STATEMENT OF ADDITIONAL INFORMATION
JULY 30, 1999,
AS AMENDED NOVEMBER 10, 1999
THE PERKINS DISCOVERY FUND
THE PERKINS OPPORTUNITY FUND,
SERIES OF
PROFESSIONALLY MANAGED PORTFOLIOS
730 EAST LAKE STREET
WAYZATA, MN 55391-1713
(800) 280-4779
(612) 473-8367
This Statement of Additional Information ("SAI") is not a prospectus
and it should be read in conjunction with the Prospectus dated July 30, 1999, as
may be revised, of The Perkins Discovery Fund ("Discovery Fund") and The Perkins
Opportunity Fund ("Opportunity Fund"). The Discovery Fund and The Opportunity
Fund are referred to herein collectively as "the Funds." Perkins Capital
Management, Inc. (the "Advisor") is the investment adviser to the Funds. Copies
of the Fund's Prospectus is available by calling either of the numbers above.
TABLE OF CONTENTS
The Trust................................................................... B-2
Investment Objectives and Policies.......................................... B-2
Investment Restrictions.....................................................B-10
Distributions and Tax Information...........................................B-12
Trustees and Executive Officers.............................................B-16
The Funds' Investment Advisor...............................................B-17
The Funds' Administrator....................................................B-18
The Funds' Distributor......................................................B-18
Execution of Portfolio Transactions.........................................B-19
Portfolio Turnover..........................................................B-21
Additional Purchase and Redemption Information..............................B-23
Determination of Share Price................................................B-26
Performance Information.....................................................B-27
General Information.........................................................B-28
Financial Statements........................................................B-29
Appendix....................................................................B-30
B-1
<PAGE>
THE TRUST
Professionally Managed Portfolios (the "Trust") is an open-end
management investment company organized as a Massachusetts business trust. The
Trust consists of various series which represent separate investment portfolios.
This SAI relates only to the Funds.
The Trust is registered with the SEC as a management investment
company. Such registration does not involve supervision by the SEC of the
management or policies of the Funds. The Prospectus of the Funds and this SAI
omit certain of the information contained in the Registration Statement filed
with the SEC. Copies of such information may be obtained from the SEC upon
payment of the prescribed fee, or may be accessed via the world wide web at
http://www.sec.gov.
INVESTMENT OBJECTIVES AND POLICIES
Each Fund is a mutual fund with the investment objective of seeking
capital appreciation. Each Fund is diversified, which under applicable federal
law means that as to 75% of its total assets, no more than 5% may be invested in
the securities of a single issuer and that it may hold no more than 10% of the
voting securities of a single issuer. The following discussion supplements the
discussion of the Funds' investment objectives and policies as set forth in the
Prospectus. There can be no assurance the objective of either Fund will be
attained.
PREFERRED STOCK
A preferred stock is a blend of the characteristics of a bond and
common stock. It can offer the higher yield of a bond and has priority over
common stock in equity ownership, but does not have the seniority of a bond and,
unlike common stock, its participation in the issuer's growth may be limited.
Preferred stock has preference over common stock in the receipt of dividends and
in any residual assets after payment to creditors should the issuer by
dissolved. Although the dividend is set at a fixed annual rate, in some
circumstances it can be changed or omitted by the issuer.
CONVERTIBLE SECURITIES AND WARRANTS
The Funds may invest in convertible securities and warrants. A
convertible security is a fixed-income security (a debt instrument or a
preferred stock) which may be converted at a stated price within a specified
period of time into a certain quantity of the common stock of the same or a
different issuer. Convertible securities are senior to common stocks in an
issuer's capital structure, but are usually subordinated to similar
non-convertible securities. While providing a fixed income stream (generally
higher in yield than the income derivable from common stock but lower than that
afforded by a similar nonconvertible security), a convertible security also
affords an investor the opportunity, through its conversion feature, to
participate in the capital appreciation attendant upon a market price advance in
the convertible security's underlying common stock.
B-2
<PAGE>
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 a Fund's
entire investment therein).
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements. Under such agreements,
the seller of the security agrees to repurchase it at a mutually agreed upon
time and price. The repurchase price may be higher than the purchase price, the
difference being income to a Fund, or the purchase and repurchase prices may be
the same, with interest at a stated rate due to the Fund together with the
repurchase price on repurchase. In either case, the income to a Fund is
unrelated to the interest rate on the U.S. Government security itself. Such
repurchase agreements will be made only with banks with assets of $500 million
or more that are insured by the Federal Deposit Insurance Corporation or with
Government securities dealers recognized by the Federal Reserve Board and
registered as broker-dealers with the Securities and Exchange Commission ("SEC")
or exempt from such registration. Each Fund will generally enter into repurchase
agreements of short durations, from overnight to one week, although the
underlying securities generally have longer maturities. Each Fund may not enter
into a repurchase agreement with more than seven days to maturity if, as a
result, more than 15% of the value of its net assets would be invested in
illiquid securities including such repurchase agreements.
For purposes of the Investment Company Act of 1940 (the "1940 Act"), a
repurchase agreement is deemed to be a loan from a Fund to the seller of the
U.S. Government security subject to the repurchase agreement. It is not clear
whether a court would consider the U.S. Government security acquired by a Fund
subject to a repurchase agreement as being owned by the Fund or as being
collateral for a loan by the Fund to the seller. In the event of the
commencement of bankruptcy or insolvency proceedings with respect to the seller
of the U.S. Government security before its repurchase under a repurchase
agreement, a Fund may encounter delays and incur costs before being able to sell
the security. Delays may involve loss of interest or a decline in price of the
U.S. Government security. If a court characterizes the transaction as a loan and
a Fund has not perfected a security interest in the U.S. Government security,
the Fund may be required to return the security to the seller's estate and be
treated as an unsecured creditor of the seller. As an unsecured creditor, a Fund
would be at the risk of losing some or all of the principal and income involved
in the transaction. As with any unsecured debt instrument purchased for a Fund,
the Advisor seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the other party, in this case the seller of
the U.S. Government security.
B-3
<PAGE>
Apart from the risk of bankruptcy or insolvency proceedings, there is
also the risk that the seller may fail to repurchase the security. However, a
Fund will always receive as collateral for any repurchase agreement to which it
is a party securities acceptable to it, the market value of which is equal to at
least 100% of the amount invested by the Fund plus accrued interest, and the
Fund will make payment against such securities only upon physical delivery or
evidence of book entry transfer to the account of its Custodian. If the market
value of the U.S. Government security subject to the repurchase agreement
becomes less than the repurchase price (including interest), a Fund will direct
the seller of the U.S. Government security to deliver additional securities so
that the market value of all securities subject to the repurchase agreement will
equal or exceed the repurchase price. It is possible that a Fund will be
unsuccessful in seeking to impose on the seller a contractual obligation to
deliver additional securities.
ILLIQUID SECURITIES
Neither Fund may 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 each Fund's portfolio, under the supervision of the
Trust's Board of Trustees, to ensure compliance with the Fund's investment
restrictions.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933 (the "Securities Act"), securities
which are otherwise not readily marketable and repurchase agreements having a
maturity of longer than seven days. Securities which have not been registered
under the Securities Act are referred to as private placement or restricted
securities and are purchased directly from the issuer or in the secondary
market. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a 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. A 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
B-4
<PAGE>
Trustees may determine that such securities are not illiquid securities
notwithstanding their legal or contractual restrictions on resale. In all other
cases, however, securities subject to restrictions on resale will be deemed
illiquid.
WHEN-ISSUED SECURITIES
Each Fund is authorized to purchase securities on a "when-issued"
basis. The price of such securities, which may be expressed in yield terms, is
fixed at the time the commitment to purchase is made, but delivery and payment
for the when-issued securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer and
no interest accrues to the Fund. To the extent that assets of a Fund are held in
cash pending the settlement of a purchase of securities, the Fund would earn no
income; however, it is each Fund's intention to be fully invested to the extent
practicable and subject to the policies stated above. While when-issued
securities may be sold prior to the settlement date, any purchase of such
securities would be made with the purpose of actually acquiring them unless a
sale appears desirable for investment reasons. At the time a 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. Each 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. Each Fund will segregate liquid assets with its Custodian equal in value
to commitments for when-issued securities. Such segregated assets either will
mature or, if necessary, be sold on or before the settlement date.
SECURITIES LENDING
Although each Fund's objective is capital appreciation, each Fund
reserves the right to lend its portfolio securities in order to generate
additional income. Securities may be loaned to broker-dealers, major banks or
other recognized domestic institutional borrowers of securities who are not
affiliated with the Advisor or Distributor and whose creditworthiness is
acceptable to the Advisor. The borrower must deliver to a Fund cash or cash
equivalent collateral, or provide to the Fund an irrevocable letter of credit
equal in value to at least 100% of the value of the loaned securities at all
times during the loan, marked to market daily. During the time the portfolio
securities are on loan, the borrower pays a Fund any interest paid on such
securities. A Fund may invest the cash collateral and earn additional income, or
it may receive an agreed-upon amount of interest income if the borrower has
delivered equivalent collateral or a letter of credit. A Fund may pay reasonable
administrative and custodial fees in connection with a loan and may pay a
negotiated portion of the income earned on the cash to the borrower or placing
broker. Loans are subject to termination at the option of a Fund or the borrower
at any time. It is not anticipated that more than 5% of the value of a Fund's
portfolio securities will be subject to lending.
B-5
<PAGE>
SHORT SALES
Each Fund may seek to hedge investments or realize additional gains
through short sales. A Fund may make short sales, which are transactions in
which the Fund sells a security it does not own, in anticipation of a decline in
the market value of that security. To complete such a transaction, a Fund must
borrow the security to make delivery to the buyer. A Fund then is obligated to
replace the security borrowed by purchasing it at the market price at or prior
to the time of replacement. The price at such time may be more or less than the
price at which the security was sold by a Fund. Until the security is replaced,
a Fund is required to repay the lender any dividends or interest that accrue
during the period of the loan. To borrow the security, a Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out. A
Fund also will incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased by the amount of the premium,
dividends, interest, or expenses s Fund may be required to pay in connection
with a short sale.
No securities will be sold short if, after effect is given to any such
short sale, the total market value of all securities sold short would exceed 25%
of the value of a Fund's net assets.
Whenever a Fund engages in short sales, its custodian will segregate
liquid assets equal to the difference between (a) the market value of the
securities sold short at the time they were sold short and (b) any assets
required to be deposited with the broker in connection with the short sale (not
including the proceeds from the short sale). The segregated assets are marked to
market daily, provided that at no time will the amount deposited in it plus the
amount deposited with the broker be less than the market value of the securities
at the time they were sold short.
LEVERAGE THROUGH BORROWING
Each Fund may borrow money for leveraging purposes. Leveraging creates
an opportunity for increased net income but, at the same time, creates special
risk considerations. For example, leveraging may exaggerate changes in the net
asset value of Fund shares and in the yield on a Fund's portfolio. Although the
principal of such borrowings will be fixed, a Fund's assets may change in value
during the time the borrowing is outstanding. Leveraging will create interest
expenses for a Fund which can exceed the income from the assets retained. To the
extent the income derived from securities purchased with borrowed funds exceeds
the interest a Fund will have to pay, the Fund's net income will be greater than
if leveraging were not used. Conversely, if the income from the assets retained
with borrowed funds is not sufficient to cover the cost of leveraging, the net
income of a Fund will be less than if leveraging were not used, and therefore
the amount available for distribution to stockholders as dividends will be
reduced.
B-6
<PAGE>
FOREIGN INVESTMENTS
Each Fund may invest up to 10% of its total assets in U.S. dollar
denominated securities of foreign issuers, including American Depositary
Receipts. In addition, each Fund may also invest without limit in securities of
foreign issuers which are listed and traded on a domestic national
securities exchange.
DEPOSITARY RECEIPTS. The Funds may invest in securities of foreign
issuers in the form of American Depositary Receipts ("ADRs") or European
Depositary Receipts ("EDRs"). These securities may not necessarily be
denominated in the same currency as the securities for which they may be
exchanged. ADRs are typically issued by an American bank or trust company and
evidence ownership of underlying securities issued by a foreign corporation.
EDRs, which are sometimes referred to as Continental Depository Receipts
("CDRs"), are receipts issued in Europe, typically by foreign banks and trust
companies, that evidence ownership of either foreign or domestic securities.
Generally, ADRs in registered form are designed for use in U.S. securities
markets.
RISKS OF FOREIGN SECURITIES. Foreign investments can involve
significant risks in addition to the risks inherent in U.S. investments. The
value of securities denominated in or indexed to foreign currencies, and of
dividends and interest from such securities, can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to
those applicable to U.S. companies, and it may be more difficult to obtain
reliable information regarding an issuer's financial condition and operations.
The euro conversion, that will take place over a several-year period, could have
potential adverse effects on a Fund's ability to value its portfolio holdings in
foreign securities, and could increase the costs associated with a Fund's
operations. In addition, the costs of foreign investing, including withholding
taxes, brokerage commissions, and custodial costs, generally are higher than for
U.S. investments.
Foreign markets may offer less protection to investors than U.S.
markets. Foreign issuers, brokers, and securities markets may be subject to less
government supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may invoke increased
risks in the event of a failed trade or the insolvency of a broker-dealer, and
may involve substantial delays. It also may be difficult to enforce legal rights
in foreign countries.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments adverse to
the interests of U.S. investors, including the possibility of expropriation or
nationalization of assets, confiscatory taxation, restrictions on U.S.
investment or on the ability to repatriate assets or convert currency into U.S.
dollars, or other government intervention. There may be a greater possibility of
default by foreign governments or foreign government-sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
B-7
<PAGE>
economic, or social instability, military action or unrest, or adverse
diplomatic developments. There is no assurance that an Advisor will be able to
anticipate or counter these potential events and their impacts on a Fund's share
price.
OPTIONS ON SECURITIES
Although it has no present intention of doing so, each Fund reserves
the right to engage in certain purchases and sales of options on securities. A
Fund may write (i.e., sell) call options ("calls") on equity securities if the
calls are "covered" throughout the life of the option. A call is "covered" if a
Fund owns the optioned securities. When a Fund writes a call, it receives a
premium and gives the purchaser the right to buy the underlying security at any
time during the call period at a fixed exercise price regardless of market price
changes during the call period. If the call is exercised, a Fund will forgo any
gain from an increase in the market price of the underlying security over the
exercise price.
Each Fund may purchase a call on securities to effect a "closing
purchase transaction" which is the purchase of a call covering the same
underlying security and having the same exercise price and expiration date as a
call previously written by a Fund on which it wishes to terminate its
obligation. If a Fund is unable to effect a closing purchase transaction, it
will not be able to sell the underlying security until the call previously
written by the Fund expires (or until the call is exercised and the Fund
delivers the underlying security).
Each Fund also may write and purchase put options ("puts"). When a Fund
writes a put, it receives a premium and gives the purchaser of the put the right
to sell the underlying security to the Fund at the exercise price at any time
during the option period. When a Fund purchases a put, it pays a premium in
return for the right to sell the underlying security at the exercise price at
any time during the option period. If any put is not exercised or sold, it will
become worthless on its expiration date. When a Fund writes a put, it will
maintain at all times during the option period, in a segregated account, liquid
assets equal in value to the exercise price of the put.
A Fund's option positions may be closed out only on an exchange which
provides a secondary market for options of the same series, but there can be no
assurance that a liquid secondary market will exist at a given time for any
particular option.
The Funds' custodian, or a securities depository acting for them,
generally acts as escrow agent as to the securities on which the Funds have
written puts or calls, or as to other securities acceptable for such escrow so
that no margin deposit is required of the Funds. Until the underlying securities
are released from escrow, they cannot be sold by the Funds.
In the event of a shortage of the underlying securities deliverable on
exercise of an option, the Options Clearing Corporation has the authority to
permit other, generally comparable securities to be delivered in fulfillment of
option exercise obligations. If the Options Clearing Corporation exercises its
discretionary authority to allow such other securities to be delivered, it may
also adjust the exercise prices of the affected options by setting different
B-8
<PAGE>
prices at which otherwise ineligible securities may be delivered. As an
alternative to permitting such substitute deliveries, the Options Clearing
Corporation may impose special exercise settlement procedures.
The hours of trading for options may not conform to the hours during
which the underlying securities are traded. To the extent that the options
markets close before the markets for the underlying securities, significant
price and rate movements may take place in the underlying markets that cannot be
reflected in the options markets. The purchase of options is a highly
specialized activity which involves investment techniques and risks different
from those associated with ordinary portfolio securities transactions.
SHORT-TERM INVESTMENTS
Each Fund may invest in any of the following securities and
instruments:
U. S. GOVERNMENT SECURITIES. U.S. Government securities in which a Fund
may invest include direct obligations issued by the U.S. Treasury, such as
Treasury bills, certificates of indebtedness, notes and bonds. U.S. Government
agencies and instrumentalities that issue or guarantee securities include, but
are not limited to, the Federal Housing Administration, Federal National
Mortgage Association, Federal Home Loan Banks, Government National Mortgage
Association, International Bank for Reconstruction and Development and Student
Loan Marketing Association.
All Treasury securities are backed by the full faith and credit of the
United States. Obligations of U.S. Government agencies and instrumentalities may
or may not be supported by the full faith and credit of the United States. Some,
such as the Federal Home Loan Banks, are backed by the right of the agency or
instrumentality to borrow from the Treasury. Others, such as securities issued
by the Federal National Mortgage Association, are supported only by the credit
of the instrumentality and not by the Treasury. If the securities are not backed
by the full faith and credit of the United States, the owner of the securities
must look principally to the agency issuing the obligation for repayment and may
not be able to assert a claim against United States in the event that the agency
or instrumentality does not meet its commitment.
Among the U.S. Government securities that may be purchased by a Fund
are "mortgage- backed securities" of the Government National Mortgage
Association ("Ginnie Mae"), the Federal Home Loan Mortgage Association ("Freddie
Mac") and the Federal National Mortgage Association ("Fannie Mae"). These
mortgage-backed securities include "pass-through" securities and "participation
certificates," both of which represent pools of mortgages that are assembled,
with interests sold in the pool. Payments of principal (including prepayments)
and interest by individual mortgagors are "passed through" to the holders of
interests in the pool; thus each payment to holders may contain varying amounts
of principal and interest. Prepayments of the mortgages underlying these
securities may result in a Fund's inability to reinvest the principal at
comparable yields. Mortgage-backed securities also include "collateralized
mortgage obligations," which are similar to conventional bonds in that they have
B-9
<PAGE>
fixed maturities and interest rates and are secured by groups of individual
mortgages. Timely payment of principal and interest on Ginnie Mae pass-throughs
is guaranteed by the full faith and credit of the United States. Freddie Mac and
Fannie Mae are both instrumentalities of the U.S. Government, but their
obligations are not backed by the full faith and credit of the United States.
CERTIFICATES OF DEPOSIT, BANKERS' ACCEPTANCES AND TIME DEPOSITS. Each
Fund may hold certificates of deposit, bankers' acceptances and time deposits.
Certificates of deposit are negotiable certificates issued against funds
deposited in a commercial bank for a definite period of time and earning a
specified return. Bankers' acceptances are negotiable drafts or bills of
exchange, normally drawn by an importer or exporter to pay for specific
merchandise, which are "accepted" by a bank, meaning in effect that the bank
unconditionally agrees to pay the face value of the instrument on maturity.
Certificates of deposit and bankers' acceptances acquired by a 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.
In addition to buying certificates of deposit and bankers' acceptances,
each Fund also may make interest-bearing time or other interest-bearing deposits
in commercial or savings banks. Time deposits are non-negotiable deposits
maintained at a banking institution for a specified period of time at a
specified interest rate.
COMMERCIAL PAPER AND SHORT-TERM NOTES. Each Fund may invest a portion
of its assets in commercial paper and short-term notes. Commercial paper
consists of unsecured promissory notes issued by corporations. Commercial paper
and short-term notes will normally have maturities of less than nine months and
fixed rates of return, although such instruments may have maturities of up to
one year.
Commercial paper and short-term notes will consist of issues rated at
the time of purchase "A-2" or higher by 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 Advisor 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 Funds and (unless otherwise noted) are fundamental and cannot be changed
without the affirmative vote of a majority of that Fund's outstanding voting
securities as defined in the 1940 Act.
B-10
<PAGE>
The Discovery Fund may not:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b)
through the lending of its portfolio securities as described above and in its
Prospectus, or (c) to the extent the entry into a repurchase agreement is
deemed to be a loan.
2. (a) Borrow money, except as stated in the Prospectus and this SAI.
Any such borrowing will be made only if immediately thereafter there is an asset
coverage of at least 300% of all
borrowings.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
3. Purchase securities on margin, participate on a joint or joint and
several basis in any securities trading account, or underwrite securities. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
4. Purchase or sell real estate, commodities or commodity contracts.
(As a matter of operating policy, the Board of Trustees may authorize the Fund
to engage in certain activities regarding futures contracts for bona fide
hedging purposes; any such authorization will be accompanied by appropriate
notification to shareholders.)
5. Invest 25% or more of the market value of its assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
6. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures or repurchase transactions.
The Fund observes the following policies, which are not deemed
fundamental and which may be changed without shareholder vote. The Fund may not:
7. Invest in any issuer for purposes of exercising control or
management.
8. Invest in securities of other investment companies which would
result in the Fund owning more than 3% of the outstanding voting securities of
any one such investment company, the Fund owning securities of another
investment company having an aggregate value in excess of 5% of the value of the
Fund's total assets, or the Fund owning securities of investment companies which
in the aggregate would exceed 10% of the value of the Fund's total assets.
B-11
<PAGE>
9. Invest, in the aggregate, more than 15% of its net assets in
securities with legal or contractual restrictions on resale, securities which
are not readily marketable and repurchase agreements with more than seven days
to maturity.
10. With respect to fundamental investment restriction 2(a) above, the
Fund will not purchase portfolio securities while outstanding borrowings exceed
5% of its assets.
The Opportunity Fund may not:
1. Make loans to others, except (a) through the purchase of debt
securities in accordance with its investment objectives and policies, (b)
through the lending of its portfolio securities as described above and in its
Prospectus, or (c) to the extent the entry into a repurchase agreement is
deemed to be a loan.
2. (a) Borrow money, except as stated in the Prospectus and this
Statement of Additional Information. Any such borrowing will be made only if
immediately thereafter there is an asset
coverage of at least 300% of all borrowings.
(b) Mortgage, pledge or hypothecate any of its assets except in
connection with any such borrowings.
3. Purchase securities on margin, participate on a joint or joint and
several basis in any securities trading account, or underwrite securities. (Does
not preclude the Fund from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities.)
4. Buy or sell interests in oil, gas or mineral exploration or
development programs or related leases or real estate. (Does not preclude
investments in marketable securities of issuers engaged in such activities.)
5. Purchase or sell real estate, commodities or commodity contracts.
(As a matter of operating policy, the Board of Trustees may authorize the Fund
to engage in certain activities regarding futures contracts for bona fide
hedging purposes; any such authorization will be accompanied by appropriate
notification to shareholders.)
6. Invest 25% or more of the market value of its assets in the
securities of companies engaged in any one industry. (Does not apply to
investment in the securities of the U.S. Government, its agencies or
instrumentalities.)
7. Issue senior securities, as defined in the 1940 Act, except that
this restriction shall not be deemed to prohibit the Fund from (a) making any
permitted borrowings, mortgages or pledges, or (b) entering into options,
futures or repurchase transactions.
B-12
<PAGE>
8. Invest in any issuer for purposes of exercising control or
management.
The Fund observes the following policies, which are not deemed
fundamental and which may be changed without shareholder vote. The Fund may not:
9. Invest in securities of other investment companies which would
result in the Fund owning more than 3% of the outstanding voting securities of
any one such investment company, the Fund owning securities of another
investment company having an aggregate value in excess of 5% of the value of the
Fund's total assets, or the Fund owning securities of investment companies which
in the aggregate would exceed 10% of the value of the Fund's total assets.
10. Invest, in the aggregate, more than 15% of its 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 described in the Funds' Prospectuses or
this SAI is adhered to at the time of investment, a subsequent increase or
decrease in a percentage resulting from a change in the values of assets will
not constitute a violation of that restriction, except for the policy
regarding borrowing or the purchase of restricted 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 Funds expect to distribute any undistributed net
investment income on or about December 31 of each year. Any net capital gains
realized through the period ended October 31 of each year will also be
distributed by December 31 of each year.
Each distribution by a Fund is accompanied by a brief explanation of
the form and character of the distribution. In January of each year each 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. Each Fund intends to qualify and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"), provided it complies with all applicable
requirements regarding the source of its income, diversification of its assets
and timing
B-13
<PAGE>
of distributions. Each Fund's policy is to distribute to its shareholders all of
its investment company taxable income and any net realized long-term capital
gains for each fiscal year in a manner that complies with the distribution
requirements of the Code, so that the Fund will not be subject to any federal
income or excise taxes. To comply with the requirements, each Fund must also
distribute (or be deemed to have distributed) by December 31 of each calendar
year (i) at least 98% of its ordinary income for such year, (ii) at least 98% of
the excess of its realized capital gains over its realized capital losses for
the 12-month period ending on October 31 during such year and (iii) any amounts
from the prior calendar year that were not distributed and on which the Fund
paid no federal income tax.
Each Fund's ordinary income generally consists of interest, dividend
income and income from short sales, less expenses. Net realized capital gains
for a fiscal period are computed by taking into account any capital loss carry
forward of a 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 a 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 each Fund's investment policy, it is
expected that dividends from domestic corporations will be part of the Fund's
gross income and that, accordingly, part of the distributions by the Fund may be
eligible for the dividends-received deduction for corporate shareholders.
However, the portion of each Fund's gross income attributable to qualifying
dividends is largely dependent on that Fund's investment activities for a
particular year and therefore cannot be predicted with any certainty. The
deduction may be reduced or eliminated if Fund shares held by a corporate
investor are treated as debt-financed or are held for less than 46 days during
the 90-day period that begins 45 days before the stock becomes ex-dividend with
respect to the dividend.
Any long-term or mid-term capital gain distributions are taxable to
shareholders as long-term or mid-term capital gains, respectively, regardless of
the length of time shares have been held. Capital gains distributions are not
eligible for the dividends-received deduction referred to in the previous
paragraph. Distributions of any net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share on the reinvestment date. Distributions
are generally taxable when received. However, distributions declared in October,
November or December to shareholders of record on a date in such a month and
paid the following January are taxable as if received on December 31.
Distributions are includable in alternative minimum taxable income in computing
a shareholder's liability for the alternative minimum tax.
A redemption or exchange of Fund shares may result in recognition of a
taxable gain or loss. In determining gain or loss from an exchange of Fund
shares for shares of another mutual fund, the sales charge incurred in
B-14
<PAGE>
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, each Fund will be required to report to the Internal
Revenue Service ("IRS") all distributions of taxable income and capital gains as
well as gross proceeds from the redemption or exchange of Fund shares, except in
the case of exempt shareholders, which includes most corporations. Pursuant to
the backup withholding provisions of the Internal Revenue Code, distributions of
any taxable income and capital gains and proceeds from the redemption of Fund
shares may be subject to withholding of federal income tax at the rate of 31
percent in the case of non-exempt shareholders who fail to furnish the Funds
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 Funds
with their taxpayer identification numbers or certify their exempt status in
order to avoid possible erroneous application of backup withholding. Each Fund
reserves the right to refuse to open an account for any person failing to
provide a certified taxpayer identification number.
Each 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 a Fund. Shareholders
are advised to consult with their own tax advisers concerning the application of
federal, state and local taxes to an investment in a 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 a Fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30 percent (or at a lower rate
under an applicable income tax treaty) on amounts constituting ordinary income.
This discussion and the related discussion in the prospectus have been
prepared by Fund management, and counsel to the Funds has expressed no opinion
in respect thereof.
B-15
<PAGE>
TRUSTEES AND EXECUTIVE OFFICERS
The Trustees of the Trust, who were elected for an indefinite term by
the initial shareholders of the Trust, are responsible for the overall
management of the Trust, including general supervision and review of the
investment activities of the Funds. 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).
B-16
<PAGE>
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
During the fiscal year ended March 31, 1999, trustees' fees and
expenses in the amount of $4,707 were allocated to The Opportunity Fund. For the
period April 9, 1998 (commencement of operations) through March 31, 1999,
trustees fees and expenses in the amount of $3,426 were allocated to The
Discovery Fund. As of the date of this SAI, the Trustees and officers of the
Trust as a group did not own more than 1% of the outstanding shares of either
Fund.
B-17
<PAGE>
THE FUNDS' INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided
to the Funds by Perkins Capital Management, Inc., the Advisor, pursuant to
Investment Advisory Agreements (the "Advisory Agreements") . The Advisor is
controlled by Richard Perkins, Sr. Richard Perkins, Jr. and Daniel Perkins.
Each 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 Advisory Agreement applies), and (2) a majority
of the Trustees who are not interested persons of any party to the Advisory
Agreement, in each case cast in person at a meeting called for the purpose of
voting on such approval. Any such Advisory Agreement may be terminated at any
time, without penalty, by either party to the Advisory Agreement upon sixty
days' written notice and is automatically terminated in the event of its
"assignment," as defined in the 1940 Act.
The use of the name "Perkins" by the Funds is pursuant to a license
granted by the Advisor, and in the event the Advisory Agreements with the Funds
are terminated, the Advisor has reserved the right to require the Funds to
remove any references to the name "Perkins."
For the fiscal years ended March 31, 1999, 1998 and 1997, the Advisor
received fees of $387,486, $726,828 and $1,152,114, respectively, from The
Opportunity Fund.
For the period April 9, 1998 through March 31, 1999, The Discovery Fund
accrued $5,616 in advisory fees, all of which was waived by the Advisor. For the
same period, the Advisor voluntarily reimbursed the Discovery Fund an additional
$119,373 in expenses.
THE FUNDS' ADMINISTRATOR
The Funds have Administration Agreements with Investment Company
Administration LLC (the "Administrator"), a corporation partly owned and
controlled by Messrs. Paggioli and Wadsworth with offices at 4455 E. Camelback
Rd., Ste. 261-E, Phoenix, AZ 85018. The Administration Agreements provide 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 Funds; prepare all
required filings necessary to maintain the Funds' qualification and/or
registration to sell shares in all states where the Funds currently do, or
intend 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
B-18
<PAGE>
activities of the Funds' servicing agents (i.e., transfer agent, custodian, fund
accountants, etc.); review and adjust as necessary the Funds' daily expense
accruals; and perform such additional services as may be agreed upon by the
Funds and the Administrator. For its services, the Administrator receives a
monthly fee from each Fund at the following annual rate:
Average net assets Fee or fee rate
------------------ ---------------
Under $12 million $30,000
$12 to $50 million 0.25% of average net assets
$50 to $100 million 0.20% of average net assets
$100 million to $200 million 0.15% of average net assets
Over $200 million 0.10% of average net assets
For the fiscal years ending March 31, 1999, 1998 and 1997, the
Administrator received fees of $66,370, $140,366 and $246,706, respectively,
from The Opportunity Fund.
For the period April 9, 1998 through March 31, 1999, the Administrator
received fees of $29,260 from The Discovery Fund.
THE FUNDS' DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a corporation partly
owned by Messrs. Paggioli and Wadsworth, acts as the Funds' principal
underwriter in a continuous public offering of the Funds' shares. The
Distribution Agreements between the Funds and the Distributor continue 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 to which the Agreement applies (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. Each 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.
For the fiscal years ended March 31, 1999, 1998 and 1997, the aggregate
sales commissions received by the Distributor with respect to The Opportunity
Fund were $1,590, $110 and 107, respectively.
For the period April 9, 1998 through March 31, 1999, the aggregate
sales commissions received by the Distributor with respect to The Discovery Fund
were $2,481.
Each Fund has adopted a Distribution Plan in accordance with Rule 12b-1
under the 1940 Act. Each Plan provides that a Fund will pay a fee to the
Distributor at an annual rate of up to 0.25% of its average daily net assets
(currently 0.20%). The fee is paid to the Distributor as reimbursement for, or
in anticipation of, expenses incurred for distribution related activity.
B-19
<PAGE>
For the fiscal year ended March 31, 1999, The Opportunity Fund paid
fees of $77,497 under its Plan, of which $9,664 was paid out as selling
compensation to dealers, $12,369 was for reimbursement of printing, postage and
office expenses, $40,391 was for compensation to the Distributor and $15,073 was
for reimbursement of advertising and marketing materials expenses.
For the period April 9, 1998 through March 31, 1999, The Discovery Fund
paid fees of $1,407 under its Plan, of which $39 was paid out as selling
compensation to dealers, $650 was for reimbursement of printing, postage and
office expenses, $267 was for compensation to sales personnel and $451 was for
reimbursement of advertising and marketing materials expenses.
Each Fund also has a Shareholder Service Plan pursuant to which
payments or reimbursements of payments may be made to selected brokers, dealers
or administrators which have entered into agreements for services provided to
shareholders of the Funds.
For the fiscal year ended March 31, 1999, fees of $55,740 were paid
pursuant to The Opportunity Fund's Shareholder Service Plan.
For the period April 9, 1998 through March 31, 1999, fees of $1,126
were paid pursuant to The Discovery Fund's Shareholder Service Plan.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Advisory Agreements, the Advisor determines which
securities are to be purchased and sold by the Funds and selects the
broker-dealers to execute the Funds' portfolio transactions. Purchases and sales
of securities in the over-the-counter market will generally be executed directly
with a "market-maker" unless, in the opinion of the Advisor, a better price and
execution can otherwise be obtained by using a broker for the transaction.
Purchases of portfolio securities for the Funds also may be made
directly from issuers or from underwriters. Where possible, purchase and sale
transactions will be effected through dealers (including banks) which specialize
in the types of securities which the Funds will be holding, unless better
executions are available elsewhere. Dealers and underwriters usually act as
principal for their own accounts. Purchases from underwriters will include a
concession paid by the issuer to the underwriter and purchases from dealers will
include the spread between the bid and the asked price. If the execution and
price offered by more than one dealer or underwriter are comparable, the order
may be allocated to a dealer or underwriter that has provided research or other
services as discussed below.
In placing portfolio transactions, the Advisor will use reasonable
efforts to choose broker-dealers capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
B-20
<PAGE>
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers that furnish or supply trading services, research
products and statistical information to the Advisor that the Advisor may
lawfully and appropriately use in its investment advisory capacities, as well as
provide other services in addition to execution services. The Advisor considers
such services, products and information, which are in addition to and not in
lieu of the services required to be performed by it under its Agreements with
the Funds, to be useful in varying degrees, but not necessarily capable of
definite valuation.
The Advisor may select a broker-dealer that furnishes such services,
products and information even if the specific services are not directly useful
to the Funds and may be useful to the Advisor in advising other clients. In
negotiating commissions with a broker or evaluating the spread to be paid to a
dealer, the Funds may therefore pay a higher commission or spread than would be
the case if no weight were given to the furnishing of these supplemental
services, provided that the amount of such commission or spread has been
determined in good faith by the Advisor to be reasonable in relation to the
value of the brokerage and/or research services provided by such broker-dealer.
The standard of reasonableness is to be measured in light of the Advisor's
overall responsibilities to the Funds. Products, services and informational
items may be provided directly to the Advisor by the broker or may be provided
by third parties but paid for directly or indirectly by the broker.
In some cases, brokers will pay for all of or a portion of products
that can be or are used for both trading and research and administrative (i.e.,
non-trading/non-research) purposes. Typical of these types of products and
services are computer hardware systems, computer software, employee education,
communication equipment, special communication lines, news services and other
products and services which provide appropriate assistance to the Advisor in the
performance of its investment decision-making, but could also be used for
administrative purposes. In these cases, the Advisor allocates the research
portion payable by the broker based on usage. For instance, the Advisor believes
that its computer systems and software serve an important research and account
management function; however, its computer system is also used for
administrative purposes. On an ongoing basis, the Advisor allocates the
administrative portion of the expenses to be paid directly the Advisor and the
research portion to be paid by brokers who execute security transaction for the
Advisor. Since this allocation of cost between research and non-research
functions is determined solely by the Advisor, a conflict of interest may exist
in its calculation.
Investment decisions for the Funds are made independently from those of
other client accounts or mutual funds managed or advised by the Advisor.
Nevertheless, it is possible that at times identical securities will be
acceptable for both a Fund and one or more of such client accounts or mutual
funds. In such event, the position of a Fund and such client account(s) or
mutual funds in the same issuer may vary and the length of time that each may
choose to hold its investment in the same issuer may likewise vary. However, to
the extent any of these client accounts or mutual funds seeks to acquire the
same security as a Fund at the same time, a Fund may not be able to acquire as
large a portion of such security as it desires, or it may have to pay a higher
B-21
<PAGE>
price or obtain a lower yield for such security. Similarly, a Fund may not be
able to obtain as high a price for, or as large an execution of, an order to
sell any particular security at the same time. If one or more of such client
accounts or mutual funds simultaneously purchases or sells the same security
that a Fund is purchasing or selling, each day's transactions in such security
will be allocated between that Fund and all such client accounts or mutual funds
in a manner deemed equitable by the Advisor, taking into account the respective
sizes of the accounts and the amount being purchased or sold. It is recognized
that in some cases this system could have a detrimental effect on the price or
value of the security insofar as a Fund is concerned. In other cases, however,
it is believed that the ability of a Fund to participate in volume transactions
may produce better executions for that Fund.
The Funds do not effect securities transactions through brokers solely
for selling shares of the Funds, although the Funds may consider the sale of
shares as a factor in allocating brokerage. However, broker-dealers who execute
brokerage transactions may effect purchase of shares of the Funds for their
customers. The Funds do not use the Distributor to execute their portfolio
transactions.
For the fiscal year ended March 31, 1999, The Opportunity Fund paid
$91,974 in brokerage commissions, of which $73,196 was paid to firms for
research, statistical or other services provided to the Advisor. For the fiscal
year ended March 31, 1998, The Opportunity Fund paid $233,821 in brokerage
commissions, of which $131,471 was paid to firms for research, statistical or
other services provided to the Advisor. For the fiscal year ended March 31,
1997, The Opportunity Fund paid $333,259 in brokerage commissions.
For the period April 9, 1998 through March 31, 1999, The Discovery Fund
paid $8,489 in brokerage commissions, of which $6.277 was paid to firms for
research, statistical or other services provided to the Advisor.
PORTFOLIO TURNOVER
Although the Funds generally will not invest for short-term trading
purposes, portfolio securities may be sold without regard to the length of time
they have been held when, in the opinion of the Advisor, investment
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 a 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." Opportunity Fund's portfolio turnover rate for the fiscal years
ended March 31, 1999 and 1998 was 19.34% and 53.37%, respectively. Discovery
Fund's portfolio turnover rate for the period April 9, 1998 through March 31,
1999 was 137.32%.
B-22
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The information provided below supplements the information contained in
the Funds' Prospectus regarding the purchase and redemption of Fund shares.
HOW TO BUY SHARES
You may purchase shares of a 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 public offering price after
receipt of the order by such agent before the Portfolio's daily cutoff time.
Orders received after that time will be purchased at the next-determined public
offering price.
REDUCED SALES CHARGES
The reduced sales charges, as noted in the Prospectus, apply to
quantity purchases made at one time by a "person," which means (i) an
individual, (ii) members of a family (i.e., an individual, spouse and children
under age 21), or (iii) a trustee or fiduciary of a single trust estate or a
single fiduciary account. In addition, purchases of shares made during a
thirteen-month period pursuant to a written Letter of Intent are eligible for a
reduced sales charge. Reduced sales charges are also applicable to subsequent
purchases by a "person," based on the aggregate of the amount being purchased
and the value, at offering price, of shares owned at the time of investment.
Automatic Investment Plan
As discussed in the Prospectus, the Funds provide an Automatic
Investment Plan for the convenience of investors who wish to purchase shares of
the Funds on a regular basis. All record keeping and custodial costs of the
Automatic Investment Plan are paid by the Funds. The market value of the Funds'
shares is subject to fluctuation, so before undertaking any plan for systematic
investment, the investor should keep in mind that this plan does not assure a
profit nor protect against depreciation in declining markets.
The public offering price of Portfolio shares is the net asset value,
plus the applicable sales charge. Each 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 Funds' 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"), normally 4:00 p.m.,
Eastern time. If you buy shares through your investment representative, the
representative must receive your order before the close of regular trading on
the NYSE and forwarded promptly to the Transfer Agent to receive that day's
public offering price.
B-23
<PAGE>
DEALER COMMISSIONS
The Distributor pays a portion of the sales charges imposed on
purchases of Fund shares to retail dealers, as follows:
Dealer Commission
as a % of
Your investment offering price
--------------- --------------
Less than $50,000 4.50%
$50,000 but less than $100,000 3.75
$100,000 but less than $250,000 2.80
$250,000 but less than $500,000 1.85
$500,000 but less than $1,000,000 0.90
$1,000,000 or more None
The NYSE annually announces the days on which it will not be open for
trading. The most recent announcement indicates that it will not be open on the
following days: New Year's Day, Martin Luther King Jr. Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. However, the NYSE may close on days not included in that
announcement.
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of the Funds' shares, (ii) to reject purchase orders in whole
or in part when in the judgment of the Advisor or Distributor such rejection is
in the best interest of a Fund, and (iii) to reduce or waive the minimum for
initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of a Fund's
shares.
HOW TO SELL SHARES
You can sell your Fund shares any day the NYSE is open for regular
trading, either directly to a Fund or through your investment representative.
SELLING SHARES THROUGH YOUR INVESTMENT REPRESENTATIVE
Your investment representative must receive your request before the
close of regular trading on the NYSE to receive that day's net asset value. Your
investment representative will be responsible for furnishing all necessary
documentation to the Transfer Agent, and may charge you
for its services.
DELIVERY OF REDEMPTION PROCEEDS
Payments to shareholders for shares of a Fund redeemed directly from
the Fund will be made as promptly as possible but no later than seven days after
receipt by the Fund's Transfer Agent of the written request in proper form, with
the appropriate documentation as stated in the Prospectus, except that a Fund
B-24
<PAGE>
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 a Fund not reasonably practicable; or (c) for such other period as
the SEC may permit for the protection of Fund shareholders. Under unusual
circumstances, a Fund may suspend redemptions, or postpone payment for more than
seven days, but only as authorized by SEC rules.
At various times, a Fund may be requested to redeem shares for which it
has not yet received confirmation of good payment; in this circumstance, the
Fund may delay the redemption until payment for the purchase of such shares has
been collected and confirmed to the Fund.
The value of shares on redemption or repurchase may be more or less
than the investor's cost, depending upon the market value of the Fund's
portfolio securities at the time of redemption or repurchase.
TELEPHONE REDEMPTIONS
Shareholders must have selected telephone transaction privileges on the
Account Application when opening a Fund account. Upon receipt of any
instructions or inquiries by telephone from a shareholder or, if held in a joint
account, from either party, or from any person claiming to be the shareholder,
the Funds or their 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 a
Fund and depositing and withdrawing monies from the bank account specified in
the Bank Account Registration section of the shareholder's latest Account
Application or as otherwise properly specified to a 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 Funds may be liable for any losses due to
unauthorized or fraudulent instructions. An investor agrees, however, that if
such procedures are used, neither the Funds nor their agents will be liable for
any loss, liability, cost or expense arising out of any redemption request,
including any fraudulent or unauthorized request.
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.
B-25
<PAGE>
REINVESTMENT AFTER REDEMPTION
If you redeem shares in your Fund account, you can reinvest within 90
days from the date of redemption all or any part of the proceeds in shares of
either Fund, at net asset value, on the date the Transfer Agent receives your
purchase request. To take advantage of this option, send your reinvestment check
along with a written request to the Transfer agent with ninety days from the
date of your redemption. Include your account number and a statement that you
are taking advantage of the "Reinvestment Privilege." If your reinvestment is
into a new account, it must meet the minimum investment and other requirements
of the fund into which the reinvestment is being made.
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 a Fund's
assets). Each 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.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the Funds 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 Day. The Funds do not expect to determine the net asset value of their
shares on any day when the NYSE is not open for trading even if there is
sufficient trading in their 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 NYSE closes at a different time or the Board of Trustees decides it
is necessary.
In valuing each Fund's assets for calculating net asset value, readily
marketable portfolio securities listed on a national securities exchange or on
NASDAQ are valued at the last sale price on the business day as of which such
value is being determined. If there has been no sale on such exchange or on
NASDAQ on such day, the security is valued at the closing bid price on such
day.
Readily marketable securities traded only in the over-the-counter market and not
on NASDAQ are valued at the current or last bid price. If no bid is quoted on
such day, the security is valued by such method as the Board of Trustees of the
Trust shall determine in good faith to reflect the security's fair value. All
other assets of each Fund are valued in such manner as the Board of Trustees in
good faith deems appropriate to reflect their fair value.
B-26
<PAGE>
The net asset value per share of each 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 that Fund outstanding at the time of the
valuation and the result (adjusted to the nearest cent) is the net asset value
per share.
PERFORMANCE INFORMATION
From time to time, the Funds 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 Funds'
average annual compounded rate of return over the most recent four calendar
quarters and the period from the Fund's inception of operations. The Funds may
also advertise aggregate and average total return information over different
periods of time.
Each Fund's total return may be compared to relevant indices, including
Standard & Poor's 500 Composite Stock Index and indices published by Lipper
Analytical Services, Inc. From time to time, evaluations of a Fund's performance
by independent sources may also be used in advertisements and in information
furnished to present or prospective investors in the Funds.
Investors should note that the investment results of the Funds will
fluctuate over time, and any presentation of a 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.
Each 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 and gives effect to the maximum applicable sales charge.
B-27
<PAGE>
The average annual total return for The Opportunity Fund for the period
ended March 31 are as follows:
One Year -20.74%
Five Years 5.98%
From Inception 10.83%
(February 18, 1993)
The annual total return for the Discovery Fund from inception (April 9,
1998) to March 31, 1999 is 10.16%.
All return figures noted above include the maximum sales charge of
4.75%.
GENERAL INFORMATION
Investors in the Funds will be informed of each Fund's progress
through periodic reports. Financial statements certified by independent public
accountants will be submitted to shareholders
at least annually.
Firstar Institutional Custody Services, located at 425 Walnut St.,
Cincinnati, Ohio 45201 acts as Custodian of the securities and other assets of
the Funds. PFPC, Inc., P.O. Box 8813, Wilmington, DE 19899-8813 acts as the
Funds' 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 Funds.
Tait, Weller & Baker, 8 Penn Center Plaza, Philadelphia, PA 19103, are
the independent auditors for the Funds.
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, 29th
Floor, San Francisco, California 94104, are legal counsel to the Funds.
On June 30, 1999, the following persons owned of record more that 5% of
The Discovery Fund's outstanding voting securities:
Donaldson, Lufkin & Jenrette Securities Corp Mutual Fund Dept.
PO Box 2052
New Jersey, NJ 07303 - 17.70%
Charles E. Johnson Trustee
for Charles E. Johnson Revocable Trust
904 Larson Drive
Zumbrota MN 55992 - 5.26%
USB Piper Jaffray
as Customer FBA Gary M Petrucci
222 So. 9th Street
Minneapolis, MN 55402 - 8.03%
B-28
<PAGE>
On June 30, 1999, Charles Schwab & Co., Inc., 101 Montgomery Street,
San Francisco, CA 94104 owned of record for the exclusive benefit of customers,
6.62% of The Opportunity Fund's outstanding voting securities.
The Trust was organized as a Massachusetts business trust on February
17, 1987. The Agreement and Declaration of Trust permits the Board of Trustees
to issue an limited number of full and fractional shares of beneficial interest,
without par value, which may be issued in any number of series. The Board of
Trustees may from time to time issue other series, the assets and liabilities of
which will be separate and distinct from any other series.
Shares issued by the Funds have no preemptive, conversion, or
subscription rights. Shareholders have equal and exclusive rights as to
dividends and distributions as declared by the Funds and to the net assets of
the Funds upon liquidation or dissolution. Each 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 Funds' assets for any shareholder held
personally liable for obligations of the Funds 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 Funds or Trust and satisfy any judgment thereon. All such rights are limited
to the assets of the Funds. 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 Funds themselves are unable to meet their
obligations.
FINANCIAL STATEMENTS
Each Fund's annual report to shareholders for its fiscal year ended
March 31, 1999 are separate documents supplied with this SAI and the financial
statements, accompanying notes and reports of independent accountants appearing
therein are incorporated by reference in this SAI.
B-29
<PAGE>
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-30
