 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.
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<PAGE>
The value of shares on redemption or repurchase may be more or less than
the investor's cost, depending upon the market value of the Fund's portfolio
securities at the time of redemption or repurchase.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value 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. It is
expected that the NYSE will be closed on Saturdays and Sundays and on New Year's
Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas. The Fund does not
expect to determine the net asset value of 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 Fund 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.
In valuing the Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the last bid price. If no bid is quoted on such day, the
security is valued by such method as the Board of Trustees of the Trust shall
determine in good faith to reflect the security's fair value. All other assets
of the Fund are valued in such manner as the Board of Trustees in good faith
deems appropriate to reflect their fair value.
Trading in foreign securities markets is normally completed well before the
close of the NYSE. In addition, foreign securities trading may not take place on
all days on which the NYSE is open for trading, and may occur in certain foreign
markets on days on which the Fund's net asset value is not calculated. Events
affecting the values of portfolio securities that occur between the time their
prices are determined and the close of the NYSE will not be reflected in the
calculation of net asset value unless the Board of Trustees deems that the
particular event would affect net asset value, in which case an adjustment will
be made. Assets or liabilities expressed in foreign currencies are translated,
in determining net asset value, into U.S. dollars based on the spot exchange
rates at 1:00 p.m., Eastern time, or at such other rates as the Adviser may
determine to be appropriate.
The net asset value per share of Class R and Class I shares of the Fund are
calculated separately. The net asset value of each class 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. The net asset value of Class R shares and Class I
shares will differ because they have different expenses.
B-31
<PAGE>
PERFORMANCE INFORMATION
From time to time, the Fund may state its total return in advertisements
and investor communications. Total return may be stated for any relevant period
as specified in the advertisement or communication. Any statements of total
return will be accompanied by information on the Fund's average annual
compounded rate of return over the most recent four calendar quarters and the
period from the Fund's inception of operations. The Fund may also advertise
aggregate and average total return information over different periods of time.
The Fund's total return may be compared to relevant indices and indices
published by statistical data gathering organizations that track performance of
mutual funds. From time to time, evaluations of the Fund's performance by
independent sources may also be used in advertisements and in information
furnished to present or prospective investors in the Fund.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's total return for any
period should not be considered as a representation of what an investment may
earn or what an investor's total return may be in any future period.
The Fund's average annual compounded rate of return is determined by
reference to a hypothetical $1,000 investment that includes capital appreciation
and depreciation for the stated period, according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial purchase order of $1,000 from which the
maximum sales load is deducted
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 purchase at the
end of the period
Aggregate total return is calculated in a similar manner, except that the
results are not annualized. Each calculation assumes that all dividends and
distributions are reinvested at net asset value on the reinvestment dates during
the period.
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.
UMB Bank, N.A. acts as Custodian of the securities and other assets of the
Fund. National Financial Data Services, P.O. Box 419284, Kansas City, MO
64141-6284, 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.
B-32
<PAGE>
Tait, Weller & Baker, 8 Penn Center Plaza, Philadelphia, PA 19103, are the
independent auditors for the Fund.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th Floor,
San Francisco, California 94104, are legal counsel to the Fund.
The Trust was organized as a Massachusetts business trust on February 17,
1987. The Agreement and Declaration of Trust permits the Board of Trustees to
issue an unlimited number of full and fractional shares of beneficial interest,
without par value, which may be issued in any number of series. The Board of
Trustees may from time to time issue other series, the assets and liabilities of
which will be separate and distinct from any other series.
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.
B-33
<PAGE>
FINANCIAL STATEMENTS
The Fund's annual reports to shareholders for its first fiscal year will be
a separate document supplied with this SAI and the financial statements,
accompanying notes and report of independent accountants appearing therein will
be incorporated by reference in future SAIs.
APPENDIX
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-34
