[LEONETTI LOGO]
LEONETTI GROWTH FUND
PROSPECTUS
JULY 26, 1999
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LEONETTI GROWTH FUND,
A SERIES OF PROFESSIONALLY MANAGED PORTFOLIOS
Leonetti Growth Fund is a no-load mutual fund that seeks to provide
investors with long-term growth of capital.
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 July 26, 1999
THE FUND IS CURRENTLY NOT AVAILABLE FOR INVESTMENT, BUT WILL OPEN TO NEW
SHAREHOLDERS ON SEPTEMBER 1, 1999.
Do not send money prior to September 1, 1999.
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TABLE OF CONTENTS
An Overview of the Fund..................................................... 3
Fees and Expenses........................................................... 4
Investment Objective and Principal Investment Strategies.................... 5
Principal Risks of Investing in the Fund.................................... 5
Investment Advisor.......................................................... 6
Shareholder Information..................................................... 6
Pricing of Fund Shares...................................................... 10
Dividends and Distributions................................................. 10
Tax Consequences............................................................ 10
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AN OVERVIEW OF THE FUND
LEONETTI GROWTH FUND'S INVESTMENT GOAL
The Fund seeks long-term growth of capital.
LEONETTI GROWTH FUND'S PRINCIPAL INVESTMENT STRATEGIES
The Fund will primarily invest in equity securities of domestic companies of any
size. In selecting investments, the Advisor will primarily invest in:
* growth stocks that exhibit a rising trend in earnings and revenue
* out-of-favor blue chip stocks
* small companies with rapidly rising revenues and earnings
PRINCIPAL RISKS OF INVESTING IN THE LEONETTI GROWTH FUND
There is the risk that you could lose money on your investment in the Fund. For
example, the following risks could affect the value of your investment:
* The stock market goes down
* Interest rates rise which can result in a decline in the stock market
* Growth stocks fall out of favor with the stock market
* Stocks in the Fund's portfolio may not increase their earnings at the
rate anticipated
* Securities of undervalued companies may remain undervalued during a
given period
* Securities of smaller-capitalization companies involve greater risk
than investing in larger-capitalization companies
WHO MAY WANT TO INVEST IN THE LEONETTI GROWTH FUND
The Fund may be appropriate for investors who:
* Are pursuing a long-term goal such as retirement
* Want to add an investment with growth potential to diversify their
investment portfolio
* Are willing to accept higher short-term risk along with higher
potential for long-term growth
The Fund may not be appropriate for investors who:
* Need regular income or stability of principal
* Are pursuing a short-term goal
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FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge (load) imposed on purchases................. None
Maximum deferred sales charge (load)............................. None
ANNUAL FUND OPERATING EXPENSES*
(expenses that are deducted from Fund assets)
Management Fees.................................................. 1.00%
Other Expenses................................................... 1.26%
-----
Total Annual Fund Operating Expenses............................. 2.26%
Fee Reduction and/or Expense
Reimbursement................................................... (0.26)%
-----
Net Expenses..................................................... 2.00%
=====
* Other Expenses are estimated for the first fiscal year of the Fund. The
Advisor has contractually agreed to reduce its fees and/or pay expenses of the
Fund for an indefinite period to ensure that the Fund's Total Annual Fund
Operating Expenses will not exceed 2.00%. The Advisor reserves the right to be
reimbursed for any reduction in 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 costs 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 period
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 $203
Three Years $627
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INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
The Fund's investment goal is long-term growth of capital.
The Fund will primarily invest in equity securities of domestic companies
of any size. Equity securities include common and preferred stock. Under normal
market conditions, the Fund will invest at least 65% of its total assets in
equity securities that have the potential for long-term growth of capital. In
selecting equity investments for the Fund the Advisor emphasizes the following
three types of investments.
The Advisor seeks growth stocks that have shown a rising trend in earnings
and revenues over a period of years. Companies with low or declining debt
levels, rising gross profit margins, expanding product lines and significant
stock ownership by management are viewed by the Advisor as attractive. Many of
such companies may be components of the Standard & Poor's 500 Index. The Advisor
does not limit its investment selections to companies within this Index and will
invest in any company that the Advisor believes has similar characteristics.
In evaluating out-of-favor companies, the Advisor's fundamental focus is on
a company's business. The Advisor looks for companies that have experienced
problems due to debt, management, excess expenses or cyclical forces, but are
still leaders in their industries. This group of companies includes, but is not
limited to, the largest corporations. It is the Advisor's opinion that such
companies frequently undergo restructuring, management changes, debt reduction
and other corporate events that can have a positive effect on the prices of such
stocks, while still providing a cash flow through regular dividend payments.
The small companies selected for the Fund's portfolio will have experienced
rapidly rising revenues and earnings. The Advisor looks for companies that have
little or no debt, a following in the investment community, an expanding product
line or products that involve a change or improvement in their industry and
control or significant involvement by company founders in day-to-day management.
The Fund will typically sell a stock when the Advisor determines that the
attributes which led to its purchase no longer exist. Securities may also be
sold when the Advisor believes a stock has reached its appreciation potential or
when a company's fundamentals and corresponding stock price have deteriorated.
Under normal market conditions, the Fund will stay fully invested in
stocks. However, the Fund may temporarily depart from its principal investment
strategies by making short-term investments in cash equivalents in response to
adverse market, economic or political conditions. This may result in the Fund
not achieving its investment objective.
The Fund anticipates that its portfolio turnover rate will be 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.
PRINCIPAL RISKS OF INVESTING IN THE FUND
The principal risks of investing in the Fund that may adversely affect the
Fund's net asset value or total return are summarized above in "Principal Risks
of Investing in the Leonetti Growth Fund." These risks are discussed in more
detail below.
MARKET RISK. The risk that the market value of a security may move up and
down, sometimes rapidly and unpredictably. These fluctuations may cause a
security to be worth less than the price originally paid for it, or less than it
was worth at an earlier time. Market risk may affect a single issuer, industry,
sector of the economy or the market as a whole.
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SMALLER AND NEWER COMPANIES RISK. Investing in securities of smaller and
newer companies may involve greater risk than investing in larger companies
because they can be subject to more abrupt or erratic share price changes than
larger companies. Small companies may have limited product lines, 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
and their prices may be more volatile.
YEAR 2000 RISK. The risk that the Fund could be adversely affected if the
computer systems used by the Advisor and other service providers do not properly
process and calculate information related to dates beginning January 1, 2000.
This is commonly known as the "Year 2000 Problem." This situation may negatively
affect the companies in which the Fund invests and by extension the value of the
Fund's shares. Although the Fund's service providers are taking steps to address
this issue, there may still be some risk of adverse effects.
INVESTMENT ADVISOR
Leonetti & Associates, Inc. is the investment advisor to the Fund. The
Advisor's address is 1130 Lake Cook Road, Suite 300, Buffalo Grove, IL 60089.
The Advisor, which manages assets in excess of $350 million, was established in
1982 and provides investment advisory services to individuals and institutional
investors. The Advisor provides the Fund with advice on buying and selling
securities. The Advisor also furnishes the Fund with office space and certain
administrative services and provides most of the personnel needed by the Fund.
For its services, the Fund pays the Advisor a monthly management fee based upon
the average daily net assets of the Fund at the rate of 1.00% annually.
Mr. Craig T. Johnson, Portfolio Manager, will be responsible for the
day-to-day management of the Fund. Mr. Johnson joined the Advisor in 1983.
FUND EXPENSES
The Fund is responsible for its own operating expenses. The Advisor 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 2.00% of the Fund's average daily net assets.
Any reduction in advisory fees or payment of expenses made by the Advisor are
subject to reimbursement by the Fund if requested by the Advisor in subsequent
fiscal years. This reimbursement may be requested by the Advisor if the
aggregate amount actually paid by the Fund toward operating expenses for such
fiscal year (taking into account the reimbursement) does not exceed the
applicable limitation on Fund expenses. The Advisor 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 Advisor is
entitled to any reimbursement of fees and/or expenses.
SHAREHOLDER INFORMATION
HOW TO BUY SHARES
You may open a Fund account with $100 and add to your account at any time
with $25 or more. After you have opened a Fund account, you also may make
automatic subsequent monthly investments with $25 or more through the Automatic
Investment Plan. The minimum investment requirements may be waived from time to
time by the Fund.
You may purchase shares of the Fund by check or wire. All purchases by
check must be in U.S. dollars. Third party checks and cash will not be accepted.
A charge may be imposed if your check does not clear. The Fund is not required
to issue share certificates. The Fund reserves the right to reject any purchase
in whole or in part.
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BY CHECK
If you are making an initial investment in the Fund, simply complete the
Application Form included with this Prospectus and mail it with a check (made
payable to "Leonetti Growth Fund") to:
Leonetti Growth Fund
P.O. Box 640856
Cincinnati, OH 45264-0856
If you wish to send your Application Form and check via an overnight
delivery service (such as FedEx), you should call the Transfer Agent at (800)
282-2340 for instructions:
If you are making a subsequent purchase, a stub is attached to the account
statement you will receive after each transaction. Detach the stub from the
statement and mail it together with a check made payable to "Leonetti Growth
Fund" to the Fund in the envelope provided with your statement or to the address
noted above. Your account number should be written on the check.
BY WIRE
If you are making an initial investment in the Fund, before you wire funds
you should call the Transfer Agent at (800) 282-2340 between 9:00 a.m. and 4:00
p.m., Eastern time, on a day when the New York Stock Exchange ("NYSE") is open
for trading to advise them that you are making an investment by wire. The
Transfer Agent will ask for your name and the dollar amount you are investing.
You will then receive your account number and an order confirmation number. You
should then complete the Account Application included with this Prospectus.
Include the date and the order confirmation number on the Account Application
and mail the completed Account Application to the address at the top of the
Account Application. Your bank should transmit immediately available funds by
wire in your name to:
Firstar Bank, N.A. Cinti/Trust
ABA Routing #0420-00001-3
Leonetti Growth Fund
DDA #821602307
Account name (shareholder name)
Shareholder account number
If you are making a subsequent purchase, your bank should wire funds as
indicated above. Before each wire purchase, you should be sure to notify the
Transfer Agent. IT IS ESSENTIAL THAT YOUR BANK INCLUDE COMPLETE INFORMATION
ABOUT YOUR ACCOUNT IN ALL WIRE INSTRUCTIONS. If you have questions about how to
invest by wire, you may call the Transfer Agent. Your bank may charge you a fee
for sending a wire to the Fund.
You may buy, sell and exchange shares of the Fund through certain brokers
(and their agents) that have made arrangements with the Fund to sell its shares.
When you place your order with such a broker or its authorized agent, your order
is treated as if you had placed it directly with the Fund's Transfer Agent, and
you will pay or receive the next price calculated by the Fund. The broker (or
agent) holds your shares in an omnibus account in the broker's (or agent's)
name, and the broker (or agent) maintains your individual ownership records. The
Advisor may pay the broker (or its agent) for maintaining these records as well
as providing other shareholder services. The broker (or its agent) may charge
you a fee for handling your order. The broker (or agent) is responsible for
processing your order correctly and promptly, keeping you advised regarding the
status of your individual account, confirming your transactions and ensuring
that you receive copies of the Fund's prospectus.
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AUTOMATIC INVESTMENT PLAN
For your convenience, the Fund offers an Automatic Investment Plan. Under
this Plan, after your initial investment, you authorize the Fund to withdraw
from your personal checking account each month an amount that you wish to
invest, which must be at least $25. If you wish to enroll in this Plan, complete
the appropriate section in the Account Application. The Fund may terminate or
modify this privilege at any time. You may terminate your participation in the
Plan at any time by notifying the Transfer Agent in writing.
RETIREMENT PLANS
The Fund offers an Individual Retirement Account ("IRA") plan. You may
obtain information about opening an IRA account by calling (800) 282-2340. If
you wish to open a Keogh, Section 403(b) or other retirement plan, please
contact your securities dealer.
HOW TO EXCHANGE SHARES
You may exchange shares between the Leonetti Growth Fund and the Leonetti
Balanced Fund on any day the Funds and the NYSE are open for business. Please
obtain a copy of the Leonetti Balanced Fund prospectus and read it before you
make your investment decision.
BY MAIL. You may exchange your shares by simply sending a written request
to the Funds' 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 in the account registration.
BY TELEPHONE. If your account has telephone privileges, you may also
exchange Fund shares by calling the Transfer Agent at (800) 282-2340 between the
hours of 9:00 a.m. and 4:00 p.m., Eastern time, on any day the NYSE is open for
trading. If you are exchanging shares by telephone, you will be subject to
certain identification procedures which are listed below under "How to Sell
Shares."
Excessive exchanges can disrupt management of the Fund and raise its
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.
HOW TO SELL SHARES
You may sell (redeem) your Fund shares on any day the Fund and the NYSE are
open for business either directly to the Fund or through your investment
representative.
You may redeem your shares by simply sending a written request to the
Transfer Agent. You should give your account number and state whether you want
all or some of your shares redeemed. The letter should be signed by all of the
shareholders whose names appear in the account registration. You should send
your redemption request to:
Leonetti Growth Fund
P.O. Box 5536
Hauppauge, NY 11788-0132
To protect the Fund and its shareholders, a signature guarantee is required
for all written redemption requests over $5,000. Signature(s) on the redemption
request must be guaranteed by an "eligible guarantee institution." These include
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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.
BY TELEPHONE. If you complete the Redemption by Telephone portion of the
Account Application, you may redeem all or some of your shares by calling the
Transfer Agent at (800) 282-2340 between the hours of 9:00 a.m. and 4:00 p.m.,
Eastern time, on any day the NYSE is open for trading. Redemption proceeds will
be mailed on the next business day to the address that appears on the Transfer
Agent's records. If you request, redemption proceeds will be wired on the next
business day to the bank account you designated on the Account Application. The
minimum amount that may be wired is $1,000. Wire charges, if any, will be
deducted from your redemption proceeds. Telephone redemptions cannot be made if
you notify the Transfer Agent of a change of address within 30 days before the
redemption request. If you have a retirement account, you may not redeem shares
by telephone.
When you establish telephone privileges, you are authorizing the Fund and
its Transfer Agent to act upon the telephone instructions of the person or
persons you have designated in your Account Application. Redemption proceeds
will be transferred to the bank account you have designated on your Account
Application.
Before executing an instruction received by telephone, the Fund and the
Transfer Agent will use reasonable procedures to confirm that the telephone
instructions are genuine. These procedures will include recording the telephone
call and asking the caller for a form of personal identification. If the Fund
and the Transfer Agent follow these reasonable procedures, they will not be
liable for any loss, expense, or cost arising out of any telephone redemption
request that is reasonably believed to be genuine. This includes any fraudulent
or unauthorized request. The Fund may change, modify or terminate these
privileges at any time upon at least 60 days' notice to shareholders.
You may request telephone redemption privileges after your account is
opened by calling the Transfer Agent at (800) 282-2340 for instructions.
You may have difficulties in making a telephone redemption during periods
of abnormal market activity. If this occurs, you may make your redemption
request in writing.
Payment of your redemption proceeds will be made promptly, but not later
than seven days after the receipt of your written request in proper form. If you
made your initial investment by wire, payment of your redemption proceeds for
those shares will not be made until one business day after your completed
Account Application is received by the Fund. If you did not purchase your shares
with a certified check or wire, the Fund may delay payment of your redemption
proceeds for up to 15 days from date of purchase or until your check has
cleared, whichever occurs first.
The Fund may redeem the shares in your account if the value of your account
is less than $100 as a result of redemptions you have made. This does not apply
to retirement plan or Uniform Gifts or Transfers to Minors Act accounts. You
will be notified that the value of your account is less than $100 before the
Fund makes an involuntary redemption. You will then have 30 days in which to
make an additional investment to bring the value of your account to at least
$100 before the Fund takes any action.
The Fund has the right to pay redemption proceeds to you in whole or in
part by a distribution of securities from the Fund's portfolio. It is not
expected that the Fund would do so except in unusual circumstances.
SYSTEMATIC WITHDRAWAL PROGRAM. As another convenience, you may redeem your
Fund shares through the Systematic Withdrawal Program. If you elect this method
of redemption, the Fund will send you a check in a minimum amount of $100. You
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may choose to receive a check each month or calendar quarter. Your Fund account
must have a value of at least $10,000 in order to participate in this Program.
This Program may be terminated at any time by the Fund. You may also elect to
terminate your participation in this Program at any time by writing to the
Transfer Agent.
A withdrawal under the Program involves a redemption of shares and may
result in a gain or loss for federal income tax purposes. In addition, if the
amount withdrawn exceeds the dividends credited to your account, the account
ultimately may be depleted.
PRICING OF FUND SHARES
The price of the Fund's shares is based on the Fund's net asset value. This
is done by dividing the Fund's assets, minus its liabilities, by the number of
shares outstanding. The Fund's assets are the market value of securities held in
its portfolio, plus any cash and other assets. The Fund's liabilities are fees
and expenses owed by the Fund. The number of Fund shares outstanding is the
amount of shares which have been issued to shareholders. The price you will pay
to buy Fund shares or the amount you will receive when you sell your Fund shares
is based on the net asset value next calculated after your order is received by
the Transfer Agent with complete information and meeting all the requirements
discussed in this Prospectus.
The net asset value of the Fund's shares is determined as of the close of
regular trading on the NYSE. This is normally 4:00 p.m., Eastern time. Fund
shares will not be priced on days that the NYSE is closed for trading (including
certain U.S. holidays).
DIVIDENDS AND DISTRIBUTIONS
The Fund will make distributions of dividends and capital gains, if any,
annually, usually on or about December 31 of each year.
All distributions will be reinvested in Fund shares unless you choose on of
the following options:
(1) Receive dividends in cash while reinvesting capital gain
distributions in additional Fund shares; or
(2) Receive all distributions in cash.
If you wish to change your distribution option, write to the Transfer Agent
in advance of the payment date for the distribution.
TAX CONSEQUENCES
The Fund intends to make distributions of dividends and capital gains.
Dividends are taxable to you as ordinary income. The rate you pay on capital
gain distributions will depend on how long the Fund held the securities that
generated the gains, not on how long you owned your Fund shares. You will be
taxed in the same manner whether you receive your dividends and capital gain
distributions in cash or reinvest them in additional Fund shares.
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.
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LEONETTI GROWTH 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:
American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788-0132
Telephone: 1-800-282-2340
You can review and copy information including the Fund's SAI at the Public
Reference Room of the Securities and Exchange Commission in Washington, D.C. You
can obtain information on the operation of the Public Reference Room by calling
1-800-SEC-0330. You can get text-only copies:
* For a fee, by writing to the Public Reference Room of the Commission,
Washington, DC 20549-6009, or
* For a fee, by calling 1-800-SEC-0330, or
* Free of charge from the Commission's Internet website at
http://www.sec.gov.
(The Trust's SEC Investment Company Act
file number is 811-5037)
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ADVISOR
Leonetti & Associates, Inc.
1130 Lake Cook Road, Ste. 300
Buffalo Grove, IL 60089
(800) 454-0999
DISTRIBUTOR
First Fund Distributors, Inc.
4455 E. Camelback Rd., Ste. 261E
Phoenix, AZ 85018
CUSTODIAN
Firstar Institutional Custody Services
425 Walnut Street
Cincinnati, OH 45202
TRANSFER AGENT
American Data Services, Inc.
P.O. Box 5536
Hauppauge, NY 11788-0132
(800) 385-7003
AUDITORS
Ernst & Young LLP
515 South Flower Street
Los Angeles, CA 90071
LEGAL COUNSEL
Paul, Hastings, Janofsky & Walker LLP
345 California Street, 29th Floor
San Francisco, CA 94104
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STATEMENT OF ADDITIONAL INFORMATION
JULY 26, 1999
LEONETTI BALANCED FUND
LEONETTI GROWTH FUND,
SERIES OF
PROFESSIONALLY MANAGED PORTFOLIOS
1130 LAKE COOK ROAD, SUITE 300
BUFFALO GROVE, IL 60089
(847) 520-0999
This Statement of Additional Information ("SAI") is not a prospectus and it
should be read in conjunction with the prospectus dated July 26, 1999, as may be
revised, of the Leonetti Balanced Fund ("Balanced Fund") and the Leonetti Growth
Fund ("Growth Fund"). The Balanced Fund and the Growth Fund are referred to
herein collectively as "the Funds." Leonetti & Associates, Inc. (the "Advisor")
is the investment advisor to the Funds. Copies of the Funds' Prospectus are
available by calling the number above or (212) 633-9700.
TABLE OF CONTENTS
The Trust................................................................. B-2
Investment Objectives and Policies........................................ B-2
Investment Restrictions................................................... B-7
Distributions and Tax Information......................................... B-10
Trustees and Executive Officers........................................... B-12
The Funds' Investment Advisor............................................. B-14
The Funds' Administrator.................................................. B-14
The Funds' Distributor.................................................... B-15
Execution of Portfolio Transactions....................................... B-15
Additional Purchase and Redemption Information............................ B-17
Determination of Share Price.............................................. B-20
Performance Information................................................... B-21
General Information....................................................... B-22
Financial Statements...................................................... B-23
Appendix A .............................................................. B-24
Appendix B .............................................................. B-25
THE LEONETTI GROWTH FUND IS CURRENTLY NOT AVAILABLE FOR INVESTMENT, BUT WILL
OPEN TO NEW SHAREHOLDERS ON SEPTEMBER 1, 1999.
DO NOT SEND MONEY PRIOR TO SEPTEMBER 1, 1999.
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 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
The Leonetti Balanced Fund is a mutual fund with the investment objective
of seeking total return through a combination of income and capital growth,
consistent with preservation of capital.
The Leonetti Growth Fund is a mutual fund with the investment objective of
seeking long-term growth of capital.
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.
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
B-2
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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.
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. Each 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 Advisor 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
Funds' 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
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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
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.
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INVESTMENT COMPANIES. Each 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 each Fund's management of daily
cash positions. In addition to the advisory and operational fees each Fund bears
directly in connection with its own operation, the Fund and its shareholders
will also bear the pro rate portion of each other investment company's advisory
and operational expenses.
CORPORATE DEBT SECURITIES. The Balanced Fund may invest in investment-grade
corporate debt securities. Investment-grade securities are generally considered
to be those rated BBB or better by Standard & Poor's Ratings Group ("S&P"), Duff
& Phelps Credit Rating Co. ("Duff") or Fitch Investors Service, Inc. ("Fitch")
or Baa or better by Moody's Investor's Service, Inc. ("Moody's") or, if unrated,
deemed to be of comparable quality by the Advisor. Changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make interest and principal payments in securities with these ratings than is
the case with higher grade bonds.
Ratings of debt securities represent the rating agencies' opinions
regarding their quality, are not a guarantee of quality and may be reduced after
the Fund has acquired the security. If a security's rating is reduced while it
held by the Fund, the Advisor will consider whether the Fund should continue to
hold the security but is not required to dispose of it. Credit ratings attempt
to evaluate the safety of principal and interest payments and do not evaluate
the risks of fluctuations in market value. Also, rating agencies may fail to
make timely changes in credit ratings in response to subsequent events, so that
an issuer's current financial conditions may be better or worse than the rating
indicates. The ratings for corporate debt securities are described in Appendix
A.
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
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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 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.
Collateralized mortgage obligations ("CMO's") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, semi-annually. CMO's may be collateralized by whole mortgage
loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMO's are structured
into multiple classes, with each class bearing a different stated maturity.
Monthly payments of principal, including prepayments, are first returned to
investors holding the shortest maturity class. Investors holding the longer
maturity classes receive principal only after the first class has been retired.
Other mortgage-related securities include those that directly or indirectly
represent a participation in or are secured by and payable from mortgage loans
on real property, such as CMO residuals or stripped mortgage-backed securities,
and may be structured in classes with rights to receive varying proportions of
principal and interest.
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
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$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, the
Funds 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 S&P, "Prime-1" or "Prime-2" by Moody's, or
similarly rated by another nationally recognized statistical rating organization
or, if unrated, will be determined by the Advisor to be of comparable quality.
These rating symbols are described in Appendix B.
INVESTMENT RESTRICTIONS
The following policies and investment restrictions have been adopted by the
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.
The Balanced 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 from banks for temporary or emergency purposes.
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.)
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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 making any permitted
borrowings, mortgages or pledges.
7. Purchase the securities of any issuer, if as a result more than 5% of
the total assets of the Fund would be invested in the securities of that issuer,
other than obligations of the U.S. Government, its agencies or
instrumentalities, provided that up to 25% of the value of the Fund's assets may
be invested without regard to this limitation.
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 in the
aggregate which 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 (other than securities that meet the requirements of Securities Act
Rule 144A which the Trustees have determined to be liquid based on applicable
trading markets).
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.
The Growth 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, or (c) to the extent the
entry into a repurchase agreement is deemed to be a loan.
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2. (a) Borrow money, except from banks etc. 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.)
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. Purchase the securities of any issuer, if as a result more than 5% of
the total assets of the Fund would be invested in the securities of that issuer,
other than obligations of the U.S. Government, its agencies or
instrumentalities, provided that up to 25% of the value of the Fund's assets may
be invested without regard to this limitation.
The Fund observes the following policies, which are not deemed fundamental
and which may be changed without shareholder vote. The Fund may not:
8. 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.
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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. 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 (the "Code"), provided it complies with all applicable requirements
regarding the source of its income, diversification of its assets and timing of
distributions. Each 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 each 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 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 each 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 a Fund
for its taxable year. In view of each Fund's investment policies, it is expected
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that dividends from domestic corporations may be part of a Fund's gross income
and that, accordingly, part of the distributions by the Funds may be eligible
for the dividends-received deduction for corporate shareholders. However, the
portion of a 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
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.
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.
Under the Code, each 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 a 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
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additional shares, will be reduced by the amounts required to be withheld.
Corporate and other exempt shareholders should provide a Fund 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 the Funds. Shareholders are advised to
consult with their own tax advisers concerning the application of federal, state
and local taxes to an investment in the Funds.
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 Funds, 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 Funds' management, and counsel to the Funds has expressed no
opinion in respect thereof.
TRUSTEES AND EXECUTIVE OFFICERS
The Trustees of the Trust, who were elected for an indefinite term by the
initial shareholders of the Trust, are responsible for the overall management of
the Trust, including general supervision and review of the investment activities
of the 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 LLC ("ICA") (mutual fund administrator and the Trust's
administrator),and Vice President of First Fund Distributors, Inc. ("FFD") (a
registered broker-dealer and the Fund's Distributor).
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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).
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.
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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 June 30, 1998, trustees' fees and expenses in
the amount of $4,300 were allocated to the Balanced Fund. As of the date of this
SAI, the Trustees and officers of the Trust as a group did not own more than 1%
of the outstanding shares of the Balanced Fund.
THE FUNDS' INVESTMENT ADVISOR
As stated in the Prospectus, investment advisory services are provided to
the Funds by Leonetti & Associates, Inc., the Advisor, pursuant to Investment
Advisory Agreements. The Advisor is controlled by Mr. Michael Leonetti. Under
the Investment Advisory Agreements, the Advisor receives a monthly fee at the
annual rate of 1.00% of each Fund's average daily net assets. The use of the
name "Leonetti" by the Funds is pursuant to a license granted by the Advisor,
and in the event the Investment Advisory Agreements with the Funds are
terminated, the Advisor has reserved the right to require the Funds to remove
any references to the name "Leonetti."
Each 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.
During the Balanced Fund's initial fiscal period ended June 30, 1996 and
for the fiscal years ended June 30, 1997 and June 30, 1998, the Advisor received
fees of $83,530, $104,200 and $130,603, respectively, under the Agreement.
THE FUNDS' ADMINISTRATOR
The Funds have Administration Agreements with Investment Company
Administration LLP (the "Administrator"), a corporation owned and controlled by
Messrs. Banhazl, Paggioli and Wadsworth with offices at 4455 E. Camelback Rd.,
Ste. 261-E, Phoenix, AZ 85018. The Administration 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
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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
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 $15 million $30,000
$15 to $50 million 0.20% of average net assets
$50 to $100 million 0.15% of average net assets
$100 million to $150 million 0.10% of average net assets
Over $150 million 0.05% of average net assets
During the Balanced Fund's initial fiscal period ended June 30, 1996 and
for the fiscal years ending June 30, 1997 and June 30, 1998, the Administrator
received fees of $27,534, $30,779 and $30,000, respectively.
THE FUNDS' DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a corporation owned by
Messrs. Banhazl, 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.
EXECUTION OF PORTFOLIO TRANSACTIONS
Pursuant to the Investment Advisory Agreements, the Advisor determines
which securities are to be purchased and sold by the Funds and which
broker-dealers are eligible 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.
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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 its reasonable
efforts to choose broker-dealers capable of providing the services necessary to
obtain the most favorable price and execution available. The full range and
quality of services available will be considered in making these determinations,
such as the size of the order, the difficulty of execution, the operational
facilities of the firm involved, the firm's risk in positioning a block of
securities, and other factors. In those instances where it is reasonably
determined that more than one broker-dealer can offer the services needed to
obtain the most favorable price and execution available, consideration may be
given to those broker-dealers which furnish or supply research and statistical
information to the Advisor that it may lawfully and appropriately use in its
investment advisory capacities, as well as provide other services in addition to
execution services. The Advisor considers such information, which is in addition
to and not in lieu of the services required to be performed by it under its
Agreements with the Funds, to be useful in varying degrees, but of
indeterminable value. Portfolio transactions may be placed with broker-dealers
who sell shares of the Funds subject to rules adopted by the National
Association of Securities Dealers, Inc.
While it is the Funds' general policy to seek first to obtain the most
favorable price and execution available in selecting a broker-dealer to execute
portfolio transactions, weight is also given to the ability of a broker-dealer
to furnish brokerage and research services to the Funds or to the Advisor, 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.
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
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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
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 in
accordance with any formula, nor do they 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, as stated
above, 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.
During the Balanced Fund's initial fiscal period ended June 30, 1996 and
for the fiscal years ending June 30, 1997 and June 30, 1998, the Fund paid
brokerage commissions of $26,457, $34,556 and $20,118, respectively.
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 the Funds 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 Funds' daily cutoff time. Orders received
after that time will be purchased at the next-determined net asset value.
The public offering price of Fund shares is the net asset value. 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
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("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 a 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 Funds
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 Funds' 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 either 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 the Funds or through your investment representative. The
Funds 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 Funds
will be made as promptly as possible but no later than seven days after receipt
by the Funds' Transfer Agent of the written request with complete information
and meeting all the requirements discussed in the Funds' Prospectus, except that
the Funds 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 a Fund's
shareholders. At various times, the Funds may be requested to redeem shares for
which it has not yet received confirmation of good payment. In this
circumstance, a 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 FUNDS
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 Funds' 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.
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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 Funds 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.
DELIVERY OF PROCEEDS
The Funds generally send 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 Funds 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, each 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 a Fund and depositing and withdrawing monies
from the bank account specified in 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 to
the extent permitted by applicable law, 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. For information,
consult the Transfer Agent.
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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 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.
The value of shares on redemption or repurchase may be more or less than
the investor's cost, depending upon the market value of a Fund's portfolio
securities at the time of redemption or repurchase.
DETERMINATION OF SHARE PRICE
As noted in the Prospectus, the net asset value and offering price of
shares of the 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
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Trust shall determine in good faith to reflect the security's fair value. All
other assets of each Fund are valued in such manner as the Board of Trustees in
good faith deems appropriate to reflect their fair value.
The net asset value per share of 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, each 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 Funds' 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.
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The Balanced Fund's average annual total return since its inception on
August 1, 1995 through the fiscal year ending June 30, 1998 was 16.14%. The
Balanced Fund's total return for the fiscal year ending June 30, 1998 was
24.10%.
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, 425 Walnut St., Cincinnati, OH
45202 acts as Custodian of the securities and other assets of the Funds. The
Custodian does not participate in decisions relating to the purchase and sale of
securities by the Funds. American Data Services, P.O. Box 5536, Hauppauge, NY
11788-0132 acts as the Funds' transfer and shareholder service agent.
Ernst & Young, LLP, 515 S. Flower St., Los Angeles, CA 90071 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 March 15, 1999, the following persons owned of record more that 5% of
the Balanced Fund's outstanding voting securities:
Star Bank, NA, Custodian for Frank G. Valeria IRA Account, Niles, IL,
60714; 16.05%
Charles Schwab & Co., Special Custody Account, San Francisco, CA 94104;
12.74%
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 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 that 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
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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 a Fund's assets for any shareholder held
personally liable for obligations of a 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 a
Fund or Trust and satisfy any judgment thereon. All such rights are limited to
the assets of a 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 a Fund itself is unable to meet its obligations.
FINANCIAL STATEMENTS
The Balanced Fund's annual report to shareholders for its fiscal year ended
June 30, 1998 and its semi-annual report to shareholders for the six-month
period ended December 31, 1998 are separate documents supplied with this SAI and
the financial statements, accompanying notes and report of independent
accountants (annual report) appearing therein are incorporated by reference in
this SAI.
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APPENDIX A
CORPORATE BOND RATINGS*
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations or
protective elements may be of greater amplitude or there may be other elements
present which make long-term risks appear somewhat larger than in Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
STANDARD & POOR'S RATINGS GROUP
AAA: Bonds rated AAA are highest grade debt obligations. This rating
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity
to pay principal and interest is very strong, and in the majority of instances
they differ from AAA issues only in small degree.
A: Bonds rated A have a strong capacity to pay principal and interest,
although they are more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
* Ratings are generally given to securities at the time of issuance. While the
rating agencies may from time to time revise such ratings, they undertake no
obligation to do so.
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APPENDIX B
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC.
Prime-1--Issuers (or related supporting institutions) rated "Prime-1" have
a superior ability for repayment of senior short-term debt obligations.
"Prime-1" repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated "Prime-2" have
a strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity is maintained.
STANDARD & POOR'S RATINGS GROUP
A-1--This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
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